Alternative beta is catching on, with Russell Investments the latest market index builder to embrace the non-cap-weighted index trend by inking a deal with Rob Arnott’s Research Affiliates company.
Russell will launch a series of “fundamental” indices, in association with Research Affiliates, during the third quarter of this year.
Fundamental indices rank stocks according to a range of factors which the strength of the underlying businesses rather than the price multiple of all their shares (capitalisation value). Critics have suggested that it is a form of value-biased index but Research Affiliates say that more factors are assessed than price:earnings figures.
Arnott, the founder and chair of Research Affiliates, said that about US$50 billion in assets were being managed using fundamental indices around the world.
Russell’s Ron Bundy, the managing director for indices, said the firm would continue to believe that cap-weighted indices represented the best description of the market’s opportunity set and therefore the most appropriate benchmarks for investors.
However he noted the increasing demand from index investors for a “more active” approach using alternative beta.
The big quant index houses, State Street Global Advisors and Barclays Global Investors (now BlackRock), have provided various bespoke and packaged indices in recent years.
SSgA, for instance, has a “diversified” index strategy which combines low-volatility with value and size tilts.
Russell, which is best known for its multi-manager funds and asset consulting, pioneered the development of growth and value indices in the US in the 1980s. The first index in the new series is likely to be a global equities index.
Research Affiliates, based in Newport, California, also provides a range of investment services from direct asset management and sub-advisory services to licensing agreements.
