Pulling from the proprietary investment methodology of their flagship actively managed investments, GaveKal Capital has launched two strategic-beta indices with the hopes that they will eventually be utilized in an exchange traded fund wrapper.
On Tuesday, GaveKal launched the GaveKal Knowledge Leaders Developed World Index (KNLGX, KNLG), which covers developed markets from North America, Europe and Asia, along with the GaveKal Knowledge Leaders Emerging Markets Index (KNLGEX, KNLGE), which covers emerging Latin America, Asia and European markets, according to a press release. The indices screen for profitability, return on capital and a Knowledge Leaders component. [ETF Chart of the Day: Strategic Beta Power]
“We isolate companies with the largest intellectual properties,” Steven Vannelli, Managing Director and Portfolio Manager for GaveKal Capital, said in a phone interview.
The so-called Knowledge Leaders include companies that choose to spend on knowledge-intensive activities, or research and development, brand development and employee education. Consequently, if they are able to develop these intangibles and market the ideas, the companies can create a competitive advantage or economic moat.
When evaluating a company through conservative accounting methods, an investor may inadvertently penalize these types of research-intensive firms. Traditional accounting provides an asymmetric view on companies with high intangibles.
“Companies that choose to invest more on innovation develop rich stores of assets that directly impact stock performance,” Vannelli said in the press release. “Yet today’s conservative accounting standards make them nearly invisible in the stock market. The GaveKal Knowledge Leaders Indexes reveal these companies, allowing investors to unlock a new opportunity hiding in the world’s most innovative companies.”
Due to the specific market criteria needed to pass through the screens, the Knowledge Leaders indices can overweight and underweight specific sectors. Given the indices’ focus on innovation, research and development, it is not surprising that a greater portion of the health care and technology sectors are selected.