Blog

In a recent paper highlighting the increasing regulation surrounding fossil fuels, and the potential impact on portfolio performance, FTSE discussed the concept of stranded assets. The paper argued that continued heightened regulation could result in un-mined or unburned fossil fuel deposits, thereby triggering write-offs or downward revaluations. Although the paper was published only four months ago, the fossil fuel story has continued to evolve and become more prominent in headlines, making the issue even more relevant and central to investment discussions.

As the prominence of “smart beta” in the index investing landscape has grown, many market observers are using the single term “smart beta” to describe both alternatively weighted and factor indexes. These are in fact two distinct categories of benchmarks, and FTSE believes that it is helpful to distinguish between them.

The recent rise of alternatively weighted indexes is well documented, and one of the more popular subsets of this index universe is the fundamental index. Unlike traditional market capitalization weighted indexes, the fundamental index does not use stock price as its primary determinant of constituent weights. Instead, fundamental indexes seek to mitigate the potential concentration concerns of cap-weighted indexes and weight companies by their economic footprint or fundamental size.

An index’s construction technique determines its long-term behavior, so it’s worth paying particular attention to questions of weighting.

For many market participants, diversification was always one of the great attractions of emerging markets. In the past, since these markets did not track developed markets they provided a useful counterbalance for the global investor. That is no longer so much the case as emerging and developed markets have shown in recent years an inconvenient and increasing correlation.

Setting a country classification framework for global equity markets requires more than a focus on relative wealth.

Equity markets in FTSE’s Global Equity Index Series fall into one of four categories: developed, advanced emerging, secondary emerging and frontier. The classification process includes an initial screening of countries by their gross national income per capita, using World Bank data.

The fact that the FTSE 100 index level is approaching 7,000 (rather than, say, 100, 999 or 10 million) reflects the decision of the index’s designers to set the initial value of the benchmark at 1,000 in 1984, when the FTSE 100 made its debut.

The change in the value of the index since shows the historical evolution of a portfolio including the largest UK-listed companies.

The news this week that President Obama is about to ramp up regulation surrounding the fossil fuel burning US power industry is a stark reminder of the growing regulatory, legislative and legal risks facing the energy sector. The new rules planned by the Environmental Protection Agency would, for example, prevent the construction of new coal-fired power plants unless they have some capacity to capture and store their CO2 emissions. Overall, the government’s plans seem likely to have a significant impact on both consumers and energy producers.

There was a time when investment managers looking after the assets of corporate pension schemes used to be measured primarily against their peers. This measurement technique had the advantage of comprehensiveness, simplicity and fairness: all managers were measured against each other, in the same way and after management fees had been taken into account.

If you’re an investor and want some exposure to China’s fast-growing economy in your portfolio, you just buy Chinese shares, right?

Unfortunately it’s not as simple as that.