‘Super Index’ Nothing New

Sat., May 3, 1997

Chet Currier Associated Press

When you hear about a hot new item this spring on the shelves of several leading mutual-fund groups, stay cool.

It’s the so-called “super index” or “enhanced index” stock fund - an idea that scores lots of marketing points, at least, for timeliness and competitive ingenuity.

But as good as they may sound, super index funds should be approached with a healthy measure of skepticism. While a few of them may succeed in their mission, as a group they seem likely to fall short.

“Enhanced” index funds have actually been around for almost as long as the product on which they are based, the classic index fund modeled after a stock-market indicator such as Standard & Poor’s 500-stock composite index.

Index funds began to attract a following as far back as the 1960s and ‘70s, boosted by academic studies that focused on the difficulties fund managers and other professional investors faced in trying to beat the market.

No matter how smart they were or how hard they worked, all of these investors couldn’t turn in above-average returns. By minimizing expenses of research and trading, in fact, index funds made the case that they could outperform the average managed fund more often than not. They have flourished, especially in the past few years.

Something in the human spirit rebels, however, at the idea of aiming for mediocrity. Once you set up a fund simply to parallel the course of the S&P 500, is there really no way to try to do better?

From such an impulse was born the enhanced index fund, which uses the latest in investment management theory and computer technology to try to get a little extra edge.

In simplest terms, enhanced index funds generally try to outdo “passive” index funds by eliminating a few duds, or overemphasizing a few promising companies, or both, among the numerous stocks that make up an index.

Alas, the logical problem that managed funds in any form face in beating the indexes has very little to do with how sophisticated their techniques may be. There is still no way for the majority to win the market-beating game.

So why index the portfolio at all? Set up a fund to own only the prospective winners and sell the losers short.

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