JOI: Do you believe that a passive strategy can be effective in emerging markets?
Shah: It’s under consideration. Right now we have only one manager in the emerging markets space. One of the things we may decide is whether or not we need to add another manager in this space. When we do that project, we will definitely consider the passive index option. That’s when we do a much deeper dive. I don’t discount it right at the front, so it will definitely be considered.
The reason is there is a huge fee difference, and you have to keep that in mind. With active management, the outperformance is there, but is it on a consistent basis? When we evaluate that segment, we will definitely be looking at the emerging markets index option.
JOI: Have you ever looked at fundamentally weighted benchmarks as opposed to the more traditional market-cap approach to indexing?
Shah: To date, we have not done that. When we do our asset liability study, which is scheduled for early next year, that is one of the issues I will have on the table. The simple fact is index investment in general is more cost-efficient, and so you want to make sure you’re considering all options when you rebalance your portfolio, and not only think within the active management space.
I don’t know how accepted that concept is, but it’s going to be a good conversation with our consultants. But you know what? The active mandates are not just going to be a given assumption. Passive index options are going to be part of the deep dive in the consideration for anything that we do in the public market.
JOI: Are there any asset classes in particular where you think that indexing is probably not an appropriate approach?
Shah: I don’t expect to use index investing in alternatives. With our public markets portfolio, if we are looking at a segment within the public markets to revise because it’s out of range or we want to change the manager lineup for some reason, the index options will be part of that project.
JOI: Do you use ETFs at all?
Shah: We don’t currently have them in our portfolio, but I think we’re going to be talking about them when we do our asset liability study and discuss the strategies. I don’t know if I have a strong feeling one way or another.