| Regulators believe index funds pose no greater risk than other asset classes |
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| 04/04/2004 | |
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Financial regulators around the world are not worried about the growth in index funds, but believe more transparency is still warranted. While investors have become increasingly eager to increase their allocation of this type of assets, the International Organization of Securities Commission (IOSCO) recently published a report about the problems raised by the intensive utilization of indices by the asset management industry, and concluded that index funds investors are not subject to any greater risk than investors in other collective investment schemes. The authors of the study, who conducted a series of interviews with various leading market regulators around the world, identified transparency as one of the major regulatory issues facing regulators. It appears that the question of fees stands out as a prime concern among this category. As indicated by the IOSCO, while collective investment scheme regulators may consider the fees charged to index funds in order to ensure adequate disclosure of costs to investors, none of them specify the fees payable by index funds. Among the recommendations formulated by the authors of the report, investors should be given adequate information to enable them to understand the differences between index funds and other types of collective investment schemes. IOSCO researchers say that the absence of a clear index fund definition on many markets and the lack of a clear-cut tracking error limit may induce certain fund managers to present some collective investment funds as being indexed while the reality is different. Risk factors Nevertheless, while regulators which participated in the survey conducted by the IOSCO, save the Japanese authority, said that the utilization of indices for asset management is not a major source of market distortion, IOSCO experts point out that many risk factors still exist. One of those risks has been identified by the working group established by the Committee on Global Financial System (CGFS). According to this working group, the massive tendency to use core market indices and the increased tightening of the tracking error may induce a herding behaviour by managers who fear to fall behind, providing a fertile ground for market volatility. Other factors might nonetheless compensate for the potential negative effects of the intensification of passive management. "Reduced reliance on peer-balanced benchmarks, increased number of asset class choices, and the shift of responsibilities for strategic asset allocation towards the owners of the funds partially offset copycat behaviours described above due to the use of core market indices and tightening of allowable tracking error", wrote the authors of the IOSCO report. After bottoming out in 2002, passive management recouped the ground lost in 2003. Standard & Poor's, a leading index provider, reported a sharp increase in the amount of capital indexed to its various indices during this period, with 2003 figures topping at US$ 1,139 billion after flattening out at US$ 841 billion in 2002, the lowest level since 1998. This e-mail address is being protected from spam bots, you need JavaScript enabled to view it |
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