The role of index funds in retirement asset allocation

David R. Gallagher*

*Corresponding author for this work

Research output: Chapter in Book/Report/Conference proceedingChapterResearchpeer-review


Pension fund trustees have exercised significant management and fiduciary
responsibilities in activities on behalf of pension fund members. Some important tasks undertaken by trustees are the implementation and monitoring of the
plan’s portfolio strategy and performance. Therefore, once the pension fund
has decided on the strategic asset allocation to be adopted, manager and/or
investment selection is critical. In this respect, trustees are required to make
choices about whether the plan will exercise either active, enhanced index, or
passive fund management (or some combination of the three). Active management is built on the premise that capital markets are not perfectly efficient, and
that information gathering and synthesis can lead to superior investment
returns relative to the market. At the other end of the spectrum, passive fund
management seeks to replicate the returns of the underlying benchmark, which
means that outperforming the market is not the goal of the strategy. Enhanced
index management is largely passive management, although quantitative techniques are permitted such that the strategy attempts to generate small alpha
(that is, outperformance of the market) in a risk-controlled setting.
Original languageEnglish
Title of host publicationRetirement Provision in Scary Markets
EditorsHazel Bateman
PublisherEdward Elgar Publishing
Number of pages23
ISBN (Electronic)9781847202826
ISBN (Print)9781843769064
Publication statusPublished - 26 Jan 2007
Externally publishedYes


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