Over the past six months, the country and broader financial industry have faced extraordinary challenges. Our local communities and economies have also been deeply affected by the fallout from the times we’re living in. This has reemphasized our founding vision to bring transparency to the historically opaque world of capital allocation. Addepar is particularly well-suited to provide a more timely and accurate view of investor sentiment, drawing on a platform that’s used to track $2 trillion of investments. 

Introducing the Addepar Investor Sentiment Index (Addepar ISI)—a transactions-based index of high-net-worth (HNW) and ultra-high-net-worth (UHNW) investor sentiment derived from U.S. equity transactions captured on the Addepar platform. We’re leveraging our ability to effectively aggregate and analyze data to provide an informative and powerful tool for all investors to use as a point of comparison for their own activity.

In this blog post, we’ll introduce the index and share our initial observations about its behavior over the past few years—and especially during the recent period of uncertainty and market volatility. This is the first of many indices and analytics we plan to develop for our clients and the larger investor community.

An index to track a distinct class of investors

The wealthiest tier of investors is often referred to as the “patient capital” in the market. These investors tend to make decisions based on longer time-horizons, with fewer restrictions on how they invest. They also have access to the highest caliber of investment resources, making them a group worthy of all investors’ attention. However, existing investor sentiment indices either don’t focus on this group or do so only with infrequent responses to surveys. 

Let’s take a closer look at how we built the index. To focus on U/HNW sentiment, the Addepar ISI includes only portfolios with greater than $10mm in value. We distill every U.S. equity market transaction tracked on Addepar into a single number: the percentage of portfolios buying U.S. equities minus the percentage of portfolios selling U.S. equities. Those interested in a more detailed description of the index and its methodology can read our white paper.

Figure 1 (below) shows a history of the Addepar U/HNW Investor Sentiment Index compared to the S&P 500 index. Notice how wealthy investors have behaved: they tend to be most bullish when the equity market is in decline. For example, during the drawdown in the fourth quarter of 2018, the Addepar index registered its highest value on record (12.6 in December 2018). Isolating the behavior of this investor group is interesting because it often stands in contrast to that of other investors. Using U.S. fund flows data (S&P 500 Index) as a broader measure of investor behavior, Addepar investors tend to be most inclined to buy when U.S. funds are experiencing the greatest outflows (see Figure 2). 

Despite the apparent inclination of wealthy investors to buy when markets decline, neither the magnitude of the buying, nor its duration, are always the same. Just four months after notching its highest value, the Addepar index declined to its lowest value of -8.3 in April of 2019, the month markets recovered from the 2018 drawdown. Possible explanations for the reversal of activity include portfolio rebalancing or viewing the 2018 lows as a tactical, rather than a strategic, buying opportunity. Additionally, bullish U/HNW investor sentiment doesn’t only occur during drawdowns, as can be seen by the consistent buying activity in the latter part of 2016 into 2017, which had minimal market volatility.

Buying the dip and selling the rally

Given that the Addepar ISI is transaction-based, we’ve been able to take a high frequency look at investor behavior during the recent bear market. Figure 3 shows the Addepar U/HNW Investor Sentiment Index computed weekly through July 7, 2020. Addepar U/HNW investors were consistent buyers throughout the downdraft, although the specific timing was not perfectly predictable because maximum buying occurred during the first half of the drawdown, rather than throughout the period. As the market recovery took hold, the bullish sentiment quickly turned bearish for ten consecutive weeks. So far, this quick reversal of sentiment appears to most closely resemble the activity around the 2018 market drawdown, but it remains to be seen whether U/HNW investors will continue to invest in a contrarian manner, or if positive economic developments will be enough to lure them back into the market.

What’s next?

Addepar’s platform is purpose-built to provide our clients with an unprecedented level of data aggregation and normalization, analytics and portfolio reporting for even the most complex investment portfolios. This helps our clients achieve what matters most: their investment goals. 

Looking forward, we will continue to develop analytics that provide additional value to our clients through the aggregated and anonymized investment data on our platform. This will include expanding asset class coverage, benchmark analytics and coverage of more topical themes. 

Stay up-to-date on the Addepar ISI 

Keep yourself up-to-date on monthly changes to the sentiment of U/HNW investors. The monthly index and our key observations will be consistently posted on our website. Contact us at investor-sentiment@addepar.com for more information.