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.
An investor can face a dilemma when looking for assistance in building an investment portfolio. Myriad sources offer advice, often rendering the decisions to be made difficult at best. Soldiering on with the advice and reading through literature, the investor will fairly soon come across a discussion on volatility, as reducing portfolio volatility has been a notable recent theme. Reading on, the investor will shortly realize that although sometimes considered together as “low volatility” strategies, the two most commonly-stated strategies for volatility are very different.
Factor-based and alternatively-weighted indexes have transformed the current investment landscape. These indexes, generically called “smart beta indexes” are weighted differently than traditional market-value or capitalization-weighted indexes, providing new tools to help tailor exposures to specific risk and return objectives. For the purpose of this study we will use the term “smart beta” or “smart beta products” to refer to an investable product such as a mutual fund or ETF that closely tracks one of these indexes.
This paper describes the FTSE country classification process which is designed to be transparent and evidence-driven. External advisory committees ensure that the criteria used to determine country classification meet the needs of global investors and are judged objectively. Consistent with the Principles for Financial Benchmarks published by IOSCO in 2013, the operation of the country classification process is overseen by FTSE’s strong internal governance structure.
FTSE Russell, the global index provider, confirms today that Scottish Mortgage Investment Trust and Rentokil Initial will be joining the FTSE 100 Index. In the rebalance, Capita and Dixons Carphone will leave the UK’s leading index and enter the FTSE 250 Index.
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.
If only Gordon Gekko had had the sense to use a Russell Style index, his fate and that of the fictional Teldar Paper could have been so different. In the 30 years since the classic movie "Wall Street" debuted, the non-fictional paper industry has undergone major reorganization and consolidation of the sort that would have proven Gekko a visionary. The Russell Style Indexes also got their start in 1987 and have served witness to these dramatic changes, using a rules based and transparent process that does not require illegal insider information.
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