Limitations: survey lacks portfolio holdings

The terms passive investing and index investing are often intertwined, but they are not exactly the same thing. Today’s guest is Adriana Robertson, the Honourable Justice Frank Iacobucci Chair in Capital Markets Regulation and an associate professor of Law and Finance at the University of Toronto Faculty of Law and Rotman School of Management. Adriana is interested in index investing and, in this episode, we hear her views on whether or not index investing is passive. Hear facts from her paper on the S&P 500 Index fund specifically, and all of the reasons that it's not passive, as well as some of the issues that are potentially arising from the creation of so many indexes or so-called passive investments. A more recent paper by Adriana, published in The Journal of Finance, surveyed a representative sample of U.S. individual investors about how well leading academic theories describe their financial beliefs and decisions, and Adriana shares the differences in something like value growth from an academic perspective versus a real-world perspective. Find out how investors can go about evaluating the performance of their portfolios and what they should be looking for when deciding which index fund to invest in, as well as why index funds aren’t a meaningful category anyway, factors from Adriana’s surveys that might influence investor’s equity allocation, and the trend towards indexing and whether it will overtake active portfolios. Tune in today for all this and more!

Key Points From This Episode:

• Whether or not it’s sensible to call the S&P 500 Index fund a passive investment. [0:03:20]
• How discretion affects the S&P 500 Index constituents and performance. [0:04:14]
• Adriana reflects on Tesla joining the S&P 500 Index and the speculation there. [0:04:49]
• Adriana’s view of benchmarking and comparing other investments to the S&P 500. [0:05:34]
• Why calling it rules-based investing rather than passive depends on the index. [0:07:35]
• How investors can go about evaluating the performance of their portfolios. [0:04:14]
• Why Adriana believes there are so many indexes and how they differ. [0:09:29]
• Value growth from an academic perspective versus a real-world perspective. [0:11:28]
• Why methodology differences between indices aren’t necessarily well-documented. [0:13:14]
• The marketing strategies involved in fund managers creating affiliated versus bespoke indices. [0:14:50]
• Common differences in index fund tracking and one-to-one mapping. [0:15:45]
• What investors should be looking for when evaluating which index fund to invest in. [0:16:53]
• Tilting towards factors versus using the market cap as the de facto benchmark. [0:18:19]
• Why Adriana’s advice is to compare an investment to the other options available. [0:20:11]
• Ex-ante versus ex-post and whether funds choosing a benchmark ex-post to inflate performance is a concern. [0:21:31]
• Concerns over asset growth in index funds and why it’s not a meaningful category. [0:23:47]
• Factors from the survey results of Adriana’s recent paper that might influence investor’s equity allocation. [0:26:16]
• The results that were surprising to her, like the need for cash for routine expenses. [0:28:21]
• Reasons there is still so much money invested in active funds – for example, a belief in higher returns and advisor recommendations. [0:29:57]
• Notably, how equity allocation is reliant upon professional financial advice. [0:32:12]
• Whether or not a year like 2020 will affect the asset allocation of investors. [0:35:17]
• The trend towards indexing and whether it will overtake active portfolios. [0:37:02]
• The implications of risk on the theoretical explanations for asset pricing anomalies. [0:39:00]
• The role of professional financial advisors in high net worth investor’s decisions. [0:37:02]
• How Adriana came to be so interested in and passionate about indexing. [0:44:49]
• Adriana’s defines success by figuring out what she wants to doing it do it well. [0:47:24]