In today’s uncertain environment, the managers who focus on low tracking error strategies and who have historically managed to a tight “risk budget” have been gaining attention from both index-oriented investors and those focused on traditional active management strategies. Given the increased level of interest and the attractive performance attributes of these approaches, we wanted to provide investors with more information on this unique corner of the market.

Exchange-traded funds (ETFs) have been one of the fastest growing areas in the European asset management industry in recent times. While these products have been available in the US for several years, their introduction in Europe only started in 2000.
Since ETFs became available in Europe, assets under management in this new and innovative investment vehicle have risen to over $16bn (e14bn). (See Chart 1.)

Imagine a racehorse which, for 10 years, wins more races than any of its rivals, but is hardly ever bet on by the public – seldom even by professionals – and gets only minimal coverage in the racing pages.
Implausible certainly, but this is exactly what has happened in the investment world. Mid cap value beat all other US equity asset classes over the 10 years to 2002, according to Lipper statistics, and yet it accounts for only 2.9 per cent of invested equity assets. (See Charts 1 and 2.)

Today’s market conditions and Europe’s expanding horizons require new index products. The main European index, for example, is now over five years old – predating both the euro and the end of the 1990s bull market.