Beta trumps alpha: State Street
Investors can benefit from the increased volatility in the equity market, according to State Street Global Advisors (SSgA) product engineer Jonathan Shead.
Instead of joining the swelling ranks of investment managers chasing alpha, the launch of SSgA’s wealth weighted index strategy aims to harness the excess beta that is now available.
“What we’re trying to capture really is the wealth of a company over time,” Shead said.
Speaking at a recent gathering in Sydney, Shead demonstrated the difference between traditional market capitalisation indices relative to the wealth weighted indices.
Tracking these over a 10-year period between 1993 and 2003, the movements predicted using a market cap approach diverged considerably from the actual company financial position.
The wealth weighted approach adapted with the FTSE Growth Wealth Allocations index mirrored actual market movement much more closely.
Shead said early adopters of this strategy could reap significant advantages, with the global concept only about 12 months old.
However, he stressed that this will mainly be of interest to institutional investors who have the required time horizon of between five and 10 years.
The strategy adapted by State Street will track the return of the FTSE GWA Developed Index, with a tracking error against that index of approximately 1 per cent per annum.
The FTSE GWA index comprises over 2,000 listed companies across 23 developed markets.
Shead predicted there would be a reduction in core active management, with greater opportunities represented within the passive space.
“Our belief is that there are more efficient ways to construct benchmarks.”
With the passive space representing a way of getting efficient exposure to companies with good capacity, he said SSgA sees “scope for a lot more money to be managed in this way”.
Further down the track, Shead said they may look at adapting the approach for inclusion on a retail investment platform, but at this stage it was only available at the institutional level.
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