The Hazards of Index-Based Investing to Stewardship

Abstract:     
This article argues that the way institutional investors (pension funds, fund managers and others) use stock market indices - in particular, measuring performance based on short-term relative returns, replicating an index's constituent holdings so that equity portfolios (including actively-managed ones) contain an excessively large number of companies, and "underweighting" stocks - vitiates the active, long-term "stewardship" mindset that policymakers in the UK, Netherlands, and other markets are promoting.

Note: This article served as the basis for an opinion piece that appeared in the Financial Times on 14 June 2010.

Number of Pages in PDF File: 2

Keywords: Investment management, shareholder responsibilities, corporate governance

JEL Classification: G23, G34

Accepted Paper Series