HAI: You do change the index under extraordinary circumstances according to your filings. When was the last time it was actually rebalanced and why?
Rogers: There have been small things. Something may go from 20 basis points to 10 basis points or something like that. It’s mainly because of liquidity. We might have a slight change in one of the agricultural components, but we take it away from one component and add it to another agricultural component, which is comparable.
I noticed in one of your previous stories that other index guys were trying to take a swipe at my index, by saying everything in their index was a significant percentage. I would remind that person that the S&P 500 has 20 components which have 1 basis point, one one-hundredth of a percent. So if he thinks that small components should be dropped, he’s fighting the world. As far as I know, the S&P 500 is the most extensively known and used index in the world.
I wanted my index to be international. I wanted it to reflect the cost of doing business around the world. I wanted it to be broad based. None of the other indexes has rice, for instance, even though two-thirds of the people in the world eat rice every day.
The other problem I found with the others is that they’re U.S. centric. At the time I was looking for an index, most of them wanted to reflect what was going on in the time zones where they were working. They had U.S. and U.K. components, so that it’s easier to arbitrage against their customers, or just to compile the index. This was long before computers were so extensive. Now, of course, that doesn’t really matter very much.
And of course you have to consider liquidity. It doesn’t do you any good to have an index which is just academic. You’ve got to be able to use it.
HAI: Why is human intervention to you more important than a rules-based index?
Rogers: The Dow Jones industrial average or even the S&P 500 are “human intervention, human judgment,” if you will. In my view, if you want to have stability and consistency in transparency, I’d prefer a system which we have developed. It stood the test of time.
The consumption of cotton doesn’t change that much over any long period of time. Maybe there are ups and downs. But you don’t change the weightings because cotton goes up one year or down another year. Look at the Goldman Sachs Index. If something goes up in price, the index increases the weighting. That’s the way my mother invests.
My mother calls me up and says, “I want you to buy X,” and I say, “Why?” And she says, “Because it’s tripled.” I say, “Mother, you’re supposed to buy it before it triples.” Goldman Sachs and UBS and the rest of them raise the weighting when prices rise. Listen, I’m an investor. This is my money. I know what people need if they’re going to invest. And they don’t need some gimmick to attract investors. They need something where they’re going to make money.
HAI: Explain how the consumption weights are calculated.
Rogers: You have to weigh consumption with liquidity. While two-thirds of the people in the world use rice every day, you couldn’t have that kind of weighting in the index because the exchange trade of the rice market is not deep enough.
Without a public market, obviously you cannot have rice with its proper weighting. Therein lies the conundrum. You have to weight liquidity with consumption. Germany and Vietnam, for instance, both have about the same population. But Germany is northern, with seasons, and very industrialized and has lots of cars. Vietnam is more southern, with very little industrialization and very few cars.
But if you’re going to have something to reflect the cost of moving around the world, you’ve got to balance, and that’s hard. That’s why you cannot just use pure consumption as much as I would like to, or use consumption for Vietnam of rice, or consumption of Germany for rice.