We’ve all heard the catch phrase “when the going gets tough, the tough get going.” In the world of finance, change it to “when the going gets tough, the tough get product patents to kill the competition“ and you’ll have a pretty good idea of where Compass Efficient Model Portfolios is headed.
The Nashville-based firm announced in late May that it’s launching five new CEMP volatility-weighted indexes calculated by Dow Jones Indexes. But that’s only the start. Before summer is out, the firm plans to have launched another four alternative indexes, and then it will get to work launching nine mutual funds to track all those indexes. In fact, CEMP has 17 mutual funds in filing right now, and in addition to launching those, the firm has ambitions of getting into the exchange-traded fund business around the end of the year.
And don’t forget the patent. Compass EMP Funds Chief Investment Officer Steve Hammers said Wednesday in an interview that due to the broad market enhancement of the CEMP Indexes, his firm’s proprietary methodology is patent pending. (Serial No. 61/645,370, in case you’re wondering).
“We’ve already got calls from ETF companies that are interested in licensing this with us,” Hammers said. “It’s a big deal in the marketplace that Dow Jones Indexes would want to publish our indexes.”
What “this” is, is CEMP’s indexing methodology that emphasizes a target weighting of different assets and asset classes by their riskiness and not by their performance or by their fundamentals.
“The core principal of CEMP Enhanced Indexing methodology is consistent earnings, and each index member receives an equal weighting on the basis of volatility,” according to a CEMP white paper. “The net result is an index that faces the same amount of future uncertainty as a traditional market capweighted index or even a fundamental weighted index, but controls and distributes that uncertainty equally across the entire index rather than concentrating it to a small subset of the index.”
For example, the CEMP U.S. Large Cap 500 Volatility Weighted Index (CEMPUSL) looks at a universe of 500 companies, screens it twice yearly, and includes only those companies that have seen positive earnings per share for each of the last four consecutive quarters.
“You’ve got to make money, otherwise you’re not in the index,” Hammers said, noting that the CEMPUSL’s annual total return has beaten the S&P 500 Index in the last 10 of 11 years. The cap-weighted S&P 500 closed out at 2.11% in 2011 versus CEMPUSL’s 3.94%.
There are skeptics, of course. It’s bound to happen when a company releases a whole new pack of products and claims that they are “truly exceptional compared to traditional indexing,” as Hammers says in a news release.
“The market is flush with new indices and related ETFs and index mutual funds that claim an edge over their predecessors,” James Picerno wrote for Wealth Magazine in 2008, “Investors who agree can choose from a growing list of products tied to equity indices that distinguish themselves by shunning market-cap weighting.”