Japan equity index rebalancing:Impact of smart beta rebalancing,Rebalancing of minimum variance inde

Forecasting trading impact of smart beta rebalancing

    MSCI conducts periodic reviews of the stocks included in its share prices indices twice a year, in May and November. The results of the next review will be announced early morning 13 November (Japan time), and the changes will be implemented at the close of trading on 30 November. The review will not only affect the MSCI Japan sub-index but will also cause changes in the composition of many factor indices that take MSCI Japan as their universe. Among MSCI factor indices, MSCI minimum volatility indices (MVIs) are frequently used as benchmarks for ETFs and other funds. Changes to these MVIs will be announced early morning 18 November (Japan time) and implemented at the same time as the changes to the share price indices (ie, at the close of trading on 30 November).

    In the analysis summarized below, we forecast the changes to the MVIs, taking into consideration the changes to the standard index that is their parent index (universe) (see Figure 1 for our analytical method). The changes in the standard index reflect the forecast made by Instinet, based in the US. The results of our analysis indicate that the weightings of stocks in the industrials sector as well as the information technology sector will fall, while weightings of stocks in the consumer staples and utilities sectors rise (Figure 2). The results indicate the index will likely continue to be heavily exposed to stocks in defensive sectors. Looking at individual stocks, 51 are likely to have their weightings increased while 47 see weightings reduced. These figures include 13 stocks to be newly included in the index and 13 that will be removed (Figures 3, 4). We expect these changes will impact trading of these stocks for just under four days maximum. Our analysis assumes that funds with assets under management (AUM) of about ￥430bn track the MSCI Japan Minimum Volatility Index. Funds included in that calculation are (1) minimum volatility funds (limited to ETFs and investment trusts) that are traded on markets around the world (Figure 5) and (2) minimum volatility funds that are owned by domestic pension funds for which we can confirm outstanding values of AUM. Our calculation does not include the value of AUM by overseas pension funds, domestic pension funds that do not disclose AUM, and private investment trusts. These limitations imply that the actual value of AUM tracking the MSCI Japan MVI is larger than our assumption.

    In our 17 April 2015 Nomura Global Research report on Japanese equity quantitative strategy, we pointed out that investors had exhibited a growing preference for low-risk, high-yield equities as substitutes for bonds amid the fall in crude oil prices and long-term interest rates from 2014 H2. This shift led to a pronounced inflow of funds into minimum volatility funds and health care funds. However, the market crash on 24 August and subsequent high market volatility appears to have had some effect on this trend. Toward the end of August, we began to notice that funds had started to flow out of healthcare-related funds (Figure 6 [b]), as the noticeable increase in market volatility likely weakened equities attraction as a substitute for bond investments. Meanwhile, the flow of funds into minimum volatility funds has shown no signs of letting up (Figure 6 [a]). Therefore, the current situation is one in which the flow of funds into defensive stocks continues despite indications that it should end.