Active management failure points to value of index investing

The failure of active managers to outperform the index is evidence the latter are reasonable benchmarks and best accessed by exchange traded products according to S&P Dow Jones.

Following a recent visit to Australia S&P Dow Jones Indices (S&P DJI), Global Head of Financial Advisor Channel Management, Shaun Wurzbach, said while the local exchange traded fund (ETF) market continued to grow it was worth considering if an index were effective for equity investments.

Wurzbach said S&P DJI had conducted performance analysis - S&P Index vs Active (SPIVA) - around passive and active management with recent results showing that apart from small-cap managers most active Australian equity managers did not beat their respective benchmarks.

"One way to judge if an index is effective is to determine if it measures an asset class or a market in an investible manner," Wurzbach said, stating S&P DJI took an interest as ETFs "are index-trackers are the delivery vehicles of index effectiveness and index-based innovations".

"With our index benchmarks demonstrating that they are hard for many actively managed mutual funds to beat (with the notable exception of Australian Small-Cap), we conclude that indices are effective in measuring markets and asset classes, which can be accessed by ETFs that track these indices."

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Wurzbach said while indexing effectiveness and indexing innovation may be beneficial for the market the burden of due diligence, as the result of newer and more complex ETF products, was falling to planners and wealth managers, and institutional investors.