(R)Evolution of Indexing Methods - Why Diversification Was Forgotten?

Abstract

In the modern era of investing, diversification has become the cornerstone of most asset managers’ investment philosophy. Within the equity space, the primary focus of most institutional investors has been to diversify their active equity managers – combining equity funds exhibiting uncorrelated return sources such as value, growth, momentum and size – in order to smooth the relative return generation. Remarkably, the ingrained virtues of diversification have hardly made their way through to the passive equity investment space. Market capitalisation-weighted indexing still represents the vast majority of assets invested in passive equity strategies. However, over the past few years, a paradigm shift has started to occur, with a new breed of passive indexing approaches entering the passive equity space. Investors are now starting to evaluate and invest into new passive indexing approaches, looking to diversify among their passive managers as well. The objective of this white paper is to scrutinise these new alternatives to traditional passive investing.