The SGI Fed Model US index aims to outperform an equally weighted portfolio of US bonds and equities.
The index is based on an asset allocation tool, which determines the optimal exposure of US shares relative to that of bonds and allocates accordingly pursuant to systematic rebalancing rules. The index is rebalanced every month.
The SGI Fed Model US is based on an equity-bond relative valuation model including:
- An equity valuation indicator, given by the earnings to price (E/P). The higher the E/P, the more attractive the equity valuation is.
- A bond valuation indicator, given by the nominal bond yield (BY). The allocation is determined according to the average historical difference between the inverse of the 12-month-forward price-to-earnings forecast and the market price of the generic 10-year Treasury bond.
- When the average spread is equal to or greater than 0.3%, the SGI Fed Model is fully exposed to equity market.
- When the average spread is equal to or less than -0.3%, the SGI Fed Model is fully exposed to the bond market.
- When the average spread is between -0.3% and 0.3% the SGI Fed Model is exposed to both equity and bond markets, with the allocation based on a linear function of the average spread.