Passive Management

The problem with pegging performance to commercial indexes is that many of these commercial indexes are created haphazardly. The S&P 500 Index, for example, is generally regarded worldwide as the proxy for US Large Cap stocks. However, Standard and Poor's is a publishing company, not a money management firm nor a statistical firm. The editors at Standard and Poor's meet periodically and, using a very ambiguous set of rules, assign 500 large companies to this S&P 500 index. Their goal is to simply assemble a group of 500 companies that collectively provide a broad representation of US Large Company stocks.

Notice that the only (albeit subjective) criterion for inclusion in the S&P 500 is some vague notion of "bigness". A company automatically satisfies all of the entry requirements of the S&P 500 list simply by being large.

Given the historical evidence that demonstrates the futility of Active Management, many investors resign themselves to passively following a Passive indexing strategy. However, as engineers, we posed the question: Can we identify other quantifiable characteristics (other than "bigness") which lead to even higher expected returns than those we see from the commercial indexes? Our research indicates that the answer is a resounding yes. Our approach, Portfolio Engineering, combines the fundamental philosophy of index investing with the centuries of aggregate global stock market research performed by the world's leading academics.

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