Last week saw the unveiling of a global macro allocation index from Dow Jones Indexes, reflecting a growing interest in more sophisticated proprietary-model-based indices.

Michael A. Petronella, President of Dow Jones Indexes.

The Dow Jones Parala Global Sector Macro Allocation Index, launched in collaboration with London-based investment adviser Parala Capital, is underpinned by a proprietary macro allocation model which analyses broad economic and market trends with the aim of anticipating the return performance of equity sectors.

In contrast to conventional capitalisation- or fundamental-weighted indices that look solely at individual security characteristics to define index weights, weights within the Dow Jones Parala Global Sector Macro Allocation Index are assigned according to a series of macro-factor scores generated by Parala Capital’s macro allocation model.

These macro-factor scores are based on global macroeconomic indicators encompassing interest rates, dividend yields, commodity prices, industrial production and inflation.

Ranking of the macro-factor scores are then implemented by Dow Jones Indexes to determine the degree to which each underlying index will be over- or under-weighted relative to its float-adjusted market-capitalisation weighting.

This particular index, the first in a series of indices with others expected to be added over time, allocates among 19 global sector indices within the Dow Jones Sector Titans Index family. Over- and under-weights are defined relative to the Dow Jones Sector Titans Composite Index.

Commenting on the launch, Michael A. Petronella, President of Dow Jones Indexes, said: “By working with Parala Capital on this unique family of indexes, we are joining with some of the financial community’s leading experts who have spent years analysing how asset prices are affected by changing economic conditions.”

Petronella added: “We believe the Dow Jones Parala Macro Allocation Indexes will appeal to market participants who appreciate innovative ideas that can help them better understand and measure the effects that macroeconomic conditions have on the financial markets.”

The indices will likely draw interest from investors seeking a greater emphasis on asset allocation. Indeed, numerous studies have stressed the importance of asset allocation as a driver of performance, and many proponents of a “top down” approach to investment, such as offered by this suite, point to a study (albeit contested) by academics Brinson, Hood and Beebower (BHB), which argued that asset allocation explained over 90% of the average fund’s return variance over time.

Putting the academics aside, from a performance perspective the first index in this range certainly deserves further attention. According to data provided at the time of the launch, the Dow Jones Parala Global Sector Macro Allocation Index has beaten its benchmark, the Dow Jones Sector Titans Composite Index, over a three-year, five-year, seven-year and ten-year time horizon.

Moreover, since 2000 the index has beaten its benchmark in all but one year, 2004, and even then it only trailed by a small margin (-0.13% relative). What’s more, the index has achieved this outperformance with approximately the same level of risk (volatility), thus resulting in an Information Ratio of 0.95.

As yet, neither the initial nor any of the planned indices have been licensed to a fund. However, the range is likely to appeal to ETF providers, as well as managers of conventional index funds and institutional investors.