QS Investors Diversification Based Investing Whitepaper - FTSE

4 | Risk exposures
Active risk exposures
Over the last 10 calendar years, on average almost 90% of
the active risk exposures for the FTSE DBI Index series came
from country, industry and currency as illustrated in Figure 13
which illustrates the active risk exposure of the FTSE DBI
Developed Index compared to the FTSE Developed Index.
As DBI specifically focuses on developing alternative weights
Figure 13: FTSE DBI Developed Index active risk exposures over time
29/12/2000 31/12/2001 31/12/2002 31/12/2003 31/12/2004 30/12/2005 29/12/2006 31/12/2007 31/12/2008 31/12/2009
Specific % 12.1% 8.8% 8.0% 6.3% 4.2% 5.3% 8.6% 8.0% 11.3% 5.1%
Common % 87.9% 91.2% 92.0% 93.7% 95.8% 94.7% 91.4% 92.0% 88.7% 94.9%
Style % 19.0% 11.7% 18.0% 6.3% 3.6% 3.1% 2.3% 5.5% 14.3% 13.6%
Size % 3.7% 5.5% 4.8% 3.2% 2.2% 1.2% 1.3% 1.9% 0.4% 0.7%
Value % 0.5% 0.0% 0.4% 0.7% 0.1% 0.0% 0.2% 0.2% 0.9% 0.9%
Country % 25.1% 35.1% 39.3% 49.8% 45.6% 54.7% 56.8% 60.7% 62.1% 58.4%
Industry % 12.3% 7.2% 3.1% 3.4% 1.8% 3.4% 3.1% 1.5% 2.7% 3.1%
Currency % 19.6% 32.1% 17.1% 47.7% 44.4% 36.4% 37.0% 27.8% 24.8% 36.4%
Covar 11.9% 5.2% 14.6% -13.4% 0.4% -3.0% -7.7% -3.4% -15.2% -16.6%
SOURCE: Axioma, QS Investors LLC
5 | Summary
Summary
Diversification Based Investing (DBI) is an international or
global approach to gaining exposure to equity markets that
provides broad exposure and, over the long-term, seeks
higher returns and higher risk-adjusted returns than its
benchmark with less exposure to down markets.
The DBI investment process is designed to capture the
benefits of a higher level of diversification by taking into
account the primary drivers of global equity returns:
geography and industry. Diversification is maintained by
taking in to account changing correlations in the countries
and industries thereby reflecting changes in how investors
think of the world and what parts have higher or lower
interdependencies. By diversifying across risk themes or
“clusters” of risk in the market, the more diversified
exposure to the risk premium in these risk themes has on
average led to higher absolute and risk adjusted returns.
FTSE DBI Page 14
at the country and industry level, it is not surprising that this
is where the majority of active risk is generated. This is in
contrast to some other alternative weighting approaches
such as fundamental indexing that can generate significant
small cap and value biases.
Owing to its differentiated top down investment approach,
DBI has generated excess return that has been uncorrelated
to both their capitalization weighted benchmarks and some
alternative weighted equity index strategies such as
fundamental indexing. The DBI investment approach has
also led to positive excess return in both rising and falling
equity markets and has captured more than 100% of
returns in up markets and less than 100% of returns in
down markets. The primary drivers of DBI’s active risk
exposures are from active country, currency and industry
positions. The Developed Index strategy has exhibited no
persistent size or style bias relative to its benchmark and only
modest bias at any given time so is a good complement to
both market capitalization weighted indices and alternatively
weighted stock selection indices such as fundamental
weighted indices.