Indices in Institutional Investment Management:
Results of a European Survey

Abstract

The authors collected 104 responses, representing investors from asset management companies, pension funds, and insurance firms all over Europe. The survey finds that liquidity, objectivity, and transparency are the most important criteria investors have for indices. Buy-and-hold characteristics are not requirements for an index, signifying a break with the traditional conception of indices, which sees the extremely low turnover as a distinguishing characteristic between passive and active investments. This finding has strong implications, as it suggests that any liquid and systematic methodology could be adopted for index construction. In terms of specific requirements for indices in different asset classes, the authors find that although subsegment indices (e.g., for styles, sectors, and so on) play a subordinate role in equity investing compared to broad market indices, subsegment indices are far more popular for bonds. Concerning the recently introduced alternative weighting schemes, index providers have paid much attention to developing alternative weighting schemes for equity; however, the adoption rate of alternative weighting schemes for bond indices is quite low at the same time the dissatisfaction with bond indices is actually higher than with equity indices, and investors perceive numerous important problems with standard bond indices.

TOPICS: Mutual fund performance, developed, portfolio construction