What Is an Optimized Portfolio As Listed Securities (OPALS)?
Let me explain what an Optimized Portfolio as Listed Securities, or OPALS, really is. It's essentially a single-country equity index that holds fewer securities than the benchmark index it's based on. Morgan Stanley created this in 1994, and I see it as a key predecessor to the exchange-traded funds that became so popular later.
Understanding an Optimized Portfolio As Listed Securities (OPALS)
You need to understand that OPALS are built to track a single-country index, but they're optimized to potentially outperform it by having fewer holdings. This means they're streamlined for better performance. These portfolios can be sold before they expire or settled by delivering the actual underlying shares. They're specifically for cross-border equity investors like you who might not be able to use futures efficiently, or perhaps regulatory issues prevent it, and running your own country-specific equity operations just isn't feasible.
Optimized Portfolio As Listed Securities and Portfolio Optimization
Now, let's talk about how OPALS ties into portfolio optimization. This process is all about picking the best possible portfolio from a range of options to meet your specific goals. It usually focuses on maximizing things like expected returns while cutting down on expenses, volatility, and overall risk. The optimal setup depends on your own return targets and how much risk you're willing to tolerate.
Optimization often happens in two phases: first, deciding the weights for different asset classes, and second, fine-tuning the weights of individual securities within those classes. For instance, you might decide what percentage of your portfolio goes into equities versus bonds or real estate—that's asset class optimization. Then, within equities, you'd choose specific stocks. Spreading your holdings across classes gives you basic diversification, and varying the assets within each class adds even more.
Optimized Portfolio As Listed Securities Listings
OPALS trade on the Luxembourg Stock Exchange and are available for various Morgan Stanley Capital International (MSCI) indices. They're typically bought by large institutional investors, with a minimum investment of $100 million. Since they're not registered with the U.S. Securities and Exchange Commission, most U.S. investors can't access them.
I consider OPALS one of the early steps toward exchange-traded funds in the U.S. They were launched on the Luxembourg exchange because its rules are more flexible, allowing Morgan Stanley to offer them to retail investors there. In 1996, Morgan Stanley followed up with World Equity Benchmark Shares (WEBS), which were SEC-registered and similar to OPALS but available to U.S. retail investors.
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