Fixed income embraces fundamental indexing

In a world where many investors are considering ways to reduce portfolio risk, he says few would disagree that a bigger tool kit will be broadly welcomed.

‘One can make a good case that these strategies do not offer alpha but better beta,’ adds Arnott. ‘Fixed-income investors have a long history of considering risk and exposure when choosing the duration and credit of active and passive bond portfolios; broad bond-market index funds are far less widely used than stock index portfolios. Similarly, currency investors typically do not use market cap or even GDP as a guide for anything other than liquidity. Perhaps it is time to revisit our automatic reliance on cap weight as the sole strategy for measuring stock performance.’