On the right track

The work that earned Eugene Fama the Nobel Prize in economics provided the intellectual foundation for index-tracking funds, which have upended stock picking as investors abandon active money managers.

Fama has argued that financial markets are efficient and that stock-price movements are unpredictable, making it impossible for even professional money managers to gain an advantage.

His conclusion that investors would be better off in low-cost funds that track the market's performance helps explain the success of Vanguard Group, the biggest mutual fund company in the United States, as well as the rise of passive investments, which had more than US$2.6 trillion in US assets between exchange-traded funds and mutual funds at the end of last year.

"His work has been seminal," said William McNabb, Vanguard's chief executive. "A lot of what we have done is based on that work."

Funds that mimic the performance of markets gained momentum after 2008 when the Standard & Poor's 500 Index fell 37 per cent and investors lost faith in the ability of stock pickers to insulate them from losses.

Over the past five years, index funds have been the most popular choice for investors, with assets in US ETFs almost tripling in that period. Investors have pulled about US$284 billion from actively managed equity mutual funds, while pouring US$243 billion into stock index mutual funds since the end of 2008, data from Morningstar shows.