State street harnesses equity volatility

Increasing competition over fee structures within superannuation funds may drive greater interest in strategies such as a wealth weighted approach, according to State Street Global Advisers (SSgA).

SSgA have devised a wealth weighted approach and claims that instead of chasing the ever-diminishing amounts of alpha in the market, cheaper beta is the target.

While the market capitalisation strategies will continue to be an important approach, the wealth weighted approach will be yet another tool in the toolkit of investment managers, according to SSgA product engineer Jonathan Shead.

He said a number of large superannuation funds from both industry and retail sectors have expressed an interest in the strategy so far, and he expects others to follow.

This is partly because the beta generated by this passive-style approach is available more cheaply than alpha-based returns.

“Our belief is that there are more efficient ways to construct benchmarks [other than market capitalisation strategies].

“What we’re trying to capture really is the wealth of a company over time,” he said.

Speaking at a recent gathering in Sydney, Shead demonstrated the difference between traditional market capitalisation indices relative to the wealth weighted indices.

Tracking these over a 10-year period between 1993 and 2003, the movements predicted using a market cap approach diverged considerably from the actual company financial position.

The wealth weighted approach adapted with the FTSE Growth Wealth Allocations index mirrored the actual market movement much more closely.

Shead said early adopters of this strategy could reap significant advantages, with the global concept only about 12 months old.

The strategy adapted by SSgA will track the return of the FTSE GWA Developed Index, with a tracking error against that index of approximately 1 per cent per annum.

The FTSE GWA index comprises over 2,000 listed companies across 23 developed markets.

With the passive space representing a way of getting efficient exposure to companies with good capacity, he said State Street sees “scope for a lot more money to be managed in this way”.

Further down the track, Shead said they may look at adapting the approach for inclusion on a retail investment platform, but at this stage it was only available to institutional investors.