Solactive has released the first Intuitive Beta indices aimed at providing access to easy-to-grasp investment themes such as workforce efficiency, corporate longevity and value investing.

The Solactive Intuitive Beta is an "innovative investment approach" constituting the bedrock of a series of smart beta indices in which intuition, or gut feeling, takes a prominent role in defining the passive investment strategy, according to Timo Pfeiffer (pictured), head of research at Solactive.

One of the primary targets for the new range is the annuities and insurance market in the US as the three indices are built from a universe of US stocks, "but the same rationale can be replicated with European stocks," said Pfeiffer, adding that the goal is to develop strategies that resonate with the end investor, while delivering attractive returns.

"We want to develop indices that can be customised to be deployed in delta one format, as a capital protected product or a risk control strategy," said Pfeiffer. "With Intuitive Beta we are building a whole range of investment strategies targeted at index-linked products, such as indexed annuities, ETFs and structured products, in which we go beyond purely quantitative screens."

According to Pfeiffer, providers are also seeking a storyline behind the strategies they deploy in their products, and with this in mind, the new range also provide "straightforward stories that should of course also translate into performance".

The Solactive Workforce Efficiency US Large Cap Index aims at extracting value from labour-intensive industries where the success of the firm mainly depends on its workforce, as opposed to capital-intensive industries where performance is more dependent on factors such as property, plant & equipment.

"We are not inventing anything new with this index (Solactive P/E Ratio US Large Cap Index) but we are simply packaging this concept into a strategy that can extract value from undervalued US companies, as measured by the P/E ratio," said Pfeiffer, adding that the Solactive Workforce Efficiency US Large Cap Index has a bit more volatility and fluctuation compared to its benchmark (Solactive US Large Cap Index) but shows a 2.6% outperformance during the backtested period 2003 - 2017.

The second newcomer, Solactive P/E Ratio US Large Cap Index, is an index made up of undervalued US companies, as measured by the P/E ratio.

"Price/Earnings ratio is, alongside dividend yield, one of the most basic factors you have in the market. Therefore," said Pfeiffer. The backtesting history for this index shows a consistent outperformance expressed in annualised excess returns of around 2% compared to the wider market (Solactive US Large Cap Index).

Lastly, the Solactive US Established Companies Index invests in a basket of 'time-proof' companies that have demonstrated resilience over time through repeated business cycles such as Du Pont (1802), Goldman Sachs (1869) and Pfizer (1849. The Solactive US Established Companies Index could be seen as the 'most boring' of the three because it plays on an old trend, according to Pfeiffer.

"However, the 'time proof' screening provides a very intuitive story for return, as these companies have survived different business cycles and market scenarios," said Pfeiffer. "By applying market cap and liquidity filters, the index provides exposure to the 100 oldest companies from the Solactive US Broad Market Index."

According to Pfeiffer, the three indices are now live and the firm is having discussions with product providers around customisation to add variations for particular products.

"At the moment, the focus of our discussions with product providers is on how to customise a particular index for a specific strategy," said Pfeiffer. "The focus is not around lowering the price of the options but about providing flexible and straightforward underlyings that add value to investors. Our mission and a key premise around our index development approach is that our indices are scalable and replicable in other markets. The other element is that we want to test concepts that work across markets. We don't want to develop strategies that have a limited scope and only work in one single market."

Pfeiffer also said that the new range is a response to demand from issuers and distributors are seeking to gain an edge through innovation and a more tailored approach "which is clearly driven by themes".

In this segment, you have less frequency of issuance, higher volumes per tranche, and specific and dedicated themes (ESG, smart beta)," said Pfeiffer, adding that this is an area where and this is exactly where our new indices fit. This segment of the market is driven by innovation. "On the other hand, you have Eurostoxx 50-type Autocall products which are the most basic commodity-like and widespread products across Europe. Production of these products highly depends on standardisation, automatisation, speed to market, simplicity and efficiency."

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