Executives for Enhanced Investment Technologies Inc. thought they had invented a better mouse trap, and didn't want the idea to be stolen while they were trying to get people to buy it.
As a result, the Palm Beach Gardens, Fla., firm -- known as INTECH -- did what other inventors do: they applied for a patent.
"If you're going to have an index, you're going to have to tell people exactly what you're doing," said E. Robert Fernholz, chief investment officer.
But if they told investors exactly what they were doing, nothing could stop the investors from taking the idea and doing it on their own, he said.
Hence, INTECH sought the patent on its Diversity-Weighted indexing process, and was granted one in early October.
Typically, mathematical formulas are not awarded patents, so INTECH tried to patent the "investment machine," commonly called a computer, and the "underlying apparatus," the index formula, which together generate trade ideas, Mr. Fernholz said. Diversity-Weighted indexes really aren't workable without a computer, he said.
With the patent in place, INTECH is hoping to get index fund managers to offer Diversity-Weighted index portfolios, which by definition will have lower weightings to the larger cap stocks in an index and higher weightings to the smaller cap stocks.
The process is purely mechanical in choosing the weightings, so portfolios could be priced around five basis points, he said. They are expected to outperform cap-weighted indexes by about 50 basis points, Mr. Fernholz said.
Performance this year has not been that good, though, with the index lagging the Standard & Poor's 500 by about 200 basis points, Mr. Fernholz said. Longer term, the index should do better, as diversity returns to the market, he said.
The index and its performance can be viewed on the Web at www.intech-investments.com.