State Street Associates, a subsidiary of State Street Corporation, has launched an 'investor confidence index' which combines a model of global investor behaviour with information that tracks the common buying patterns of higher-risk investments by institutional investors around the world.
"Just as consumer confidence surveys aim to determine whether consumers are willing to spend money, our index sheds light on whether, or not, institutional investors are bullish enough to take on higher risk investments given economic fundamentals and market conditions," said Paul O'Connell, director at State Street Associates, who devised the model along with Ken Froot, a professor of business administration at Harvard University and senior partner at State Street.
According to the company, the new measure is based on financial theory that assigns precise meaning to changes in investor risk sentiment, or the willingness of investors to hold proportionally more or less of their portfolio in higher-risk investments. So the more institutional investors are willing to devote their portfolios to more volatile investments over less volatile investments, the greater their appetite for risk and the greater their confidence.
The monthly index data for September, for instance, shows investor confidence fell marginally from August, but remains strong compared with the first six months of 2003. In September, the index fell 0.2 points to 103.4 from 103.6 in August, and is still well above the 96.4 average in the first half of the year.
According to State Street, the index is an unbiased quantitative measure of the investment behaviour of thousands of institutional investors, and it is not directly tied to good or bad news, or to the price of stocks, bonds or other assets.
"Until now, information on investor confidence had to be gleaned from surveys, which do not necessarily reflect the underlying trends that help drive investor behaviour," said Froot.
The index will be published on the second to last Tuesday of each month and will be released globally.
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