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Figure 1
Main Index Providers And Recent Index Activity
As Of July 1, 2012 2
Source: Index providers
No. Of New Indexes
Launched
01/01/09–01/07/12
No. Of Index Series
Launched
In Partnership
With 3rd Party
Dow Jones 25 9
FTSE 20 19
MCSI 11 1
Russell 22 10
S&P 3 45 27
Stoxx 16 2
Sum across providers 139 68
Standard cap-weighted market indexes have traditionally
been used as a reference for determining
how much additional risk one is willing to tolerate, in
terms of deviating from peer group behavior. This presupposes
a basis to consider any index or method as a universally
applicable and neutral starting point, but there is
ample empirical evidence and theoretical support that this
attribution of neutrality is unwarranted and that standard
indexes suffer from poor risk/return properties (see e.g.,
Amenc, Goltz, Martellini and Retkowsky [2011] for a review
of the various drawbacks of cap-weighted indexes). 1
More recently, index providers have been expanding
their offerings to an array of different types of indexes,
while the proliferation of ETFs has given a broader range
of investors’ direct access to indexing. A clear trend
has been emerging in recent years and reflects a movement
away from standard indexes towards constructing
indexes with the purpose of fulfilling a specific set of
investment objectives, such as obtaining low risk, high
risk-adjusted returns, or calibrated exposure to a given
risk factor. While most traditional indexes can be clearly
seen as “market indexes” that provide a representation of
the average performance of investors in a given market
segment, many recent indexes can be seen as “strategy
indexes” that aim at achieving a given risk/return objective
through a set of systematic rules.
As illustrated in Figure 1, there have been numerous
index launches in the past few years, many of which
involved collaborations of index providers with asset management
firms or other third parties.
Due to such heavy index launch activity over recent
years, investors are now faced with an increasing variety of
index offerings with different construction methods, often
from the same provider. In particular, rather than sticking
to the default index construction scheme where stocks
within a geographic or industry segment are selected by
their market cap and then weighted in proportion to their
market cap, new index launches often draw on alternative
constituent selection schemes and/or alternative weighting
schemes. Such innovation naturally raises the question
of what desirable properties an index should have in
the first place. Also, in view of this increasing variety of
index supply, another relevant question is whether investors
who make up the potential demand side accept such
new index construction schemes and how they integrate
the corresponding products into their overall investment
process. In fact, while recent innovation and the continuous
extension of strategies that are offered from index providers
have led to informal debate on where the limits are
of what one could reasonably refer to as “an index,” little
evidence is available on where index investors actually
draw this line. This article focuses on results of the aforementioned
survey that provide insights into this question.
To better gauge the attitudes of investment professionals
with respect to such innovation and to help
anticipate the direction indexing is likely to go in the
future, EDHEC-Risk Institute has conducted a survey of
investment management professionals in North America.
A broad and comprehensive set of questions was asked
to allow us to present a clear picture of which attributes
of indexes users value. The EDHEC survey consisted of
a questionnaire given in Q1 and Q2 2011 and answered
by 139 North American investment professionals, 4 most
of whom are institutional investors or asset managers;
further, the overwhelming majority of all respondents
have used indexes as investments. This survey was done
in parallel with similar surveys conducted in Asia and
Europe, to help provide a comprehensive global picture
of the indexing industry and note any regional disparities
(see Amenc, Goltz, Mukai, Narasimhan and Tang [2012]
and Amenc, Goltz and Tang [2011]. This article provides
a summary of key results of the American survey concerning
investors’ quality requirements for indexes in general
and their use of alternative index strategies. We discuss
results for equity indexes as well as fixed-income indexes.
An analysis of the complete results of the survey is presented
in Amenc, Goltz, Tang and Vaidyanathan [2012].
We first discuss survey results on the current use and
satisfaction with indexes in equity and fixed-income
investing. We then focus on investors’ views on what the
fundamental quality requirements for indexes are before
providing an overview of respondents’ views on alternative
weighting schemes.
Current Use Of Indexes And Satisfaction Rates
Before discussing the results obtained for each class of
indexes, we first present the general adoption rate and satisfaction
rate of indexes for each asset class. Index usage among
respondents to our survey is high and broad, as depicted in
Figure 2, especially when it comes to equity investments, with
about 89 percent of respondents using indexes.
However, as shown in Figure 3, results indicate satisfaction
with these indexes was surprisingly low, further
emphasizing the importance of investigating the sources
of dissatisfaction and issues that index providers need to
account for when constructing indexes that would truly
address investors’ needs. For example, only about 69 percent
of equity index users were satisfied with equity indexes,
March / April 2013 27