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Gold No Longer Worth Its Weight

Joining the Index Club

Monkey See, Monkey Do?

Market Attributes: Index Dashboard

Income Beyond Bonds

Gold No Longer Worth Its Weight

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Jodie Gunzberg

Former Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

Year-to-Date Dow Jones-UBS Commodity Index is off 5.41%

  • Gold, the commodity with the heaviest 2013 target weight in the DJ-UBS CI, no longer is the most heavily weighted commodity in the index, falling from 10.8% to 9.5% since the beginning of the year. The DJ-UBS CI Natural Gas Subindex, the best performer YTD, has now taken over as the most heavily weighted single commodity in the index, rising from a 2013 target weight of 10.4% to 14.7%.
  • Despite the fall across the energy sector, the DJ-UBS CI Natural Gas Subindex added 4.0% last week bringing the MTD and YTD returns up to 9.0% and 25.3%, respectively, as it continues to rally from cold weather and high electric power sector demand, especially as stricter environmental rules make coal burning more expensive. Given the relatively high weight of natural gas, the DJ-UBS CI Energy Subindex is up 4.0% YTD and is the only positive sector in the index.
  • The DJ-UBS CI Precious Metals Subindex, the worst performing sector lost 8.53% this week, causing MTD and YTD returns to be -14.20% and -18.89%, respectively.  DJ-UBS CI Gold Subindex had its biggest one day loss ever,-9.3%, on April 15, 2013 to hit its lowest level since Feb 2, 2011. The decline was due to worries about central bank sales, especially from Cyprus, but also, from the Fed winding down bond purchases.  However, buying improved from India ahead of the Akshaya Tritiya, a gold buying festival, next month.  Also, the wedding season has started and will continue until June. The DJ-UBS CI Silver Subindex hit its lowest level on April 19, 2013 since Oct 4, 2010.
  • To sweeten the softs, the harvest of cane and output of sugar was slowed by a very rainy start to April.  Also, Brazil’s coffee areas have moved northwards, so the frost may not affect the crop as much as in past years as the frost-risk period approaches. The DJ-UBS CI Coffee and Sugar are up 2.6%, and 1.3%, respectively MTD.

Index Performance through April 19, 2013

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Joining the Index Club

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Craig Lazzara

Former Managing Director, Index Investment Strategy

S&P Dow Jones Indices

The Wall Street Journal recently urged its readers to “Beware of Index Funds That Aren’t” (http://on.wsj.com/Xycv7P). If some soi-disant index funds “aren’t,” which ones “are” — or, at the most basic level, what is an index?

A good working definition of an index is this: an index is a portfolio in which constituent and weighting changes are not motivated by alpha-seeking. (Read “alpha” as excess or above-average return.) The contrast with active management is clear; the manager of an active portfolio typically only makes changes that are motivated by alpha-seeking. If not alpha, what objectives might drive the managers of index portfolios? Historically we can identify three stages of index evolution:

  • Asset class replication. A good example here is the S&P 500, which aims to represent the U.S. equity market.
  • Subsets and extensions of basic asset class replication. Examples would include the S&P MidCap 400 or Small Cap 600, as well as sector and style (growth and value) indices.
  • Factor or strategy indices — e.g., the S&P 500 Low Volatility Index or the Dow Jones Select Dividend Index. The distinctive quality of factor indices is that they aim to deliver a particular pattern of returns — in our examples, a pattern characterized by less volatility or higher yield.

It’s this last category whose bona fides the Journal seemed to question, and admittedly the line between active and passive here is a bit more gray. (See, e.g., http://us.spindices.com/documents/research/research-the-limits-of-history.pdf.) But well-constructed factor indices can provide defined patterns of return without requiring the payment of active management fees. This makes them a valuable addition to any passive investor’s toolkit.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Monkey See, Monkey Do?

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Craig Lazzara

Former Managing Director, Index Investment Strategy

S&P Dow Jones Indices

A recently published paper  received a fair amount of publicity for its suggestion that portfolios selected randomly by monkeys would have outperformed a capitalization-weighted index of the same universe.  In recent years it seems like everyone is bashing cap-weighted indices, so it was probably only a matter of time until apes took a shot. Maybe pigs and dolphins are next.

The problem with this analysis is that the monkeys formed their portfolios by choosing stocks so that each stock (of 1000 in the test universe) had an equal likelihood of being selected and/or overweighted by each monkey. This more or less guarantees that the monkeys’ portfolios, perhaps with a very few exceptions, will have a small cap bias. In a period when we know that small size paid off, it’s not surprising that the monkeys outperform cap weighting.

One of the virtues of a cap-weighted index is that it accurately reflects the nature of the investor’s opportunity set. Otherwise said, the world is cap-weighted. An investment dollar chosen at random is not equally likely to be invested in Apple Computer as on the smallest stock in the universe. It is much more likely to be invested in Apple. The monkeys presumably did not know this, and thus, in a particular way, behaved anything but randomly.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Market Attributes: Index Dashboard

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Craig Lazzara

Former Managing Director, Index Investment Strategy

S&P Dow Jones Indices

Simple juxtapositions can sometimes produce insight, or so at least runs the theory behind our just-introduced monthly U.S. index dashboard: http://us.spindices.com/documents/commentary/dashboard_032813_2914.pdf. For the first quarter of 2013, e.g., we can observe that:

  • The equity markets were very strong (no revelation there), with both the Dow Industrials and S&P 500 both up more than 10% and at record levels by quarter-end.
  • Strangely for such a strong quarter, defensive indices outperformed the general market. S&P 500 Value topped both S&P 500 Growth and the S&P 500 (granted by only a whisker in the latter case). More interestingly, such defensive stalwarts as S&P High Yield Dividend Aristocrats and S&P 500 Low Volatility came in well ahead of the S&P 500.
  • This pattern also turned up at the sector level. For the quarter, the best performing S&P 500 sectors were Health Care, Consumer Staples, and Utilities, all of which strike a defensive note.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Income Beyond Bonds

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Craig Lazzara

Former Managing Director, Index Investment Strategy

S&P Dow Jones Indices

With both short- and long-term interest rates in the basement, income-sensitive investors have naturally begun to look to equities.  Significantly, the yield on the S&P 500 now exceeds that of the 10-year U.S. Treasury bond – a relationship last seen in approximately 1958.  But if some equity yield is good, does that mean that more equity yield must be better?  Not necessarily – we recently identified some of the opportunities and pitfalls for investors seeking income beyond bonds: http://us.spindices.com/documents/research/research-income-beyond-bonds.pdf

 

 

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.