GLOBAL - Fundamental or wealth weighted indices have the potential to compete in the active or enhanced indexation space, according to Roger Urwin, global head of investment consulting at Watson Wyatt.
Urwin said he expected “a lot more indices” weighted by fundamental factors such as book value, rather than market capitalisation, to be made available going forward.
“Wealth weighted indices are a form of passive investment but I think they could compete in the enhanced indexation area,” he told the NAPF conference in Edinburgh today.
“[Take-up] will be slow, the passive side will take off first, but this may well represent an interesting way to take active mandates in future. You can’t think of cap weighted as the ultimate top dog in the benchmark world.”
Urwin said mispricing implied cap weighting would overweight overpriced stocks and underweight undervalued stocks, while wealth weights were neutral to such effects.
“If stock prices do come back to fair value, you’ve booked rebalancing profits,” he said.
It was reasonable to assume a wealth weighted passive approach would outperform cap weighted by about 1 percentage point per year, plus a tracking error of 2, he added. In addition, the risk relative to liabilities was actually slightly less than in a normal cap weighted index.
Adrian Jarvis, responsible for Morley Fund Management’s strategic asset allocation service, said there were proven gains from the value tilt inherent in fundamental indices.
While he supported a move to wealth weights, he admitted now was not the best time for a “wholesale switch”, adding that a gradual move was more optimal.
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