Given the difficulty of beating the market, some managers have abandoned this ambition and simply target a performance that is as close as possible to that of the corresponding market index. To do this, they do not need to carry out extensive research and analysis to select the best securities. They simply replicate the market index by investing in all securities contained in the Index, and this in exactly the same proportions that the individual securities have in the index.
In the German DAX index, for example, that reflects the market for German equities, car manufacturer BMW has a weight of 3.17 percent, software maker SAP a share of 8.15 percent and Deutsche Bank accounts for 2.85 percent *. An investment fund that wants to replicate the DAX index will just invest 3.17 of the money entrusted to it by investors in BMW shares, 8.15 percent in SAP shares, 2.85 percent in Deutsche Bank shares and so on. That way, its performance will certainly never be higher than that of the index, but it will not be much worse either.
It is said that these managers manage their funds passively, and these funds are called “passive funds”. Besides the active funds, they are another important category of funds. In our article entitled “Passive management: the path of least risk … for the manager,” we explain a bit more in detail how this type of fund works and what advantages and disadvantages it has.
