bOSTON — In the world of investing, everyone wants an edge. And what better way to get one than to find out what the other guy is thinking.
In fact, that's just what institutional investor clients of State Street Associates, a unit of State Street Corp., Boston, said when they were polled several years ago.
"We heard that they would really like to have a way of measuring sentiment, or confidence," said Ken Froot, the Andre R. Jakurski Professor of Business Administration at Harvard University's Graduate School of Business, Cambridge, Mass., and a senior partner at State Street Associates.
So in 1999, Mr. Froot and Paul O'Connell, director at State Street Associates, set out to come up with a way to measure institutional investor sentiment.
Rather than simply measuring which stocks investors were buying or selling, the two thought that a true sentiment gauge should instead measure what kind of stocks they were buying and how many shares.
"We wanted to cull millions of transactions," Mr. Froot said, and pull out a common component: "investors' willingness to buy riskier assets. That would be a way of measuring their risk appetite or their willingness to purchase assets at a given risk level."
Thus, the State Street Investor Confidence Index was born. Data used for the index is pulled from assets of State Street clients, which represent 15% of the world's tradable assets, according to Stanley W. Shelton, executive vice president at State Street.