IndexUniverse.com assistant editor Heather Bell spoke with Steven Schoenfeld in December about asset allocation and other topics. Schoenfeld is the chief investment officer for Global Quantitative Management at Northern Trust Global Investments.

Index Universe: What do you think is happening with the real estate market, and what is it telling us about the U.S. economy as a whole right now?

Schoenfeld: The numbers don't lie. There is a range of indicators—whether it's data from the real estate industry or the S&P/Case-Schiller indexes or other indexes and indicators—that clearly points to a continuing downturn in residential real estate. We've not seen sustained weakness in commercial real estate, although the exuberance is no longer there.

The big question is a combination of declining residential real estate values and the more restrictive environment for credit: Is that going to tilt the American consumer further into a cautious stance and hurt the economy that way? Because consumer spending is, depending on how you measure it, between 60 and 70 percent of the U.S. economy. You can't deny what's happening in real estate. How will it affect the consumer and will that negative impact—because there is nothing very positive about that—be offset by the benefits of continued economic growth and exports due to the weak dollar? Greater economic minds than mine are still not sure, but I think the balance of probabilities is that we're going to have a weaker economy. Will it tip into it a recession? As of December 2007, I don't know.

Index Universe: What trends have you noticed in the field of indexing?

Schoenfeld: I'd say there's three powerful trends in the broad indexing field that are independent of each other, so they're powerful in their own right, but then there's cross-synergies that make them even stronger. The first is the embracing of indexing for a broader group of asset classes, in the acceptance of indexing as one of the most efficient ways to get beta. And the trend toward taking that beyond U.S. equities where it's long been accepted—international equities, new asset classes such as global real estate or global infrastructure, and subasset classes such as international small-cap and emerging markets. I consider it powerful general acceptance of indexing for efficient beta among a broad range of investors.

The second follows neatly on that: continued, very strong, secular growth in the use of indexing for the broadening and deepening of portfolios, in particular for international equities. By "secular," I mean not dependent on market cycles. The best example of "broader/deeper' is the trend of going "beyond EAFE" (i.e., developed international large/mid-cap). That includes emerging markets, that includes international small cap and increasingly it will include emerging markets small-cap, and even the nascent or frontier markets. You've seen the growth of new benchmarks for those areas. It's the same situation going deeper into fixed income, so you're seeing more and more slices of fixed income becoming available, and I believe this will extend into international fixed income.

The third trend is the use of indexing to combine asset classes—or put another way, using these "building blocks of beta" to create multi-asset strategies, whether it is target date or other types of allocation where you have conservative, moderate or aggressive-type allocations. This is something that I discussed extensively in Chapters 30 and 31 of Active Index Investing, but at the time of publication [2004], it was highly aspirational. Now it's happening! These multi-asset-class capabilities will be dramatically expanding the use of indexing in the coming years.

I would say those are the three most powerful trends, but there, of course, are many others.

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