Non-capitalization weighted indexing system, method and computer program product

• US 20050171884A1
• Filed: 10/12/2004
• Published: 08/04/2005
• Est. Priority Date: 02/04/2004
• Status: Active Grant

• Current Assignee: Research Affiliates LLC (Research Affiliates Global Holdings LLC)
• Original Assignee: Research Affiliates LLC (Research Affiliates Global Holdings LLC)
• Inventors: Arnott, Robert D.
• Granted Patent: US 7,792,719 B2
• Time in Patent Office: Days
• US Class Current: 705/36.R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/04 Trading; Exchange, e.g. stocks, commodities, derivatives or currency exchange
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

A passive investment system based on indices created from various metrics is disclosed. The indexes may be built with metrics other than market capitalization weighting, price weighting or equal weighting. These metrics may include, but are not limited to book value, sales, revenue, earnings, earnings per share, income, income growth rate, dividends, dividends per share, earnings before interest, tax, depreciation and amortization, etc. Non-financial metrics may also be used to build indexes to create passive investment systems. Additionally, a combination of financial non-market capitalization metrics may be used along with non-financial metrics to create passive investment systems. Once the index is built, it may be used as a basis to purchase securities for a portfolio. As the data underlying the indexes changes because of, e.g., economic activity, the index may be updated and may be used as a basis to rebalance the portfolio. Alternatively, the index can be rebalanced when a pre-determined threshold is reached. Specifically excluded are widely-used capitalization-weighted indexes and price-weighted indexes, in which the price of a security contributes in a substantial way to the calculation of the weight of that security in the index or the portfolio. Valuation indifferent indexes of the present invention avoid overexposure to overvalued securities and underexposure to undervalued securities, as compared with conventional capitalization-weighted and price-weighted. Also specifically excluded are equal weighting weighted indexes.

Claims

1. A method of constructing a non-capitalization weighted portfolio of assets, comprising:

(a) gathering data about a plurality of assets;

(b) selecting a plurality of assets to create the index of assets; and

(c) weighting each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets,

wherein said weighting comprises;

(i) weighting at least one of said plurality of assets; and

(ii) weighting other than weighting based on at least one of market capitalization, equal weighting, or share price weighting.

2. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises at least one of a stock;

a commodity;

a futures contract;

a bond;

a mutual fund;

a hedge fund;

a fund of funds;

an exchange traded fund (ETF);

a derivative;

or a negative weighting on any asset.

3. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises a stock.

4. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets a commodity.

5. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises a futures contract.

6. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises a bond.

7. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises a mutual fund.

8. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises a hedge fund.

9. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises a fund of funds.

10. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises an exchange traded fund (ETF).

11. The method according to claim 1, wherein said (c) comprises weighting each of said plurality of assets, wherein said each of said assets comprises a derivative.

12. The method according to claim 1, wherein said (c) comprises a negative weighting on any asset.

13. The method according to claim 12, wherein said negative weighting is performed for purposes of at least one of establishing, or measuring performance for at least one of any security, a portfolio of assets, a hedge fund, or a long/short position.

14. The method according to claim 1, wherein said (c) comprises weighting based on said objective measure of scale, wherein said objective measure of scale comprises a measure of company size associated with each of said plurality of assets.

15. The method according to claim 14, wherein said measure of company size comprises at least one of

gross revenue,

sales,

income,

earnings before interest and tax (EBIT),

earnings before interest, taxes, depreciation and amortization (EBITDA),

number of employees,

book value,

assets,

liabilities, or

net worth.

16. The method according to claim 1, wherein said (c) comprises weighting based on said objective measure of scale, wherein said objective measure of scale comprises a measure relating to an underlying asset itself.

17. The method according to claim 16, wherein said asset comprises at least one of:

a municipality, a municipality issuing bonds, or a commodity.

18. The method according to claim 16, wherein said objective measure of scale associated with said asset comprises at least one of:

revenue,

profitability,

sales,

total sales,

foreign sales,

domestic sales,

net sales,

gross sales,

profit margin,

operating margin,

retained earnings,

earnings per share,

book value,

book value adjusted for inflation,

book value adjusted for replacement cost,

book value adjusted for liquidation value,

dividends,

assets,

tangible assets,

intangible assets,

fixed assets,

property,

plant,

equipment,

goodwill,

replacement value of assets,

liquidation value of assets,

liabilities,

long term liabilities,

short term liabilities,

net worth,

research and development expense,

accounts receivable,

earnings before interest, taxes, dividends, and amortization (EBITDA),

accounts payable,

cost of goods sold (CGS),

debt ratio,

budget,

capital budget,

cash budget,

direct labor budget,

factory overhead budget,

operating budget,

sales budget,

inventory method,

type of stock offered,

liquidity,

book income,

tax income,

capitalization of earnings,

capitalization of goodwill,

capitalization of interest,

capitalization of revenue,

capital spending,

cash,

compensation,

employee turnover,

overhead costs,

credit rating,

growth rate,

tax rate,

liquidation value of company,

capitalization of cash,

capitalization of earnings,

capitalization of revenue,

cash flow, or

future value of expected cash flow.

19. The method according to claim 1, wherein said (c) comprises weighting each of said assets in the index based on said objective measure of scale, wherein said objective measure comprises a ratio of any combination of said objective measures of scale of the asset other than ratios based on weighting the assets based on market capitalization, equal weighting, or share-price weighting.

20. The method according to claim 19, wherein said ratio of any combination of said objective measures of scale comprise at least one of:

current ratio,

debt ratio,

overhead expense as a percent of sales, or

debt service burden ratio.

21. The method according to claim 16, wherein said objective measure of scale comprises a demographic measure of the asset.

22. The method according to claim 21, wherein said demographic measure of scale comprises at least one of:

employees,

floor space,

office space,

location, or

other demographics of an asset.

23. The method according to claim 14, wherein said measure of company size comprises at least one of

a demographic measure of the asset.

24. The method according to claim 23, wherein said demographic measure of the asset comprises at least one of:

a non-financial metric,

a non-market related metric,

a number of employees,

floor space,

office space, or

other demographics of the asset.

25. The method according to claim 1, wherein said (c) comprises weighting based on said objective measure of scale, wherein said objective measure of scale comprises a geographic metric.

26. The method according to claim 25, wherein said geographic metric comprises a geographic metric other than gross domestic product (GDP) weighting.

27. The method of claim 1, wherein the method comprises a passive investing method comprising:

constructing the portfolio of assets according to the index.

28. The method of claim 27, wherein the portfolio of assets comprises at least one of:

a fund;

a mutual fund;

a fund of funds;

an asset account;

an exchange traded fund (ETF);

a separate account,

a pooled trust;

or

a limited partnership.

29. The method according to claim 27, further comprising:

selecting a plurality of assets for trading according to the index; and

trading one or more of said plurality of assets based on said weighting of the index.

30. The method according to claim 29, wherein said trading comprises:

rebalancing the portfolio based on the index.

31. The method according to claim 30, wherein said rebalancing comprises:

rebalancing on a periodic basis.

32. The method according to claim 30, wherein said rebalancing comprises:

rebalancing based on the assets reaching a threshold.

33. The method according to claim 29, further comprising:

applying rules associated with the index.

34. The method according to claim 1, wherein the method of constructing the non-market capitalization weighted portfolio may be used for at least one of:

investment management, or

investment portfolio benchmarking.

35. The method of claim 1, wherein the method comprises an enhanced index investing method comprising:

constructing the portfolio of assets in a fashion in which at least one of holdings, performance, or characteristics, are substantially similar to the index.

36. The method according to claim 1, wherein said method comprises a computer-implemented method and said (a) comprises:

gathering data using computerized databases.

37. The method according to claim 1, wherein said (c) comprises weighting based on a non-market capitalization financial metric associated with each of said plurality of assets, and a non-financial metric associated with each of said plurality of assets.

38. A system for constructing a non-capitalization weighted portfolio of assets, comprising:

means for gathering data about a plurality of assets;

means for selecting a plurality of assets to create the index of assets; and

weighting means for weighting each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets,

wherein said weighting means comprises;

means for weighting at least one of said plurality of assets; and

means for weighting other than weighting based on at least one of market capitalization, equal weighting, or share price weighting.

39. A computer-implemented non-capitalization weighted portfolio of assets construction system, comprising:

a processor adapted to gather data about a plurality of assets;

adapted to select a plurality of assets to create the index of assets;

adapted to weight each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets;

adapted to weight at least one of said plurality of assets; and

adapted to weight other than based on at least one of market capitalization, equal weighting, or share price weighting.

40. A machine readable medium that provides instructions which when executed by a computing platform, cause said computing platform to perform operations comprising a method of constructing a non-capitalization weighted portfolio of assets, the method comprising:

(a) gathering data about a plurality of assets;

(b) selecting a plurality of assets to create the index of assets; and

(c) weighting each of said plurality of assets selected in the index based on an objective measure of scale of said each of said plurality of assets,

wherein said weighting comprises;

(i) weighting at least one of said plurality of assets; and

(ii) weighting other than weighting based on at least one of market capitalization, equal weighting, or share price weighting.