| Rafey Sayood | ||||||
By its very nature, index investing is a relatively effortless way to manage institutional money. All a fund manager need do is pile assets into a basket of securities that replicates the relevant yardstick, sit back and let the markets do the rest.
For the majority of active investors, index benchmarks provide the foundation for portfolio construction. The fraction of assets diverted away from market-neutral positions determines whether a fund outperforms or underperforms.
And for the providers of the indices against which performance is measured, calculating prices and disseminating data are the twin keys to establishing market dominance. Often this opens up more lucrative relationships with users - based either on license fees for information and analytics or via revenues from transactions services, portfolio investment advice and wholesale portfolio rebalancing.
Indexing is traditionally a fairly straightforward exercise - even if the methodology used to create and maintain an index can be extraordinarily complicated.