If you knew what goes on behind the scenes of an index you’d understand why the “passive” label misrepresents index funds. Most indexes are actively managed, meaning the index fund counterpart is too.

I’ve highlighted this in the past with the S&P 500 and MSCI’s indexes. S&P adds and removes stocks from the index every year. So the S&P 500 today looks different than it did ten years ago. It’ll look different 10 years from now.

MSCI reviews and reclassifies countries often (the reviews are an annual event). So countries get moved from frontier to emerging market or emerging market to developed market indexes or vice versa (stocks are added to and removed from each index as well).
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The latest from Michael Mauboussin at Credit Suisse was released this week. The report digs into the important question of how the rise of index funds are impacting the market.

About 39% of AUM (and growing) currently sits in index funds and ETFs. But there is a point where that becomes a problem. Everyone can’t index because then nobody is buying based on fundamentals. So at what level does the balance between active and passive investing lead to an unhealthy market?

Well, Mauboussin and crew, think they have a way to measure it. Or, at least, measure the opportunity in the market, assuming you find an active manager with the skillset to take advantage of it. Continue Reading…

Howard Marks delivers a very consistent message on the importance of understanding where we are in the cycle. He does so because risk changes as we move through the cycle.

So if you’re basing your allocation decisions on risk (you’re controlling for risk, not returns), this is a most important thing to know. In the Investor Series, I linked to last week, Marks came back to explain why a few times: Continue Reading…