October’s climb continued a trend seen throughout much of 2003, with confidence rising from a level of 87.2 at the beginning of the year. This comes after September’s 0.2 point decline from August’s 103.6 level.
The index, developed by Harvard Professor Ken Froot and State Street Associates Director Paul O’Connell, is based on financial theory that assigns precise meaning to changes in investor risk sentiment, or the willingness of investors to hold proportionally more or less of their portfolio in higher-risk investments. The more of their portfolios that institutional investors are willing to devote to more volatile investments over less volatile investments, the greater their appetite for risk and the greater their confidence. Thus, this past month showed that even in the current environment of stagnant consumer confidence, institutional investors remained positive about investment opportunities.
“Institutional investors continue to display a sense of optimism ahead of any changes in employment and spending,” said Froot. “Yields on bonds have risen, but not by enough to dissuade investors from buying additional risky assets,” O’Connell added.
Because the index is a quantitative measure of the investment behavior of thousands of institutional investors, it is not directly tied to good or bad news, or to the price of stocks, bonds or other assets so it can more easily help measure investor sentiment, according to a press release. The index was launched in September 2003 (See State Street Associates Unveils Institutional Confidence Measure ).