Post-crisis investors are seeking products they can understand of subprime mortgages and leveraged products to the financial crisis has caused investors to flee to safer products which offer a higher level of transparency.

Laurence Black, head of thematic research and indices for global markets of ABN Amro Bank NV, a subsidiary of the Royal Bank of Scotland plc (RBS), said investors are wiser now and preferred to invest in products that they understand.

“In Europe, we are seeing a tremendous demand for transparent products. (Before the crisis) People did not understand black box investing, systematic managers and people don’t know where their money is going or how to get it back,” Black told reporters yesterday.

As a result, investors were caught in the crisis and were unable to get back their returns due to the lack of understanding on these products.

“So, there is a real big demand for transparent products as investors can understand how they work,” he added.

RBS has teamed up with Joel Greenblatt, managing director of New York-based Gotham Capital International, to develop an innovative and transparent family of new indices allowing investors to access Greenblatt’s fundamental value investing principles while using Gotham’s enhanced accounting data.

Yesterday, RBS unveiled the Gotham Enhanced Value Index (GEVI) in Malaysia. The index was developed by Gotham and designed to be traded by RBS through an exclusive partnership.

GEVI is a rule-based, long-only equity index comprising a diversified basket of up to 25 highly liquid shares from various industries in the US. Among the companies in its portfolio at the moment are Pfizer Inc, Accenture plc and Reynolds American Inc.

Greenblatt said the rule for choosing companies to invest in is “above average companies at below average prices”.

He noted that although the formula has proven to be successful in ensuring higher returns compared to the S&P 500 Index over the last few years, there were also times when the formula may not work in the short term and investors should stick with it for a longer period to see returns.

“This index is very systematic and unemotional. It only cares about how cheap and good the company is,” Greenblatt said.

“Pre-crisis, we were seeing a lot of demand for leveraged products and leveraged indices. But they have stopped that and the trading commission is now looking at open exposure and speculation. So, this really brings us back to basics and fundamentals. And we feel now is the time for this product,” Black said.

Meanwhile, Garry Frenklah, RBS’ Singapore-based managing director of global banking and markets, said RBS was hopeful of partnering local asset management and insurance companies to offer unit trusts to retail investors interested in the index.

“We have seen quite a lot of interest from Malaysia in the US market in recent months. The sentiments have improved. I am very positive on the uptake from Asian investors, especially Malaysia.”


This article appeared in The Edge Financial Daily, November 11, 2009.