New Zealand's Index Funds

Mar 1, 1991

How difficult is it to track a market index with a limited number of assets? The question is an important one, since most of the world's smaller equity markets are narrow and are dominated by a few large companies. This type of structure has definite consequences in predicting the risk of portfolios holding these countries' assets. New Zealand is a case in point. Its market is quite narrow; its largest company, Fletcher Challenge, represents more than 23% of the Barclays Index, and its five largest companies make up 64% of the weight of the forty-stock capitalization-weighted index. How well can we track the Barclays Index - New Zealand's most quoted? The compromise between a portfolio which reduces tracking error and one which is easy to implement is an individual decision to be made by each investor. The investor may find the Global Equity Model useful in informing this decision, whether in New Zealand's equity market or in other small markets.