Passive replication of the ‘value premium’ in equity markets might be an old idea, but it’s been combined with a more novel attempt to systematically capture the ‘momentum premium’, in a new product which aims to compete with active equity managers and puts the onus on them to prove their genuine alpha creation.
The challenge has come all the way from Boulder, Colorado, the home of Westpeak Global Advisors. Westpeak, the wholly-owned quantitative management division of French bank Natixis, has teamed up with FTSE to create the ‘ActiveBeta’ index series.
Westpeak has developed a process whereby stocks in a regular cap-weighted FTSE universe are ranked according to a momentum signal – simply, their rolling 12-month total return – and a value signal, which is the average of three factors, namely price-to-cashflow, price-to-book value and price-to-sales.
The process creates three indices. For instance, where it is applied to the FTSE Developed Markets Index, ‘ActiveBeta Value’ and ‘ActiveBeta Momentum’ versions of the Developed index are produced, both targeting approximately 50 per cent market cap coverage of the original universe.
The Momentum and Value indices are also combined into the FTSE ActiveBeta Momentum and Value Index, to create a product with 75 per cent market cap coverage of the relevant cap-weighted index.
Westpeak’s director of portfolio management, Steve Platt, said his firm believed markets were “highly efficient but not perfectly efficient”, yet there persisted sources of positive active return which were “reasonably simple to identify”.
Institutions can purchase a feed of any ActiveBeta index for 8 basis points, shared between Westpeak as the indices’ creator and FTSE as its constructor. Westpeak can also act as the implementer, although Platt acknowledged Australian funds might be more comfortable with using an index-oriented manager with a larger local presence, such as State Street Global Advisors. Platt said super funds could use the indices as a “true measure of their active managers’ ability to generate alpha that’s unique to them”.