Research Note Series

1/2014

Research Note Series 1/2014

1741 SWITZERLAND INDEX SERIES

HOW ALTERNATIVE INDICES ARE
REVOLUTIONISING INVESTOR BEHAVIOUR
During the second half of the 20th century, a number of Nobel
Prize-winning research studies supplied the theoretical foundation for the triumph of indexing based on market capitalisation. With reference to the efficient-market hypothesis, it was
deduced that rational investors with mean-variance preferences should invest only in the broad market and should refrain from making active investment decisions on a quest for
alpha.
In recent years, academics and practitioners have increasingly launched successful attacks on the theory of the rational
investor and the efficient-market hypothesis. Alternatives have
been put forth that are better able empirically and theoretically
to explain stock market returns. The traditional single factor
capital asset pricing model (CAPM) has since been supplanted
by multifactor models that explain expected stock returns not
just by means of market beta, but also by means of a variety of
systematic factors. These multifactor models lay the theoretical
foundation for alternative indexing methods.
The financial industry has since picked up on these findings, and indexing methods are being launched that specifically attempt to capture the individual factors that explain
stock returns. These new indices should not be understood
as active strategies, but rather as rule-based alternatives to a
conventional capitalisation-weighted index. An index imperatively must feature transparency, broad diversification, ample liquidity and low implementation costs. Alternative indices meet those criteria and present a coequal alternative to
capitalisation-weighted indices.
Alternative indices can be employed along different stages
of the investment process. They can be used to evaluate the
performance of active portfolio managers, and they enable deliberate cost-efficient investments to be made in individual systematic factors that are tailored to specific strategic and tactical investment needs. As the array of alternative indices on
offer grows, their importance for investors as a portfolio building block is becoming ever more essential. For this reason, 1741
Asset Management Ltd drawing on its longstanding experi-

ence and expertise in the field of alternative indexing has developed the 1741 Switzerland Index Series of eight indices for
the Swiss equity market. The eight indices consistently cover
the spectrum of relevant systematic factors and enable investors to specifically capture individual risk premiums. The main
focus of this research note is to introduce these indices and
subject them to an empirical test. In addition, case studies are
presented in order to point out potential tangible ways to put
these indices to use.
F R O M T H E S I N G L E FA C TO R M O D E L TO T H E
A LT E R N AT I V E I N D E X A T H E O R E T I C A L O U T L I N E
The publication of the Capital Asset Pricing Model (CAPM)
around 1964 sounded the start of the victory parade for indexing
based on market capitalisation.1 Below is a brief refresher on the
main cornerstones of the model:
1. The CAPM is a single factor model:
Investors receive compensation in the form of a higher expected return only for holding systematic risk.
Expected equity returns (above the risk-free interest rate)
are a function of a single systematic factor: the market risk
premium.2
2. A capitalisation-weighted market portfolio is a mean-variance
efficient portfolio, i.e. it is the portfolio with the highest sharpe
ratio.
For investors this implies one simple dictate: Hold only a market
portfolio! Over the subsequent decades, most of the CAPMs
underlying assumptions and its theoretical foundation were
questioned and empirically tested. This research revealed that
scaled broad-market beta as a sole systematic factor inadequately explains the expected equity return. Additional factors
exist that systematically explain equity returns. Analogously to
the CAPM, the expected return in such multifactor models is
depicted as a linear combination of exposures to multiple systematic factors.3

Research Note Series 1/2014

The move from one to multiple systematic factors is a significant step: In a multifactor world, a capitalisation-weighted
market portfolio is not necessarily mean-variance efficient. In
order to build an efficient portfolio, the investor must accordingly also take into consideration the rest of the systematic
risks. One of the best-known and most commonly employed
multifactor models is the Fama-French three factor model
(FF3FM)4, which adds in the systematic factors value (i.e. an
enterprises valuation level) and size (i.e. the absolute size of
each enterprises market capitalisation) alongside the market
factor. Juxtaposing the FF3FM against the CAPM instantly reveals a practical application possibility for multifactor models
using them to isolate alpha from beta. The classical CAPM
regression (R tei = i + imR tem + ti ) yields an alpha, a systematic performance differential between a portfolio and a (scaled)
capitalisation-weighted index. But if one uses the FF3FM regression (R tei = i + imR tem + iValueRteValue + iSizeR eSize
+ ti ) to evalt
uate portfolio performance, the return is explained by means
of three different factors. The far-reaching consequence of this
is that it turns parts of the alpha (which is often considered a
proxy for manager skill) into beta (i.e. exposure to a systematic factor). This distinction is by no means purely semantic,
because whereas the asset management industry often charges
high fees for purported alpha, beta can usually be obtained less
expensively. Why should one pay high fees for a return that is
easy to replicate?
The search for systematic factors goes far beyond just
value and size. In recent years a variety of systematic factors have been identified that can help to explain expected returns. Each factor, in turn, can be encapsulated by a separate
alternative index. An investor can selectively exploit the risk
premium on individual factors by investing in the corresponding alternative index. Drawing on earlier research,5 alternative
indices can be classified into five different beta categories. Each
index category targets different systematic factors and exhibits
a specific risk/return profile. Chart 1 illustrates the connection
between equity return, systematic factors and beta category.

CHART 1: BETA CATEGORIES AND SYSTEMATIC FAC TORS

Beta category
1 price-based

Systematic factors
Small size
Large Size

2 price-agnostic
Market
factor

Liquidity

3 fundamentalbased

Growth

4 risk-based

Momentum

5 return-based

Structural
factors

Value

Returnbased
factors

Quality
Volatility

Risk

Source: 1741 Asset Management Ltd. For information on beta categorisation, see Gander, Leveau
& Pfiffner (2012)

1741 S W I T Z E R L A N D I N D E X S E R I E S A LT E R N AT I V E
INDICES IN THE SWISS EQUIT Y MARKE T
The usefulness of alternative indices is obvious in theory. In
practice, however, it is sometimes an extremely challenging
task to find suitable alternative indices. For one thing, the alternative indices available on the market frequently lack transparency. This is not a trivial matter because in reality, an alternative index lacking transparency hardly differs from an active
fund the investor cannot reconstruct with sufficient certainty
how its performance is achieved. The uncontrolled methodology proliferation by some index providers likewise appears
problematic. Alternative indices often blend together multiple systematic factors and thus do not allow investors to selectively seize distinct individual risk premiums. A classic example
of this is value indices based on a preselection of value stocks
that are subsequently weighted in the index in accordance with
their respective market caps. This type of methodology blends
the market beta with the value beta and makes it impossible to
isolate the value premium. It potentially will even mix undesired factor exposure into the investors portfolio, thus undermining his investment decision.
These are serious drawbacks, and they make working with
alternative indices unnecessarily complicated for investors. In

Research Note Series 1/2014

the course of its research in the field of alternative indexing

methods, 1741 Asset Management Ltd has developed eight alternative indices for the purpose of making the best-known individual systematic factors investable for investors by rendering
them methodologically consistent and comparable across different weighting formulas.

CHART 2: OVER VIEW OF 1741 SWITZERLAND INDEX SERIES

Beta category

Index

Information source

1 price-based

Cap Weighted

Market capitalisation
per company

2 price-agnostic

Equal Weighted

Number of companies: N

3 fundamentalbased

Accounting Based

Fundamental data
(absolute) per company

4 risk-based

Minimum Volatility
Risk Parity

Price data

5 return-based

Value Momentum
Quality

Fundamental (relative)
and price data implied
return expectations

Source: 1741 Asset Management Ltd. For information on beta categorisation, see Gander, Leveau
& Pfiffner (2012)

These indices can be used by investors as a benchmark for evaluating the performance of their stock portfolios (e.g.: Is the value
manager worth the money spent?), and they make it possible to
invest in alternative indices on the Swiss equity market. They
cover all five beta categories and their best-known underlying
systematic factors. Individual indices or multiple indices combined are suitable for use depending on the investors needs. The
next section of this research note takes a closer look at the 1741
Switzerland Index Seriess investment universe and its construction as well as its weighting methodology.
DEFINITION OF INVESTMENT UNIVERSE AND
C O N S T R U C T I O N M E T H O D O LO G Y
All stocks traded on the SIX Swiss Exchange form the base investment universe. A company must have a free float greater

than 20% and an average daily share trading volume greater

than CHF 1 million to be considered for inclusion into the 1741
Switzerland Index Series. From the remaining pool of companies, the 50 largest ones by market capitalisation are selected at
the end of each quarter to be the next quarters constituents for
all of the alternative indices. The size of a company is not measured by its closing market cap on the last day of the quarter, but
instead is determined by its moving average over the preceding
six months so that an undesired fluctuation of index constituents
from one quarter to the next is avoided.6
Chart 3 illustrates how the method chosen to define the
universe affects the return of the index weighted by market
capitalisation. It compares the traditional Swiss Performance
Index (SPI) with the 1741 Cap Weighted Index over time. Despite their different number of underlying constituents, they
have performed almost identically with an annualised return
differential of just 10 basis points.
Since all of the indices are representative of the market,
they all reflect the general movement of the broad market.
Whether it is a cap weighted, minimum volatility, accounting
based or momentum index, they all provide diversified investment exposure to the Swiss stock market.
All eight indices are based on the same universe and differ
only in terms of their respective weighting formulas. A detailed
description of the universe definition and the individual meth-

CHART 3: PRAC TICALLY IDENTICAL PERFORMANCE

250
1741 Switzerland Cap Weighted +4.6% p.a.
Swiss Performance Index (SPI) +4.5% p.a.
200
150
100
50
1998

2000

2002

2004

2006

2008

2010

2012

1741 Cap Weighted Index: Based on 1741 universe. SPI: Based on SWX universe.
Source: Calculations by 1741 Asset Management Ltd. Data for period from 31 December 1997 to
31 December 2013.

Research Note Series 1/2014

odologies employed is beyond the scope of this research note,

but interested readers can access information on the individual
index methodologies at www.1741am.com. Such methodological transparency is absolutely imperative if alternative indices
truly are to gain traction in the future as a genuine alternative
to the traditional index weighted by market capitalisation.
The availability of the data required for the respective index calculations (fundamental data, price data, trading volume,
etc.) allows a calculation starting point set at 31 December
1997. The resulting calculation period encompasses a number
of completely different market phases: the tech bubble, the
2000s bull run, the subprime crisis, and the sovereign debt crisis and subsequent recovery. A historical analysis of the risk/
return characteristics allows inferences to be drawn about the
performance of the indices under widely different scenarios
and leads to robust findings, in our opinion.
E M P I R I C A L O B S E R VAT I O N O F T H E I N D I V I D UA L I N D I C E S
In the sections that follow, we examine the attributes of the
individual components of the 1741 Switzerland Index Series
from return, risk and diversification perspectives and take a
look at their behaviour under different market scenarios. The
underlying index time series have been rechecked and verified
for accuracy by an external index calculator.7 All of the following calculated risk/return ratios and transaction data are based
on these officially calculated index time series, which can be
downloaded from Bloomberg and other market data suppliers.8 Without giving away too much in advance, it turns out that
no single index is superior to the others in all aspects and circumstances; a different index or a combination of different indices present themselves depending on the investors objective
and market scenario.
Perspective: Return

The returns of the individual indices and other pertinent data

are shown in Table 1. When one considers that around 99.8%
of all Swiss stock-market ETFs replicate market-capitalised indices, one might be surprised to learn that the cap weighted
index is the one that generates the lowest annualised return.
The minimum volatility and risk parity indices, which focus on

risk, score much better in terms of their returns even though

they mainly concentrate on minimising or dispersing index
risk. However, its the return-focused indices that historically
exhibit the highest return. The momentum and quality indices
were the only ones to generate a return above 8% per annum,
and the value index as well exhibits a bit more than a 3 percentage point annual outperformance relative to its cap weighted
counterpart.
Perspective: Risk

The indices explicitly focused on risk management do not just

minimise ex-ante volatility; they also exhibit by far the lowest
annualised ex-post volatilities and betas (as measured against
the cap weighted index). The minimum volatility index also
stands out with the lowest maximum drawdown.
Relative risk can be judged from two different angles. A look
at tracking error relative to the cap weighted index reveals that
aside from the accounting based index, the rest of the indices
dwell in a relatively narrow band between 7.9% and 10.7%. The
respective information ratios range from 0.08 (accounting based
index) to 0.45 (momentum index). The return-focused Beta 5 indices generally score the best here. However, the results change
when tracking error is examined in comparison to the average
for the alternative indices. When viewed from this angle, the risk
parity and equal weighted indices exhibit the lowest tracking
error, and the value and cap weighted indices the highest. The
resulting information ratio is negative for the cap weighted, accounting based and equal weighted indices while the momentum
and quality indices again score the best.
Perspective: Diversification

A good way to illustrate the potential diversification effect is

to look at the correlation matrix of relative returns (Table 2).
The low and frequently negative correlations indicate that a
diversification effect can be obtained by investing in multiple
indices. Notably, all of the indices except the accounting based
index exhibit a negative correlation to the cap weighted index.
The high correlation between the cap weighted and the accounting based indices implies that both tap exposure to very
similar systematic factors.

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TABLE 1: HISTORICAL RISK/RE TURN OVER VIEW

Cap
Weighted
Return, p.a.

Equal
Weighted

Accounting
Based

Minimum
Volatility

Risk Parity

Value

Momentum

Quality

4.6%

6.6%

5.0%

7.5%

7.1%

7.7%

9.6%

8.4%

0.02%

0.04%

0.02%

0.07%

0.06%

0.09%

0.13%

0.06%

18.8%

17.9%

20.8%

12.4%

15.0%

20.3%

18.4%

17.1%

0.88

1.09

0.59

0.72

0.93

0.83

0.80

Tracking error

n/a

8.4%

4.1%

9.8%

7.9%

10.7%

10.7%

9.1%

Tracking error2

6.1%

2.6%

6.8%

6.1%

3.3%

6.8%

6.7%

4.7%

Sharpe ratio

0.19

0.31

0.18

0.51

0.40

0.32

0.46

0.42
0.40

Impact of 5 bps TC, p.a.

Volatility
Beta

Information ratio

n/a

0.24

0.08

0.28

0.28

0.27

0.45

Information ratio2

neg.

neg.

neg.

0.07

0.01

0.08

0.38

0.27

53.8%

64.2%

59.9%

48.9%

54.8%

64.3%

56.1%

58.8%

Risk Parity

Value

Momentum

Quality

Maximum drawdown

Source: Analysis by 1741 Asset Management Ltd for the period from 31 December 1997 to 31 December 2013 (in CHF)
1
Calculated relative to Cap Weighted Index
2
Calculated relative to the average for the alternative indices

TABLE 2: CORRELATION MATRIX OF RELATIVE RE TURNS

Cap
Weighted
Cap Weighted
Equal Weighted

Equal
Weighted

Accounting
Based

Minimum
Volatility

1
0.55

Accounting Based

0.81

0.26

Minimum Volatility

0.27

0.32

0.58

Risk Parity

0.56

0.09

0.77

0.81

Value

0.35

0.40

0.08

0.38

0.20

Momentum

0.38

0.13

0.51

0.04

0.12

0.31

Quality

0.38

0.13

0.46

0.09

0.16

0.16

0.16

Source: Analysis by 1741 Asset Management Ltd. Calculations based on relative returns for period from 31 December 1997 to 31 December 2013 (in CHF)

Chart 4 shows the resulting diversification effect. Employing

a very simple diversification strategy that, rather than investing
100% in the cap weighted index, invests increasingly in a composite index consisting of all of the alternative indices, doubles
the sharpe ratio. This means that beneficial diversification can
be obtained not just by investing in multiple actively managed
funds, but also by investing in alternative indices.

Perspective: Market scenarios

The preceding analyses concentrated on the long-term characteristics of the indices. Equally interesting, though, is the question of how the individual indices behave under different market
scenarios. Table 3 displays their average monthly returns broken down by rising, sideways-trending and falling market periods. As one would expect, the return-focused indices deliver

Research Note Series 1/2014

APPLICATION EXAMPLES OF USES OF ALTERNATIVE INDICES

What are good examples of practical uses for alternative indices? Three specific application possibilities are outlined below:

CHART 4: DIVERSIFICATION PAYS OFF

Sharpe ratio
0.50

0.40
Cap Weighted
Index

0.30

0.20

100% 90% 80%

70% 60%

50% 40%

30% 20%

10% 0%

Weight of Cap Weighted Index

Source: Calculations by 1741 Asset Management Ltd. 100% signifies a 100% investment in an
index weighted by market capitalisation, 0% signifies a 100% investment in a composite index of
alternative indices (1/7 invested in each of the 7 alternative indices); time period: 31 December
1997 to 31 December 2013 (in CHF).

disproportionate returns in rising markets, whereas the riskfocused indices perform better in falling markets. In rangebound
markets, focusing on specific systematic factors only marginally
pays off; all eight alternative indices deliver similar returns.

TABLE 3: RE TURNS UNDER DIFFERENT MARKE T SCENARIOS

Risingmarkets

Sidewaystrendingmarkets

Fallingmarkets

Cap Weighted

4.6%

0.5%

6.0%

Equal Weighted

5.3%

0.7%

6.6%

Accounting Based

5.2%

0.5%

6.8%

Minimum Volatility

3.9%

0.6%

4.2%

Risk Parity

4.5%

0.7%

5.5%

Value

6.0%

0.5%

6.9%

Momentum

5.1%

1.0%

5.8%

Quality

5.0%

1.0%

6.1%

C A S E S T U DY 1: S T R AT E G I C P O S I T I O N I N G
With the advent of alternative approaches to indexing, investors are starting to ask themselves which index is the right one
for their personal investment needs. Personal investment objectives inevitably lead to the use of different indices. As outlined in
section 2, substantial risk and return differences are empirically
observable. Investors can exploit those differences. There is a
suitable specific alternative index for each investment objective.
Empirical experience suggests that investors whose goal is to
maximise long-term returns should turn to return-focused indices that capture value, quality and momentum premiums. These
indices record the highest return over the long term, though
the enhanced return potential is also accompanied by greater
risk. Investors with a low appetite for risk are better served by
minimum volatility and risk parity indices, which explicitly take
the risk attributes of individual stocks into account when setting
the index weightings. Chart 5 uses three simple portfolio combinations to illustrate this long-term effect.

CHAR T 5: EXAMPLES OF POR TFOLIO COMBINATIONS

Traditional

MCAP
MV
VAL
MOM
QUA

Return, p.a.
Source: Analysis by 1741 Asset Management Ltd. Calculations based on relative returns.
Time period: 31 December 1997 to 31 December 2013 (in CHF)

Volatility
Sharpe ratio

Risk reduction

Return
maximisation

17%
100%

50%

50%

50%

17%
17%

4.6%

6.1%

6.8%

18.8%

15.6%

18.3%

0.24

0.39

0.37

Source: Calculations by 1741 Asset Management Ltd. Data for period from 31 December 1997
to 31 December 2013 (in CHF). MCAP = Cap Weighted, MV = Minimum Volatility, VAL = Value,
MOM = Momentum, QUA = Quality

Research Note Series 1/2014

C A S E S T U DY 2: TA C T I C A L P O S I T I O N I N G
If an investor holds a specific opinion about the stock markets
direction, alternative indices can be used to help build a portfolio that promises the best return under the investors expected
market scenario. The empirical evidence presented in section 2
indicates that return-focused indices exhibit the highest returns
in bull markets while risk-focused indices minimise expected
losses in bear markets. An investor who is convinced about an
impending bull market should accordingly build an index portfolio composed of value, quality and momentum indices. Chart 6
graphically lays out the case:

CHAR T 6: TIMING BULL AND BEAR MARKE TS

500
400

Good timing
Bad timing
MCAP portfolio

300
200
100
0

Good markets

Bad markets

Good timing (Investor X)

+318%

47%

Bad timing (Investor Y)

+203%

57%

MCAP portfolio

+192%

53%

Definition of good timing and bad timing: Most attractive, or conversely, least attractive index
portfolio in each market phase.
Good markets: 12 March 2003 to 31 May 2007. Bad markets: 1 June 2007 to 9 March 2009.
Source: Analysis by 1741 Asset Management Ltd

If Investor X, for example, correctly foresees the great bull

market rally from March 2003 to June 2007 and puts his prediction into action in the form of a portfolio of equally weighted
return-focused indices (34% momentum, 33% quality, 33%
value), he achieves a performance of +318% over this period
(or +40% p.a.). In contrast, Investor Y, who opts for a combina-

tion of cap weighted and minimum volatility indices, earns a return of just +30% p.a., which works out to a relative annualised
underperformance of 10 percentage points.
The opposite holds in a bear market. If Investor X reassesses the situation in June 2007 and comes to the conclusion
that a significant bear market is imminent and thus prudently
switches to a defensive index portfolio (50% cap weighted, 50%
minimum volatility), during the credit market crisis from June
2007 to March 2009 he loses just 47% instead of 57%. Investor
X, who is skilled at timing the market, would have achieved a
performance of +122% over the entire period from March 2003
to March 2009 while a classic cap weighted investor would have
earned a return of just +39%. By comparison, Investor Y, who is
not adept at timing the market, switches from a defensive portfolio to a more aggressive one in June 2007 and earns a return
of +31% for the same six-year period, which is only marginally
lower than the performance achieved by the cap weighted investor. So compared to the classic cap weighted index, selectively employing alternative indices provides substantial outperformance potential for those investors who want to time bull
and bear markets without altering the equity allocation in their
portfolios.
C A S E S T U DY 3: E VA LUAT I N G T H E P E R F O R M A N C E O F A N
AC TIVE FUND MANAGER
Alternative indices serve not just as an aid for strategically and
tactically managing the composition of a stock portfolio, but
also help to evaluate active fund managers. Chart 7 compares
the live track record of one of the best-known and most successful Swiss value managers with that of the 1741 Switzerland
Cap Weighted Index and the 1741 Switzerland Value Index.
Two things stick out: If an investor uses the cap weighted
index as the performance benchmark, he or she might draw
false conclusions about the managers performance contribution. The outperformance from February 2002 to October 2008
looks impressive, but the subsequent underperformance until
March 2009 is equally disillusioning. Did the fund manager first
do an excellent job and afterwards a terrible job? If the relative
performance is judged using the value index, which is the more
appropriate benchmark in view of the managers systematic

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CHAR T 7: PERFORMANCE EVALUATION

Indexed (in CHF)
350
Prominent Swiss value fund
300
1741 Switzerland Value Index
250
1741 Switzerland Cap Weighted
Index
200
150
100
50
0
1997

2000

2003

2006

2009

2012

Source: Calculations by 1741 Asset Management Ltd based on net returns for period from
31 December 1997 to 31 December 2013.

factor exposures, then the picture changes. The long outperformance phase was not achieved solely through astute stockpicking on the part of the manager, but was also driven by the
funds value bias. The same applies to the underperformance
phase in 2008/2009. Another striking observation is that the
transparent, publicly accessible value index stands up well in a
comparison with active value funds. In the example presented,
the value index actually even delivered a slightly superior return over the entire observation period.
Irrespective of whether the return is slightly better, equally
good or mildly inferior, it is the transparency and the consistent capturing of factor premiums that make alternative indices
a compelling alternative to conventional active managers. A
straightforward, rule-based, transparent investment approach
that replicates the bulk of the relative performance simply and
inexpensively compensates the investor for any forfeit of manager skills.
We have limited ourselves to outlining three possible ways
to use alternative indices in the investment process. Besides
employing them as a benchmark for an active manager or using
them to strategically position a stock portfolio or to tactically
manage it, there are many other application possibilities for alternative indices throughout the entire portfolio construction
process.

QUINTESSENCE
After several decades of preeminence, the dominance of market cap weighted indexing is beginning to crumble. Successful
theoretical and empirical attacks have been launched against
the bastion of cap weighted indexing. Today numerous alternative indices are crowding onto the market. Empirical evidence
shows that none of these indices is superior to any of the others in all aspects and circumstances. Their suitability is much
more determined by an investors personal investment objectives. Different indices present themselves for use depending
on the investment need. However, the wild proliferation of
indexing methodologies and the often deficient transparency
needlessly complicate working with alternative indices in actual practice. 1741 Asset Management Ltd developed the 1741
Switzerland Index Series to address this. Composed of eight
alternative indices featuring heretofore unparalleled transparency and methodological consistency, the 1741 Switzerland Index Series offers investors a user-friendly instrument that can
be utilised to profit from the systematic factor premiums on the
Swiss equity market.

F O OT N OT E S
1 Sharpe, W. 1964. "Capital Asset Prices: A Theory of Market Equilibrium under
Conditions of Risk". Journal of Finance, vol. 19, no. 3, 425-442.
2 Formula: E(Rei)=im E(Rem)
3 Formula: E(Rei)=im m+j ij j , where j is the risk premium in reference to an
identifiable systematic risk, j.
4 Fama, E., K. French. 1993. Common Risk Factors in the Returns on Stocks and
Bonds. Journal of Financial Economics, vol. 33, no. 1, 3-56.
5 Gander, P., D. Leveau, and T. Pfiffner. 2012. Categorization of Indices: Do All
Roads Lead to Rome?. Journal of Index Investing, Winter 2012, 12-17.
6 Compared against the Swiss Performance Index (SPI), the universe determined this way exhibits a historical cap coverage of approximately 95% on
average.
7 The official calculator of the 1741 Index Series is Solactive Ltd, one of the
leading providers of financial-market indices. Solactive Ltd currently calculates more than 900 indices across all asset classes for more than 90 clients in
Europe, North America and Asia. Approximately USD 20 billion is currently
invested in indices calculated by Solactive.
8 The corresponding tickers are listed in the appendix.

Research Note Series 1/2014

APPENDIX
I N D E X M E T H O D O LO G Y
1741 Cap Weighted Index
The constituents of the 1741 Switzerland Cap Weighted Index
are weighted on the basis of their total market capitalisation. On
each quarterly rebalancing date, each companys market capitalisation is set in relation to the aggregate market capitalisation
of all companies in the 1741 Switzerland Index Series universe.
1741 Equal Weighted Index
On each quarterly rebalancing date, each of the companies in
the 1741 Switzerland Equal Weighted Index is given an identical
weighting of 2%.
1741 Accounting Based Index
On each quarterly rebalancing date, the constituents of the 1741
Switzerland Accounting Based Index are weighted on the basis of their absolute values for four fundamental metrics (book
value, earnings, revenue and dividends). The average over the
last three years is applied for each of those metrics.
1741 Minimum Volatility Index
On each quarterly rebalancing date, the weights of the constituents of the 1741 Switzerland Minimum Volatility Index are set
such that the overall index risk defined as historical 6- and
12-month volatility is minimised. The maximum weight of a
company on the rebalancing date is 10%.
1741 Risk Parity Index
On each quarterly rebalancing date, the weights of the constituents of the 1741 Switzerland Risk Parity Index are set such that
the risk contributions of each index constituent are all identical.
Risk is defined as historical 6- and 12-month volatility. The maximum weight of a company on the rebalancing date is 10%.

10

1741 Momentum Index

On each quarterly rebalancing date, the constituents of the 1741
Switzerland Momentum Index are each weighted on the basis
of the strength of their momentum. The momentum calculation
is based on each constituents return over the prior nine and
twelve months excluding the last one. An aggregate ranking is
determined for each company, and a weighting function assigns
each one a weight. The maximum weight of a company on the
rebalancing date is 10%.
1741 Quality Index
On each quarterly rebalancing date, the constituents of the 1741
Switzerland Quality Index are weighted on the basis of their attractiveness with regard to the systematic factor quality. Three
quality metrics are examined: return on equity, net profit margin and debt-to-equity ratio. An aggregate ranking is determined
for each company and a weighting function assigns each one a
weight. The maximum weight of a company on the rebalancing
date is 10%.
1741 Value Index
On each quarterly rebalancing date, the constituents of the 1741
Switzerland Value Index are weighted on the basis of their attractiveness with regard to the systematic factor value. Four
value metrics are examined: price/book value, price/earnings,
price/sales and dividend yield. An aggregate ranking is determined for each company, and a weighting function assigns each
one a weight. The maximum weight of a company on the rebalancing date is 10%.

Research Note Series 1/2014

11

OVER VIEW OF INDICES

Index

Bloomberg Ticker

1741 Switzerland Cap Weighted Price Index

1741 Switzerland Cap Weighted Net Total Return Index

1741CHCW Index

1741 Switzerland Cap Weighted Gross Total Return Index

1741 Switzerland Equal Weighted Price Index

Reuters

ISIN

.1741CHCWP

DE000SLA0ZZ7

.1741CHCWN

DE000SLA0CQ5

.1741CHCWG

DE000SLA0CS1

.1741CHEWP

DE000SLA0CU7

.1741CHEWN

DE000SLA0CV5

1741 Switzerland Equal Weighted Gross Total Return Index

.1741CHEWG

DE000SLA0CX1

1741 Switzerland Accounting Based Price Index

.1741CHABP

DE000SLA0CY9

.1741CHABN

DE000SLA0CZ6

1741 Switzerland Accounting Based Gross Total Return Index

.1741CHABG

DE000SLA0DD1

1741 Switzerland Minimum Volatility Price Index

.1741CHMVP

DE000SLA0DE9

1741 Switzerland Equal Weighted Net Total Return Index

1741 Switzerland Accounting Based Net Total Return Index

1741 Switzerland Minimum Volatility Net Total Return Index

1741CHEW Index

1741CHAB Index

.1741CHMVN

DE000SLA0DF6

1741 Switzerland Minimum Volatility Gross Total Return Index

.1741CHMVG

DE000SLA0DG4

1741 Switzerland Risk Parity Price Index

.1741CHRPP

DE000SLA0DH2

.1741CHRPN

DE000SLA0DJ8

.1741CHRPG

DE000SLA0DK6

1741 Switzerland Risk Parity Net Total Return Index

1741CHMV Index

1741CHRP Index

1741 Switzerland Risk Parity Gross Total Return Index

1741 Switzerland Value Price Index
1741 Switzerland Value Net Total Return Index

1741CHV Index

1741 Switzerland Value Gross Total Return Index

1741 Switzerland Momentum Price Index

.1741CHVP

DE000SLA0DL4

.1741CHVN

DE000SLA0DN0

.1741CHVG

DE000SLA0DQ3

.1741CHMP

DE000SLA0DR1

.1741CHMN

DE000SLA0DS9

1741 Switzerland Momentum Gross Total Return Index

.1741CHMG

DE000SLA0DU5

1741 Switzerland Quality Price Index

.1741CHQP

DE000SLA0DV3

.1741CHQN

DE000SLA0DW1

.1741CHQG

DE000SLA0DX9

1741 Switzerland Momentum Net Total Return Index

1741 Switzerland Quality Net Total Return Index

1741 Switzerland Quality Gross Total Return Index

1741CHM Index

1741CHQ Index

Research Note Series 1/2014

12

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