Our Progress Developing Modern Investment Solutions

Our Progress Developing Modern Investment Solutions

As passive investing and index-based investment methods have become increasingly favored by investors, their limitations have also come to light.

Addressing these issues and driving the search for better solutions is the foundation of our work.

A move to passive

As the capital markets have evolved, so too have investors. A desire for diversification and efficiency has led to the rise of passive strategies that offer broad market performance at a lower cost.

The problem with buying every stock in an index

Many passive strategies have taken the form of tracking an index, which ignores a key rule in investing: that some stocks perform better than others.

Every investor intuitively understands that companies with superior products and better management will outperform less worthy companies over time, and not every stock in the index deserves your investment.

However, this approach usually takes an actively managed strategy and volumes of research to implement.

The foundation of SuperDex

After studying the subject of passive investing extensively over many years, our collective research has produced three key observations:

Principle 1: Although popular, tracking an index is an imperfect investment strategy.

Within any index or industry group are companies that are doing well and others that are not.

We use new technology and sophisticated analytics to process data and determine which companies are succeeding and driving an index’s return.

Owning only the most attractive stocks, rather than all the stocks in the index, is the foundation of our research that has led to Enhanced Indexing.

Principle 2: Improving index construction is important.

Traditionally, indexes are constructed according to the size of the company or the dollar price of the stock, rather than according to merit. Many of the passive strategies designed to track these indexes follow these same methods of construction.

In addition, many of the strategies available are built in pooled accounts with limited transparency where the investor holds a share of a fund rather than owning the stocks directly.

A better approach is to own the stocks directly, in weightings that expand on the benefits of diversification.

Principle 3: In a fast moving world, information has to be re-evaluated frequently.

Sourcing data and evaluating it consistently is essential in order to keep pace with the companies that are succeeding and those that are not.

As more data becomes available and flows through channels with increased efficiency, frequent analysis is critical.

Learn more about Our Strategies based on these key principles.

Issues with index construction

Charles Dow didn’t envision that investors would use his railroad average as an investment strategy when he constructed the predecessor to the Dow Jones Transportation Average in 1884. Dow’s price-weighted construction was simply a function of the railroad industry at the time.

Surprisingly, the same method is still used today in the Dow Jones Industrial Average, where the most weight is given to the highest priced stocks. The limitations of this method are quickly apparent since the price of a stock has little to do with a company’s actual value.

For this reason, Standard and Poors sought to improve index construction in 1923, by creating a competing index known as the S&P 500, where companies are weighted according to their market value (known as a cap-weighted approach). While this method seemed appropriate back then, there has since been little advancement in indexing, despite significant market change in recent years.

Today, a small number of very large companies influence index performance as they are given by far the heaviest weighting in practically all major indexes – a limitation that has yet to be resolved. Instead, the industry has developed investment products that seek to track these very indexes, despite their underlying flaws.

The benefits of SuperDex

With the help of an academic team and advanced computing methods, we have developed a screening system that analyzes the stocks within an index according to a defined set of rules, and then select the best scoring companies from the screen. We apply this process to the market’s leading indexes and asset classes.

Separating the businesses that are doing well from those that are not, while retaining the benefits of broad exposure and diversification, is the foundation of our approach.

Learn more about Our Strategies