Barclays partners with Nouriel Roubini to launch smart beta strategy indices

Jul 14th, 2015 | By | Category: Equities

London-based bank Barclays has partnered with economist Nouriel Roubini and his Roubini Global Economics research firm to launch a suite of smart beta equity indices: the Roubini Barclays Country Insights Indices. As tradeable strategy indices, the suite is ideally suited to underlie index-linked investment products such as exchange-traded funds.

Barclays partners with Nouriel Roubini to launch smart beta strategy indices

Nouriel Roubini, a.k.a. “Dr Doom”.

Nouriel Roubini, a professor of economics at NYU’s Stern School of Business, is perhaps best known for his contrarian prediction of the 2008 financial crisis, for which the media labelled him “Dr Doom”, and his prescient analysis of the ongoing Eurozone debt crisis.

The engine behind the new indices is Roubini’s “Country Insights” model, which measures country risks and opportunities via a systematic rules-based approach. The model ranks countries based on four key pillars – external adjustment capacity, institutional robustness, growth potential and social inclusion – and incorporates some 200 distinct variables. Input data come from a variety of sources, including the Bank for International Settlements, the International Monetary Fund, the World Bank, the World Economic Forum and Gallup Polls.

The model aims for a granular assessment of each country across a variety of metrics and is designed to derive a country’s “Investment Attractiveness Score”. Inputs include a country’s ability to innovate, its demographic make-up, the quality of education and availability of healthcare. The model not only takes into consideration a country’s macroeconomic performance, but also other factors directly relevant to a nation’s growth potential in areas such as policy and political risk.

The model currently ranks 174 countries and has shown predictive capability in identifying potential patterns of weakness or strength, either within geographical regions or across specific areas of economic risk (e.g., external vulnerabilities, overall debt and structural problems). Countries are scored on a scale of 0 to 10, with 0 being the worst (e.g., serious risk or very low growth potential) and 10 being the best (e.g., very low risk or very strong growth potential).

It is worth noting that, of the Eurozone countries, the model consistently ranked Greece, Portugal, Italy and Spain in the bottom four in terms of their investment attractiveness as far back as September 2005, clearly identifying them as countries with elevated levels of risk and low growth prospects. At this time, the Roubini Barclays indices would have significantly underweighted or avoided these countries entirely.

“The majority of investors would not invest in a company without first assessing its assets, liabilities and ownership structure.Investors may wish to perform a similar analysis when looking at the economic attractiveness of a country”, said Paul Domjan, Managing Director at Roubini Global Economics.

“The Roubini Barclays Country Insights Indices aim to do this. Instead of focusing entirely on a country’s ‘income statement’ – namely its short-term economic performance – the indices use current data attempting to understand the investment risk and benefits of a particular country or region. These data include factors that impact a country’s ‘balance sheet’, including the health of the banking system, the total debt of the economy, the age of the population and its ability to innovate, along with social factors including inequality and education.”

The indices are currently available in All-World, Developed Markets, Developed Markets ex-North America and Emerging Markets versions and use as their basis the MSCI AC World, the MSCI World, the MSCI EAFE, the FTSE Emerging indices, respectively, with country allocations re-weighted or excluded according their Investment Attractiveness Score, as calculated by the model. The indices are re-balanced quarterly.

Based on back-tested data, each of the indices has produced superior Sharpe ratios (before fees, trading costs and expenses) since October 2005 relative to their parent index. Specifically, the Roubini Barclays Country Insights Developed Markets Equity Index has delivered a Sharpe ratio of 0.36 compared to 0.27 for the MSCI World Index; similarly, 0.29 for the Developed Markets ex North America Index versus 0.16 for the MSCI EAFE Index; 0.30 for the Emerging Markets Equity Index versus 0.24 for the MSCI EAFE Index; and 0.33 for the All-World Equity Index versus to 0.26 for the MSCI AC World Index.

With these kinds of track records, albeit simulated, coupled with the allure of the Roubini brand, the indices are likely to draw the attention of product development executives at ETF providers. Indeed, Barclays is thought to be in early-stage talks with a number of firms.

Commenting on the launch, Fabien Labouret, Global Head of EFS Investment Strategies at Barclays, said: “We are delighted to launch the Roubini Barclays Country Insights Indices. They will offer investors a way to differentiate between countries in today’s difficult macro-environment, and offer a tradable mechanism to gain access to enhanced beta across the globe.”

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