Cross-Sector Signals Can Boost Alpha

(May 14, 2013) — Combining long-term growth estimates and credit default swap (CDS) spreads could help investors identify alpha when buying into equity markets, data and services provider S&P Capital IQ has claimed.

The company, which is a unit of the McGraw Hill family, said that using both data sets had produced outperforming equity returns over three, six, and nine years, and three, six, and 12-month periods.

The approach, marketed to institutional investors and fund managers, considers the long-term growth estimates from over 700 brokers and analysts worldwide, then takes the mean of all collated input. The company then injects the short-term market view of a company through the CDS spread figure. This gives two sides to a story that may not have been considered by the investor.

The company does not offer specific stock-picking advice to investors, but claims back-testing the strategy had produced a cumulative return of 37.2% relative to the S&P 350’s index return of 19.7%.

Claudia Holm, director at S&P Capital IQ told aiCIO that the strategy could be exported to other equity markets and it gave investors the option to consider cross-asset signals about their investments.

Holm said that although the strategy did not reverse downward trends in the recent crisis period, it outperformed traditional methods and continues to do so in the current recovering economy.

She added that the outperformance came with a similar risk profile to equity investment that only took traditional indicators into account when picking stocks.

To read the S&P Capital IQ report, click here.