Investment Process
We have a systematic and mathematical approach to index tracking, which enables us to achieve our goal of minimising both tracking errors and costs.
Minimising Tracking Error
We aim to invest at least 80% of the portfolio in securities that comprise the underlying index (which may include depository receipts) as well as holding investments that have similar economic characteristics to required securities.
Additional steps to reduce tracking errors include:
- Forecasting cash-flows (e.g. interest accruals, dividends, etc.)
- Anticipating benchmark changes
- Monitoring settlement windows by market
- Managing cash in lieu settlements within tight deadlines.
Minimising Cost
Long-term value is best added by minimising overall portfolio costs. We achieve this by:
- Keeping trading costs to a minimum (by monitoring portfolio turnover, imposing minimum trade thresholds, etc.)
- Negotiating low fees with service providers
- Proactively executing trades in response to corporate events.
- Charging low investment management fees.
Portfolio Construction and implementation
- Daily portfolio benchmark updates provide risk exposures in our portfolios, enabling us to identify potential areas for slippage and effectively manage our track errors.
- When shares in the index have a high cost structure or are illiquid, Barra International is used to find suitable alternative securities that have similar risk/return characteristics (portfolio optimization).
Risk Management
Stringent risk control measures are in place throughout our investment process.