Changes to the Wealth Management Association’s (WMA) Private Investor Index Series, designed to acknowledge intermediaries’ growing use of alternatives, have seen new index provider MSCI take an unconventional approach to benchmarking the asset class.
The WMA’s new index will not have any physical exposure to alternatives – an asset class normally defined as hedge funds, private equity, infrastructure and private debt –because doing so would have made it impossible for discretionary fund managers (DFMs) to replicate, according to the trade body.
MSCI, which is taking over from FTSE as the provider of the WMA indices, has instead created a benchmark that is 50 per cent weighted to the MSCI World Diversified Multiple Factor index, with the remaining 50 per cent in cash.
The provider said back-testing had shown that this combination’s returns and volatility profile were closely correlated to those produced by a basket of alternative assets.
The global equity index includes large and mid-cap stocks but is also exposed to a range of factors including value, momentum, quality and smaller company, in order to provide a correlation to alternative assets.
The trade body had previously said that the need for a more sophisticated alternatives benchmark, as well as a more advanced fixed income index, was a principal reason for making the switch to MSCI.
MSCI executive director Steve Kowal said: “The index delivers the return and volatility metrics of alternatives. [We could] try to recreate an index using all the alternative asset classes but it would not be investible, and you would not be able to use hedge funds.”
According to Mr Kowal, the WMA’s index committee found the alternatives measurement received “broad-based consensus” from the wealth management community, despite its inability to physically match assets.
“It’s not an easy thing to do,” he said. “It depends on the view of what is ideal but there is no consensus on what is ideal.”
The FTSE index series, deemed inadequate in the way it accounts for alternatives, currently measures the asset class using the WMA Custom Hedge Index, which is an even mix of the FTSE All-Share and FTSE UK Conventional Gilts up to 5 Years index.
MSCI will begin providing the underlying indices for the WMA series on March 1. The series was set up in 1997 to ensure wealth managers are able to communicate to clients what to expect from their risk-rated portfolios.
The WMA’s focus on providing an upgraded element for alternatives benchmarking comes at a time when discretionary fund buyers and advisers are increasingly turning to the sector to eke out returns for clients.
Earlier this month, Investment Adviser reported that demand for alternatives had risen significantly, in particular as a substitute for highly valued equities and bonds.
Research from consultancy PwC has predicted global retail assets in alternatives could reach $8.1trn (£6.5trn) by 2020, up from about $900bn in 2015, with much of the growth concentrated in Europe.
Underlying indices: WMA Private Investor Index series