Bank introduces indexed investing – Chase Manhattan Bank

Ray Brady

Bank Introduces Indexed Investing It was a typically sedate corporate dining room in mid-Manhattan, but the announcement that came out of it hit Wall Street with the impact of a bomb. As members of the financial press scribled notes and television cameras rolled, an official of Chase Manhattan Bank, the nation’s third largest, announced a dramatically new kind of investment offering–one that is indexed to go up and down with the stock market.

The Market Investment Index, as it’s called, works this way: You make a minimum deposit of at least $1,000, which goes into a kind of certificate of deposit. Under one of three available plans, your return on your investment could be as high as 75 percent of the gain in the Standard & Poor Composite Price Index–or nothing if it drops (although you get your principal back). For example, if the S&P went up 10 percent, investors in the new market fund could get a return of 7.5 percent. (Under other available options, you get a lesser return if the S&P index rises, but you do get some minimum interest if that index drops.) What’s more, the Federal Deposit Insurance Corporation insures an account up to $100,000.

“It captures the best characteristics of an indexed mutual fund and a bank certificate of deposit,” says Robert R. Douglass, chairman of Chase, in announcing the new investment. “It gives the customer the chance to profit from an increase in the market without [risking] the principal.”

While some Wall Streeters wonder if the plan conflicts with federal law separating commercial banks from the securities business (a point still being discussed), the announcement also sent many investors scurrying to the stock tables, wondering if this might not be the time for the prudent to look either into the Chase plan or into one of Wall Street’s indexed mutual funds.

As nearly all readers know, the stock market has been on a real rampage through most of this year. But what about the professional managers of Wall Street, who charge hefty sums to invest one’s money?

I must admit that a few managers I know have admirable track records, leading their clients to gains of 50 percent or more so far this year. But others have considerably less favorable records during one of the biggest bull markets ever. It took off so fast and so unexpectedly that they couldn’t get their investment acts together.

What’s more, the new tax law has turned Wall Street into a whole new ball game. As the difference between long-term and short-term capital gains shrinks, the market stands to become even more volatile–with more swings, up and down, as investors no longer wait for capital gains but simply trade, trade, trade.

So what about looking at those funds that, like the Chase plan, simply tie their results to a broad measure of the market? For example, the S&P 500 measures the performance of 500 stocks on the New York Stock Exchange; professionals consider it a more accurate gauge than the better-known Dow Jones Industrial Average, which measures just 30 stocks.

The largest and oldest of the index funds–the Vanguard Index Trust–buys virtually all of the stocks on the S&P index. No attempt is made to manage the portfolio through fundamental or technical analysis.

Some Wall Streeters have criticized the index funds. As one professional puts it, “Why pay a firm to simply go through a mechanical process, buying whatever is in the index?” Michael Metz of Oppenheimer & Company, the giant Wall Street firm, takes a surprisingly different view. Though he’s in the business of advising on individual stocks, Metz says: “The index funds theoretically have the potential to put us out of business. But I still think they’re a pretty good idea.”

The reason? “You don’t have to make decisions about what individual stocks to buy,” Metz points out. “And you don’t have to worry about what your timing should be. Besides, the funds minimize transaction costs.”

A good point: The cost to the investor in one of the funds is low, since expenses tend to be low, and management advisory fees are modest. After all, the fund’s managers are only buying stocks in an index. Not only that, the index funds hardly need to zip in and out of the market, so commission costs and oeprating expenses are low.

The funds themselves come in a variety of shapes and sizes. The Colonial Small Index Trust is linked to an index made up of the smallest 20 percent of companies on the New York Stock Exchange. Another–Continental Heritage’s S&P 100 Growth Fund–closely matches a smaller index of 100 stocks on the New York exchange.

The whole idea, it should be noted, isn’t perfect. In a slumping market, the index fund strategy may be worse than that of the canny investor who knows how to get out of the market before the roof falls in.

Some of the stock-picking variety of Wall Streeters also note that a number of funds have failed to keep up with the S&P 500. Still, compare it with the record of the Vanguard Index Trust: Over the past 10 years, the S&P 500 has racked up an annual rate of return of 13.7 percent on the investors’ money; the Vanguard has not been far behind, with an annual rate of 13.3 percent.

“Listen,” says Michael Metz, “most professional money managers don’t match the averages. This means that the index funds–along with offshoots like Chase Manhattan’s Market Investment Index–may pick up more and more converts as time goes on.”

COPYRIGHT 1987 U.S. Chamber of Commerce

COPYRIGHT 2004 Gale Group

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