EUROPE - A panel of institutional investors has expressed its doubt over the added value of non-cap-weighted indices such as fundamental indices.

A discussion about new forms of indices and benchmarks at Edhec Pension Fund conference in Paris saw Alan Dubois, chairman of Lyxor Asset Management, Tomas Franzén, head of asset allocation at SEK181 (€19.4bn) AP2 buffer fund, and Theo Jeurissen, chief investment officer of the €33bn Dutch metal pension fund PMT criticise a presentation about the increasing focus on new forms of indices.

Dubois argued the trend towards these type of indices could lead a self-fulfilling prophecy.

"It could create a market phenomenon, like reduction of very high market caps, and could lead to performance of these indices just because everybody invests in them," said Dubois.

"It is an interesting trend, but should be arbitraged as soon as possible," he suggested.

AP2's Franzén outlined that fundamental indices outperforming the market-cap-weighting suggests "it is the market-cap-indices that are flawed and not necessarily the alternatives that are, per se, intelligent".

He continued: "If we accept the idea that there is noise and pricing error, which leads to a constant overweighting over overvalued stocks and underweighting of undervalued stocks, that is what produces this return drag. I presume that any scheme that breaks the link between price and allocation is going to be better."

According to Franzén, indices are the consequence of the market itself, rather than a sign of the strategy.

"If we start by believing the market is efficient, then I guess value, and small-cap premiums for that matter, should be seen as compensation for taking on more systemic risk," he said.

"If we start, on the other hand, by saying that markets are not necessarily completely efficient, then maybe those excess returns could be explained by for instance behavioural anomalies.

"As long as a value premium is not compensation for an obvious risk in your portfolio, then I think this doesn't matter very much. It is interesting obviously, but it doesn't really matter," he concluded.

Theo Jeurissen said he believes diversification is one of the basics of investing and hence welcomes research into new form of indices and benchmarks, but warned funds have to look into these topics very carefully.

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