Tuesday, April 26, 2011

Indexing- What's In A Name?

In the Wall Street Journal's weekend edition of two weeks ago, Matt Phillips wrote a nice piece describing fund manager Joel Greenblatt's recently-initiated "value-weighted indexing" funds.

I've read the book Greenblatt, founder of Gotham Capital, wrote for the Little Book of Investing series. Frankly, I like Vanguard founder John Bogle's volume better. Perhaps because, as the developer and manager of a quantitative equity portfolio strategy, I'm biased. If I weren't using my own approach, I'd generally adhere to Bogle's. Greenblatt is a value style investor who relies on fundamentals which my proprietary research found to be relatively weak. It remains challenging for me to distinguish between a "value" equity and, well, a poorly-performing equity.

But, to each his own.

However, Phillips' piece described Greenblatt's latest creations. You can read the article for details. Basically, Greenblatt employs what he calls "value weighting," wherein the funds weight holdings based on value-oriented scores.

With all the buzz around broadly-based ETFs and concerns over expensive, actively-managed funds, one wonders whether Greenblatt hasn't just produced a sort of 'fighting brand' category of funds with an index label.

But, as Phillips quoted one observer,

"This is an actively managed quant fund. There's no indexing involved. Just beause you use math doesn't make you and indexer."

So true.

Perhaps Greenblatt is simply becoming a more astute marketer, while following an old brokerage habit- create new products when the older ones become too efficient, i.e., have declining margins. Or, in this case, perhaps become less fashionable as expensive actively-managed funds.

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