Index Investing Works Better

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Index Investing Works Better

• David M. Blitzer
• Managing Director Chairman of the
  Index Committee
• 212-438-3907
• David_Blitzer_at_standardandpoors.com

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Active vs. Passive Investing
Its not passive investing, Its Intelligent
Investing.
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Topics

• Indices defined
• Intelligent vs. Active performance
• Choosing an index
• Using Indices
• Intelligent vs. Active costs

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Whats an Index

• A portfolio of stocks designed to represent the
  market or a segment of the market.
• Clear definition of what is included or excluded
• Data are published so index can be replicated
• Investment results and supporting information are
  available.

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Why invest with an Index?

• Transparency
• Performance
• Cost

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What You Can Do With Indices

• Track the market
• Measure performance
• Invest
• Manage risk

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Intelligent Investing
Performance
Data from SPIVA reports on www.standardandpoors.c
om
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Index vs. Active ManagementIndices Outperform
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Consistent Performance
Indices work in bear markets, too.
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Indices Out-Perform in Bear Markets
Source SPIVA reports
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Index vs. Active Management Large and Small
Funds
Returns over 5 years through March, 2003
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Intelligent Investing
Choosing an Index
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Standard Poors Indices

• Representative
• Liquidity Tests
• Fundamental Reviews
• Committee Oversight
• Widely Reported

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Standard Poors Indices
SP 500

• You all know the SP 500,
• Most of you know the SP MidCap 400 and the
  SP SmallCap 600
• There are some other Standard Poors indices

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SP Family of Indices
All SP equity indices are classified according
to the Global Industry Classification Standard
(GICS). Sector Indices are also available.  For
more information, please visit the SP Indices
section of www.standardandpoors.com
April 1, 2003
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ETFs, Futures and Options on SP Indices
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Asset Market Shares of Major U.S. Indices
By Index Provider
By Index
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Intelligent Investing
Using the Index
Asset Allocation
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Intelligent Investing

• Institutional Management
• ETFs
• Listed and custom derivatives
• Index Mutual Funds

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Strategies

• Value vs. Growth
• One factor is a stocks returns is its
  orientation to growth or value. Growth is
  exciting, but value triumphs
• Small Caps
• Small cap stocks sometimes outperform large cap
  stocks 2001 and 2002 were one of those times.
• Sectors
• The Global Industry Classification Standard
  (GICS) supports sector and industry strategies

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Asset Allocation Approaches

• Core and Explore
• Developed by large pension funds which recognize
  the value of indexing
• Most of the equity exposure is through a large
  market index like the SP SuperComposite 1500 or
  the SP 500
• Explore selective bets can be made in attractive
  styles or sectors

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Asset Allocation Approaches

• Style Building Blocks
• Developed from Markowitz ideas and the
  efficient frontier
• Idea is to choose 1-2 best managers in each
  asset class to build the portfolio
• Asset class weights based on asset allocation
  strategy designed to control risk and enhance
  return

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Intelligent Investing
Low Costs
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Intelligent Investing Costs Are Low
Average expense ratios by category in basis points
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• Indices outperform most active managers

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Thank You

• David M. Blitzer, Ph.D.
• Managing Director Chairman of the Index
  Committee, Standard Poors
• 212 438 3907
• David_Blitzer_at_standardandpoors.com