Rahul Seksaria

Barclays Global Investors recently filed with the SEC to offer 51 open-end domestic index funds

A 1998 report commissioned by Barclays Global Investors and conducted by PricewaterhouseCoopers reaffirms the growing knowledge that passive management leads to higher returns than active management. It concludes that indexing has saved institutional investors worldwide as much as $105 billion since the inception of the first index fund in 1973.

Barclays Global Investors introduced the world's first stock index fund and has been a market leader in index investing ever since. They recently introduced the BGI US Bond Index Plus Fund that uses enhanced bond index strategy to seek incremental returns over the Lehman Brothers Aggregate Bond Index.

The PWC report, entitled "Twenty Five Years of Indexing," is supposedly the first comprehensive report on the merits of indexing. Following are the highlights of the report, along with comments from Pricewaterhouse and Barclays executives: (facts, figures and quotes are taken directly from the Barclays Global Investors press release).

• Since the first index fund was launched in 1973, indexing has saved US investors (specifically those invested in tax-exempt U. S. equities under external management) somewhere between $80 billion to $105 billion.
• In the US alone, indexing saves institutional investors an estimated $14 billion to $18 billion each year.
• Only one out of five traditional active funds beat its benchmark in the period between 1993 and 1997, indicating that active management alone is no guarantee of above-benchmark results.
• Over the past 10 years, the average active manager in the US and the UK has underperformed the index by up to 1.7% per year, or by as much as 3.2% per year when survivorship bias and fees are taken into account.
• "Over the last 25 years, indexers have successfully developed a low-cost product with efficient risk-return characteristics," says Richard Gleed, director of PricewaterhouseCoopers' Policy and Economic Group.
• "It's no longer acceptable for traditional active managers to provide mediocre or even poor returns, while charging excessive management fees," says Jim Creighton, chief investment officer for global index strategies at Barclays Global Investors. "Investors no longer look at their asset allocation in light of an active-versus-passive decision," he adds. "They want quantitative options that offer them strong returns with acceptable levels of risk. And it takes a manager with experience in matching the benchmark, to move beyond and beat the benchmark."
• According to the report, "a dynamic balance" is evolving between traditional active management and index management. Active managers are using quantitative methods to reduce costs and improve performance, while index managers are offering enhanced products such as tilted index funds.