David Booth

Index and Enhanced Index Funds

The purpose of including Exhibit 5 is to demonstrate that portfolio management is a sufficiently complicated task even when index funds are used. In some ways, the role of an investment committee is made more difficult, because it has to decide which asset classes should be indexed and how much to invest in each.

Once the asset mix is established, investing is less stressful. There is no second-guessing of the manager, because an index fund always provides the return of an asset class to within tight tolerances. There is no anxiety about market forecasting, because the proportion of the portfolio invested in each fund remains fixed.

In summary, logic and empirical evidence overwhelmingly favor an investment approach based on index funds. The returns are higher and the fees are lower. The returns of an asset class are assured. The discipline keeps the portfolio fully invested, thereby avoiding the adverse timing pitfall inherent in investment committees and active managers.

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Dalbar study. "Quantitative Analysis of Investor Behavior." Fourth Quarter Update (1996).

Davis, James L. "Mutual Fund Performance and Manager Style." Financial Analyst Journal 57, No. 1 (2001), 19-27.

Fama, Eugene F. and Kenneth R. French. "The Cross-Section of Expected Stock Returns." Journal of Finance 47 (1992), 427-65.

Fama, Eugene F. and Kenneth R. French. "Size and Book-to-Market Factors in Earnings and Returns." Journal of Finance 50 (1995), 131-55.

Quigley, Garrett and Sinquefield, Rex A. "Performance of UK Equity Unit Trusts." Journal of Asset Management 1, No. 1 (2000), 72-92.

April 2001