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The Dim Sum Bond Market Expanded 57% YTD in 2014

U.S. Debt Markets/CDS reaction to Argentina Credit Default

Does active management work in Europe?

Why So Many Worry About Inflation

Three Reasons to Consider Index Funds

The Dim Sum Bond Market Expanded 57% YTD in 2014

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Michele Leung

Director, Fixed Income Indices

S&P Dow Jones Indices

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On the back of strong issuance this year, the size of the dim sum (as known as Offshore Renminbi) bond market, that tracked by the S&P/DB ORBIT Index, rose 57% year-to-date (YTD) to currently CNH 264 billion. As shown in Exhibit 1, 68% of the dim sum bond market is composed of the credit issuers.  Note that the index targets to track the most liquid segment of the market, the bond must meet a minimum outstanding par of RMB 1 billion in order to be eligible to enter into the index.

Exhibit 1: The Sector Breakdown by Market Value

20140807_ORBIT2
Source: S&P Dow Jones Indices. Data as of August 6, 2014. Charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart may reflect hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance 

The credit sector contributed most to the growth in market value; the top 5 largest issuers of this year were China Unicom, China Construction Bank, China Eastern Air, Hainan Airline and Beijing Capital. While there is an increasing concentration of Chinese credits, it is good to see some foreign names and returning issuers such as Volkswagen and Caterpillar that brought in the diversity.

According to the S&P/DB ORBIT Index, the total return rose 2.03% YTD while the yield to maturity widened by 40bps to 4.07%, as of August 6, 2014. The solid gain reflected better investor sentiment, benefited from the improving economy and the stabilizing currency. As a reference, the 5-year and 10-year China Government Bond (CGB) are trading around 3.02% and 3.81%, respectively.

Despite the concern of the deteriorating credit quality early this year, the S&P/DB ORBIT Credit Index outperformed the S&P/DB ORBIT Sovereign and Quasi-Sovereign Index, which were up 2.18% and 1.76%, respectively. Please see Exhibit 2 for the total return performance.

The yield spread between the S&P/DB ORBIT Credit Index and the S&P/DB ORBIT Sovereign and Quasi-Sovereign Index surged from 120bps at the end of last year to 159bps. It seems that while the supply remains robust, the chase for yield continues to support the market.

Exhibit 2: The Total Return Performance of the S&P/DB ORBIT Index Family

Source: S&P Dow Jones Indices.  Data as of August 6, 2014.  Charts are provided for illustrative purposes.   Past performance is no guarantee of future results.  This chart may reflect hypothetical historical performance.  Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
Source: S&P Dow Jones Indices. Data as of August 6, 2014. Charts are provided for illustrative purposes. Past performance is no guarantee of future results. This chart may reflect hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

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

U.S. Debt Markets/CDS reaction to Argentina Credit Default

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Heather Mcardle

Director, Fixed Income Indices

S&P Dow Jones Indices

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On Wednesday, July 30th, S&P cut the credit rating on Argentina’s foreign currency bonds to “selective default” after they failed to reach a deal with holdout bondholders from their last default in 2001. US Treasuries initially sold off only to recover, investment grade corporate bond markets had a somewhat muted reaction, while high yield and Credit Default Swap markets widened considerably. On Friday, August 1st, ISDA ruled Argentina’s failure to pay bondholders a “credit event”.

U.S. Treasuries finished lower on Wednesday as markets expected a last minute deal to come through, decreasing the need for the safety of U.S. Treasuries. The (duration 3.92) yield closed wider on July 30th by 4 bps from 1.10% to 1.14% before tightening to 1.09% by employment Friday’s close. The S&P/BGCantor Current 10-Year U.S. Treasury Index widened 10 bps on July 30th from 2.46% to 2.56% before tightening to 2.50% due to the weaker than expected employment figures on Friday.

Corporate bonds were lower Wednesday with the S&P U.S. Investment Grade Corporate Bond Index yield widening 7 bps from 2.75% to 2.82%. U.S. Corporate CDS spreads lagged the trend, with the S&P/ISDA U.S. 150 Credit Spread Index ending mostly unchanged on Wednesday at 49.03, and widening only on Thursday July 31st to 51.44. CDS spreads widened further to Friday to 52.74 after ISDA’s decision and the employment number failed to impress.

The high yield market naturally took the most dramatic response to Argentina. The S&P U.S. Issued High Yield Corporate Bond Index yield widened only 8 bps from 5.31% to 5.39% on Wednesday, as again the market anticipated a last minute deal, only to widen further on the 31st to 5.62% and then again on Friday to 5.84% for a total move of 53 bps. High yield CDS spreads barely reacted Wednesday, with the S&P/ISDA CDS U.S. High-Yield Index widening only 1.6 bps to 278.83. Spreads caught up on Thursday widening to 292.38 and then another 5.5 bps on Friday to close at 297.89. That is 19 bps – a spike the S&P/ISDA CDS U.S. High-Yield Index has not seen since Janet Yellen’s stimulus program comments in March caused a 31 bps jump. High yield CDS spreads have snapped back since Friday, closing Monday August 4, at 292.88, 5 bps tighter.

CaptureThe divergence between CDS spreads and actual high yield bond yields show that the bond market has not followed CDS spreads movements due to the appetite for yield supporting the high yield market and pushing bond yields down.  Argentina’s default caused bond yields to move more in line with the direction of CDS.

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

Does active management work in Europe?

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

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Academic arguments may well have “proven” the theoretical advantages of passive investing.  But theory is nothing without experiment; a comprehensive and impartial assessment of where and when active managers have delivered the promised “alpha” – or not – is a necessary and critical component of the debate.

Our S&P Index Versus Active scorecard and associated Persistence reports have – for twelve years – quantitatively examined the performance of active mutual funds in the U.S. versus their relevant benchmarks. Yet many questions regarding the global picture have so far been left unanswered, and the publication last week of the first SPIVA® scorecard dedicated to the performance of the European fund industry is accordingly of great interest.1

The overall conclusion for Europe is entirely familiar: broadly speaking, the majority of funds fail to beat their benchmarks.  However, the conclusion is more nuanced at the more granular level of country and currency fund categories; and there are certainly a few surprises:

SPIVA Europe highlights

Throughout the report –which contains analysis for multiple further categories and time periods, as well as statistics on fund survival rates – interesting themes emerge above and beyond the headline numbers.  Two conclusions of particular note are evidenced in the chart above:

  • There are pockets (time periods and markets) where active managers as a group have conclusively delivered excess returns.  In this case – nearly 7 out of 8 managers providing sterling-denominated exposure to U.K equities outperformed.
  • Such pockets may be found in surprising places.  Who amongst us would have anticipated such praise-worthy performance within the highly liquid, well-studied and notoriously efficient U.K. markets?  It is particularly remarkable in contrast to the lamentable performance of emerging market equity managers, operating in the more volatile and idiosyncratic waters that supposedly mark the domains of active preeminence.

Of course, it is tempting to speculate as to what drivers might be accountable for the curious performance of active managers in the U.K. (indeed, we’re not immune to that temptation).  However, what shouldn’t be lost is the critical observation that, at a fine enough degree of granularity and across enough time periods, one will almost certainly find places and times where active management delivered.

Moreover, such anomalies raise important further questions, which include:

This is an area of ongoing research for us, and one that we consider to be deeply important. As such, we hope you join us in welcoming the Europe SPIVA report to an increasingly lively and global debate.


1)      With the issuance of the most recent European report, there are now five regions covered including the U.S., Europe, Canada, India and Australia. The reports can be found here.

 

 

 

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

Why So Many Worry About Inflation

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Inflation fears are everywhere except in the data.  While the Fed keeps reminding us that the inflation rate is below their 2% target, analysts keep arguing that the Fed will be miss signs of inflation.  Any hint of rising prices anywhere – from the CPI to oil to the money supply – is highlighted while reports of little change are ignored.  Is there actually less threat of inflation than most perceive? Why do so many investors expect inflation to appear any moment?

The numbers: The latest figures for the CPI and the Core (excluding food & energy) CPI are 2.1% and 1.9% in the 12 months ended in June. The Fed uses the personal consumption expenditure (PCE) and Core PCE deflators which show slightly lower 12 month numbers of 1.6% and 1.5%, also as of June.  The chart shows all four series over the last five years, there isn’t much of a trend either up or down. Whatever the numbers show, some will point out that we’re looking at the past and what matters is the future. True, but the key factors that drive inflation don’t give any reason for worry. Wages, salaries and benefit costs are one inflation factor – if employment costs rise, businesses will try to recover their costs in price increases.  However, the government’s Employment Cost Index for total compensation doesn’t give any hints of impending inflation. Since 2010 it has averaged 1.9%, the last figure was 2.1%, the same pace reported in third quarter of 2010 and the second quarter of 2011.  The price of oil is another key determinant of inflation. While oil prices are volatile, they don’t show massive inflation dangers. Prices recently at a bit below $100 per barrel for WTI have ranged between $95 and $113 since August 2010.

Some see inflation as something of a self-fulfilling prospect – if everyone expects higher inflation then business will raise prices and consumers will rush to buy before prices go up and the result will be inflation.  The University of Michigan Consumer Sentiment survey asks people what they expect for inflation. From the beginning of 2010 to June of this year, the average is 3.2%. Even though consumers expect slightly higher inflation than we’ve experienced, the expectation isn’t raising the inflation rate. However, the difference between peoples’ expectation and the actual numbers confirms that a lot of us do believe prices are about to rise more quickly in the future.

The continuing belief that rising inflation is around the corner stems from either economic theories or personal experience.  It can be difficult to confirm or deny economic theories with data because the economy is continually changing. So, while theory should be judged by how well it explains the data, it is often accepted if it seems plausible or can be understood.  The simplest theory of inflation is “too much money chasing too few goods causes inflation.”  Combine this with the Fed’s quantitative easing that boosted the money supply and you will expect more inflation.  But the inflation didn’t happen. The theory missed that the Fed began to pay interest on bank reserves and banks responded by keeping large deposits at the Fed rather than lending them out and creating more money. There wasn’t too much money where it would have mattered.

Most people don’t attempt to forecast inflation with economic theory. Their expectations of the future economy, or tomorrow’s markets, are based on their own past experiences.  One large group which came of age in an age of inflation are probably still concerned about prices. The baby boom, born between 1946 and 1964, turned 18 years old in 1964 through 1982, a period characterized by rising prices, two oil crises and sky-high interest rates which ended when the Fed attacked double digit inflation with a deep recession.  Today the baby boomers range from 50 to 68 years old and some are probably still worried that rising prices will outrun their savings.

Should we forget about inflation? Not completely. However, before we buy, sell or hold anything based on a belief of higher inflation, looking at the numbers would be a good idea. The numbers suggest that inflation is reasonably well anchored near but a bit below the Fed’s 2% target.  For the last few years the Fed responded to unemployment that was too high and inflation that is too low, with very easy money. At some point in the next year or so, the Fed may face inflation and unemployment both close to their targets of 2% inflation and about 5.5% unemployment. Then Fed policy is likely to change and the markets will react.

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

Three Reasons to Consider Index Funds

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Priscilla Luk

Managing Director, Global Research & Design, APAC

S&P Dow Jones Indices

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Indexing is an investment approach which simply tracks an index to provide exposure to a market or segment of a market. For the three reasons listed below, it may be a viable complement or substitute to actively managed investments.

Firstly, indices outperform the majority of actively managed funds. The SPIVA Australia Scorecard, which is published twice a year, tracks the number of actively managed Australian mutual funds that were outperformed by their comparable benchmarks over different timeframes. The year end 2013 SPIVA Australia Scorecard showed that benchmark indices outperformed the majority of their comparable actively managed funds over three- and five-year horizons. Similar findings are also observed in the U.S., Canada and Europe SPIVA Scorecards.

Percentage of Active Funds Outperformed by the Comparable Index

Secondly, winning streaks don’t often last. We observed that only very few Australian actively managed funds were consistent top performers. Out of 95 top-quartile-performing Australian Equity Large-Cap funds as of December 2009, only 3.2% managed to remain in the top quartile by the end of December 2013. In the US, less than 1% of domestic equity funds that began as top-quartile performers in March 2010 ended up in the top quartile almost four years later, as shown in the Persistence Scorecard published in June 2014.

Performance Persistence of Australian Active Funds Over Five Consecutive 12-Month Periods

Lastly, indexing generally offers lower costs, greater transparency and portfolio diversification. Index-linked products generally have lower management and administration fees and no commissions. There is also less turnover in ETFs than in most actively managed funds, resulting in lower trading costs and fewer taxable events, such as capital gains distributions. All of these reasons contribute to the cost of investing in an ETF being less expensive than the cost of investing in actively managed funds.

Compared to active funds, ETFs are typically more transparent as most ETF providers update ETF performance and constituent lists every trading day on their websites, whereas most actively managed funds only publish a selection of their holdings on a monthly basis. Indexing also provides more portfolio diversification as each index can track hundreds–even thousands–of securities, which reduces a portfolio’s dependence on single investments.

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