The Pursuit of No Surprises
The reality is that a lot goes into ensuring that things “go right” with index investing. “Making sure a fund tracks closely to the index is a bit like the duck paddling under the water,” Lynn says. “Everything appears calm above the water, but underneath is where all the action is, the thousands of individual decisions that need to be made correctly.”
What goes into some of those decisions? “It’s a combination of things, but it starts with people,” Lynn says. She points to portfolio managers like Emiliano Rabinovich — one of the more than 100 long-tenured indexing professionals at State Street Global Advisors. In this field, experience counts for a lot, she says. “Having been there at the beginning of the indexing revolution, our firm has built up a lot of institutional knowledge about the countless index rules and market nuances required to effectively manage and trade an index portfolio.”
Scale, as it turns out, also matters, according to John Tucker, another indexing veteran and operations expert. At a moment when many firms are trying to offer their clients index strategies, the ability of sophisticated trading and investment processes and proprietary index portfolio management systems to pursue the lowest overall implementation cost can’t be overstated.
“You need professionals who can do a variety of things — everything from implementing an index in the most cost-effective way to creating index change strategies that maintain and build value as companies come in and out of multiple indexes,” John says. “It’s also critical to have local trading folks on the ground who really understand major global markets and can get the best possible price. And you need a rigorous process ensuring that all regulatory and contractual guidelines and market, credit and liquidity risk requirements are met. Honestly, you wouldn’t believe how many people have to be involved at a very detailed level.”