The Active Index Strategist

January 01, 2004


To many investors, the words active and index are opposites, and to use them together is simply an oxymoron. However, as I will describe in detail in the forthcoming book "Active Index Investing," one can be "as active as you want to be" using index products (index funds, ETFs, and index futures/options). Whether you are a long-term investor who chooses to make annual asset allocation rebalances or a hyperactive market timer, index-based vehicles are usually the most efficient way to get precisely targeted exposure to sectors, style categories, market-cap ranges or entire markets -domestic or international. And increasingly, as readers of this publication know, index products are becoming available for virtually every asset class, including fixed income, precious metals, currencies and even hedge funds.

This column, which will be supplemented by a more frequent column on, aims to provide a big picture view of the major investable asset classes, with a focus on investment strategies that are implementable with index products. Unlike investment outlooks that I wrote when working at a major institutional asset manager, I will be unconstrained about making specific macro - and sometimes micro - recommendations, and whenever possible I will indicate some of the specific positions and index products one could utilize to capture the trends. I will also derive my opinions from a blend of fundamental views based on global economics and politics, as well as on what some consider the "Ouija Board School of Investment Strategy"-technical analysis.1 The column will not, however, be a newsletter or tip sheet, but instead aims to provide a framework for investors to develop their own investment strategies.

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So, after 2003's spectacular performance in most global equity markets, and clear, tradable trends in fixed income, commodity and currency markets, what can we can expect in 2004? We know that politics will be a big feature of this year-not just the U.S. primary and general elections, but also national elections in major economies such as Russia, India, South Africa, Taiwan and Indonesia. The U.S. election will be tight, with major implications for tax/fiscal policy and global trade relationships.

Regardless of one's political views, many of us are trying to determine which current or soon-to-be-launched index products are the appropriate vehicles with which to implement our market views. For this initial column, I will refer to some of the key performance figures for major markets and asset classes, but I will not try to be comprehensive (one can consult the Index Research section of the Web site for complete and up-to-date statistics on a variety of index returns).

My perspective will be of medium-long term (my definition of this being a six-month to 12-month view), with the goal being to highlight implementable positions to capture these trends. Although I consider my globalist credentials quite up-to-date, and I take a global macro view of markets and opportunities, in this column I am writing with the U.S. as the 'home' market and thus when I refer to international it means outside the United States.

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