In March 1944, while the second world war was still raging, the Royal Commission on Population was appointed ‘to examine the facts relating to the present population trends in Great Britain; to investigate the causes of these trends and to consider their probable consequences; to consider what measures, if any, should be taken in the national interest to influence the future trend of population; and to make recommendations’. This step was of twofold significance. First, it marked the recognition by the Government of the possible need to take policy decisions in the field of population—to translate the subject from the academic to the political plane. Secondly, it marked official recognition of the fact that despite a flood, during the immediate prewar years, of reports of grave foreboding by the demographers of the day (whose anxieties have since proved to have been exaggerated) the Government had insufficient information to decide whether or not there was a 'population problem' in Great Britain. That the problem does not now appear to be so pressing as was once thought does not abate in any way the necessity for observing the facts. The Royal Commission, indeed, emphasized the necessity for continuous study of the population problem which, they said, will always be changing.

We have chosen Investment Policy and Index Numbers as the title of this paper, because the origin of the Actuaries' Investment Index is to be found in a paper, The Statistical Groundwork of Investment Policy, by the late C.M. Douglas (T.F.A. 12, 173).

The main policy consideration discussed by Douglas was the extent to which offices should invest in equities. Douglas maintained that funds should only be invested in equities if greater security was thereby obtained. To establish the suitability of equities, it was necessary to study the relative variations in equity prices, debenture prices and business activity. For this purpose, index numbers were required.

From a study of index numbers covering the period 1924-28 Douglas concluded that share prices were related to the level of business activity, i.e. to the progress of the ‘trade cycle’, equity prices following the cycle directly, and debenture prices following the cycle inversely, but with a different tempo and interval. If, therefore, an investor could judge the future trend of business activity, a sound investment policy could be pursued.

In this paper we propose to review some of the developments that have taken place in the principles and practice of investment policy over the last twenty-five years, and to study the contribution to these principles that the Actuaries' Investment Index and other index numbers can provide. In addition, we propose to review the methods used in the construction and maintenance of the Actuaries' Investment Index in the light of current conditions.