Investment Themes

Sign up to receive Indexology® Blog email updates

In This List

Joining the Index Club

Monkey See, Monkey Do?

Market Attributes: Index Dashboard

Income Beyond Bonds

National Credit Default Rates Decreased in February 2013 According to the S&P/Experian Consumer Credit Default Indices

Joining the Index Club

Contributor Image
Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

two

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?

Contributor Image
Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

two

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

Contributor Image
Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

two

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

Contributor Image
Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

two

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.

National Credit Default Rates Decreased in February 2013 According to the S&P/Experian Consumer Credit Default Indices

Contributor Image
J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

two

Three of the Five Cities Saw Default Rates Descend in February 2013

New York, March 19, 2013 – Data through February 2013, released today by S&P Dow Jones Indices and Experian for the S&P/Experian Consumer Credit Default Indices, a comprehensive measure of changes in consumer credit defaults, showed a decrease in national default rates during the month. The national composite was 1.55% in February, down from 1.63% in January.

The first mortgage default rate moved down to 1.48% in February, from 1.58% in January. The bank card rate was 3.37% in February vs. 3.41% in January. The second mortgage and auto loan default rates increased in February posting 0.71% and 1.11%; they were marginally up from their respective 0.69% and 1.10% January levels.

“Consumer credit quality remains healthy”, says David M. Blitzer, Managing Director and Chairman of the Index Committee for S&P Dow Jones Indices. “The first mortgage and bank card default rates moved down, the second mortgage and auto loans were marginally up in February. All loan types remain below their respective levels a year ago.

“These trends are consistent with other economic news – improvements in employment and overall economic activity and continuing gains in housing. Additionally, foreclosure activity continues to decline even though it remains at elevated levels compared to the period before the financial crisis.

“Three of the five cities we cover showed decreases in their default rates in February – New York was down by 12 basis points, Los Angeles by 18 and Miami by 24 basis points. Chicago was marginally up by one basis point and Dallas was up by seven basis points. Miami had the highest default rate at 3.21% and Dallas – the lowest at 1.26% among the five cities. All five cities remain below default rates they posted a year ago, in February 2012.”

The table below summarizes the February 2013 results for the S&P/Experian Credit Default Indices. These data are not seasonally adjusted and are not subject to revision.

S&P/Experian Consumer Credit Default Indices  February 2013

 

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