FTSE Russell has signed a collaboration agreement with momentum investing specialist and analytics firm, Trendrating to develop new momentum indexes that will incorporate Trendrating's 'unique momentum model' and supporting data as a core component of the methodology.
Founded in 2013 by Rocco Pellegrinelli (pictured), Trendrating provides a range of tools designed to maximize investment performance and improve risk control. Currently more than 100 institutional fund managers across Europe, the US and Asia use the company's momentum metrics in their investment decision making process.
Trendrating has been researching momentum strategies for over five years and one of the things that became clear since the very beginning was that the industry needs better tools to deliver more value to investors, according to chief executive Pellegrinelli. "Momentum analysis was an area with a clear lack of tools and ways to measure this important factor, and after some years of research we launched the model and software," said Pellegrinelli. "The focus on momentum comes from the fact that it is the factor that captures the essence of what equity investing (or asset management) is about - capturing the major trends to maximise returns. We thought that understanding trends and therefore the sound assessment of momentum should be a key part of any efficient decision making process."
According to Pellegrinelli, trends are more and more driven by liquidity flows and mass perceptions, which is something you cannot explain using only a fundamental approach. "However, if you provide a view on momentum and can capture those trends then you are offering a more pragmatic and disciplined methodology," said Pellegrinelli. "We have followed academic research in the US, and the conclusion is that perhaps markets are not efficient at all. Momentum is a strong and persistent factor that can be captured, generating better returns and lower risks."
The agreement covers FTSE Russell's existing range of factor products, launched in the summer of 2015, including the FTSE Global Factor Index Series and the FTSE Global Diversified Factor Index Series. These indexes are used by institutions as a performance benchmark and risk management tool, but also by product issuers as a foundation for new exchange-traded funds (ETFs) and funds. Over the last 12 months, Deutsche Bank, JP Morgan, O'Shares and State Street Global Advisors have all developed tracker products linked to the indexes but no index of these two families have been licensed to any structured products provider.
"We don't have any preference for the vehicles used to deliver these strategies, but we believe the future is about the adoption of momentum as a factor across the board," said Pellegrinelli. "We expect to see adoption of momentum not only in the ETF industry, primarily in the smart beta area, but also amongst active fund managers, as momentum can really make an impact in terms of higher returns. The key thing is for asset managers to consider integrating some elements of a systematic approach into the decision making process they have in place. Momentum is an obvious place to start, and one for which research and models are available."
According to Sudir Raju, managing director ETP relationships, Europe, Middle East & Africa (Emea) at FTSE Russell, as passive investment requirements become increasingly sophisticated, the collaboration will respond to demand from a variety of market participants. "We intend the indexes to be used by product providers in both the retail and institutional space," said Raju. "We believe these momentum indexes will appeal to ETFs, mutual funds and issuers of structured products. Factors have been around for many years and the recent focus has provided new opportunities to deploy factor strategies via passive investment products."
Trendrating has a comprehensive set of data and analytical tools focused on sophisticated measures of momentum, which many feel is the most difficult factor to capture, said Raju. "Using momentum to identify opportunities in the market place is something wealth managers currently have not been able to achieve in an efficient way," said Raju. "We are now able to develop indexes that capture momentum in various market cycles. Using Trendrating quantitative models, we can develop indexes based on a comprehensive set of momentum metrics," he said.
"Momentum is a strong and persistent factor, rapidly gaining popularity among top global asset managers as a key component in portfolio construction and tactical allocation," said Pellegrinelli. "This collaboration with FTSE Russell represents a huge leap forward for momentum investing and further endorses our momentum model as one of the leading methods to enable fund managers to harness the power of this important factor."
According to the first FTSE Russell retail financial advisor survey, smart beta and factor index adoption by financial advisors is prevalent and broad-based. The 2015 FTSE Russell Smart Beta survey of US financial advisors also found an increased interest in multiple smart beta indexes among retail financial advisors. Survey results show that nearly half (48%) of the financial advisors surveyed use an equal weight index or plan to use one in the near future, and more than half (52%) are already using or very likely to use a low volatility index.
There are currently over 5,200 structured products featuring FTSE Russell indexes across jurisdictions that are still live. Approximately $10tr is currently benchmarked to FTSE Russell indexes globally.
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