Live From The Superbowl

December 07, 2006

Thoughts and observations from the world’s premier indexing conference.

The Superbowl of Indexing is the sine qua non of indexing conferences.  Everyone who's anyone is there, and they are there for all the right reasons: to debate, schmooze and wheel-and-deal about everything from exchange-traded funds (ETFs) to portable Alpha strategies. (They're also there to golf, but that's another topic entirely).

I had the pleasure of attending the Superbowl over the past few days, at the lovely Arizona Biltmore in Phoenix, Arizona. When I wasn't busy handing out awards or moderating panels, I kept my ear to the ground and my notebook ready, ready to capture the zeitgeist of this critical conference as best I could.

This was my first Superbowl, so I can't know if the feelings captured below are "new."  Moreover, mine was a singular perspective, shaped by the vagaries of my schedule and the happenstance of speaking to one person and not another; another conference-goer may have come away with a completely different impression. 

Nonetheless, here's one window onto the biggest indexing conference of the year…

The Indexing Swagger

My top takeaway from the conference was this: The index industry has developed a swagger. We are standing bestride the financial services industry like we own the place. For both institutional and retail strategies alike, the consensus is that we've got active management on the run; that exchange-traded funds (ETFs) will one day rule the world; and that there ain't nothing nobody can do to stop us.

That feeling was particularly palpable among ETF developers, some of whom actually expressed pity to me for traditional fund companies, the same way you might pity a VCR repairman or a microfiche salesman these days: "Sorry, guys, the writing is on the wall."

The industry's swagger, however, owed itself to more than just excitement about novel product structures. There was a real sense that the index industry is redefining active management. Although people use different terms to describe it, Steven Schoenfeld's "active indexing" idea is all-the-rage. Stock-picking, hedge funds, sector rotation, even straight indexing … those are all so 1990s. Today, excess returns are being created by tweaking index methodologies and using passive tools to drive tactical asset allocation strategies.

The key word is "tactical"; I must have heard the phrase "tactical asset allocation" 20 times at the Superbowl. By "tactical," the conference-goers were setting up a contrast with "strategic" asset allocation, which mixes different asset classes to place a portfolio at a specific spot on the risk/return curve.  In contrast, "tactical" asset allocation uses a mix of passive portfolios to pursue active strategies, with the goal of achieving above-market returns.  I'm not sure that's such a good idea, but people sure were talking about it, and it is definitely seen as the wave of the future.

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