It is easy to forget the primary purpose of a benchmark index. Simply put, a benchmark index exists to measure the return of a universe of assets. The universe that should be measured is the total opportunity set available to the investor: everything that investor could buy, and nothing that it could not. Unless a benchmark index is doing this, and doing it accurately rather than by approximation, it is less accurate than it could be.
Around these seemingly obvious propositions swirl all of the debates that we and other index providers have: the rather oddly named (bearing in mind the physique of most of the players) ‘battle of the indices’.
As everyone in the industry is aware, the question of the style of the manager has become substantially more important in the recent past. A concept originally developed in its present form in the US for the domestic equity markets, it has during the past 10 or so years made significant progress in the international markets, and is also becoming a more important issue in the hiring of managers for institutions based in Europe.
As more and more managers with pronounced styles are hired, the benchmark question becomes important. If managers see their opportunity set in a very different way from the whole equity market because of their management style, and if the owner of capital has appointed them because of that management style, then it rapidly becomes important to make sure that the benchmark index being used reflects that opportunity set rather than the whole market. What are the problems involved in the construction of these benchmark indices?
The first problem is a simple one: there is no such thing as style. By this I am not suggesting that the idea of style management is invalid. The problem is that, although managers will generally use similar ideas to describe their styles, their description of what a ‘growth’ or a ‘value’ manager is will typically be slightly different from every other manager’s description.
Everyone would agree that firms which buy stocks with very low price- to-book values are probably value managers, and that firms which have portfolios with no yield and price-to-earnings ratios above 100 are likely to be growth managers. Exactly where that would leave a manager who held a portfolio with all three characteristics would be a topic for debate. While everyone will agree that the styles exist, coming to a universally agreed definition of how they are defined is much more difficult. Without this universally agreed definition it is difficult to construct a single opportunity set that is appropriate to the managers.
The second problem is the non-comparability of data between countries. Anyone who has dealt with international investment knows the effect that different

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