FINC3017 Investments and Portfolio ManagementEssay: The Rise of Index InvestingDue: 4pm, 1st October...

Question

FINC3017 Investments and Portfolio Management

Essay: The Rise of Index Investing

Due: 4pm, 1st October 2018

Word limit: 1,500 (excluding reference list at the end of the document)

Weight: 16.5%

In August 2018, the S&P500 Index closed at an all-time high. The performance of the U.S. stock market

since the GFC is being described by some market analysts as the longest bull market of the modern

financial era. Through this time there has also been a shift across the funds management industry to index

investing. This combination of an extended bull-market and increased funds flow towards index investing

is unprecedented and provides a unique opportunity for fund managers around the world. In your essay,

you are required to discuss index investing and its implications, and consider an investment strategy to

take advantage of current market conditions.

Your essay should:

1. Define index investing. Describe and contrast the types of securities used by retail and institutional

clients to index invest.

2. Explore the purpose of index investing for an investment manager.

3. Describe the strengths and weaknesses of index investing and comment on why index investing

has increased in popularity. What are the implications of increased index investing for market

efficiency?

4. With reference to market efficiency, briefly describe the momentum anomaly and detail an

investment strategy that aims to exploit it.

5. Conclude by evaluating the usefulness of your investment strategy to an institutional fund

manager in response to the current index investing trend.

Other information

• Marks will be awarded for the depth of discussion, as well as the clarity and structure of your

essay.

• Your essay should include both academic AND high-quality, non-academic references.

• Your essay can discuss any asset classes (i.e. equity, fixed income, etc) and/or investment strategy

if it is relevant to your discussion, but should be based on a well-supported argument.

There are many finance journals that you can reference. To help you identify relevant articles the

following journals are of higher quality and are likely to be most relevant:

• Journal of Finance

• Journal of Financial Economics

• Review of Financial Studies

• Journal of Financial and Quantitative Analysis

• Financial Analysts Journal

• Journal of Portfolio Management

You can refer to articles from other journals too. I am just using the above journals as a guide. In addition

to published articles, you can also refer to unpublished working papers (often available on SSRN

(https://www.ssrn.com/en/). There is no minimum number of articles but you should present a rigorous

and detailed survey of the literature in your essay to support your arguments.

The best approach to surveying the academic literature is to use Google Scholar

(https://scholar.google.com.au/). You can click (or tap) on ‘Settings’ and you should find a link on the left

hand side labelled ‘Library links’. After clicking (or tapping) on this link you can search for the University

of Sydney Library. Check the box for ‘University of Sydney Library - @ University of Sydney’ and click

(or tap) save. Now when you search in Google Scholar you’ll be able to log in directly to the University

of Sydney Library to access the article. This is really useful if you are off-campus.

Please use 12pt font with 2cm margins and include all references in a bibliography. Students should adhere

to the Academic Honesty requirements of the University of Sydney and use either APA or Harvard

referencing style. For this assessment, the word limit does not include in-text referencing nor the reference

list at the end of the document. Essays should be submitted as either a Word document or a PDF via the

Turnitin link labelled ‘Essay’. Please ensure you document your Turnitin submission using a screenshot

that captures the date and time of your submission to ensure you have evidence of your submission in

the case of disputed late submission penalties.

Sarabjeet · Accepted Answer

The Rise of Index Investing
Investments and Portfolio Management
Student Name
University Name
Unit Name
Unit Code
Introduction
An indexing investment is a mutual fund whose portfolio is designed to match and to track the components of the market index, for example, S & P 500 index. The Indexing Mutual Fund is asked to offer comprehensive market exposure, lower operating expenses as well as lower portfolio business. These funds follow specific rules or standards (such as tax administration or less tracking errors), and these rules or standards are kept in place despite market conditions. "Index" is a passive type of fund management which successfully crosses managed active mutual funds. Index investment is a passive strategy that attempts to generate equal returns with the broader market index (Becker, 2015).
Index investing: Types of securities used by retail and institutional clients to index invest
Trading Securities might be as easy as using a purchase or sales button on the electronic trading account. The more sophisticated merchant can select another complex business by setting a limit value for a block business, which is parsed by several brokers and is traded within a few days. The difference is in a type of merchant, complexity, and speed required for business. There are two retail and institutional traders, Retailers, most often known as personal traders, buy and sell securities for individual accounts (Fassas, 2014). For institutional traders or organizations, purchase and sell securities for managed accounts. Pension funds, mutual fund families, insurance companies and exchange-traded funds are general institutional traders. There are several important differences between the two trading groups, and for the past few years, these differences have created the types of transactions in which they can participate, the cost of each transaction, and the level of information and analysis of each transaction. Although there are still some differences, the difference between the two has decreased considerably (Giese, 2015).
Purpose of index investing for an investment manager
Index fund managers did not receive much respect. In stark contrast to the “exciting” active management world, index fund managers are considered to be a very boring person who needs very little talent or information to perform their duties. Vanguard 500 index fund manager Gus Sauter was famous for hearing a potential investor say by phone that "a monkey can run the fund." In fact, operating an index fund requires a special talent. However, the strategy and goals of the index manager are very different from the strategies and goals of active managers.
Managing index funds is a base point game (Hunstad and Dekhayser, 2016). Unlike active stock managers, they expect the fund's performance to remain high relative to their benchmarks and peers, and index fund managers are often indifferent to the absolute performance of the index itself. This does not mean that index fund managers are not interested in the performance of a particular benchmark, or they do not quietly hope that the stock market will go higher. But it does not matter whether the benchmark index is appreciated or depreciated (Potter and Schwarz, 2012).
Strengths and weaknesses of index investing 
Strengths: Low Risk and Steady Growth
One of the main advantages of the index fund is that they are a relatively low-risk option for investing in stocks and bonds with the aim of achieving stable long-term growth. They are essentially diverse and represent many different areas of the index which can prevent deep loss. In addition,

FINC3017 Investments and Portfolio Management Essay: The Rise of Index Investing Due: 4pm, 1st October 2018 Word limit: 1,500 (excluding reference list at the end of the document) Weight: 16.5% In...

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