"There is a widespread assumption that indexed funds look after these things for investors and ensure that they are immune from company-specific risk. Not so. Investors in these funds often unwittingly break some of the most basic rules of prudent portfolio management." John Plender in the FT writes.
The answer would be education. (Is that not the answer for almost everything?) If people really knew what they are buying, then they could be happy either a concentrated fund like these or settle for an ETF that tracks the World index or a broader US index. It is not such a big problem except that the writer indicates that consumers presumably do not understand what they are buying.
"Take the Nasdaq 100 index on which the popular PowerShares Nasdaq 100 ETF is based. It has almost $50bn of assets, making it one of the 10 largest ETFs in the US. ..just the top five holdings in the Nasdaq 100 — Apple, Google, Microsoft, Amazon and Facebook — comprise 41 per cent of the value of the entire index. If an active manager took on such a concentration of risk it would be regarded as daring, bordering on reckless. ... in some jurisdictions it would violate regulations. Concentration risk that is forbidden to an active manager is considered reasonable and permissible if it happens to be an index.
A case in point is Europe, where certain UCITS funds cannot have more than 40% exposure from position sizes of 5% or greater. To do so is indeed considered reckless. Yet, the Nasdaq 100 is available via the iShares Nasdaq 100 UCITS ETF and has more than $1.1bn in assets under management in the UK alone. In other words, concentration risk that is forbidden to an active manager is considered reasonable and permissible if it happens to be an index. This is dangerous nonsense.
Similar considerations apply to smart-beta strategies, whereby the fund manager recalibrates broad indices to reflect factors such as growth, value, low volatility, dividends or momentum. Backtesting of these strategies throws up favourable results partly because they tend to have a bias towards value and small-capitalisation stocks, which academic research suggests outperform over the long run...."
Cross fertilise. Read about the autistic mind here and ideas on the arts here. On investing try a thought on stock valuations.