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Invesco gets more from index strategy

Invesco Perpetual has introduced the US equity benchmark plus fund, an Oeic that uses an enhanced index strategy.

The fund targets a return of 2.5 per cent above the S&P 500 index. It will comprise 100-150 US companies and the risk profile of the portfolio will broadly match that of the index. The fund can also invest in Canada.

Managers Thorsten Paarmann and Jeremy Lefkowitz will manage the portfolio with a tracking error of 4 per cent, which is how they intend to add value relative to a tracker fund. Tracking error refers to the maximum amount in percentage terms that the fund can deviate from the benchmark.

The first step in the investment process is defining the stock universe. This is made up of 700 of the biggest and most liquid US stocks. Invesco Perpetual’s stock selection model, which has a 23-year track record, will be used to assess the expected price performance of each stock. Stocks are also assessed on the basis of risk and in relation to factors such as earnings momentum, price and volume trends and management action.

Invesco Perpetual says this approach removes bias from stock selection since industry, sector and regional weightings are strictly controlled through the 4 per cent tracking error.

The US market is the biggest in the world and it is very efficient compared with other markets. This is why active managers find it so difficult to outperform the S&P 500. The enhanced index strategy gives the fund manager a chance to outperform the index, without increasing the risk profile relative to the benchmark. This strategy is generally cheaper than active management.

However, one potential drawback of the enhanced index strategy is that investors will have high exposure to overvalued stocks and less exposure to cheaper stocks, which may be very good companies. They are also likely to have substantial bias to stocks and sectors on the index, so could miss out on other good opportunities.


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