Proprietary Indices

Objectives

Professional Investment Tools has developed a set of proprietary indexes, designed to analyse changes in price over time. These indexes are the basis on which quantitative recommendations are generated by Investors RouteMap for making decisions about asset allocation and market timing by region, asset class ( bonds / cash / equities ) as well as equity investing styles. Long-term performance simulations are available.

• To provide historical records as long as possible of live market performance.
• To represent as broadly as possible the performance of global markets.
• To provide a consist basis for generating Best Guesses on the outlook for markets

Historical time series have been created for the following types of data:

• GDP Output Gaps
• Real Effective Exchange Rate Indexes
• Long Term Government Bond Indexes *
• Regional Indices for all Asset Classes
• Stock Market Indexes *
• Style Investing Indexes
• Earnings per Share Indexes

These indexes are not intended to be used as performance measurement for actual funds or portfolios. They are intended to provide a means of generating Best Guesses regarding the outlook for different markets in terms of direction and order of magnitude.

Long Term Bonds Indices

Ten Year Government Bond indexes are reciprocals of the yields. Country bond indexes are weighted by GDP, rather than by market capitalisation, to make analysis compatible with economic aggregates. Bond price indexes represent notional 10 year government bond performance, rather than a spectrum of all maturities and can therefore be expected to act in a more volatile manner than actual portfolios. For simplicity, our indexes ignore the minimal damping effect of the distant maturity date on fixed-interest securities, and do not reflect changes in risk premiums for lower grade bonds issued in the same currency.

Real Effective Exchange Rate Indices

For foreign currency, indexes of real effective exchange rates have been created based on movements in nominal exchange rates and changes in consumer price indexes, These are weighted by the average of exports and imports to and from leading trading partners, and are rebased every five years. On average these partners represent around two thirds of trade for each country. The global benchmark is represented by IMF Special Drawing Rights (SDR). Users should note that data for early years in long time series may be liable to significant distortion owing to structural changes in economies and high levels of past inflation. Data prior to 1980 is shown for completeness, but is not used in quantitative analytic modelling. Comparisons since 1980 with similarly calculated indexes produced by the IMF show an average divergence of only 0.4% per annum compound for 20 countries on which comparable data is available.

All Assets Indices

These indexes show total returns on portfolios invested equally across six asset classes. These are Cash, Domestic Bonds, Foreign Bonds, Domestic Shares, Foreign Shares and Real Estate. The indexes are calculated monthly on the basis of continuous re-weighting and are intended to provide an average against which decisions on the comparative merits of each asset classes can be made. They are not intended as performance benchmarks. Indices for component asset classes are derived from other PIT indices which are in turn derived from leading national indexes in the constituent countries.    

Earnings Per Share Indices

Earnings per Share time series have been derived from published PE ratios and broadly-based national stock market indexes to provide an estimate of current year EPS for the whole market. Appropriate lagging adjustments have been made. Regional and Global time series are created by weighting constituent country series by market capitalisation.

The regional and global averages are currently based on broad-based national stock market indexes that are produced by individual bourses or other sources for individual countries. To maintain consistency, wherever possible these are market capitalisation weighted, price-only indexes that exclude reinvested income. Other compatible indexes may be fitted to the currently used indexes so as to create longer runs of historical data.

This makes it possible to create long-term historical series of implied EPS back as far as 1972 for many developed countries and at least as far back as 1994 for all the countries analysed in the Shares RouteMap. Those in turn provide the basis for analysing past relationships between economic factors and company profits and between company profits and share prices.

This forms the basis for a top-down EPS Revisions strategy. Having established which economic variables explain EPS in the past and the weighting of each variable, Consensus Forecasts are then plugged into the EPS models to predict EPS for the current and following year.

Even though economists are often wrong, the direction of their month by month revisions to these forecast EPS can be a useful indicator of future stock market performance - and one that avoids the frequently over-optimistic bottom-up bias of sell-side analysts and their contacts in the corporate sector, whose forecasting horizon is typically limited to the length of their order book. For further information on historic EPS indices see Earnings Per Share in the Chart Library and for forecast EPS see Forecasting Profits in Conceptual Frame work > Investment Process 

NB. These indices are not intended for performance measurement, and forecasts are as fallible as the average economist. 

Global Style & Sector Indices

These are intended to act as a barometer for changing fashions in stock market investment. As far as possible they are assembled from compatible national sources and represent price-only geometric averages of broad market trends. However to generate long historical time series near matches may be chained to the beginning of the current data series. All indexes are rebased at year end 1994 = 100 for comparability.