More recently, the role of index tracker providers in influencing how tracker and closet tracker funds should invest has become a prominent topic in this highly charged debate, in addition to continued speculation as to how trackers will fare in a market downturn.

With 70 to 80 per cent of active funds failing to out-perform an appropriate index, the reasoning behind the growing popularity of passive management on both sides of the Atlantic has not been difficult to rationalise.

In a market that is increasingly momentum-driven, being underweight in those sectors that continue to drive the market higher is quite simply not an option.

Index tracker funds, by indiscriminately investing in the market's biggest capitalised stocks within an increasingly narrow range of sectors, at any price, offer the line of least resistance for those seeking to minimise the risk of underperforming an index. The final quarter of last year, for example, will see many UK pension funds, underweight in telecom stocks, underperform the All Share index by some 2 per cent.

Such is the concern of relative under-performance among UK pension funds, in particular, that recent research conducted by US-based consultancy Greenwich Associates confirmed that these key players are increasingly moving away from balanced management towards specialist and index-tracking management.

Indeed, one-third of UK pension fund UK equity holdings are now passively managed, given general disappointment with the balanced approach adopted by several prominent UK pension fund managers.

However, this number excludes those mainstream active managers, perhaps the overwhelming majority, who surreptitiously track indices.

As any manager knows, the larger the number of funds that track an index, the more difficult it is to out-perform the benchmark, subject, of course, to the impact on market efficiency.

Coinciding with this increased popularity for index-tracking funds has been the launch of a plethora of new indices to reflect changing investment patterns, most with a relatively low number of constituents to allow cost-efficient replication.

Adding to the 3,000 or so existing indices, this has in turn intensified the battle between the three top index providers for pre-eminence in the setting of global benchmarks. Most reflect either the move away from regional to pan-European sector investing, in response to an Emu-inspired single equity market, globalisation and the dominance of multinational companies in internationally invested portfolios, or the seemingly insatiable demand for internet stocks.

In the latter case, a dramatic increase in the number of investors scrambling into the latest internet offering has seen the recent introduction of a FTSE Techmark 100 index. In addition, the composition of many older, more established indices has changed to mirror the shift away from capital-intensive industries to those that rely on intellectual capital. In this technologically driven world, bits and bytes now matter more than buildings and bulldozers.

A study published in December by the London Business School highlighted the fact that 70 per cent of the UK's 100 biggest companies by market value in 1900 were in sectors that either no longer exist today or are of little significance.

Needless to say, increased weightings of technology stocks within these older, more established, indices have served to increase their volatility, especially those that are market value weighted.

Take internet portal company Yahoo. Half of the four-fold rise in its share price last year was accounted for when it entered the S&P in December. Even in the UK, a relatively unknown microchip designer, ARM Holdings, replaced long-serving British Energy in December's FTSE 100 reshuffle.

Although the elevation of technology stocks may raise concerns of hope replacing experience, FTSE technology stocks represent only about 30 per cent of the market capitalisation of the UK's biggest company, BP Amoco.

But in the US, technology stocks account for about a quarter of the entire market. Together with telecom stocks, they are valued at more than the entire Japanese market, making the US particularly vulnerable to the technology bubble bursting.

Another interesting finding in the LBS survey is that the increased concentration of the UK equity market and the resulting decline in investor diversification, as a result of the increased popularity of index trackers and the copy-cat tactics of momentum-driven active managers, is not unprecedented.

Today's top 10 UK companies account for about 35 per cent of UK market capitalisation, as did the top 10 of 100 years ago. Whereas today it is four sectors - banks, oil, pharmaceuticals and telecommunications - that make up nearly 60 per cent of the FTSE 100, a century ago it was one dynamic growth industry that dominated the market - the railways.

In fact, market concentration levels were generally higher during the first half of the last century than they are today.

Even 20 years ago, the All Share index was less diversified than it is today.

Nevertheless, the prices of certain shares in these dominant sectors have been artificially boosted as a result of a shortage of supply in many cases being chased by index trackers, which must hold the stock's index weighting.

In response to this development, leading index provider FTSE International is, from June 2001, to restrict the weighting of existing constituent companies within its indices whose free float of equity available to the market is less than 75 per cent of outstanding shares, so as to make its indices more representative of the market.

The changes will also see the exclusion of several South African companies from the FTSE 100 as FTSE International tightens up its rules regarding nationality.

Inevitably, the share prices of those companies affected under each of these proposals dropped sharply, given the need for both index trackers and pseudo-trackers to readjust the composition of their portfolios once these changes are implemented.

In theory, this should reduce market concentration although last September's European Commission proposal to allow index-tracking funds to invest up to 35 per cent of their portfolios in a single stock from the current maximum of 10 per cent looks certain to muddy the waters of the concentration debate.

The FTSE International move, in conjunction with the recent changes made by its peers, Stoxx and MSCI to the composition of their European indices, has also served to illustrate the increased power index providers now have over market valuations by influencing the way in which many institutional investors construct their portfolios.

More than ever, this emphasises the importance attached to choosing which index to track. Although indices containing large liquid stocks have generally out-performed those containing minnows in recent years, owing to the premium commanded for liquidity, 1999 was quite the exception.

With the scramble for internet stocks last year providing the fuel for momentum investing, technology-rich indices provided investors with quite extraordinary returns. The Nasdaq returned an all-time US stockmarket record of 86 per cent while the S&P produced a respectable, though less awe-inspiring, 21 per cent. A not dissimilar dichotomy of returns was also evident in the UK.

This is all very well while the market continues its upward march but what is likely to happen to fully invested tracker funds as and when equity markets correct?

It is fashionable to claim that trackers should under-perform in falling markets because of their inability to move into cash and to hedge against market risk but bear markets are notoriously difficult to predict and no active fund manager wants to count the opportunity cost of investing defensively.

One only has to look at the 66 per cent of UK growth funds that failed to outperform the All Share index during the period September to December 1987 to realise this. But the ultimate test of their resilience has yet to appear.

While on the subject of performance, the lower costs and turnover of tracker funds allied to the efficiency of market pricing make them hard to beat over the longer term.

But, as was demonstrated in the second quarter last year in the US when, unloved and under-rated, US cyclical stocks took over the running from growth stocks, active management in general can and does occasionally outperform.

Perhaps more important though, specialist active management, when properly resourced and supported by original research and a disciplined investment process can produce modest gains over and above the appropriate benchmark. The performance of Fidelity's Magellan fund over the past 35 years amply demonstrates this.

At a time when equity markets are pricing in Nirvana and likely to tread water at best in the medium term, sharp-suited diligent stockpickers and value managers must surely prosper over auto-piloted computer modelling. As always, only time will tell if past performance proves to be a guide to the future.