This was the message of initial statements made by Steven Schoenfeld, Chief Investment Officer, Global Quantitative Management, Northern Trust Global Investments, in a panel discussion on indexing sponsored by Dow Jones to mark its 10-year business anniversary. Schoenfeld added to his expectation that this broader, deeper, and more complete international approach will definitely have a positive impact on international markets.
The panel discussed the value of and necessity for indexing, concluding that index funds are really good investment tools. “I have never said that indexing is the best strategy an investor could ever possibly follow, but I can say that the number of strategies that are worse is infinite,” touted panel member, John C. Bogle, President, Bogle Financial Markets Research Center, and Founder of the Vanguard Group.
The panel seemed to favor enhanced indexing strategies over quasi-active or passive indexing. As Schoenfeld pointed out enhanced indexing differs from quasi-active or passive strategies in that it is more derivative-based or more quantitative, and because quasi-active or passive strategies rely on a certain factor that does not evolve like the enhanced strategy. However, panel member Robert J. Waid, Vice President and Principal at Wilshire Associates, did say that, although passive investing is boring, in the long run it bears out.
Schoenfeld added that enhanced indexing is transparent, using evaluation metrics which consider momentum and corporate inside trading. Enhanced index evaluation metrics also do not take any bets not compatible with the index model and consider transaction costs, he said.
Panel members noted that the new long/short strategies such as 130/30 strategies work if the manager is skilled, and are definitely for the institutional investor since the expense of shorting is great.
Indexing and Diversification
Speaking on diversification and underlying asset mixes of funds such as target date funds, Schoenfeld stated, “There is no reason an investor can’t create a diversified portfolio using index strategies.” He was the only panel member that favored annual or more frequent rebalancing though; pointing out that it counters the problems caused by investors’ emotions.
Offering some guidelines, Bogle suggested investors’ bond position can equal age or age minus 10% as a starting point, and pointed out bond indexing works better than stock indexing. He also said investors’ international position should use international index funds, noting that indexing works better in international markets because expenses are less.
Active Funds, If You Must
Though the panel favored indexing, Schoenfeld pointed out that pension funds and institutional investors fuel the demand for active managers. Waid offered tips when considering active funds, telling the audience investors should look for insight an active manager may have that others don’t. Market anomalies create profit for a time then go away, he warned, so the best money managers review anomalies continuously, finding new ones and enhancing the ones they have. Investors should ask active managers how often their model is reviewed.
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