Dow Jones Indexes has launched the Dow Jones RBP US Directional Allocation Index, which automatically allocates weights among other indexes that reflect viewpoints on the US market.
Constructed as an “index of indexes,” the new gauge reallocates among an “aggressive” index, a “defensive” index and a “market” index—while also allowing the possibility to allocate fully to a cash component—based on an automated system that uses economic and market indicators as inputs.
The Dow Jones US RBP Directional Allocation Index is the latest addition to the Dow Jones RBP Index series offered by Dow Jones Indexes and Transparent Value, a New York-based asset management and financial information services company. The Dow Jones RBP Indexes are built upon a methodology using proprietary, rules-based analytics supplied by Transparent Value.
The proprietary metric upon which all Dow Jones RBP Indexes are built is RBP, which stands for Required Business Performance. Transparent Value calculates RBP by reversing a traditional discounted cash flow model to measure the future business performance required for a company to support its current stock price. The goal is to measure the likelihood that the company can deliver such required business performance by applying the RBP methodology over specified time periods.
In May 2010, Dow Jones Indexes and Transparent Value announced that they had expanded the Dow Jones RBP Index family to include Dow Jones RBP Directional Series Indexes, which underlie the index launching today. These “directional” indexes were designed to reflect distinct market viewpoints, integrating the Dow Jones RBP Index methodology into measures geared toward investors with bullish, bearish and neutral views of the market.
“With today’s launch we’ve further supplemented the toolkit available to those seeking sophisticated measures of the US market,” says Michael A Petronella, president, Dow Jones Indexes. “The Dow Jones RBP US Directional Allocation Index is the first index of its kind seeking to account for the current market environment.”
Julian Koski, managing director and co-chief executive officer of Transparent Value, says: “We developed these indexes in response to feedback we received in the marketplace. Advisors liked the approach of the Dow Jones RBP Directional Series Indexes, but were looking for an automated solution that incorporated a cash component.”
The allocation mechanism used in the new index’s methodology uses a “moving average crossover system” to generate signals for rebalancings by comparing moving averages of economic and market indicators. The primary indicators considered for the Dow Jones RBP US Directional Allocation Index include:
- 12-month simple moving average (SMA) of The Conference Board Consumer Confidence Index® (CCI) [Source: The Conference Board]
- 6-month SMA of The Conference Board Leading Economic Index (LEI) [Source: The Conference Board]
- 250-day SMA of the Dow Jones US Large Cap Total Stock Market Index
In addition, 250-day SMA of the Dow Jones RBP Directional Series Indexes is used as a secondary indicator to test the validity of the primary indicator.
The index is rebalanced quarterly, and after the close of any Friday if LEI moves above or below its moving average on the snapshot day, which occurs three business days prior to the rebalance day. Back-tested historical index values are available daily back to 31 December 1999, the date at which the index base value is set at 1000.