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

• US 7,620,577 B2
• Filed: 08/04/2005
• Issued: 11/17/2009
• Est. Priority Date: 06/03/2002
• 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., Wood, Paul Christopher
• Primary Examiner(s): Kalinowski; Alexander
• Assistant Examiner(s): JOHNSON, GREGORY L
• Application Number:
  US11/196,509
• Publication Number:
  US 20060015433A1
• Time in Patent Office: 1,566 Days
• Field of Search: 705/35, 705/36
• US Class Current: 705/35
• 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 computer implemented method of constructing an index of assets (I), the method performed by at least one processor operable to perform the method, the method comprising:

(a) accessing by the at least one processor of one or more databases storing and permitting retrieval of data (D) about a plurality of companies (C) and a plurality of corresponding assets (A) each issued by or having been issued by at least one of the plurality of companies (C);

(b) receiving by the at least one processor a numerical size (N) of the index of assets (1);

(c) receiving by the at least one processor at least one objective measure of scale (O) regarding one or more of the plurality of companies (C) associated with said corresponding assets (A);

(d) retrieving by the at least one processor one or more of said data (D) about a plurality of said companies (C) and said corresponding assets (A);

(e) selecting by the at least one processor said one or more data (D) to be a quantitative data (Q) reflecting the amount of said at least one objective measure of scale (O) associated with each of said companies (C), wherein said selecting comprises;

(i) excluding any of said data (D) regarding the market prices (P) of any of said assets (A); and

(ii) excluding any of said data (D) regarding the market capitalization (MC) of any of said companies (C),

wherein said at least one objective measure of scale (O) comprises a measure of the size (SZ) of each said company (C) associated with each said given asset (A), and

wherein said measure of the size (SZ) of each said company (C) corresponding to each said asset (A) comprises at least one of;

gross revenue of a said company (C) associated with a said asset (A),

sales of a said company (C) associated with a said asset (A),

income of a said company (C) associated with a said asset (A),

earnings before interest and tax (EBIT) of a said company (C) associated with a said asset (A),

earnings before interest, taxes, depreciation and amortization (EBITDA) of a said company (C) associated with a said asset (A),

number of employees of a said company (C) associated with a said asset (A),

book value of a said company (C) associated with a said asset (A),

assets of a said company (C) associated with a said asset (A),

liabilities of a said company (C) associated with a said asset (A),

net worth of a said company (C) associated with a said asset (A),

cashflow of a said company (C) associated with a said asset (A),

any dividends of a said company (C) associated with a said asset (A),

an attribute relating to employees of a said company (C) associated with a said asset (A),

an attribute relating to floor space of a said company (C) associated with a said asset (A),

an attribute relating to office space of a said company (C) associated with a said asset (A),

an attribute relating to location of a said company (C) associated with a said asset (A),

a demographic measure (DM) of a said company (C) associated with a said asset (A), or a measure relating to a demographic attribute of a said company (C) associated with a said asset (A);

(f) ranking by the at least one processor said companies (C) based upon a said quantitative data (Q) associated with the at least one objective measure of scale (O) of each of said companies (C);

(g) selecting by the at least one processor said numerical size (N) of the index of assets (I) of the companies (C) having the highest rank of said quantitative data (Q) to comprise the plurality of constituent index assets (IA) exclusively comprising the index of assets (I); and

(h) calculating by the at least one processor percentage weights for the index of assets (I) to be objective measure of scale weights (OW) exclusive of (i) any of said market prices (P) of any of said assets (A); and

(ii) any of said market capitalization (MC) of any of said companies (C), wherein the calculating comprises;

(i) adding the quantitative data (Q) of each of said at least one objective measure of scale (O) for all of said constituent index assets (IA) to yield a sum total quantitative data (SUMQ) for said at least one objective measure of scale; and

(ii) dividing a said quantitative data (Q) of a said at least one objective measure of scale (O) for each said constituent index asset (IA) by the sum total quantitative data (SUMQ) to yield the objective measure of scale weight (OW) of each of the constituent index assets (IA) comprising the index of assets (I),

wherein said at least one objective measure of scale (O) comprises a measure of the size (SZ) of each said company (C) associated with each said given constituent index asset (IA), and

wherein said measure of the size (SZ) of each said company (C) corresponding to each said constituent index asset (IA) comprises at least one of;

gross revenue of a said company (C) associated with said constituent index asset (IA),

sales of a said company (C) associated with said constituent index asset (IA),

income of a said company (C) associated with said constituent index asset (IA),

earnings before interest and tax (EBIT) of a said company (C) associated with said constituent index asset (IA),

earnings before interest, taxes, depreciation and amortization (EBITDA) of a said company (C) associated with said constituent index asset (IA),

number of employees of a said company (C) associated with said constituent index asset (IA),

book value of a said company (C) associated with said constituent index asset (IA),

assets of a said company (C) associated with said constituent index asset 0A),

liabilities of a said company (C) associated with said constituent index asset (IA),

net worth of a said company (C) associated with said constituent index asset (IA),

cashflow of a said company (C) associated with said constituent index asset (IA),

any dividends of a said company (C) associated with said constituent index asset (IA),

an attribute relating to employees of a said company (C) associated with said constituent index asset (IA),

an attribute relating to floor space of a said company (C) associated with said constituent index asset (IA),

an attribute relating to office space of a said company (C) associated with said constituent index asset (IA),

an attribute relating to location of a said company (C) associated with said constituent index asset (IA),

a demographic measure (DM) of a said company (C) associated with said constituent index asset (IA), or

a measure relating to a demographic attribute of a said company (C) associated with said constituent index asset (IA).

2. The computer implemented method according to claim 1, wherein said each of said assets comprises at least one of a stock (S);

a commodity (CO);

a futures contract (FC);

a bond (B);

a municipal bond (MB);

a corporate bond (CB);

a mutual fund (MF);

a hedge fund (HF);

a fund of funds (FF);

an exchange traded fund (ETF);

or a derivative (DE).

3. The computer implemented method according to claim 1, wherein each of said assets comprises a stock (S).

4. The computer implemented method according to claim 1, wherein each of said assets comprises a commodity (CO).

5. The computer implemented method according to claim 1, wherein each of said assets comprises a futures contract (FC).

6. The computer implemented method according to claim 1, wherein each of said assets comprises a bond (B).

7. The computer implemented method according to claim 1, wherein each of said assets comprises a mutual fund (MF).

8. The computer implemented method according to claim 1, wherein each of said assets comprises a hedge fund (HF).

9. The computer implemented method according to claim 1, wherein each of said assets comprises a fund of funds (FF).

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

11. The computer implemented method according to claim 1, wherein each of said assets comprises a derivative (DE).

12. The computer implemented method according to claim 1, wherein said (h) comprises weighting comprising performing a negative weighting on any of said assets (NW).

13. The computer implemented method according to claim 12, wherein said negative weighting (NW) is performed for purposes of at least one of:

establishing or measuring performance, for at least one of;

any security (S);

a portfolio of assets (PA);

a hedge fund (HF);

or at least one of;

a long or a short position.

14. The computer implemented method according to claim 1, wherein said at least one objective measure of scale (O) comprises a measure relating to at least one of an underlying attribute of one or more of the assets (A), or a said company (C) associated with a said asset (A).

15. The computer implemented method according to claim 1, (i) wherein said sales comprises at least one of:

total sales, foreign sales, domestic sales, net sales, net revenue or gross sales, (ii) wherein said book value comprises at least one of;

a value adjusted for inflation, a value adjusted for replacement or a value adjusted for liquidation value, (iii) wherein the cash flow comprises at least one of;

a said entity associated with a said asset, or future value of expected cash flow of a said entity associated with a said asset, and (iv) wherein said at least one objective measure of scale (O) associated with any said assets comprises at least one of;

profitability of a said company associated with a said asset;

profit margin of a said company associated with a said asset;

operating margin of a said company associated with a said asset;

retained earnings of a said company associated with a said asset;

earnings per share of a said company associated with a said asset;

reported profits of a said entity associated with a said asset;

reported pre-exceptional profits of a said entity associated with a said asset;

value of an expected cash flow of a said entity associated with a said asset;

dividends of a said company associated with a said asset;

assets of a said company associated with a said asset;

tangible assets of a said company associated with a said asset;

intangible assets of a said company associated with a said asset;

fixed assets of a said company associated with a said asset;

property of a said company associated with a said asset;

plant of a said company associated with a said asset;

equipment of a said company associated with a said asset;

goodwill of a said company associated with a said asset;

replacement value of assets of a said company associated with a said asset;

liquidation value of assets of a said company associated with a said asset;

liabilities of a said company associated with a said asset;

long term liabilities of a said company associated with a said asset;

short term liabilities of a said company associated with a said asset;

net worth of a said company associated with a said asset;

research and development expense of a said company associated with a said asset;

accounts receivable of a said company associated with a said asset;

accounts payable of a said company associated with a said asset;

cost of goods sold (CGS) of a said company associated with a said asset;

debt ratio of a said company associated with a said asset;

budget of a said company associated with a said asset;

capital budget of a said company associated with a said asset;

cash budget of a said company associated with a said asset;

direct labor budget of a said company associated with a said asset;

factory overhead budget of a said company associated with a said asset;

operating budget of a said company associated with a said asset;

sales budget of a said company associated with a said asset;

inventory method of a said company associated with a said asset;

type of stock offered of a said company associated with a said asset;

liquidity of a said company associated with a said asset;

book income of a said company associated with a said asset;

tax income of a said company associated with a said asset;

capitalization of earnings of a said company associated with a said asset;

capitalization of goodwill of a said company associated with a said asset;

capitalization of interest of a said company associated with a said asset;

capitalization of revenue of a said company associated with a said asset;

capital spending of a said company associated with a said asset;

cash of a said company associated with a said asset;

compensation of a said company associated with a said asset;

employee turnover of a said company associated with a said asset;

overhead costs of a said company associated with a said asset;

credit rating of a said company associated with a said asset;

growth rate of a said company associated with a said asset;

tax rate of a said company associated with a said asset;

liquidation value of entity of a said company associated with a said asset;

capitalization of cash of a said company associated with a said asset;

capitalization of earnings of a said company associated with a said asset;

capitalization of revenue of a said company associated with a said asset;

or value of expected measure of scale of a said entity associated with a said asset.

16. The computer implemented method according to claim 1, wherein said at least one objective measure of scale (O) comprises a ratio of any combination of objective measures of scale (O) relating to one or more of said assets (A) and the ratio is not based on any one of:

weighting said one or more assets based on market capitalization;

equal weighting;

or weighting in proportion to the market price of said one or more assets.

17. The computer implemented method according to claim 16, wherein said ratio of any combination of said objective measures of scale comprises at least one of:

current ratio,

debt ratio,

overhead expense as a percent of sales, or

debt service burden ratio.

18. The computer implemented method according to claim 1, wherein said at least one objective measure of scale (O) comprises said demographic measure (DM) of said company (C) of said asset (A), and wherein said demographic measure (DM) comprises at least one of a financial attribute, an accounting data attribute, a non-financial attribute, a non-accounting data attribute.

19. The computer implemented method according to claim 1, wherein said measure of size comprises a demographic measure comprising any accounting data appearing in an annual report of a said company (C).

20. The computer implemented method according to claim 1, wherein said demographic measure comprises at least one of:

a financial metric;

a non-financial metric;

a non-market related metric;

a number of employees;

a floor space;

or

an office space.

21. The method according to claim 1, wherein said (g) comprises weighting based on said at least one objective measure of scale (O), wherein said at least one objective measure of scale (O) comprises an economic indicator (EI).

22. The computer implemented method according to claim 1, wherein said at least one objective measure of scale (O) comprises a measure tied to a particular geography (G) associated with at least one of the assets (A) or the company (C).

23. The computer implemented method of claim 1, wherein the method comprises constructing a portfolio of assets (PA) based upon the index of assets (I).

24. The computer implemented method of claim 23, wherein the portfolio of assets (PA) comprises at least one of:

a fund (F);

a mutual fund (MF);

a fund of funds (FF);

an asset (A) account;

an exchange traded fund (ETF);

a separate account;

a pooled trust;

or

a limited partnership.

25. The computer implemented method according to claim 23, comprising:

selecting the portfolio of assets (PA) for trading according to the index of assets (I); and

trading one or more of said assets (A) comprising said portfolio of assets (PA) based on said method of constructing an index of assets (I).

26. The computer implemented method according to claim 25, wherein said trading comprises:

rebalancing the portfolio of assets (PA) based on the index of assets (I).

27. The computer implemented method according to claim 26, wherein said rebalancing is performed on a periodic basis.

28. The computer implemented method according to claim 26, wherein said rebalancing is based upon the constituent assets (IA) reaching a threshold value.

29. The computer implemented method according to claim 25, further comprising:

applying one or more rules associated with the index of assets (I).

30. The computer implemented method according to claim 1, wherein the method of constructing the non-capitalization weighted index (I) is used for at least one of:

investment management;

or investment portfolio benchmarking.

31. The computer implemented method of claim 1, wherein the method further comprises an enhanced index (EI) investing method, comprising:

constructing a portfolio of assets in a fashion in which at least one of;

holdings;

performance;

or characteristics, are substantially similar to the index of assets (I).

32. The computer implemented method according to claim 1, wherein said method further comprises:

gathering data about the plurality of assets (A) by an index (I) construction manager device comprising computerized databases.

33. The computer implemented method according to claim 1, wherein said at least one objective measure of scale (O) comprises at least one of a financial metric, or a non-financial metric.