Active versus passive investing

Charles Dow and Edward Jones created the first index in 1896, to provide a sense of whether the market was on the whole going up or down by averaging the prices of individual stocks. Since then, creating and providing indices has become a big business - and a fiercely competitive one at that. Today, indices such as the Dow Jones Industrial Average and the S&P 500, FTSE 100, MSCI, NIFTY and SENSEX are among the best-known brands in financial markets. But the index providers did not reach this pole position by tracking the performance of a set of assets in a standardized way, they did so because their role itself morphed to that of drivers of asset allocation decisions through their index inclusions and exclusions. Today index providers are arbitrators of whether a fund performance has been good or not – because beating the benchmark is the single most important aspect of asset management, making index providers the most influential players in the markets.

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