Addepar, a U.S.-based wealth manager with $2.5 trillion of assets on its platform, has shared a report that introduces their proprietary Investor Sentiment IndexSM.
As explained by Addepar, the index measures or gauges investor sentiment using “detailed portfolio-level data” from the firm’s Wealthtech platform.
The platform is reportedly used to analyze and report “more than $2 trillion of total assets” for over 400 wealth advisors, family offices and major financial institutions that “oversee individual portfolios—ranging from the affluent to the U/HNW investor segments.”
As noted in the update from Addepar, a reliable measure of risk sentiment among investors is “a highly coveted, but elusive, resource.”
Many traders and researchers “rely on indicators drawn from investor surveys, aggregated portfolios and option markets,” the team at Addepar noted while adding that the survey responses might “not map to actual behavior, and aggregated market statistics—such as volumes and derivative prices—can reflect market technicals and other distortions.”
The detailed data on the Addepar platform enables the firm to “improve on both of these dimensions.” The company further explained that they collect anonymized data on portfolio-level equity transactions, allowing them to “observe the most immediate measure of risk sentiment: the number of investors adding (or shedding) equity risk through their portfolio allocations.”
The Investment Sentiment Index (ISI) is calculated “as the relative share of individual investors who are net buyers of U.S. equity securities versus those who are net sellers, or net neutral.”
A positive reading indicates that “relatively more individual investors are adding equity risk, while a negative reading based on more sellers than buyers indicates that investors are reducing risk,” the report from Addepar explained.
The firm focuses their index on the investment behavior of U/HNW investors who “have
more than $10 million in total net worth across all asset classes on the platform.”
To date, Addepar has found that their ISI measure of investor sentiment is “closely linked statistically to market performance,” the firm claims while noting that investor sentiment and market performance is “negatively correlated contemporaneously: U/ HNW investors tend to be net sellers of stocks in months when markets rally.”
In the pre-pandemic period, the ISI is “positively correlated with future equity market returns,” the report noted. When U/HNW investors are net buyers of stocks, returns “tend to be higher in the following month.” And this suggests that the ISI, and investor sentiment among U/HNW investors, “may be a leading indicator for equity returns under normal market conditions,” the report added.
Since April of 2020, the relationship has “reversed: U/HNW investors have been consistent net sellers of US equities, but markets have continued to rally.”
Addepar’s management confirmed that they plan to watch the data carefully to see if the pre-pandemic relationship “reestablishes itself in the data in the months ahead.”
In order to protect the confidentiality of their customer data, the Wealthtech company aims to ensure that “no single firm accounts for more than 10% of all portfolios in our ISI.”
In the instance that a company “breaches this threshold we randomly sample down the portfolios managed by the firm to preserve the structure of the data,” the update explained.
For more details on this update, check here.