easy indexing by hendrik schwarz

8/14/2019 Easy Indexing by Hendrik Schwarz

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Easy Indexing

Buy low and sell high

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Easy Indexing


Abstract

In this paper, a rule-based strategy that systematically identifies attractive stock

markets is examined. Markets are ranked on a relative value basis and targeted

investments in the three most attractive stock markets are made. When relative

valuations change the strategy switches to more attractive indices. By including a200-day Moving Average as a Trend Indicator, the strategy is able to adapt to a

change in the market environment. The basic strategy set-up works according to the

fundamental principle: invest in the three most attractive indices of your universe

according to traditional value ratios. Respectively, switch to new attractive indices

when relative valuations change. When more than 50% of the investment universe

break their 200-day Moving Average, a change in market environment must be in

place. As a consequence, the strategy switches to a long/short approach: short only

the three least attractive markets on a relative value basis. A targeted short in the

most expensive markets profits from a bear market. The strategy turns bullish

again, and invests in the three most attractive indices of the investment universe,

when more than 50% of the 200-day Moving Averages cross the underlying indicesfrom below. A combination ofBehavioural Finance approaches, as well as structural

construction inefficiencies of major country indices, allow the strategies to

consistently outperform its benchmark.

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Behavioural Finance A Paradigm Shift in Financial Academia

Human behaviour has always had a role in financial markets. Yet, it is only in the last

years that the study of human behaviour has achieved acceptance as a distinct academicfield in finance1. Behavioural Finance, Behavioural Economics or Open-minded

Finance2

are just a few of the many names of the search to identify the habitual cognitive

errors of investors and their effects on financial markets.

The Nobel Prize in economics in 2002 went to a psychologist, Daniel Kahneman, who

helped pioneer the field of Behavioural Finance3. Kahneman basically shows that

investors are predictably irrational. Investors continue to make the same mistakes over

and over.

Understanding the habitual and often predictable errors of human beings is both the pith

of Behavioural Finance and the optimum research modality for understanding the marketand profiting from it.

Behavioural Finance on the Level of the Individual

Both an enormous amount of evidence and anecdotal experience suggests that people are

very bad at predicting the markets4. This is often because we all tend to be massively

overconfident. The two most common biases are Over-optimism and

Overconfidence5.

Perhaps Over-optimism is the best comprehensible of all psychological errors. People

tend to exaggerate their own abilities. Overconfidence refers to a situation wherebypeople are surprised more often than they expect to be. Effectively people are generally

much too sure about their ability to predict. This tendency is particularly pronounced

amongst experts. That is to say, experts are more overconfident than lay people. This is

consistent with the illusion of knowledge driving overconfidence.

Several studies confirm professional investors to be particularly overconfident6. For

instance, one study found that 68% of analysts thought they were above average at

forecasting earnings; 75% of fund managers think they are above average at their jobs. In

fact the appalling performance statistics of the active fund management industry tell a

different story, with an average of between 75 and 90% of fund managers

underperforming a benchmark index7.

1 There were many pioneers before that such as Granger and Morgenstern (1970)2 Thaler (1993)3 It is also thanks to the efforts of economists and psychologists such as Amos Tversky, Richard Thaler,

Meir Statman and Hersh Shefrin.4 DeBondt and Thaler (1985 and 1987), Schachter et al. (1986)5 DeBondt and Thaler (19906 Montier (2002)7 A large body of empirical work, starting with Jensen (1969), finds that actively managed funds, on

average, underperform the market index.

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However there are plenty of investment strategies that don't need forecasts as inputs such

as value strategies based on trailing earnings, or momentum strategies8

based on past

prices.Easy Indexing is one of them.

Behavioural Finance on the Aggregate Level

According to Kahneman and Tversky the Availability Biasis a rule of thumb by which

decision makers reassess the frequency of class or the probability of an event by the ease

with which instances or occurrences can be brought to mind9. All else being equal, it isn't

a bad rule of thumb - common events come to mind easier than rare events. People are

exceptionally afraid of financial situations involving ambiguity10

. This translates into

extreme caution on the part of investors with regard to stocks they think they don't know.

The flip side of the bias is a preference for the known or the familiar or the Home Bias

leading to investments in the local investors market11

. However empirical studies12

show

a significant risk reduction by considering markets on a global perspective.


Price-earnings ratio (P/E) tests indicate that low P/E ratio stocks experienced superior

results relative to the market, while high P/E ratio stocks have significantly inferior

results13

. The size effect indicates that small firms consistently experienced significantly

larger risk-adjusted returns than larger firms14

. This is called the Small Firm Effect.

Tests of the small firm effect also found that firms that have only a small number of

analysts following them (thus, they are neglected firms) have abnormally high returns.

These excess returns appear to be caused by the lack of institutional interest in the firms.The Neglected Firm Effect applies to all sizes of firms

15. A huge Eurostoxx 50

company is usually widely followed by market participants while some index members of

the Danish OMX Index are hardly in the spotlight.

Easy Indexing profits from the market inefficiencies mentioned above. Easy Indexing

does not rely on the experience of a seasoned market pro. Neither Overconfidence nor

Home Bias hinders the performance ofEasy Indexing. An unemotional P/E ratio based

trading signal could be blind to any market fads16

. Easy Indexing supports the financial

community P/E ratio debate arguing for predictive power of the P/E ratio.

8 Kaufman (1998a), Jegadeesh and Titman (2005)9 Kahneman and Tversky (1973)10 Benartzi (2001)11 Kenneth Froot et al. (1999)12 Dimson et al. (2002)13 DeBondt and Thaler (1985 and 1987), Keppler (1991), Lakonishok et al. (1993), Schachter et al. (1985

and 1986), Shleifer (1998), Hong and Stein (1999), Cutler et al. (1989), OShaughnessy (2005a)14 Keim (1983)15 Elfakhani and Zaher (1998)16

Although one could argue that the P/E ratio is mostly driven by price changes or in other words marketfads.

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Indexation & Allocation of Capital

The phenomenon of indexing portfolios to capture efficiently and cheaply the long-term

return of the stock market is gathering momentum. However there is a significant

underperformance against the index by many professional money managers.

The consensus for indexing portfolios is that an indexed fund owns a diversified strategy.

In fact most major country indices are very concentrated amongst a few sectors and

stocks and do not offer appropriate diversification.

As of June 21st

2006, the financial sector represents 33 % of the European Eurostoxx 50

index. For an investor it is extremely unwise to invest one third of the money that he has

allocated for Europe in one sector. Another example: the 15 biggest stocks in the UK

stock market (FTSE 100) represent 58% of the index. By buying the UK FTSE 100

index, an investor is buying a concentrated portfolio of big stocks. And since this

movement towards big market capitalisations has taken place all over the world, a major

country index will be overweight in "big caps". Still one has to keep in mind, not all

country indices are structurally flawed Capital Weighted indices but the majority of them

are.

Easy Indexing uses the 16 largest and most liquid Western European indices as an

investment universe. The total sum of 16 indices are 650 stocks, i.e. an investment in the

three smallest by number of members Western European indices still represents a

portfolio of 59 stocks, while an investment in the three largest by number of members

Western European indices represents a portfolio of 215 stocks, a much better diversified

portfolio.

How do you make money in financial markets17

?

The money management community is using mainly three techniques to reach investment

decisions:

1. Momentum Based Strategies: one of the best ways to make money in the financialmarkets is to identify a trend and get in (and out) at the right time. Most money

managers try to invest following momentum.

2. Return to the Mean Strategies: the second way to make money in the financialmarkets is to buy what is undervalued/oversold and to sell what isovervalued/overbought and wait for the asset price in question to return to its

historical mean. This is the strategy adopted by most value managers.

3. Carry Trade Strategies: the third and final way to make money in the financialmarkets is to play intelligently the yield curve (i.e. borrow at low rates and lend at

higher rates).

17 Gave et al. (2005)

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A combination of two empirical supported strategies

Empirical studies18

have shown that undervalued stocks outperform their overvalued

peers. Buy stocks that are out of favour and sell them when they are back en vogue.

What works for stocks, should also work for indices: just buying the index can be a costcautious but efficient investment strategy. Due to the principle of Mean Reversion,

inexpensive indices achieve an above-average performance over the long term.

Therefore, a successful strategy should invest in only most attractive indices according to

traditional value ratios. Then switch to the new attractive indices when relative valuations

change.

How does it work?

Easy Indexing is a simple19

, rule-based strategy that systematically identifies attractive

stock markets. With Easy Indexing, the 16 largest and most liquid Western European

markets are analyzed according to two traditional value ratios only: P/E and P/BV20

. The

markets are ranked on a relative basis, and targeted investments in the three most

attractive stock markets are made.Easy Indexing switches to new attractive indices when

relative valuations change.

The Easy Indexing strategy was implemented to a set of 16 Western European Country

Indices. The indices used are shown in Table 1:

18 DeBondt and Thaler (1985 and 1987), Keppler (1991), Lakonishok et al. (1993), Schachter et al.

(1985 and 1986), Shleifer (1998), Hong and Stein (1999), Cutler et al. (1989), OShaughnessy (2005b)19 Gigerenzer & Goldstein (1996), Czerlinski et al. (1999)20 Using 12 months-Trailing Multiples of MSCI Country Indices

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Table 1: 16 Western European Country Indices

Country Index Name BloombergTicker

Numberof Index

Members

Type of Index

1 United

Kingdom FTSE 100 ukx index 101 Capitalization -Weighted21

2 Switzerland Swiss Market Index smi index 27 Capitalization -Weighted3 Sweden OMX Stockholm omx index 30 Capitalization -Weighted

4 Spain IBEX 35 ibex index 35 Capitalization -Weighted

5 Portugal Lisbon PSI-20 psi20 index 20 Capitalization -Weighted

6 Norway Oslo OBX obx index 25 Capitalization -Weighted TR22

7 Netherlands Amsterdam - AEX aex index 24 Capitalization -Weighted

8 Italy Milan MIB30 mib30 index 30 Capitalization -Weighted

9 Ireland Irish Stock Exchange iseq index 54 Capitalization -Weighted

10 Greece Athens General ase index 60 Capitalization -Weighted

11 Germany DAX dax index 30 Total Return Index23

12 France CAC 40 cac index 39 Modified Capitalization Weighted24

13Finland OMX Helsinki hex index 25 Capitalization -Weighted14 Denmark OMX Copenhagen kfx index 20 Capitalization -Weighted

15 Belgium Brussels BEL 20 bel20 index 19 Modified Capitalization Weighted

16 Austria Vienna ATX atx index 20 Capitalization -Weighted

Historical Simulations

TheEasy Indexing strategy was simulated from January 1994 until February 2006, with

the strategys decision rule applied on a monthly basis. Even profitable trading strategies

could lose money when commissions and slippage are added, therefore all simulationswere conducted including 1.5% management fee and 5 bps per trade:

21 A Capitalization Weighted Index measures the change in the market value of the index components.

In this type of index the sum of all market values (market value = price*outstanding shares) is divided bythe index divisor.

22 Note that effective April 21st 2006, OBX Stock Index became a total return index and had price history

split by a factor of 4.23 A Total Return Index reflects the total value of a stock portfolio in the index because it incorporates

the dividends paid by index constituents as part of the calculation process. Total Return Indices are day-

end only and are calculated after dividends for the constituent stocks have been analyzed after the close

of trade.24 In a Modified Capitalization Index, the weightings of large index members are capped in order to reduce

the impact on the index performance by a small number of large capitalization stocks. The constituent

stocks in this index are weighted according to the total market value of their outstanding shares. In this

way, the impact of a components price change on the Index is generally proportional to the issues total

market value. The Index value is calculated by summing up the weight-adjusted market capitalizations

for all constituent stocks and dividing that sum by a predetermined base value. The value of the Index isadjusted to reflect changes in capitalization resulting from mergers, acquisitions, stock rights,

substitutions and other capital events.

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Assuming a 3-year holding period for the investment, Easy Indexing would have

outperformed the Eurostoxx 5025

in 70.3% of all observations. Average outperformance

against the Eurostoxx would have been 6.24% p.a. based on the Internal Rate of Return

(IRR) for weekly launches. Graph 1 illustrates the development of the strategy:

Graph 1: Internal Rate of Return for Easy Indexing for 3-year holding period

Investment Horizon: 3 Years

-30%

-20%

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0%

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Launch Date

IRR(

%p.a.)

Easy Indexing

Eurostoxx 50

Assuming a 3-year holding period for the investment, Easy Indexing (the blue square-

dotted line) would have had an average standard deviation of 11.46% p.a. vs. the

Eurostoxx 50 (the orange triangular-dotted line) with an average standard deviation of19.36% p.a. based on weekly launches. Easy Indexing would have been about 40% less

volatile than an Eurostoxx 50 investment. The maximum drawdown ofEasy Indexing

would have been -4.34% while the maximum drawdown for the Eurostoxx 50 was -

28.39%. Easy Indexing would have demonstrated an improved risk/return profile

compared to the Eurostoxx 50. Table 2 compares the average/maximum/minimum

annualized percentage return of the strategy versus the Eurostoxx 50:

Table 2: Easy Indexing vs. the Eurostoxx 50 Index for 3-year holding period

Easy Indexing Eurostoxx 50

Average annualized return (%) 15.64% 9.40%Maximum annualized return (%) 43.87% 38.48%

Minimum annualized return (%) -4.34% -28.39%

Average standard deviation (%p.a.) 11.46% 19.36%

25 Indices arent directly investible. It is assumed to use the underlying index futures which can have a

slightly different performance than the spot index. Furthermore in the past some indices such as the

Grecian ASE Index would have been very difficult to invest with the underlying futures when costs and

liquidity would have been considered. The Eurostoxx 50 was selected due to its publicity. Benchmarkssuch as the MSCI Europe or the Dow Jones Europe Index have performed very similar to the Eurostoxx

50 despite the fact that these indices have more index members as the Eurostoxx 50.

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Assuming a 5-year holding period for the investment, Easy Indexing would have

outperformed the Eurostoxx 50 in 70.05% of all observations. Average outperformance

against the Eurostoxx would have been 6.53% p.a. based on the IRR for weekly launches.

Graph 2 illustrates the development of the strategy:

Graph 2: Internal Rate of Return for Easy Indexing for 5-year holding period

Investment Horizon 5 years

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IRR(%p.a.)

Easy Indexing

Eurostoxx 50

Assuming a 5-year holding period for the investment, Easy Indexing (the blue square-

dotted line) would have had an average standard deviation of 7.65% p.a. vs. the

Eurostoxx 50 (the orange triangular-dotted line) with an average standard deviation of

14.70% p.a. based on weekly launches. The maximum drawdown of Easy Indexing

would have only been -0.81% while the maximum drawdown for the Eurostoxx 50 was -

11.50%.Easy Indexing would have increased the average annualized return by 80% with

only half of the volatility and almost no negative drawdown. Table 3 compares the

average/maximum/minimum annualized percentage return of the strategy versus the

Eurostoxx 50:

Table 3: Easy Indexing vs. the Eurostoxx 50 Index for 5-year holding period


Average annualized return (%) 14.60% 8.07%

Maximum annualized return (%) 26.27% 33.33%

Minimum annualized return (%) -0.81% -11.50%


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Easy Indexing for all Market Environments

How long can a bull market last? Markets do not always rise, so market performance is

not a one-way street. Most big bear markets have taken place because of a massive

misallocation of capital, the classical example being the bear markets in Asia, 1997-1998

as well as the global Internet bubble, 2000-200326.

Easy Indexing should be able to adapt to a change in the market environment.

How will we know we are entering a Bear Market?

Stock prices move in trends. However, random fluctuations in prices mask these trends.

By using Moving Averages, once can eliminate the minor blips from graphs but retain the

overall long-run trend in prices27

. Although, focussing on only one Moving Average is

doomed to give false signals. However, when more than the half of all underlying equitymarkets turn and cross their Moving Average respectively, a change in market

environment must be in place28

.Easy Indexing Long Shortcan adapt to this market trend.

Buy low, sell high and identify a trend and get in (and out) at the right time

Easy Indexing Long Shortinvests in the three most attractive indices of the index

universe according to traditional value ratios. Respectively, it switches to more attractive

indices when relative valuations change.

A Moving Average can track a trending market, but can also generate wrong signals.However, when more than 50% of the investment universe break their 200-day Moving

Average, a change in market environment must be in place. Easy Indexing Long Short

switches to a long/short approach.

Easy Indexing Long Shortshorts only the three least attractive markets. A targeted short

in the most expensive markets profits from a bear market.

When more than 50% of the 200-day Moving Averages cross the underlying indices from

below, Easy Indexing Long Shortturns bullish again and invests in the three most

attractive indices of your universe.

26 Campbell and Shiller (2004), Shiller (2000)27 Kaufman (1998b)28 The Dow Theory argues that related Averages discount everything and must confirm each other.

For a Long/Short-signal averages must move into the same direction. One could argue that what works

well for the Dow Jones Industrial and Rail averages should also work for country indices of onegeographical area.

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Historical Simulations

Easy Indexing Long Shortwas simulated for the period January 1994 until February

2006, with the strategys decision rule applied on a monthly basis. Even profitable

trading strategies could lose money when commissions and slippage are added, therefore

all simulations were conducted including 1.5% management fee and 5 bps per trade:

Assuming a 3-year holding period for the investment, Easy Indexing Long Shortwould

have outperformed the Eurostoxx 50 in 63.6% of all observations. Average

outperformance against the Eurostoxx would have been 9.81% p.a. based on the IRR for

launches occurring every 2 weeks. Graph 3 illustrates the development of the strategy:

Graph 3: Internal Rate of Return for Easy Indexing Long Short for 3-year holding period

Investment Horizon: 3 Years

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50%

Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03

Launch Date

IRR(%p.a.)

Easy IndexingEasy Indexing Long Short

Eurostoxx 50

Assuming a 3-year holding period for the investment, Easy Indexing Long Short(the grey

diamond-dotted line) would have had an average standard deviation of 7.96% p.a. vs. the


19.36% p.a. based on weekly launches. The maximum drawdown of Easy Indexing

would have been still positive with 0.33% while the maximum drawdown for the

Eurostoxx 50 was -28.39%. The significant outperformance of the Eurostoxx 50 of 104%

combined with no negative performance would have madeEasy Indexing Long Shortthesuperior investment approach to a long only Eurostoxx 50 investment. Table 4 compares

the average/maximum/minimum annualized percentage return of the strategy versus the

Eurostoxx 50:

Table 4: Easy Indexing Long Short vs. the Eurostoxx 50 Index for 3-year holding period




Minimum annualized return (%) 0.33% -28.39%


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Assuming a 5-year holding period for the investment, Easy Indexing Long Shortwould

have outperformed the Eurostoxx 50 in 63.63% of all observations. Average

outperformance against the Eurostoxx would have been 9.42% p.a. based on the IRR for

launches occurring every 2 weeks. Graph 4 illustrates the development of the strategy:

Graph 4: Internal Rate of Return for Easy Indexing Long Short for 5-year holding period

Investment Horizon 5 years

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-10%

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IRR(%p.a.)

Easy Indexing Long-Short

Easy Indexing

Eurostoxx 50

Assuming a 5-year holding period for the investment,Easy Indexing Long Short(the grey

diamond-dotted line) would have had an average standard deviation of 3.35% p.a. vs. the


14.70% p.a. based on weekly launches an impressive volatility reduction of 77%. The

maximum drawdown ofEasy Indexing would still have been positive with 7.47% while

the maximum drawdown for the Eurostoxx 50 was -11.50%. The performance figures

speak for themselves. Although the average annualized return of the 5-year holding

period would have been smaller then for the 3-year holding period the risk/return profile

would have been enhanced with a convincing minimum return with still only half of the

volatility compared to the 3-year holding period. Table 5 compares the

average/maximum/minimum annualized percentage return of the strategy versus the

Eurostoxx 50:

Table 5: Easy Indexing Long Short vs. the Eurostoxx 50 Index for 5-year holding period




Minimum annualized return (%) 7.47% -11.50%


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Comparative Performance vs. Hedge Fund Indices

Hedge funds invest in a wide variety of public and private markets. However, the term

hedge fund simply refers to investment vehicles with a similar legal structure.

Consequently, generalizations about hedge funds are problematic and often contain more

sensationalism than sound understanding.

Inflows into hedge funds totalled over USD123 billion during 200429

. While increasing

asset flows will dilute investor returns in many areas, the impact will differ depending on

the supply/demand balance within the area in question. With barriers to entry low and

investor interest high, many low-quality hedge funds have entered the business. These

new launches are likely to provide disappointing results. In addition, many hedge funds

charge unjustifiably high fees. Most investors would balk if one of their traditional

managers asked for a 1% to 2% management fee plus 20% of profits, yet this is exactly

what many so-called hedge funds represent: market-oriented managers charging

exorbitant hedge fund fees. In comparison Easy Indexing andEasy Indexing Long Short

historical simulations were conducted including management fee of just 1.5% and 5 bps

per trade. Hedge fund indices provide a rough gauge of the diverse hedge fund group and

its dedicated strategies, such as Merger Arbitrage or Distressed Trading.

Graph 5 below shows the comparative performance ofEasy Indexing (the blue square-

dotted line) and Easy Indexing Long Short(the grey diamond-dotted line) versus the

Eurostoxx 50(the orange triangular-dotted line), the CS Tremont Long Short Equity

Index (the puce dotted line) and the CISDM Equity Long-Short Europe Index (the sky-

blue cross-dotted line), with the strategys decision rule applied on a monthly basis for an

open-ended investment observed during the period January 2001 until February 200630

.

Easy Indexing and Easy Indexing Long Shorteven outperform the CS Tremont LongShort Equity Index as well as the CISDM Equity Long-Short Europe Index.

Taking the high hedge fund fee structure and the comparative performance chart from

above into account, the results of the simple and cost consciousEasy Indexing andEasy

Indexing Long Shortstrategies are quite staggering. EspeciallyEasy Indexing Long Short

would have beaten even Hedge Fund indices by a wide margin. While particularly skilful

practitioners offer compelling value as concentrated or activist managers, many products

offer nothing more than periodic exposure to market beta. Hedge fund fees are justifiable

only for those managers possessing extraordinarily specialized expertise.

29 Fortmiller et al. (2005)30 The shorter observation period was due to the limited data availability of the ISDM Equity Long-Short

Europe Index.

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Graph 5: Comparative Performance of Easy Indexing and Easy Indexing Long Short versus the

Eurostoxx 50, the CS Tremont Long Short Equity Index and the CISDM Equity Long-Short Europe

Index

Comparative Performance

0

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Easy Indexing Long Short

Eurostoxx 50

CS Tremont Long Short Equity

CISDM Equity Long/Short Europe

Index

Summary

Easy Indexing and Easy Indexing Long Shortare strictly defined, scientifically proven

trading strategies. Both systematic strategies incorporate psychological as well as

economic reasons and have clear and objective Buy and Sell signals. Easy Indexingand Easy Indexing Long Shortinvest in the 16 most liquid European indices. The 16

indices offer a well diversified portfolio with an universe of 650 stocks. Hence Easy

Indexing andEasy Indexing Long Shortare transparent strategies using transparent index

underlyings.Easy Indexing andEasy Indexing Long Shortoffer outperformance in rising

but also in falling markets. According to historical simulations the long term

outperformance of the strategies vs. EuroStoxx 50 is about 8-10% p.a. with on average

only half the annual volatility of the EuroStoxx 50.

Conclusion

The conclusion that can be drawn from the paper is thus fairly simple: there are simple,

mechanical strategies that can give a risk/reward ratio greater than that of buying and

holding the market index. The strategy can earn large returns without taking on additional

riskEasy Indexing is an easy and simple to understand Trading Strategy, with superior

and stable returns based on buying value. Active (buying value) and passive (just indices)

fund management techniques are incorporated in one strategy. By following a set of

predetermined rules for managingEasy Indexing, costs can be reduced, and on an after-

fee basisEasy Indexing should have a significant advantage if it can deliver returns

similar to passive index and active fund strategies.Easy Indexing was able to even

outperform major hedge fund benchmarks based purely on the merits of the investment.

The factEasy Indexing can be delivered at lower cost is an added benefit. BecauseEasyIndexing is rules-based, it can also offer greater transparency compared with traditional

hedge funds and depending on the investments they make, better levels of liquidity.

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Easy Indexing Long Shortis designed to do the following:

Provide diversification benefits when combined with traditional portfolioinvestments;

Enhance liquidity and transparency compared with the average hedge fund; Elimination of single-manager risk; Ability to scale investments to a larger size due to the liquidity of the underlying

assets;

Provide meaningful protection in declining markets; and Enhance overall portfolio results.

Outlook

Easy Indexing could become the platform for more diverse underlyings and other easy to

gasp trading concepts such as:

Easy Indexing Emerging Markets Easy Sector Indexing

Appendix: Backtest Summary

Table 6: Backtest Summary for Easy Indexing and Easy Indexing Long Short

Backtesting summary* Easy Indexing Easy Indexing Long-Short**

1. # Observation points 147 147

2. # SIGNALS 63 66

3. Occurrence 42.30% 44.30%

4. AVERAGE #days between signals 68.9 (2.3months) 65.8 (2.2months)

5. Rolling backtests launches every week launches every 2 weeks

3-year holding period 477 products examined 238 products examined

5-year holding period 372 products examined 186 products examined

*Easy Indexing andEasy Indexing Long Shortwere tested over a 12-year period since 1994.**Long short with MAs was implemented using a 200-Day Moving Average and a "bear"

signal was generated if more than half of the indices (i.e. 9 out of 16) had a price lower than

the MA at the observation date, and vice versa for a bull signal.

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References

BENARTZI, Shlomo (2001):Excessive Extrapolation and the Allocation of 401(k) Accounts to

Company Stock," Journal of Finance, Vol. 56, Pages 1747-64.

CAMPBELL, John Y.;SHILLER, Robert J. (2004): Valuation Ratios and the Long-Run Stock

Market Outlook: An Update, in: THALER, Richard H. (Publisher) (2005):Advances in

Behavioural Finance Volume II, Princeton University Press and Russel Sage Foundation, New

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