Vanguard Investments has defended its method of constructing indices based on the market capitalisation of companies, following the launch of alternative methods of construction.
"Any bet against the market cap is an active strategy," Vanguard Investments strategy group principal Francis Kinnery said yesterday.
In recent years, new methods of compiling indices have been developed that apply a wide range of financial metrics to determine a company's health and growth prospects.
The reasoning is that a company's size is no measure for its ability to generate strong returns and, therefore, it makes better sense to look at a company's financial health.
However, Kinnery said that promising outperformance over the market based on a formula was unlikely to be successful.
"We have a difficult time working out that professional people who do this 24/7 have a hard time outperforming, but someone is going to come along and write down a rules-based strategy and that is going to outperform," he said.
Vanguard Investments Australia head of retail Robin Bowerman said the alternative methods of constructing indices effectively took a value-style approach to investing and did not give a reflection of the market.
Therefore, calling it an index was misleading, Bowerman said.
"By all means take a tilt however you want, but don't call it index," he said.
