ArthVeda Capital has launched the Smart Alpha Framework, a rules-based, value investing framework designed to produce a portfolio of low risk, high quality stocks that are available at a discount to intrinsic value.
The Smart Alpha family currently comprises an initial suite of eight Smart Alpha, Smart Value and Smart Income Indexes. Each one is weighted by its discount to intrinsic value, as compared to the float-adjusted market-cap weightings of conventional indexes. ArthVeda Capital is working with the New York Stock Exchange (NYSE), which is providing calculation and dissemination services for its indices in the US.
ArthVeda Capital plans to launch options on each of the Smart Alpha indexes on the NYSE later this month. In addition, the company is in discussion with several major ETP providers and expects to create investable products in early-2016.
“The major disadvantage of conventional indexes is that, because they are market-cap weighted, they tend to over-allocate to overvalued stocks and under-allocate to undervalued stocks,” says Dr Vikas Gupta (pictured), Executive Vice President and Chief Investment Officer at ArthVeda Capital and the inventor and architect of the Smart Alpha concept. “Smart Alpha does the reverse, which tends to produce better performance over the longer term.”
Smart Alpha Indexes consist of stocks that have stable business models, strong balance sheets, a value-creating capital allocation track record and are available at a discount to intrinsic value. They are weighted by each component’s discount to intrinsic value as determined by ArthVeda’s proprietary model.
Smart Income Indexes consist of the top 50 dividend-paying companies from their respective Smart Alpha pools, equally weighted.
Finally, Smart Value Indexes primarily consist of the same stocks which are represented in various major market indexes, weighted based on each component’s discount to intrinsic value as determined by ArthVeda.
“We should be clear that these are not smart beta products,” says ArthVeda Director & Chief Executive Officer Bikram Sen. “Rather than adjusting for exogenous factors that may affect business in the short term, we focus entirely on identifying undervalued high quality companies using our patent-pending Smart Alpha framework, which differs considerably from low price multiple approaches that are typically associated with value investing.”
Smart Beta indexes often look at external factors such as interest rates, exchange rates, or price-related factors such as momentum, price-to-book and volatility rather than the internal fundamental ratios reflecting the company’s business model and the market price relative to its intrinsic value. While Smart Beta indexes deliver the promised tilt to a portfolio, what is not known is whether, in the future, the factor tilt will deliver the returns it has in the past as more investors embrace the strategies.
“The US launch of our global family of Smart Alpha Indexes represents an important new initiative for ArthVeda Capital,” says ArthVeda Chairman & Managing Director Kapil Wadhawan. “As a leading innovator in global asset management, we are looking forward to making our proprietary methodology available to investors in US and International equities through partnerships with leading US-based ETF issuers and asset managers.”
