A tool for both active and passive investors

FPX indexes can either be used as benchmarks to measure the performance of your own portfolio or as fully investable portfolios.

My colleague, Richard Croft, and I designed the indexes as performance measures of representative diversified investment portfolios. Each index is composed of cash, fixed income and growth components.

The cash portion, in the form of Government of Canada 91-day treasury bills, is designed to provide nominal capital preservation and liquidity for the portfolios.

The income component consists of Government of Canada bonds of other maturities and is expected to maintain capital preservation and generate periodic cash flow for spending or reinvestment. To get a cross-section of maturities, we chose the "on-the-run" (bellwether) Government of Canada bonds maturing in three, 10 and 30 years.

The equity category is designed for capital growth and dividend income. Index participation units are used for this section.

The Canadian product is the Toronto Stock Exchange's TIPS 100, companion to the first successful IPU, TIPS 35 -- a product whose structure is so sound it has paved the way for all subsequent IPUs. TIPS 100 is pegged to the TSE 100 index. The units are fully eligible for registered retirement savings plans and income funds and other tax-shelter plans.

For the U.S. component, we selected Standard & Poor's Depositary Receipts. SPDR is a copy of TIPS, but is based on the U.S. S&P 500 composite index. They are not eligible for RRSPs.

Morgan Stanley Worldwide Equity Benchmark Shares were used for the international component. The five WEBS in the portfolios and their respective weights were chosen to replicate Morgan Stanley's EAFE (Europe, Australia and Far East) index. WEBS are also not eligible for RRSPs.

The FPX indexes differ from one another primarily in the strategic asset allocation, or the percentage of the portfolio allocated to safety, income and growth components.

The growth portfolio is the most aggressive, with 10% in 91-day T-bills, 20% in medium-term government bonds and 70% in TIPS 100, SPDRs and WEBS.

The balanced portfolio is a traditional 50-50, with 10% allocated to 91-day T-bills, 40% split evenly among the government of Canadas spanning the maturity structure; and 50% in equities allocated among TIPS 100, SPDRs and WEBS.

The conservative income portfolio holds 20% in 91-day T-bills; 50% evenly split among the Canada bonds; and 30% allocated between TIPS 100 and SPDRs.

Each index uses an assumed portfolio of $100,000, an amount representative of the average investment portfolios of National Post readers. The indexes are denominated and expressed in Canadian dollars. The base period for all three indexes is April 1, 1996, with an original index value of 1000. If, for example, the balanced index is at 1396 as at April 1, 1999, this means it has appreciated by 39.6% over the three-years. This appreciation, in turn, can be expressed as 11.76% on an annual compounded basis.

The indexes are reported in National Post every day and reflect any surplus cash, accrued interest and closing bond, share and units values. Each of the portfolios is rebalanced to the target weights annually on April 1. (Rebalancing is the process of bringing a portfolio in line with a target structure when deviation is caused by fluctuations in market values.) Commissions and other transaction costs are not included in the calculations. No taxes, personal or otherwise, are included, nor are the withholding taxes charged on SPDRs and WEBS distributions.

The FPX indexes have been designed for both the passive and the active investor. If you are an active investor, use the indexes as benchmarks. Look for the one closest to your own portfolio mix and measure the progress of your portfolio against FPX. Look to see whether the active approach is adding value.

If you are a passive investor, measure your portfolio against FPX. For the ultimate in passive investing, you can simply buy one of the FPX portfolios.

[Note: The tables below summarise the initial composition of the three FPX indexes as published in the May 1998 A Guide to FPX supplement to the Financial Post. Current Values of these indexes are available on the web as well as in each edition of the Financial Post section of the National Post. ...Bylo]

FPX Growth

Asset Class                   Percent
Cash and Equivalents            10%
   Gov't Cda 91-day T-bill         10%
Fixed Income                    20%
   Gov't Cda 7.25% 01Jun07         20%
Equity                          70%
   TIPs 100 (TSE100)               35%
   SPYs (S&P 500)                  15%
   WEBs Germany                     1%
   WEBs Japan                       8%
   WEBs U.K.                        4%
   WEBs Mexico                      2%
   WEBs France                      5%
 

FPX Balanced

Asset Class                   Percent
Cash and Equivalents            10%
   Gov't Cda 91-day T-bill         10%
Fixed Income                    40%
   Gov't Cda 7.00% 01Sep01         13.33%
   Gov't Cda 7.25% 01Jun07         13.33%
   Gov't Cda 8.00% 01Jun27         13.33%
Equity                          50%
   TIPs 100 (TSE100)               25%
   SPYs (S&P 500)                  10%
   WEBs Germany                     0.75%
   WEBs Japan                       6%
   WEBs U.K.                        3%
   WEBs Mexico                      1.5%
   WEBs France                      3.75%
 
                             
FPX Income

Asset Class                   Percent
Cash and Equivalents            20%
   Gov't Cda 91-day T-bill         10%
Fixed Income                    50%
   Gov't Cda 7.00% 01Sep01         16.67%
   Gov't Cda 7.25% 01Jun07         16.67%
   Gov't Cda 8.00% 01Jun27         16.67%
Equity                          30%
   TIPs 100 (TSE100)               25%
   SPYs (S&P 500)                   5%