The State Street Investor Confidence Index is published at 10am Eastern Time in Boston on the second to last Tuesday of each month.
Developed by State Street Associates, the bank’s academic partner, the index is “an unbiased quantitative measure of the investment behaviour of thousands of institutional investors”.
The index was launched last year using a model developed by academics Ken Froot and Paul O’Connell. The basis they use for measuring investor confidence is risk tolerance. The model uses holdings and flow information from State Street’s own custody database, which the bank says provides a “clear and objective measure of risk tolerance”.
The team are certainly high-powered. Froot for example is professor of business administration and director of research at Harvard University’s Graduate School of Business. He is also a consultant to the International Monetary Fund, the World Bank and the Federal Reserve.
State Street spokeswoman Hannah Grove says the index is “increasing in traction” as “more and more people are looking at it”. Stanley Shelton, senior managing director and head of State Street Global Markets, says the index is being taken into account by central banks. The bank was “pleased with the impact this has had at the policy level,” he says, adding that the index provides central banks with a way to gauge the impact of interest-rate decisions. He points out that central banks such as the European Central Bank, the Bank of Japan and the Fed have mentioned the index in their published writings. “They are all pretty active users of this.”
“This could spawn a whole new approach to portfolio management,” Shelton says. The index mostly tracks equities, the riskier assets, Froot says – while O’Connell explains that the index is “a broad brush tool to help investors see what is going on”.
Shelton agrees that it is not predictive. But it shows “this is where the world is now – which is a good place to start”.
This assertion is borne out by that low correlation, 0.27, between the index and US stock prices. State Street has tracked the data back to September 1998, when it was at 86.4. Its highest-ever mark was 111.2 in February 2001. In November it stood at 106.2. Incidentally, the index is not a percentage – it was set at 100 in 2000.
One query investors may have about the new index is over a possible conflict of interest, what with a bank having prior access to potentially market sensitive information.
Spokeswoman Grove, while acknowledging that the index is market sensitive, says there is a so-called Chinese wall between State Street Associates and the bank itself and that the subsidiary is on a separate system.
“Prior to its release there are a very small number of people, maybe three of four, who have access at State Street Associates. “The protocol is very very analogous to the consumer confidence index.”
“We haven’t said this is a leading indicator,” she adds. “It’s a very valid indicator.”