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August 27, 2021 at 08:57 AM
What You Need to Know
- Laurence Black knows how to review indexes because he's developed index recipes himself.
- He argues that binging on plain vanilla indexes is risky for retirement returns.
- One quick test of an index team's risk control strategy is how they performed in March 2020.
Laurence Black has started The Index Standard, a company that could help bring order and quality ratings to the world’s rapidly growing list of investment indexes.
Black has been working in the index world since 2003, when he was head of thematic research and indexes at a business that’s now part of ABN AMRO. While there, he launched investment indexes with super investors such as Jim Rogers and Joel Greenblatt.
He then became global head of the quantitative index team at Barclays Investment Bank. There, Black developed designer investment indexes with financial rock stars Robert Shiller and Nouriel Roubini.
Since June 2019, he has worked as Shiller’s own index advisor, and in September 2019, he began to set up The Index Standard.
His goal has been to create what amounts to the equivalent of a Zagat’s restaurant guide for investment indexes. The company will evaluate and rate investment indexes, and the products built around the indexes, such as ETFs, and indexed annuities.
The firm bases its ratings on a scoring system that includes about 30 criteria, including measures of returns, efficiency, capital at risk, and expected future returns.
It has started by rating the 150 indexes used in indexed annuities and about 500 of the indexes used inside ETFs. Black says he’s especially interested in indexes developed by teams that have said they hope to control investment risk.
The firm is also using simulations to predict how investment indexes and ETFs might perform over the next 10 years.
Here are five things Black has said about investment indexes and index rating efforts, drawn from a recent interview.
1. Gorging on plain vanilla can be dangerous.
Early on, insurers linked most indexed life and annuity products to the performance of the well-known S&P 500 index. Later, insurers began to branch out and use a few indexes that were almost as well known.
Black said steering too many life and annuity product owners toward the S&P 500 in an effort to decrease risk could actually create risk.
“It’s very expensive,” Black said.
