Dow Jones Indexes and econometric research firm Parala Capital yesterday launched what they claim to be the first index series in the world using a top-down methodology.
The Dow Jones Parala Global Sector Macro Allocation index is the first in a new family of indices that will take a forward-looking methodology and apply it to benchmarks.
The index will rank 19 global sectors according to how they measure up against existing macro variables. It will then rebalance the index every quarter based on those rankings.
Weightings to oil and gas stocks, for instance, might go up a quarter based on their historical reaction to growth trends, or financial stocks might be underweighted due to historical underperformance in a falling interest-rate environment.
“We were looking to find a way to harness asset allocation and put it into an index product,” explains Jamie Farmer, executive director of Dow Jones Indexes in London. “There is a strong desire among investors for alpha generation while real interest rates are close to zero.”
Dow Jones has teamed up with Parala Capital to construct the methodology based on their research into the way macroeconomics affect stock prices.
“This new index will incorporate macroeconomic indicators in a forward-looking context,” says Steven Goldin, managing partner of Parala Capital in London. “We have found that asset prices are affected by the state of the economy and yet you do not find that in Sharpe ratios or in general beta calculations.”
Both Dow Jones and Parala stress that the methodology is not a black box, preferring to call it a glass box. It is not discretionary, but follows strict rules while adhering to the basics of indexing: being fully invested and covering all sectors.
Farmer notes that it does allow a certain amount of customisation for asset managers who might be looking to licence the product.
The combination of macro overlays leading to customisation of indices looks like a product in tune with strategies being pursued by many of the more sophisticated asset owners.
It will be interesting to see if the product developers who licence this product will see it as in competition to their own discretionary advice and models. At heart it is a product that will offer active investing for passive pricing.