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Hedge Funds Agonistes

Lower Expectations Meant Lower Rates, And A Continued Search for Yield

Preferred Stock Returns 9.61% (TR)

Municipal Bonds Continue Their Climb Out of the Basement

A Review of the S&P Global Intrinsic Value Index

Hedge Funds Agonistes

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

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 “A lot of people were hoping this year would turn out to be a stockpickers’ market, but that has turned out to be anything but the case so far” – Troy Gayeski, partner and senior portfolio manager at SkyBridge.

At the beginning of this year, we indicated that despite a chorus of voices to the contrary, 2014 would not prove to be a “stock-picker’s market”. We also speculated that 2014 might well be the first year in which ETF assets overtake those in hedge funds.

The first prediction was based on the observation that dispersion – a measure of the opportunity set for active management – was at record lows. Combined with dispersion’s historical tendency to change fairly slowly, we anticipated that dispersion would remain low for some time. So far in 2014, it has done:

2014 YTD 500 Dispersion

Source: S&P Dow Jones Indices as of month-end April 2014. Charts provided for illustrative purposes. Past performance is no guarantee of future results.

There are two ways a fund (ETF or otherwise) can gain assets: it can attract new money, or gain new assets through positive returns. Even if hedge funds don’t perform, they may still attract assets; it certainly seems that they have been doing so. On the other hand, the record quarterly flows into hedge funds last quarter were outpaced by assets attracted to ETFs in April alone.

And what of the “stock-pickers” performance? According to today’s Financial Times, so far not so good.

The race is most certainly on…

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

Lower Expectations Meant Lower Rates, And A Continued Search for Yield

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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Investor’s search for yield continued at the very start of last week’s heavy economic calendar.  The Retail Sales numbers continued the trend of lower yields as the number released (0.1%) was weaker than the 0.4% surveyed.  The news started a process of investor reassessment of economic growth expectations not only domestically but globally.

Year-to-date the yield of the 10-year as measured by the S&P/BGCantor Current 10 Year U.S. Treasury Bond Index is 51 basis points lower closing on Friday at a 2.52%.  To date the rise in interest rates has not materialized as has been expected.  As a result, performance in longer maturity indices has been strong as seen by the year-to-date total return of the S&P/BGCantor 20+ Year U.S. Treasury Bond Index which is 13.2%.

This week the calendar is light as the U.S. heads into a holiday weekend.  Wednesday will be the first release of the week as MBA Mortgage Applications for May 16th will be released along with the minutes from the FOMC meeting of April 29th and 30th.  Initial Jobless Claims (310K, expected), Existing Homes Sales for April (4.69M, exp.) and the conference Board U.S. Leading Index (0.4%, exp.) will follow on Thursday.  Friday morning’s New Home Sales (425K) release will close out the week as the April surveyed number is expected to be stronger than March’s 384K.

The recent mediocre economy and current earnings expectations is reflected in the performance of the S&P 500’s whose total return year-to-date is presently 2.4%.    Continued equity underperformance could keep bond yields lower in the near term continuing the demand for the steady income streams of fixed income products.  Comparing equity returns to the hybrid product of preferreds, which contain components of both equity and debt, the hybrids are returning 9.74% year-to-date as measured by the S&P U.S. Preferred Stock Index.

The continued demand for higher yields can also be seen in the high yield and senior loan markets.  The yield-to-worst of the S&P U.S. Issued High Yield Corporate Bond Index on the year is 42 basis points lower and currently at a 4.97%. Recent demand has been so popular that there is much discussion as to whether these markets are trading “rich” or overvalued.  The total rates of return performance for both the S&P U.S. Issued High Yield Corporate Bond Index and the S&P/LSTA U.S. Leveraged Loan 100 Index on the month are in step at a 0.57% and 0.60% respectively.   Year-to-date these indices do differ, 4.25% for high yield versus 1.75% for senior loans.  Senior Loans have had small but steady increases to date while high yield’s strong February performance (1.92%) has carried the other months.

Activity in the new issue investment grade market has increased along with the lower interest rates.   Multiple maturity deals issued in the primary market by names such as Pfizer, General Electric, Prudential Financial, Toyota Motor Credit, Volkswagen and more have added to investment grade issuance totals.  A number of the fixed rate deals should find their way into the S&P U.S. Issued Investment Grade Corporate Bond Index.  The index has returned 0.97% month-to-date and 5.08% on the year.

 

Source: S&P Dow Jones Indices, Data as of 5/16/2014, Leveraged Loan data as of 5/18/2014.

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

Preferred Stock Returns 9.61% (TR)

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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The U.S. preferred stock market is exhibiting the qualities of the hybrid equity / bond like structure they are.  Through May 15th, 2014, the S&P U.S. Preferred Stock Index has recorded a year to date total return of 9.61% mirroring more the bond market than the stock market in this low rate environment.  The index is heavily weighted in the financials sector, a sector that has seen a resurgence.  The May 16, 2014 Wall Street Journal article entitled Higher-Yielding Bank Debt Draws Interest highlights the appetite for higher yields including subordinated debt and preferred stock.  The bond like characteristics of preferred stocks seems to be rewarding investors so far in 2014.

Source: S&P Dow Jones Indices, LLC.  Data as of May 15, 2014.
Source: S&P Dow Jones Indices, LLC. Data as of May 15, 2014.

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

Municipal Bonds Continue Their Climb Out of the Basement

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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As of mid May 2014, the S&P Municipal Bond Index has returned 5.91% as the supply demand imbalance continues.  New issue supply remains comparatively low to relative to past years and munis have been enjoying a flight to quality halo despite the weaknesses shown by Detroit and Puerto Rico.   The S&P 20 Year High Grade Index has erased its 2013 losses and has returned over 13.9% year to date.

Puerto Rico General Obligations tracked in the S&P Municipal Bond Puerto Rico General Obligation Index have rebounded positively in 2014 but may have peaked in recent days as the market has shown little indication of continued forward progress.   The weighted average yield of the index has been hovering around 7.67% and 7.73% for the month to date without a major move in either direction. The Puerto Rico bond market has a long way to go to offset it’s 2013 losses of over 20%. Source: S&P Dow Jones Indices, LLC.  Data as of May 15, 2014.

Source: S&P Dow Jones Indices, LLC. Data as of May 15, 2014.

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

A Review of the S&P Global Intrinsic Value Index

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Alka Banerjee

Managing Director, Product Management

S&P Dow Jones Indices

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The recently published research paper on S&P GIVI®: Factor Investing: A Review of the S&P Global Intrinsic Value Index analyzes in detail the source of GIVI returns globally and regionally. S&P GIVI is a multi-factor global index which provides exposure to low volatility and the value factors by removing 30% of the highest beta stocks in each country and weighting the rest of the stocks by their intrinsic value. The case for factor investing has gathered momentum post the 2008 crisis when it became clear that diversification by sector, geography and size was not sufficient and factor diversification was equally essential. S&P GIVI launched in March 2012 and we now have almost two years of live performance data and back tested data for 13 years prior to 2012. Analyzing the live data we see immediately the benefit of low volatility in emerging markets which have seen severe volatility recently (Figure 1). In the US where markets have seen a sharp rise, the drag effect of a low volatility approach is negated by the value tilt which is experiencing a strong uptick (Figure 2).

Review of GIVI_Figure 1

Review of GIVI_Figure 2

The full period (2000-2013) Sharpe ratio of the S&P GIVI Global is 0.46 which compares favorably with a Sharpe ratio of 0.17 for the corresponding market capitalization- weighted S&P Global BMI (Figure 3). While the performance gap shrinks when we examine shorter and more recent time periods, the S&P GIVI Global either matches or outperforms the S&P Global BMI during the corresponding time periods. The S&P GIVI Developed clearly outperforms the S&P Global BMI in every time period examined (Figure 4).

Review of GIVI_Figure 3

Review of GIVI_Figure 4

The research paper shows the impact of using portfolios in a sequential fashion starting with a portfolio which is 100% intrinsically value weighted and progressively allocating in increments of 10% a portfolio of low beta stocks with the final portfolio being 100% low beta and no allocation to intrinsic value weighting. The most interesting observation was that the S&P GIVI Global matched or outperformed each of these combinations over each time period measured (Figure 5).

Review of GIVI_Figure 5

S&P GIVI allows investors to invest in two factors simultaneously without worrying about the right allocation mix in a cost efficient manner. Exposure to low volatility and value provides a diversification from regular market capitalization weighted indices, with downside protection in time of downturn and potential for growth in up markets.

Watch the S&P GIVI video now and find out more about GIVI returns globally and regionally. bit.ly/1v9fYHD

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