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Welcome to The Index Investor

Founded in 1997, we provide independent analysis and insight each month on asset class valuation, portfolio construction and risk management to a global audience of investment managers, financial advisers and sophisticated individual investors.

We help our subscribers build more effective portfolios that are well diversified across broad asset classes and uncorrelated alpha strategies, make better decisions in the face of high uncertainty, and avoid large downside losses that sharply reduce the probability of achieving their long-term goals. We also help them to practically apply the latest academic research to improve their investment performance.

Our research is based on the application of complex adaptive systems theory (also known as the adaptive markets approach). We believe that financial markets are filled with positive feedback loops and nonlinear effects caused by the interaction of competing strategies (for example, value, momentum, and passive approaches) and underlying decisions made by people with imperfect information and limited cognitive capacities who are often pressed for time, affected by emotions, and subject to the influence of other people. As a result, while attracted to equilibrium, they never reach it, and can sometimes generate substantial over and undervaluations. Under these conditions, mean variance optimization is likely to produce disappointing portfolio results. Given this, we take an innovative approach to portfolio construction that is based on multiple regimes (high uncertainty, high inflation, and normal growth), stochastic optimization (to assess shortfall risk and goal achievement under a wide range of scenarios) and evolutionary search (for integrated asset allocation and rebalancing strategy solutions that are robust in the face of uncertainty).

We provide model portfolios in eight currencies, including AUD, CAD, CHF, EUR, GBP, INR, JPY and USD. They are based on a combination of broad asset class index funds and uncorrelated alpha strategies. The former include real return (inflation protected) bonds, nominal bonds, foreign bonds, domestic and foreign commercial property (real estate), commodities, timber, and domestic, foreign, and emerging market equities. We also add new asset classes to our model portfolios as they become investable. Our model portfolios also include explicit rebalancing strategies.

A second implication of our adaptive markets perspective is that when overvaluations reach dangerous levels, we believe that relatively passive approaches to risk management (such as diversification and automatic rebalancing) must be supplemented with more active approaches, like increasing allocation to liquid assets and buying put options. To enable our subscribers to make these decisions, each month we provide them with fundamental valuation and momentum updates for asset classes in all the currency regions we cover, as well as updated economic scenarios that assess potential asset class valuation and systemic risk changes over a longer time horizon. Our monthly research also includes feature articles on new products, strategies, and analytical methodologies.

At a time of unprecedented uncertainty in the world economy and financial markets, the analysis and insight we provide each month is more important than ever. For example, in March 2000 and again in May 2007, we advised our subscribers to hedge or reduce their exposure to dangerously overvalued asset classes.

The quality of our research has been recognized around the world.

As Barron's has noted, "If you're looking for loads of editorial content on asset allocation, check out content is thorough, and the investing rationale carefully explained." In the U.K., Money Management magazine said " keeps us up to date both with the latest thinking on risk, and the surest way of reducing it to a level that we find satisfactory."

To start accessing our research, you can subscribe to our monthly journal, download a sample research report, or review the free materials on this site.

Speaking Engagements:

For a small fee, we can provide an entertaining and informative speaker for your conference, meeting or webinar. Please contact us for more details.

Redistributing Our Content:

If you are interested in redistributing our content, please feel free to contact us.

What's New on The Index Investor

Monthly Updates:
Global Asset Class Returns
Uncorrelated Alpha Strategies Detail
Table: Market Implied Regime Expectations and Three Year Return Forecast
Table: Fundamental Asset Class Valuation and Recent Return Momentum
Investor Herdng Risk Analysis
Global Asset Class Valuation Updates - Detail
Monthly Updates to Model Portfolios

10.11 October 2011 Letters to the Editor: Response to Criticism of ETFs, Rhode Island - Canary in the Coal Mine; Global Asset Class Valuation Detail Through September 30, 2011; The IMF's Gloomy Outlook; Portfolio Performance Through September 30, 2011

09.11 September 2011 Letters to the Editor: Why the Swings in the Equity Market? What Do You Think Causes this Volatility? What Do You View as a Risk Free Asset Today?; Global Asset Class Valuation Detail Through August 31, 2011; Economic Situation Analysis: The Gordian Knot and Its Implications for Asset Class Returns

Thoughtful Quotes

"My great regret is that I and so many of us who have been involved in this industry for so long did not recognize the serious possibility of the extreme circumstances that the financial system faces," [Robert] Rubin wrote in a letter to Vikram Pandit. - Reuters, Jan 10, 2009

"In 2007, the people who ran Wall Street, and the ones who regulated it, did not understand how serious the financial crisis was becoming." - Floyd Norris, The New York Times, Dec. 19, 2008

"Big (and negative) changes are not too far away in the world economy, even as global growth continues to be strong, equity indexes around the world hit new highs, and credit risk margins are at near record lows...There is still an element of chance as to what will be the event or events that reverses the herd and sets the crash in motion. That these events frequently aren't clear, even in retrospect - just read the studies about the events of 1929, 1987 or 2001 -- means that forecasting them is basically impossible. However, we are not without indicators that something dangerous is building up in the system....For example, earlier this year we had a sudden burst of volatility that disappeared almost as quickly as it arrived...Foreign central banks - not private investors - are today funding most of the U.S. current account deficit...Most recently, we have seen many U.S. housing indicators plunge, without apparent impact on consumer spending or financial market risk premiums and returns...Liquidity is at record levels, and this is typically associated with the quickening development and subsequent rapid deflation of financial market bubbles...There is also considerable evidence that many asset classes have simultaneously become overvalued, which is a rare event in historical terms. Moreover...the collapse of housing bubbles is likely to have a far more severe impact than the collapse of an equity bubble...Analysts tend to underestimate the risk they face, and financial models - including the Value At Risk Models that underpin many institutional investors' risk management plans - inadequately capture it...Greed and fear are finely balanced today, and it won't take much to tip the balance in the latter direction...Given the strong linkages between asset classes created by developments in the derivatives markets, we think any downturn could quickly accelerate and spread across many asset classes...In the ten years our publications have been in existence, we have never suggested taking what for us is a radical step: reducing one's exposure to different asset classes, and raising holdings of cash...Yet in spite of the possibly unpleasant tax consequences, we think that reducing exposure to the most overvalued asset classes and either raising allocations to undervalued asset classes or moving into cash (or short term government bonds) looks more and more like the most prudent course of action. We wish that wasn't so. But we can't ignore the increasingly insistent warning voice that keeps us awake at night." - The Index Investor, May, 2007 - "Why We Don't Sleep Well at Night" (Complete Article is available.)

"We are often asked whether or not we believe the U.S. equity market is overvalued. Our answer is a resounding "yes!" .... It is certainly possible that from time to time relative valuations (e.g., of bonds versus equities) will get so glaringly out of line that it makes sense to temporarily move beyond your target portfolio weights for each asset class. If you believe (as we do) that this is the case today in the United States, then your next question is "what can I do about it?"...The first option is to simply sell your S&P 500 index, and reinvest the proceeds in a bond market index fund...The second option is to purchase a put option on the S&P 500 Index..." - The Index Investor, March 2000

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Our chief strategist, Tom Coyne, has contributed a chapter to Qfinance, "The definitive finance encyclopedia - everything from the latest research paper to cutting edge financial education resources and best practice articles." Mr. Coyne's contribution is "Asset Allocation Methodologies."

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"October 2011 II Journal"
Publication Date: October 27, 2011