EUROPE - The European Asset Management Association (EAMA) has published a collection of essays questioning European Union legislators’ approaches to the indexation of investments.
The booklet examines passive investment from an investor protection viewpoint and its effects on the European economy, according to EAMA.
“ There is a widespread misconception that indexing is somehow safer for investors than other types of investment strategy. The reality is that indexing is no safer than the index replicated,” says Donald Brydon, president of EAMA and chairman and chief executive of AXA Investment Managers.
The issues currently raised in Europe are important because of the increasing use of indexation as an investment strategy by many UCITS and other funds, and the rising popularity of benchmarking actively managed funds to indexes, the association says.
“ Many funds which are benchmarked to an index are effectively competing in the same marketplace as index funds. It is wholly inappropriate to treat index funds differently from those which do not seek to replicate an index,” says Brydon.
“ This difference in treatment will be all the more significant in view of the limitations proposed in the UCITS Amending Directive on the use of derivatives as a means of increasing exposure to favoured stocks or bonds,” he adds.
The directive has been adopted by the European Commission and the Council of Ministers and will be considered shortly by the European Parliament.
According to EAMA, the proposal allows national regulators to permit index funds to enjoy greater freedom of investment than actively managed funds, provided that the indexes replicated have been approved by competent authorities.
Brydon says: “ Conferring the right to determine when an index is an index, as provided in the UCITS Amending Directive, gives enormous investment powers to regulators, who, however well intentioned, are ill-equipped to take investments decisions.
“ Regulators should be confined to establishing principles for the construction of indices but not rule on the validity of specific indices.”