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Contributing to the Active vs. Passive Debate: The Grand Launch of the SPIVA® Europe Scorecard

Will the S&P/Case-Shiller Reverse The Trend Or Are Spreads The True Indicator?

Now Your Penny Is Worth More: It's What's On The Inside That Counts

Big Week for Economic Numbers and the Fed

Weighing In: On Diversification

Contributing to the Active vs. Passive Debate: The Grand Launch of the SPIVA® Europe Scorecard

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Daniel Ung

Director

Global Research & Design

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Following the success of the SPIVA publications in the U.S. and elsewhere, we have decided to launch a similar publication for Europe to shed some light on the ongoing active vs. passive debate.  Similar to the publications in other regions, SPIVA Europe will be published twice a year; mid-year and at the end of the year.

Let’s have a look at the results of the past year.

Euro-Denominated Equity Funds
The past year saw a strong rebound of the European equity markets, as measured by the S&P Europe 350®, which posted an impressive 21% gain.  Over 1-year, 3-years and 5-years, most actively managed funds invested in European and Eurozone equities underperformed. This was equally true for both global equities and emerging market equities, which would have been expected to outperform their respective benchmarks in conditions of heightened volatility and wide return dispersion.

GBP-Denominated Equity Funds
The significant majority of the U.K. and European actively managed equities funds have posted better returns than the benchmark.  This success was not repeated when it came to international funds, emerging market funds and U.S. funds, over the short-term and the long-term.

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

Will the S&P/Case-Shiller Reverse The Trend Or Are Spreads The True Indicator?

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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Today’s Pending Home Sales for June month-over-month came in lower than the expected 0.5% at a -1.1%.  The prior May number was a 6.1% later revised to a 6.0%.  Tomorrow the S&P/Case-Shiller 20-City Composite Home Price Index is due for release at 9am.

Heading into the release, the spread of the S&P/ISDA CDS U.S. Homebuilders Select 10 Index is at 155.7, steadily increasing the cost of insurance throughout the month after an initial step down the first week.  Year-to-date the cost of homebuilders insurance topped out at a spread of 178.05 on April 23rd.  The spread touched a bottom point of 136.6 at the beginning of July, 11 basis points tighter than the December 31st value of 147.58.  At 155.7 the cost of insurance would be $1,557,000 per million of coverage.

Spreads of the homebuilder issuers, of which the majority reside in the S&P U.S. Issued High Yield Corporate Bond Index due to the nature of the business and their credit worthiness, have widened on average over the course of July by 19 basis.  M/I Homes Inc. widened the most in option adjusted spread (OAS) by an average of 181 basis points, followed by Shea Homes LP.,at 105.

Kris Hudson of the Wall Street Journal recently wrote an article entitled: Some Home Builders Say First-Time Buyers Returning, Other Not Sure, which covers the indecisiveness of whether buyers, especially first time buyers, are returning to the housing market.

Source: S&P Dow Jones Indices, data as of 7/25/2014

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

Now Your Penny Is Worth More: It's What's On The Inside That Counts

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Do you know what is inside that seemingly copper penny? It may be more valuable than you think. I’ll give you a hint: It rhymes with think.

Inside the industrial metals, we usually speak of copper and aluminum, especially in the context of the spread trade where it seems aluminum is perpetually more abundant than copper. Also, copper has a reputation, though not well-deserved in my opinion, of predicting the health of the economy, earning a nickname of “Dr. Copper.”

However, this year, nickel has taken center stage as the new gold for 2014 as Indonesia bans exports in an effort to grow its domestic stainless steel industry. It is unusual to see nickel in the spotlight given most people are unaware of its common applications, but the YTD return of almost 40% is hard to ignore. ZInc is not unlike nickel in that its main use is as an alloy, used mostly to strengthen the stars of the show.

Did you know Zinc is the primary metal used in making American pennies? 97.5% of every penny made since 1982 is zinc. Zinc is found almost everywhere in daily life: in every cell of the human body, in the earth, in the food we eat and in products we use such as sunblock, cosmetics, automobiles, airplanes, appliances, batteries, musical instruments, surgical tools and zinc lozenges. Further, zinc is the third most used nonferrous metal (after aluminum and copper), of which the U.S. consumes more than one million metric tons annually; the average person will use 730 pounds of zinc in his or her lifetime, according to the U.S. Bureau of Mines.

In the DJCI and S&P GSCI, zinc is weighted just like the alloy it is, about 2% in DJCI and less than 1% in S&P GSCI. However, it is now becoming noticeable for its returns. For the first time since 2005-06, there are two consecutive months where the total returns are greater than 7.5% in each month – June and July through the 25th. The S&P GSCI Zinc index levels are now at the highest in 3 years.

Source: S&P Dow Jones Indices. Data from Jan 1991 to July 2014. Past performance is not an indication of future results.
Source: S&P Dow Jones Indices. Data from Jan 1991 to July 2014. Past performance is not an indication of future results.

Zinc is the best performer in the indices in July MTD, bringing its YTD performance to 14.8%, which is strong but not a standout in a year like 2014.  Generally low inventories coupled with recent strong Chinese industrial demand growth is driving the price increase. Data from last Monday showed China’s zinc imports rose 123.55% in June year on year to 68,475 tonnes. Also, zinc prices have been driven higher this year by a paucity of big mine projects just as existing mines such as Century in Australia dry up.

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

Big Week for Economic Numbers and the Fed

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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By lunch time next Friday (August 1st) we will have many more numbers about the economy, maybe we will know more about the economy.   The week starts slow with pending home sales on Monday, likely to show that sales of existing home are okay. Tuesday brings the S&P/Case-Shiller Home Price Indices; recent months revealed that the pace of price increases is slowing.  After warming up with two days of data, Wednesday brings second quarter GDP and the Fed’s announcement following its two day FOMC meeting.  Betting on GDP is for a solidly positive report of up 2.9%, reversing the first quarter plunge.  Thursday is a momentary relief from the data deluge with only the weekly initial unemployment claims. This series has been sending very bullish economic signals lately.  Lest any number crunchers be tempted to rest on Friday the chatter begins at 8:30 AM with the July Employment Report, followed by auto sales and the ISM Manufacturing report.  If that’s not enough, two consumer sentiment reports and June personal income numbers are due during the week.

The most interesting item will be the Fed’s statement following the FOMC meeting.  Attention is rapidly shifting to the question of when will the central bank begin raising interest rates and how it will do so. The economy is looking stronger and this week’s numbers are likely to make it look even better: second quarter GDP growth, another month of job gains comfortably over 200,000 in July, auto sales holding steady and the ISM numbers slightly higher.  While most of these will be reported after the FOMC meeting and Fed summary, everyone will be looking for some hints about the long-awaited move on interest rates.  Moreover, the Fed has taken both quantitative easing and inflation fears off the table. The minutes of the last meeting, released a few weeks ago, confirmed that bond buying and quantitative easing will end in October.  Contrary to some commentators worried about inflation, the Fed does not see signs that price rises will accelerate over the next few quarters.  Further, even if a slight rise in its preferred inflation gauge, the PCE deflator, appears in the June personal income and outlay numbers on Friday the Fed is not likely to react.

The Fed won’t offer a clear signal or a date for a rise in interest rates. However, its comments, combined with remarks from some FOMC members in recent weeks, will lead analysts to expect the move to be sooner rather than later. The second half of 2015 seems too far away unless the economy suddenly sours; a better bet is Spring 2015 when the unemployment rate is likely to be between 5.5% and 6% and the economy will have a string of four quarters of respectable growth.   Since the Fed’s balance sheet will still be above $4 trillion then and since excess bank reserves will still be massive, the Fed action is likely to consist of an increase in the interest rate paid on excess reserves combined with reverse repos to boost the short term interest rate floor.  Given that inflation will still be modest and that some time is needed for everyone to fully understand the new operating procedures, the Fed will probably move gradually – no 50 or 75 basis point jumps. However, the first Fed rate hike after a long period of monetary ease usually spooks the market.

 

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

Weighing In: On Diversification

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Diversification is one of the main reasons investors use commodities in their portfolios. Despite the fact that in only 4 years since 1970 did commodities and equities drop in the same year (1981, 2001, 2008, 2011), investors lost confidence in commodities as a diversifier as the correlation spiked with equities after the crisis. That confidence is starting to return as investors watch the correlation fall into negative territory, even lower than the historical averages of 0.20 for the DJCI and 0.17 for the S&P GSCI when measured with S&P 500.

Source: S&P Dow Jones Indices. Data from Jan 20, 1999 to July 24, 2014. Past performance is not an indication of future results.
Source: S&P Dow Jones Indices. Data from Jan 20, 1999 to July 24, 2014. Past performance is not an indication of future results.

To help understand the diversification benefits from each the DJCI and S&P GSCI, we will continue our series called “Weighing In:” As you can see from the chart above, the answer to the question of “which commodity index to pick?” from correlation as a measure of diversification is not definitive.  Looking at a correlation matrix like the one below based on monthly data going back to Jan 1999, the S&P GSCI fares slightly better than the DJCI with correlation of 0.30 versus 0.42.

Source: S&P Dow Jones Indices. Data from Jan 1999 to Dec  2013. Past performance is not an indication of future results.
Source: S&P Dow Jones Indices. Data from Jan 1999 to Dec 2013. Past performance is not an indication of future results.

Another way some investors might describe diversification is by preservation of capital, perhaps through protection against losses from equities. When evaluating returns on an annual basis, again going back to 1999 (starting in Jan,) on average when the S&P 500 lost, it lost 17.01%. Commodities have had better performance in those years where on average the DJCI lost only 2.43% and the S&P GSCI actually showed gains, although small, of 0.44%.

Source: S&P Dow Jones Indices. Data from Jan 1999 to Dec  2013. Past performance is not an indication of future results.
Source: S&P Dow Jones Indices. Data from Jan 1999 to Dec 2013. Past performance is not an indication of future results.

With all of these measures, the S&P GSCI is showing a slightly stronger diversification benefit than the DJCI.  Although, when we look at what may be the holy grail of diversification, measured by the risk adjusted return of a portfolio when commodities are added to stocks and bonds, the DJCI comes out slightly ahead.

Source: S&P Dow Jones Indices. Data from Jan 1999 to Dec  2013. Past performance is not an indication of future results.
Source: S&P Dow Jones Indices. Data from Jan 1999 to Dec 2013. Past performance is not an indication of future results.

It seems, whether you pick DJCI or S&P GSCI, there is a diversification benefit, though in the time period, the higher risk adjusted return of the DJCI outweighs the lower correlation of S&P GSCI by a small amount, adding an addition 20 basis points annually with 16 basis points less of risk, measured by standard deviation. Notice with the addition of commodities, the portfolio cumulative return consistently stays above a 50/50 stock/bond mix and far above equities alone.

If you have other ways to think about diversification, let us know so we can continue the analysis.

 

 

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