Indexology^® Blog

The Dow Jones Industrial Average ended September at 16,284.70 – down 1,538.37 points year to date for a -8.63% return. Q3 2015 was the worst calendar quarter since Q3 2011.

• Leader & Laggard – Nike (NKE) was the biggest contributor during Q3; Goldman Sachs (GS) was the biggest detractor.
• Industry Performance – the Consumer Goods industry was the best (and, frankly, only) contributor during the period; Industrials the worst.
• Worst Day (In Points & Percent) – down 588.40 points or -3.57% – on August 24th. While bad – the worst 1 day loss since August 2011 – it could have been worse: the DJIA was down over 1,000 points in early trading before recovering.
• Best Day (In Points & Percent) – a mere two days later, on August 26th, the DJIA finished up 619.07 points or 3.95% as investors were drawn back to the markets following a period of panic selling.
• No New Highs – Q3 saw no new highs for the DJIA, the last having been struck on May 19, 2015.

Download the full report

In recent years, passive management has had an increasingly strong foothold, with a sharp rise in assets under management (AUM). According to PricewaterhouseCoopers Asset Management’s 2020 report, the AUM of global passive investments stood at USD 7.3 trillion as of 2012, and they are expected to grow to USD 22.7 trillion by 2020. The active versus passive debate has been raging on for years, with compelling opinions on both sides. S&P Dow Jones Indices has been publishing the SPIVA^® report across regions as an independent arbiter of this debate. The latest research paper seeks to cover questions frequently raised by our readership that are not addressed in our usual publications.

• What is the trend and impact of fees on investment returns? Is it uniform across different markets?
• Are active managers in some markets more efficient than their peers in other markets? How do they fare across different geographies and across different investment styles?
• Do AUM play a role in the overall performance of active managers? If yes, is it consistent across markets?

In our most recent report, we found that over the past five years ending in 2014, active funds levied higher charges, at least double those of passive funds, regardless of where the funds were domiciled. The active management fee in the developed world witnessed a general downward trend over the same five-year period.

The active versus passive debate is ongoing, and the empirical results obtained with such reports can provide statistics that back up one’s contentions. To find out more, please download the full report.

The S&P GSCI Total Return lost 19.3% in the third quarter of 2015. This was the 5th worst quarter and the 3rd worst 3rd quarter for commodities in history since 1970. Historically worse quarters were: Q4 2008 (-47.0%,) Q3 2008 (-28.6%,) Q4 2014 (-27.7%,) and Q3 1976 (-20.2%.) In total, there have been 183 quarters where 67 were negative and 116 were positive. On average, there was a gain of 8.6% in positive quarters and a loss of 8.2% in negative quarters. Historically, the 3rd quarter has been the most profitable, gaining an average of 4.3% but has also been the most volatile with annualized volatility of 28%. The best quarter ever was also a 3rd quarter that happened in 1990 and returned 55.2%.  Only the 4th quarters on average have been negative, losing on average 0.4%. There is no guarantee of a rebound as the quarters following the four worst quarters on record (that were worse than this one,) lost 10.6% (Q1 2009), lost 47.0% (Q4 2008,) lost 8.2% (Q1 2015,) and gained 5.2% (Q4 1976.)

For the quarter, 23 of 24 commodities posted negative returns, which only happened once before in Q3 2008. It is a drastic change from Q2 2015, the prior quarter, when only 11 commodities were negative. Below are charts of the percentage of negative and positive commodities (since the number of commodities has not always been 24 like today) quarterly through history:Source: S&P Dow Jones IndicesSource: S&P Dow Jones Indices

The S&P GSCI Lean Hogs was the only winner for the quarter and gained 13.4%. Back in Q3 of 2008, the S&P GSCI Lead was the only winner.  The S&P GSCI Feeder Cattle was the only single commodity index to set a losing record return this quarter, losing 17.2%. However, one quarter of the 24 single commodities were notable quarterly losers posting losses worse than 20%: crude oil (-26.9%,) brent crude (-26.5%,) Kansas wheat (-21.2%,) unleaded gasoline (-21.0%,) heating oil (-20.9%,) and gasoil (-20.7%.) Some single commodities in the index also had their biggest losses in quite a long time: live cattle (-14.6%, worst since Q4 2008,) zinc (-15.9%, worst since Q3 2011,) and copper (-10.2%) and aluminum (-7.9%) each lost most since Q2 2013.

Year-to-date through September, 2015 is the 3rd worst year recorded, losing 19.5%. Only 2001 and 1998 were worse ytd through Q3, losing 23.2% and 21.9%, respectively. Now the S&P GSCI Total Return is on track to record its 6th worst year after 2008 (-46.5%,) 1998 (-35.8%,) 2014 (-33.1%,) 2001 (-31.9%) and 1981 (-23.0%.) Perhaps some good news for 2016 is that in the years following these historical losses, returns were positive 13.5%, 40.9%, 32.1% and 11.6%, respectively, in 2009, 1999, 2002 and 1982.

To hear the best calls for the coming year, please tune into our expert panel from the S&P Dow Jones Indices 9th annual commodity seminar.

The Asia-Pacific region is the third-largest ETF market in the world, after the U.S. and Europe. Despite the fact that the ETFs listed in the Asia-Pacific region represent less than 10% of global ETF assets, the region’s asset growth rate has outpaced the two former leaders and is now ranked at the top.

The Asia-Pacific ETF market is quite scattered, with ETFs listed across different countries.  By AUM, Japan has a dominant position in the Asia-Pacific ETF market (see Exhibit 1).  However, the significant growth potential of Hong Kong and China cannot be underestimated.  The exchanges in Hong Kong and China have recorded the highest ETF turnovers among their peers, at USD 38 billion and USD 157 billion, respectively (see Exhibit 2).  The emergence of cross-border initiatives, including Mainland-Hong Kong Mutual Recognition of Funds (Mutual Recognition) and Shenzhen-Hong Kong Stock Connect (SZ-HK Connect), could also serve as a catalyst for the growth of Hong Kong’s and China’s ETF markets.

Expanding Footprints to Other Markets
The Mutual Recognition and SZ-HK Connect programs are setting the stage for Hong Kong- and China-listed ETFs to penetrate the other markets.  The Mutual Recognition program allows eligible and approved mainland China and Hong Kong funds and ETFs to be offered to each other’s markets.  Similarly, the SZ-HK Connect program would allow eligible shares listed on the Shenzhen Stock Exchange and the Hong Kong Stock Exchange to be offered to the other markets (and could potentially include ETFs).  These two arrangements could open more opportunities for cross-border ETF distribution to retail investors and potentially help boost their sales momentum.

Stimulating ETF Market Growth
The Hong Kong ETF market is more diverse than the Chinese ETF market in terms of product offerings, and hence the southbound flow could benefit more from the cross-border initiatives.  On top of the strong product lineup of local Hong Kong and A-shares ETFs, Hong Kong has also showcased a variety of ETFs covering different geographies, sectors, and asset classes.

The China A-shares market has become volatile this year, which is a concern for many investors in mainland China.  To diversify their risk out of the A-share market, investors may look for investment products that provide overseas exposure.  Hong Kong-listed ETFs could be a good tool for them to access markets outside of China.

Furthermore, the cross-border initiatives could accelerate the development of China’s ETF market.  China-listed ETFs will be facing direct competition from their Hong Kong counterparts that are well-regulated and more advanced in terms of market making, product diversification, investor education, etc.  In order to become more competitive and keep abreast of the global standard, China’s ETF market could be enhanced in order to attract more inflow over the long term.

Dividend yield is an important source of total return from an investment in equities. The other source is capital gains. While capital gains tend to be volatile and depend on the stock price movement in the market, dividend income tends to remain stable and depends on the dividend distribution policy of the company. The dividend policy may depend on the stage of the business life cycle, industry, economy in which the company operates, etc.

How India fares globally in terms of dividend yield?

India is an emerging economy and the growth opportunities are tremendous. The corporate debt market is minuscule in comparison to the government debt. Hence the companies are better off when they retain greater part of their earnings, and utilize it in the net positive value investments which generate returns in excess of the opportunity cost of capital. This is evident from the fact that India has historically been a low dividend yielding country. The difference between the yield of the S&P India BMI and S&P Developed BMI was almost 88bps as on April 30 2015. (See Exhibit 1)

Exhibit 1: Historical Dividend Yield

Source: S&P Dow Jones Indices

Comparison of the dividend yield between large mid cap and small cap companies

Indian large mid cap companies have exhibited more stable dividend yield in comparison to the small cap companies historically. At the time of global recession in 2007-08, the small cap companies had a higher drawdown in comparison to the large mid cap companies which led to higher dividend yield of the small cap companies in that period. The difference between the dividend yield of the S&P India SmallCap and the S&P India LargeMidCap peaked at 95 bps on February 28, 2009. (See Exhibit 2) Since the Indian Lok Sabha elections in May 2014, the S&P India LargeMidCap has delivered higher dividend yield than the S&P India SmallCap. (See Exhibit 2)

Exhibit 2: Historical Dividend Yield

Source: S&P Dow Jones Indices

Difference between the dividend yield of Indian value and growth companies

The growth companies tend to utilize higher percentage of their earnings and hence distribute lesser dividends to the shareholders in comparison to the value companies. Therefore the value companies should have higher dividend yields in comparison to the growth companies. The S&P India BMI Value has had higher dividend yield in comparison to the S&P India BMI Growth historically and the difference between the dividend yields of the indices was almost 34 bps as on April 30, 2015. (See Exhibit 3)

Exhibit 3: Historical Dividend Yield

Source: S&P Dow Jones Indices

The dividend yield of cyclical and defensive sectors

The sectors such as the consumer discretionary, energy, financials, industrials, information technology and materials are considered cyclical sectors. Amongst all these sectors, S&P India BMI Industrials had the lowest and S&P India BMI Energy had the highest dividend yield as on April 30, 2015. (See Exhibit 5)

Exhibit 4: Historical Dividend Yield

Source: S&P Dow Jones Indices

The sectors such as consumer staples, healthcare, telecommunication services and utilities are considered defensive sectors. Amongst these sectors, the dividend yield of the S&P India BMI Health Care and the S&P India BMI Telecommunication Services have remained the lowest historically. (See Exhibit 4)

Exhibit 5: Historical Dividend Yield

Source: S&P Dow Jones Indices

The dividend strategy in investments

Many investors consider dividend as important factor in the investment decisions. The models which utilize the dividends to value the companies are best suited for the investors who are minority shareholders and do not possess the power to alter the dividend policy of the company and the company has a stable and sustainable dividend payout ratio. S&P Dow Jones Indices has a vast family of indices focused on dividends like the dividend aristocrats, dividend opportunities, etc. Globally many ETF’s exist which are focused on dividend strategies. Since December 2014, Indian market also has introduced ETF’s focused on dividends.