According to a press release, the new index is comprised of three strategy indices covering long/short large-cap U.S. equities and long/short commodities. The Index applies Standard & Poor’s target risk asset allocation framework which focuses on downside risk, and “seeks to deliver consistent returns over time with low volatility,” according to the firm.
The S&P MATRIX Target Risk Index makes use of what S&P termed “three innovative features”, which it contrasted with traditional mean-variance based allocations: First, a shortfall, or downside, risk constraint is employed instead of the traditional total risk constraint. Second, the Index incorporates assumptions about the return distribution to make the framework more efficient in the treatment of alternative assets which reflects the nature of three underlying strategy indices, and third, allocations to the underlying strategy indices are limited based on their contribution to total portfolio risk.
“The S&P MATRIX Target Risk Index was created to help investors navigate two co-existing but opposing views of the future: a world filled with optimism and one filled with uncertainty,” comments Steven Goldin, Vice President of S&P Strategy Indices. “It does so by providing access to 3 long/short strategies which are combined using S&P’s Target Risk asset allocation framework which is focused on downside risk.”
The S&P MATRIX Target Risk Index is comprised of three strategy indices. The asset allocation for these indices is updated quarterly to reflect the underlying investment opportunity of three represented strategies:
- Barclays Capital QBES Large Cap US Excess Return Index, which S&P says is designed to take advantage of the market’s reaction to surprises in the components of the S&P 500 company earnings versus consensus estimates for those companies selected. Monthly, the strategy identifies 25 stocks that have announced earnings exceeding expectations. The index then goes long an equally-weighted basket of these stocks and short the S&P 500 TR Index, according to the announcement.
- Barclays Capital ComBATS 6A Excess Return Index is designed to take advantage of the fundamental dislocation in identifying a pure spot price. Monthly, the index shorts the front month futures contracts on a fixed set of commodities at fixed weights, and then employs an algorithm to identify a futures contract further out the term structure which it goes long.
- Barclays Capital GSP US Large Cap Excess Return Index attempts to capture the most recent market information on a universe of stocks filtered through a number of fundamental metrics. The Index takes a long position in the 20 to 25 stocks with the highest PEG ratio (defined as Historic Annual Growth rate divided by the Price/Earnings per share) and a short position in the S&P 500 TR Index.
S&P notes that the S&P MATRIX Target Risk Index attempts to maximize the return per unit of risk through its allocation to the three underlying indices subject to the following: weights in the Index must equal one, and the weight for each component should be within the specified range of 10% to 50%; the risk contribution of an individual strategy must be less than or equal to 50% of the total portfolio variance; and the realized shortfall risk, after optimization, must not be greater than the maximum specified shortfall risk.
The complete methodology for the S&P MATRIX Target Risk Index can be found by accessing: www.indices.standardandpoors.com