How does one person end up editing a 31-chapter investment book that encompasses a comprehensive array of theories, products, and practices spanning all of the world’s major asset classes? Well, to some extent, accidentally. The project started a bit more modestly with “only” 24 chapters and was originally focused on global equity indexing. But as I developed numerous outlines and discussed the project with industry peers, the importance of developing a comprehensive survey of index-based investment became evident—and the project expanded accordingly.
The initial motivation to embark on this project developed during my six years as an investment strategist and manager of institutional equity index funds. At the same time that my colleagues and I were diligently capturing every basis point for our clients’ portfolios, I was meeting with consultants, clients, and other investment professionals who considered index funds essentially a commodity. They often differentiated these funds only by price—the management fees, which were often measured in fractions of a basis point.
My former colleagues and I at Barclays Global Investors’ investment strategy team - especially Robert Ginis, Joy Yang, Binu George and Niklas Nordenfelt, all contributors to the book - would provide detailed advice on benchmark selection and overall investment policy, and assist clients with complete investment solutions. These included standard or customized index funds, benchmark evolution, and portfolio transition services. My team of investment strategists and portfolio managers also interfaced with all of the major index providers, sharing information on corporate actions, advising them on methodology, evaluating the prospects for new benchmarks, and sometimes complaining loudly when their index changes were not well-aligned with market realities. During the late 1990s and early 2000s, we spent a lot of time explaining to clients how we delivered significant value—consistent performance, low fees, cost-effective investment/redemption through crossing, efficient shifts between benchmark indexes, and enhanced returns through securities lending and efficient trading. We also developed some of the most efficiently-managed exchange-traded funds (ETFs) that were used by both institutional and retail clients.
We knew that through our hard work, we were saving our clients millions of dollars each year. Yet indexing—whether U.S. large-cap, European developed markets or Asian emerging markets—continues to be viewed as a passive investment process. In reality, whether one looks at the benchmark decisions, portfolio management, or asset allocation strategies that we were involved with, our approach to indexing was “anything but passive,” and this became our group’s slogan at the time. I was therefore constantly looking for ways to demonstrate the value that index-based strategies delivered for investors and gave many presentations with this message. My colleagues and I also wrote numerous articles and research papers that highlighted the sophistication of indexing, and how the “active versus index” debate was obsolete. In some ways, these presentations and articles were the genesis of the book project, and the “nonpassive” nature of index managements and applications became the inspiration for the book’s title, Active Index Investing.
But the specific catalyst came in early 2001 when Bill Falloon at John Wiley & Sons approached me with a proposal for a book on indexing I was favorably disposed to both the idea and the messenger, as I had worked closely with Bill when I was a trader and writer in Singapore in the late 1980s, and he was a writer and editor at Intermarket Magazine in Chicago. . I initially refused, remembering how much work my first book had been. . But the idea stayed with me, and the continuing challenges in conveying the value of index-based strategies to some of the most sophisticated financial institutions reminded me that a book that “explained it all” might be a useful contribution to the financial community. I also talked to colleagues throughout the industry—friends at asset managers, pension plan sponsors, institutional brokers, index providers, exchanges—and they almost universally agreed that there was a need for such a book. As one colleague reminded me, although indexing accounted for about 25 percent of institutional equity assets and over 12 percent of mutual fund assets, there was no comprehensive, professional-level book on index-based investment.