Friday, September 22, 2000
The Power of Index Funds
Ted Cadsby runs the mutual fund unit of the Canadian Imperial Bank of Commerce. He is an advocate of the merit of buying entire markets in the form of mutual funds that replicate their measurement indices. Why? Becuase index investing tends to outperform most managers' attempts to beat highly efficient markets such as those for large capitalization U.S. stocks. Over the long term, index funds, which charge much lower management fees than managed funds, have a strong advantage for the investor. Moreover, with index funds, the investor gets what he pays for - no cash lying around and being "managed" at high fees. There are other advantages too.
In a style that explains by imaginary discourse, Mr. Cadsby points out that not only do managed funds tend to have non-persistent performance, they actually have a nasty tendency to move to from top to bottom of the performance ladder. That can't happen to an index fund. Index funds also don't suffer from style drift - the tendency of managers to move away from their mandates, often chasing performance of hot stocks. Mr. Cadsby also distinguishes between using index funds in efficient market in which all major players use the same information from use of index funds in inefficient markets, typically emerging countries or regions, where information is not uniformly known or analyzed.
The Power of Index Funds is not only a strong case for the product, it is a candid one too. Mr. Cadsby compares index funds to investment devices that replicate indices but that are traded like stocks such as World Equity Benchmark Shares (WEBs) which offer participation in specific national markets and Standard & Poor's market basket units called Spyders. WEBs give a focus for certain national markets like France not available through retail level mutual funds in Canada.
Spyders, on the other hand, offer a very low management fee that, to date, mutual fund management companies in Canada can't beat. Mr. Cadsby compares mutual fund vendors' index products, adds in some managed funds that he thinks admirable and provides a valuable index. The Power of Index Funds is a valuable manual on index investing and the definitive book on the subject in Canada.