Twenty-Five Years of Indexing




A report commissioned by Barclays Global Investors concludes that indexing has saved institutional investors worldwide as much as $105 billion since its inception 25 years ago. The report, entitled "25 years of indexing: an analysis of the costs and benefits," was conducted by PricewaterhouseCoopers and is believed to be the first systematic appraisal of the benefits of indexing.

Among the findings: Since the first index fund was launched, in 1973, indexing has saved US tax-exempt investors somewhere between $80 billion to $105 billion. In the US alone, indexing saves institutional investors an estimated $14 billion to $18 billion each year.

Over the last 10 years, index funds have outperformed traditional active managers by 1% to 1.5% (before costs) each year. This performance gap is even wider when management fees are deducted and far wider yet in taxable accounts.  The report also shows that only one out of five traditional active funds beat its benchmark in the period between 1993 and 1997, indicating that active management is no guarantee of above-benchmark results.

According to the report, between 1993 and 1997, an actively managed US fund would have had to be in the top 20% of all funds in order to outperform an index fund. 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, the report says. By comparison, "over the last 25 years, indexers have successfully developed a low-cost product with efficient risk-return characteristics," said Richard Gleed, director of PricewaterhouseCoopers` Policy and Economic Group.

A major finding in the PricewaterhouseCoopers`report concerns the historical divide between traditional active management and index management. According to the report, a "dynamic balance" is evolving between the two styles; already, active managers are using quantitative methods to reduce costs and improve performance, according to the report, while index managers are offering enhanced products such as tilted index funds.

Barclays Global Investors has been a market leader in index investing since launching the world`s first index fund in 1973 (as Well Fargo Bank), but is also the 10th-largest active manager in the US, thanks to the success of its quantitative active strategies, according to Creighton.

Barclays Global Investors is the world`s largest institutional investment manager, with more than $689 billion in assets under management and advice (as of 6/30/99). A global investment management firm devoted exclusively to quantitative investing, BGI is also the world`s largest provider of structured investment strategies such as indexing, tactical asset allocation and quantitative active strategies.

Source: 25 years of indexing: an analysis of the costs and benefits, PricewaterhouseCoopers, Commissioned by Barclays Global Investors, 1998