Monday, March 8, 2021

Index Managers, the SEC, and Mutual Fund Investors. Oh, My!

Friend-of-the-BLPB Bernie Sharfman and his co-author Vincent Deluard recently posted their article, How Discretionary Decision-Making Has Created Performance and Legal Disclosure Issues for the S&P 500 Index, on SSRN.  The article plays to several audiences, as noted by the authors.  The SSRN abstract follows:

When investment funds track the S&P 500, the index becomes more than just a list of 500 companies. The focus then turns to the financial and regulatory issues that arise from the discretionary decision-making of its Index Committee. The discussion of these issues and their implications should be of extreme interest to both investors and regulators. This discussion involves: how Sharpe’s equality will hold in practice, what kind of companies may still be impacted by the index effect, how we are to understand the expected returns versus risk of a broad based market portfolio, whether funds that track the S&P 500 are to be considered actively managed or passive, the S&P 500’s suitability as an “appropriate” benchmark index, and what kind of legal disclosures are required in the use of the index. As a result of our discussion, including our empirical findings, we do not find the S&P 500 index to be desirable for either tracking or benchmarking purposes, even though our proposed legal disclosures should mitigate any potential legal liability for its continued use.

Our paper makes contributions to the literature on index managers and the SEC’s disclosure policy for open-end investment management companies. Most importantly, it will help guide the investment decisions of tens of millions of investors who are currently invested in, or are considering investing in, funds that track the S&P 500.

The abstract is thought-provoking.  I am always interested in reading works that rely, illuminate, or comment on disclosure policy.  And I believe my son has invested in at least one index fund that tracks the S&P 500. Other family members also may have investments in funds of that kind.  So, I may need to read this . . . .

Joan Heminway | Permalink


Joan, thanks for plugging our article. For legal scholars reading our article, you will need to be patient as the writing first takes you on an extended journey into the world of general finance before getting into the legal issues. However, I believe that journey is well worth it, as you will get, I think, an easy to understand explanation of some really interesting concepts such as Sharpe's equality, the "index effect" (think of Tesla finally being included into the S&P 500), passive versus actively managed funds, and efficient portfolios. To be honest, I enjoyed writing the finance section more than the legal section, even though I believe the legal section came out very well.

Posted by: Bernard S. Sharfman | Mar 9, 2021 7:04:01 AM

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