It wasn’t too long ago that the concept of factors in investing was the exclusive province of professors of finance and a few active “quant” managers. Mainstream portfolio construction was focused primarily on asset allocation. Within equities, that meant achieving the right balance in allocation to various segments such as large cap and small cap, country and sector, and perhaps value and growth style.
Traditional style indexes – such as growth and value, large and small cap – are designed to represent broad market segments based on investment styles and sets of characteristics that are focused on by professional investment managers, making them excellent benchmarks for evaluating the skill of active managers.
In 1995, Nomura Research Institute and Frank Russell Company’s index group partnered to create the Russell/Nomura Japan Equity Indexes (RNJEI) as benchmarks for the Japanese equity market. The year 2015 marks the 20th anniversary of the creation of the RNJEI series and provides a good opportunity to evaluate the effectiveness of the indexes.
The RNJEI series was created to accomplish several objectives:1
An equity factor index is intended to offer controlled exposure to a factor or factors. But how does it achieve this goal in practice? There are a number of conceptual and design steps involved in the creation of an equity factor index and in this paper we explore these decisions.
Recent volatility in the value of the euro, Swiss franc and Japanese yen suggest that risk in global currency markets may be on the rise. The currency market is the world’s largest financial market and, with the ongoing globalization of portfolio exposures, is becoming an increasingly important component of investors’ returns. However, if investors share their currency exposures with those implicit in their equity, fixed income or other benchmarks, they may be setting their currency policy unconsciously, rather than consciously.
The earth is flat . . . or so it was believed, until sometime after 500 B.C.1 Until then, explorers dared not venture too far, for fear of reaching the physical limits of the planet and . . . falling off. It’s easy to imagine how constrained the world must have seemed to those who held this view. Equity indexing, too, has had its own “flat earth” period, when the global opportunity set seemed to be limited to the largest stocks from a select number of large countries.
In finance and investment theory, factors are variables that drive equity returns. In recent decades there has been great interest in identifying factors that help explain equities’ behavior, and factor research has been actively pursued across other asset classes, such as fixed income and currencies.
Capitalisation weighted indexes are considered to be representative of the broad market opportunity set and are characterised by high levels of liquidity, investment capacity and relatively low levels of turnover. However, concentration risks that may arise during market bubbles and the inherent factor traits of capitalisation weighted indexes have prompted alternative approaches to index construction, with the resulting indexes commonly referred to as “smart beta”. Smart beta indexes encompass both alternatively weighted and factor indexes.
FTSE Russell has today announced the results of the FTSE China Index Series quarterly review. Bank of Shanghai (A) and China United Network Communications (A) were added to the FTSE China A50 Index and, as a result, Daqin Railway (A) and Shanghai RAAS Blood Products (A) will be deleted from the FTSE China A50 Index. In the FTSE China 50 Index, Postal Savings Bank of China (H) and China Galaxy Securities (H) have been added in this review period. As a result Sinopharm Group (H) and Hengan Intl Group (H) will be deleted from the FTSE China 50 Index.
As China continues to open its markets to international investors, FTSE Russell is pleased to confirm the launch of two new benchmark indexes for China A-shares stocks. The FTSE China A Innovative Enterprise Indexes will provide a benchmark for the fast-growing ChiNext stocks listed on the Shenzhen Stock Exchange.
By: Catherine Yoshimoto, Senior Index Product Manager
"Follow the yellow brick road” is perhaps the most famous advice ever uttered in movie history. But whether or not you imagine that the 2016 presidential election equates to the cyclone in The Wizard of Oz, President Trump has vowed to invest more in America’s basic infrastructure including roads. Even before the November election, interest in infrastructure was gaining ground. For market participants looking to track this segment, FTSE Russell offers an index series with a focus on infrastructure and infrastructure-related companies.
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