It's time to point the finger at the index
Friday, 15 June 2007
What is an index? The question is sundering the world's fund management community. John Authers from the FT Published his article on May 26 2007. He says "An index is a measure of the market. It is built by taking the stocks in the market, and aggregating their performance. Not all stocks are the same size, so you must decide how to weight them. The most logical way to do this is by their market value - what they are worth according to the market.
This has applications for investment management. Most managers fail to beat their index. So, don't beat it, join it" For the full articles, go to the FT here
The discussion is focused on fundamental indexing versus traditional indexing. Irrespective of the differences, the issue as always, is can active retail funds, which most investors buy, outperform the indexes?
There is enough evidence to say no. In fact, mathematics tell us so. Want some evidecne, visist Bill Sharpe and he will explain. Click here
So why invest in active funds then? The margins for the fund managers and the salesman are high enough to make it worth their while. But bear in mind, if mathematics tells us that over time they do not outperform, guess who pays these healthy margins to the fund manager and the investment salespeople…the poor investor. We like to give our clients ever chance of increasing their wealth and high fees erode wealth.
In John's final paragraph, he says "...And there is no need to be ashamed about a "value" style. Funds allocated this way provide rigorous quantitative protection against the temptation to buy stocks for more than the fundamentals suggest they are worth. That is always a good idea. As long as their costs stay under control, these funds deserve a place, with market cap-weighted indices, as the bedrock of many portfolios."
I couldn't agree more. Lets all take a common sense view and protect our wealth and not divest to the active fund managers!
Categories: Index Funds, Asset Class Management, Active Funds
posted by Murray Round Wealth Management @ 21:45,
The Authors
Nicholas Round
Nic is the Managing Director of Murray Round Wealth Management Limited, who seeks to ensure the advice provided is truly independent. Based in Shropshire with clients local, national and worldwide, Nic has strived to find the best possible service for his clients needs, by researching and studying the market, trends and philosophies. Nic strongly believes Asset Class Management will bring his clients Financial Freedom, Independence and Happiness.
Kirsty
Kirsty is our communication guru. Managing information requires considerable due diligence and her passion for organisation gives the clarity we all seek. From Shropshire, with a Psychology Degree and much travelling, she is now back in Shrewsbury...and London often, keeping us all at Murray Round focused.
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