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July / August 2008
Money and Your Mind
IN THIS ISSUE
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Written by Journal of Indexes Staff
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Thursday, 12 June 2008 05:00 | Related ETFs:
DBV / INP / KLD
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Dow Jones Embraces RBP In New 130/30 Indexes
Dow Jones has launched a new suite of indexes that follow the "130/30" strategy popular with many hedge funds.
The 130/30 strategy is designed to deliver higher-than-market returns without taking on excessive risk. In the classic 130/30 strategy, a hedge fund manager starts with a 100 percent long position in the market and then layers a 30 percent long/30 percent short stock-picking portfolio on top of it. In this "30/30" portfolio, the manager goes long the stocks she likes the best and short the stocks she likes the least. The idea is to maintain 100 percent net exposure to the market while adding alpha with the 30/30 portfolio.
The Dow Jones U.S. RBP indexes use a unique methodology developed by Transparent Value LLC to select stocks for the 30/30 basket. Transparent Value's methodology, called "Required Business Performance" (hence RBP), uses discounted cash flow analysis to determine how much revenue a company needs to generate each quarter in order to justify its current stock price. It then examines historical revenue trends to project the likelihood that the stock will meet this RBP requirement.
Stocks with the highest probability of meeting their RBP form the 30 percent long basket in the new indexes, while stocks with the lowest probability form the 30 percent short basket.
Currently, the DJ U.S. RBP index family consists of three major indexes: the core Dow Jones RBP U.S. Large-Cap 130/30 Index, plus similarly constructed growth and value versions.
Dow Jones expects to launch additional indexes (including non-130/30 indexes) using the RBP methodology.
Merrill Joins The Frontier
In March, Merrill Lynch Global Research rolled out the Merrill Lynch Frontier Index, joining the growing number of indexers moving into the frontier market category. The new index covers 50 of the largest and most-traded companies from 17 countries in Asia, Africa, Europe and the Middle East. The list includes companies from countries like Nigeria, Cyprus, Kazakhstan and Morocco. Vietnam, one of the most spectacular frontier market success stories, is also included. Stocks eligible for inclusion must have a minimum market capitalization of $500 million and a minimum three-month average daily turnover of $750,000. They must also have a foreign ownership limit of more than 15 percent.
There is not yet an ETF tied to the index, but many expect one to launch in the future.
UBS Index Tracks Food Inflation
Spurred on by the continuous increases in food prices, UBS AG and Bloomberg Finance have launched the UBS Bloomberg CMCI Food Index. The new commodity index covers 13 different food commodities ranging from orange juice and lean hogs to coffee and soybeans. The index is based on the same methodology as the UBS Bloomberg Constant Maturity Commodity Index, which incorporates multiple maturities into its calculation and has a complex, multifactored weighting methodology.
''The UBS Bloomberg CMCI Food Index was developed in response to a growing demand from investors looking to hedge against this price inflation as well as from those looking to buy food-related commodities for diversification purposes,'' said UBS head of Commodity Index Structuring Morgan Metters.
At the index's launch, corn had the largest weighting, at 17.33 percent, followed by soybeans, at 14.94 percent. According to UBS, the new index is designed to underlie investable products like ETFs. It is calculated in U.S. dollars, euros and Swiss francs.
KLD Racks Up Licensees
Not even a year after it launched its global sustainability indexes, KLD is licensing them near and far. As of March 2008, Northern Trust, TIAA-CREF and Pax Worldwide Management Corp. now offer KLD index-based funds tied to the benchmarks, which are the company's first broad-based, global benchmarks. The indexes evaluate more than 700 stocks from 24 countries around the world, and include a flagship index and five regional subindexes.
Northern Trust rolled out its Northern Global Sustainability Index Fund in March. The no-load mutual fund charges an expense ratio of 65 basis points. Meanwhile, TIAA-CREF has licensed the index to use in its previously all-domestic, actively managed CREF Social Choice variable annuity account. The portfolio is the largest socially screened portfolio in the U.S., with 430,000 investors and $9.2 billion in assets.
Finally, Pax World Management Corp. has licensed the KLD Global Sustainability Index, the KLD North America Sustainability Index and the KLD Europe Asia Pacific Sustainability Index for use in a variety of investable products, including ETFs.
Merrill Tracks Emissions
Contracts With New
CO2 Emissions Index
Merrill Lynch recently launched a carbon emissions benchmark, the MLCX Global CO2 Emissions Index, that tracks two types of emissions contracts. The contracts are the European Union Allowance (EUA) contracts established under the European Union Emission Trading Scheme and the Certified Emission Reduction (CER) contracts that are part of the Kyoto protocol.
The two contracts have equal standing in the index, but component weightings are based on liquidity. Merrill also calculates a subindex for both contract types. According to a Reuters article, CER contracts represent about 29 percent of the index, while EUA contracts represent about 71 percent.
It is likely the firm will add other types of emissions contracts to the broad emissions index as they begin trading on the relatively new and developing global carbon credit market. Merrill's intent is for the MLCX Global CO2 Emissions Index to be used to underlie investable products, like ETFs.
S&P Offers A Narrow
Slice Of India
At the end of March, S&P launched the S&P India 10 Index. With only 10 components, the new index seems comparatively narrow. Capitalization minimums are the reason. Companies eligible for inclusion must have market capitalizations of at least $500 million and a monthly average daily traded value of $1 million. Rather than size, the components are selected and weighted based on liquidity, with a 20 percent cap placed on individual components. Stocks are selected from the S&P/IFCI India Index. All components trade as ADRs or GDRs on developed market exchanges.
S&P accounts for the foreign ownership restrictions when determining a company's float, which should take care of the new restrictions on capital inflows imposed by the Indian government last year. The index itself was designed to underlie investment products, according to S&P.
S&P Offers Access To Africa
With Three New Indexes
Standard & Poor's recently launched its Africa index series, the first of its kind from a large index provider.
The S&P Pan Africa Index is designed to represent 80 percent of the market capitalization of each of 12 African markets: Botswana, Cote D'Ivoire, Egypt, Ghana, Kenya, Mauritius, Morocco, Namibia, Nigeria, South Africa, Tunisia and Zimbabwe. It has a total of 333 companies and represents about $362 billion in adjusted market capitalization.
The S&P Africa Frontier Index excludes Egypt, Morocco, South Africa and Tunisia and has a market cap of around $72 billion.
Lastly, there is the narrowly defined S&P Africa 40 Index, which includes the largest and most liquid stocks in the continent. It has components from eight African countries and a market cap of $207 billion.
New Alternative Long-Short
Fund From Rydex
In March, Rydex Investments launched a new long-short index mutual fund that uses a fund of funds approach to investing in alternative benchmarks that include ETFs.
The Rydex Alternative Strategies Allocation Fund (RYFOX) can allocate its assets to absolute strategies in five segments using ETFs or mutual funds. Around the time of its launch, the fund was invested primarily in (by order of total assets) the Rydex Managed Futures Strategy Fund (RYMFX), which tracks the S&P Diversified Trends Indicator index (47.5 percent of the portfolio); the Power- Shares DB G10 Currency Harvest (AMEX: DBV) ETF (21 percent); and the Rydex Commodities Strategies Fund (RYMEX), which follows the S&P GSCI Commodity Index (14 percent). The remainder of the portfolio was invested in the Rydex Real Estate Fund (RYREX).
The RYFOX fund rebalances monthly but can do so even more often depending on its quant screens. The annual expense ratio is estimated at 1.76 percent. No fund of funds fees are charged.
Direxion Leverages India
In March, Direxion Funds expanded its offering of leveraged mutual funds that track emerging markets with the launch of its India Bull 2X Fund (DXILX), which aims to capture 200 percent of the daily price performance of the MSCI India Total Return Index.
The new fund invests mainly in the iPath MSCI India Index exchange-traded note (NYSE Arca: INP) and derivatives linked to it. Direxion says it will use other exchange-traded products that track India's market if INP continues to have difficulty tracking its index.
DXILX charges a net management fee of 1.50 percent.
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