(July 3, 2012) — The attitude toward benchmarks to measure risk and return depends on geographical location, a survey of international investors’ attitudes has revealed.
North American investors are generally content with their equity benchmarks, due to their overall investment philosophies, while Europeans are demanding alternatively weighted measurements, a survey by the EDHEC-Risk Institute has found.
In reference to equities, investors on the west of the Atlantic favour a buy-and-hold strategy, which sits more comfortably with a market capitalising-weighted index. Conversely, Europeans are not as concerned with this investment philosophy and favour more innovative theories behind indexes, a paper written on the survey reported.
“Overall, we conclude that European investors are more flexible in terms of index construction methodology as long as they are transparent, liquid and free of discretionary choices; they do not exhibit much concern about whether or not the index is buy and hold,” the paper said.
“North American investors are less flexible in terms of innovative index construction approaches: buy and hold is appreciated more than transparency, liquidity and objectivity, which are the three basic qualities.”
These differing attitudes mean that North American investors were revealed as being more satisfied with the current crop of indexes available, and saw fewer issues with index construction than their European counterparts.
There has been much debate around creating indexes that are not weighted – or skewed – by market capitalisations of large companies.
Investors on either side of the Atlantic opt for different types of indexes against which to benchmark, the EDHEC-Risk survey showed.
“European investors prefer broad market indices over any sub-segment indices, such as style, sector, or size indices. We rationalise this, as the main objective to invest in equity is seeking diversification; not as bonds which are mainly used for hedging, since the important risk factors for bonds are well understood. This is in contrast to equities, where there is still a debate over which risk factors are the most important. However, this does not seem to be the case with North American investors. In this survey, we find that investors pay more attention to sub-segment indices, especially size and style indices, compared to their European counterparties,” the paper claimed.
Another split in attitude came in the form of using volatility indexes – in Europe, investors are more likely to use these products to diversify their equity holdings, whereas North American investors would prefer to use them as a hedge.
To consult the whole paper, click here.