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Indices should shy from only reflecting passive strategies, says EDHEC

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  • Indices should shy from only reflecting passive strategies, says EDHEC

EUROPE - Indices should shy away from only reflecting passive investment strategies, according to new research conducted by EDHEC-Risk Institute.

In a survey of more than 100 European institutional investors, the organisation - part of EDHEC Business school - also found that liquidity, objectivity and transparency were three areas viewed as most important by investors when assessing indices.

According to the report, 58% of respondents did not think indices should reflect a passive investment approach, but 75% also urged that an alpha strategy should not form the basis either.

Turning to equity indices specifically, EDHEC noted: "Equity investors are mainly concerned that standard cap-weighted indices overinvest in overpriced stocks and provide poor diversification within the constituent universe.

"In contrast, fixed-income index users pay more attention to reliable duration exposure and are concerned with liquidity issues.

"Ultimately, investors consider that cap-weighted indices remain the reference, and even when they adopt alternative forms of indices, they continue to compare the performance of the latter to that of the former."

It said sub-segment indices were of "relatively little importance" to equity investors where broad market indices dominate, but are of "prime importance to bond index users".

The survey concluded that, as long as indices remain transparent and focused on beta rather than alpha approaches, respondents are "open" to new index designs, as long as these match their investment objectives.

"This opening toward new forms of indices is occurring through relative risk and performance compared with cap-weighted indices, rather than the latter disappearing or being replaced," EDHEC said.

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