Indexing with added style
Despite the emergence of hundreds of new securities indices this year from all the major providers, investors are increasingly turning to tailor-made benchmarks. Independent London-based consultancy Style Research is now launching a new ‘index’ service to create global equity performance standards which suit a client’s individual style.
“We want to give managers the opportunity to represent themselves fairly against a standard which mirrors their practice,” says Robert Schwob, managing director of Style Research. In many cases off-the-shelf indices cannot do this. When filtered by European value or growth, indices from the major providers have strong sector or country imbalances, he says.
The company’s new web service gives clients access to its database of 22,000 companies. Using this, they can establish their own sort criteria to identify only those companies which are relevant to their particular investment strategy and style.
When the request is submitted, the service calculates not only ongoing information but provides 10 years of historical data for the new benchmark. The style indicators or guidelines are calculated monthly, and can be linked directly to the company’s portfolio analysis system.
As an example to show why more complex individual screening can be necessary, Schwob cites a fund manager targeting value companies in the Euro-zone. If these are simply sorted by book to price, the result will be a significantly underweight position in the Netherlands, and an overweight position in France, Germany and Italy.
However, many managers would be anxious to avoid this implicit country weighting.
Similarly, when sorting by growth or value, certain sectors would come to the fore depending which criterion was used. For example the utilities sector, says Schwob, is itself a growth sector.
And although a portfolio may be managed globally, investment selections may be best made on a local basis, with a stock chosen against its direct local competitors.
Schwob says this type of bespoke benchmarking is now far more relevant to European managers than it was two or three years ago. They are becoming more ‘style-aware’ he says.
Whereas before the single currency was introduced, a French fund manager might restrict themselves to France – an area small enough to allow a thorough knowledge of major stocks – that manager’s remit is now spread right across Europe. As the new area is too broad to hope for an in depth knowledge of the individual stocks, the only option becomes to look at the themes running across Europe, says Schwob.