Sumitomo Mitsui Banking Corporation and Toshiba have jointly developed the SMBC/TOSHIBA Quantum Driven Diversified Japan Equity Index and the SMBC/TOSHIBA Quantum Driven Diversified U.S. Equity Index, new benchmarks designed to contribute to effective risk mitigation. These Indices utilize Toshiba’s advanced quantum-driven optimization computer, the Simulated Bifurcation Machine, to solve large-scale combinatorial optimization problems and construct portfolios exhibiting lower correlations between constituent stocks than traditional methods allow. By building a portfolio of stocks whose price movements are less likely to move in tandem, the Indices aims to preserve the benefits of diversification even during broad market downturns. SMBC will promote investment strategies based on these Indices to asset management companies, contributing to effective risk mitigation.
Background and Objectives
Equity investment is central to asset management, but it also carries the ever-present risk of abrupt and substantial market fluctuations driven by geopolitical developments, changes in economic policy, and other external factors. In uncertain markets, investors are constantly seeking innovations in risk diversification that can protect their assets from unexpected market shocks. SMBC and Toshiba have together developed new Indices that combine SMBC’s expertise in financial markets with Toshiba’s advanced quantum-driven technologies. These Indices use solutions to large-scale combinatorial optimization problems to realize well diversified equity portfolios that are difficult to construct with traditional methodologies. They aim to maintain the benefits of diversification even during times of market volatility and contribute to effective risk mitigation. The companies stated that building a portfolio of stocks whose price movements are less likely to move in tandem is a key goal, highlighting the demand driving this development. The objective, according to SMBC and Toshiba, is to contribute to effective risk mitigation.
Overview of the Indices
The Indices use the constituent stocks of existing Japanese and U.S. Equity Indices, not creating novel assets, but rather optimizing selections from established Japanese and U.S. equity pools. Calculations for these Indices have already begun, utilizing the end of the period as a base date for comparison and analysis. This technology allows for a level of diversification beyond traditional methods, focusing on historical price volatility as a key metric. The Indices will be rebalanced quarterly, with individual components selected through these complex calculations. This strategy aims to contribute to effective risk mitigation, with the weighting of each stock directly tied to its historical price volatility within the selected equity pools.
Key Features of the Indices
These new benchmarks achieve diversification by selecting stocks with low correlation, a process that aims to contribute to effective risk mitigation. The Indices are constructed through an optimization process that selects a subset of stocks from the universe so as to keep correlations across constituent pairs low. This level of diversification is enabled by Toshiba’s Simulated Bifurcation Machine, an advanced quantum-driven optimization computer. According to the developers, building a portfolio of stocks whose price movements are less likely to move in tandem is a key goal in preserving the benefits of diversification even during broad market downturns. Looking ahead, the methodology behind these indices is geared toward practical fund management, with proprietary calculation rules designed to account for stock liquidity and transaction costs during rebalancing, and a joint patent application is pending.
By building a portfolio of stocks whose price movements are less likely to move in tandem, the Indices aims to preserve the benefits of diversification even during broad market downturns.
Roles of Each Company
SMBC led the development of the Indices, using financial engineering expertise cultivated within its global market and treasury divisions to develop the calculation methodology. It will now promote diversified investment strategies based on the Indices to asset management companies. Toshiba provides the Indices with a customized version of the quantum-driven optimization technology of the Simulated Bifurcation Machine, handles system maintenance, and will execute the quarterly rebalancing calculations. Daily calculation and distribution of the Indices will be done by S&P Dow Jones Indices, responsible for maintaining data accuracy through adjustments for corporate actions like stock splits and dividend payments, and delivering reliable index data to the market.
Outlook
Publication of the Indices marks the start of a collaborative initiative by SMBC and Toshiba. They will now move forward by promoting proposal activities that aim for broad utilization of the Indices in financial markets. As a first step, they will start exploratory discussions with asset management firms on index funds, ETFs and other investment vehicles linked to the Indices. They recognize that value to investors can only be realized when these indices are used to develop financial products that offer investors in Japan and overseas practical diversification options, as a spokesperson stated, emphasizing the need for tangible financial instruments. Alongside new indices derived from the current methodology, SMBC and Toshiba will continue to pursue the application of advanced technologies in the financial sector, including quantum and quantum-driven technologies.
