Investors gloomy on market-cap

Buying and holding market-cap weighted equity and bond indices for the long haul has come under attack in a new survey of European institutional managers’ investing habits.

Research from Edhec-Risk Institute suggests big investors would prefer to take stakes in alternative indices such as equal-weighted ones, risk-adjusted indices or accounting-based ones in the belief these would throw up higher returns. However, they are reluctant to switch as the performance of these investments would still be measured against a market-cap weighted benchmark, creating a performance risk if the alternatively weighted indices underperform.

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Nearly half (45 per cent) of equity investors polled have adopted alternatively weighted indices.

“There’s a lack of satisfaction with standard cap weighted indices but adoption of alternatives is low due to the fact that as investors move from a cap-weighted benchmark they take on peer group risk,” said Felix Goltz at Edhec and co-author of this year’s European index survey.

More than 90 per cent of equity investors polled used indices while adoption rates for bond indices were not as high, with only 72 per cent of respondents using government bond indices and 61 per cent corporate bond indices. Investors tended to be dissatisfied with bond indices because their duration can change due to the replacement of matured bonds or the passage of time. Corporate bond indices failed to meet the needs of 46.5 per cent of bond investors polled.

Despite the wave of complaints from investors, indexation still plays a pivotal role in portfolios. As of the end of June, “indexed” assets had risen to $5,994bn, which represented a 25 per cent increase over the $4,781bn recorded in the same period a year earlier. Asset managers, pension funds and insurers across Europe took part in the survey.