The Europe Australia Far East (EAFE) index is the most widely used benchmark for evaluating the performance of foreign equity money managers. It is interesting to note that international managers have performed much better than their Canadian counterparts compared with passive forms of money management (Figure 2). Some argue that there are more opportunities to capitalize on market inefficiencies in some of these less developed markets and that it is, therefore, easier to exploit over-reactions to market activities.
The advantages of indexing are as follows.
The disadvantages of indexing are as follows.
fund will always be in cash, either awaiting investment or raised to meet redemptions; and the cost of management fees. This difference in performance and its causative factors are collectively referred to as the tracking error of the fund.
Pooled versus separate account portfolios: ‘Pooled portfolios’ are commonly referred to as mutual funds. As you probably know, they represent the combined assets of a group of investors with the same investment objectives, managed by an investment expert with a formally stated set of objectives. On the other hand, the ‘separate account portfolios’ referred to here are managed on a ‘discretionary’ basis by qualified professional money managers. ‘Discretionary’ refers to the managers’ responsibility to make the day to day decisions and execute transactions on behalf of their clients as long as these decisions fall within the guidelines established in a contract between the client and the manager.
Figure 2) A ten-year perspective of active versus passive strategies internationally. Note that all returns are gross of fees. Avg Average; EAFE Europe Australia Far East; Int’l International; MSCI Morgan Stanley Capital International. Reproduced with permission from Northern Trust Global Advisors, Inc
‘Separate account portfolios’ differ from most common investment accounts with a stockbroker in that it is rare for brokers to be qualified or licensed to manage accounts on a discretionary basis. According to securities regulations, brokers must ask for and receive consent on every transaction in a client’s account before executing that transaction. Failure to do so is the practice of ‘discretionary trading’ by stockbrokers and can lead to not only serious penalties, but also, in extreme cases, the removal of their license to practice.
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