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Walgreens case study - S&P Healthcare Claims Indices to better manage expectations

REITs – A Mature Asset Class in the U.S. and Growing Interest Globally

Colombia — Innovation in Indexing

A Quick Look at SPIVA India

The VIX is at a crossroads - mind the gap.

Walgreens case study - S&P Healthcare Claims Indices to better manage expectations

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Glenn Doody

Vice President, Product Management, Technology Innovation and Specialty Products

S&P Dow Jones Indices

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In late August, as reported by the Wall Street Journal, Walgreens announced the departure of their CFO at the end of the current year. This news came after a significant cut in forecasts by $1.1 billion from the original $8.5 billion forecast in fiscal 2016 pharmacy-unit earnings. According to the Wall Street Journal, “Walgreens hadn’t factored in, among other things, a spike in the price of some generic drugs that it sells as part of annual contracts.” This illustrates an opportunity where the S&P Healthcare Claims Indices may have been utilized as a tool to monitor the changing costs of both medical and drugs. As evident in the cost chart below, generic drug costs tend to be quite volatile, with overall costs growing at times in excess of 20%. However, looking at utilization, we can see that growth peaked in January of 2013, and has been declining ever since.

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To gain insight on generic drugs, one may look at Unit Cost Indices, which show that while brand name drugs continue to escalate in price steadily over time, the cost of generic drugs on a Unit Cost basis tends to be more volatile, even declining in price at times. Because both the utilization and average cost of generic drugs are driven by factors such as the end of the patent protection period on brand drugs, high volatility is likely to be an inherent characteristic of generic drugs. By utilizing the S&P Healthcare Claims Indices, one may be able to better manage expectations for future changes in healthcare costs by studying recent trends.

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

REITs – A Mature Asset Class in the U.S. and Growing Interest Globally

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Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

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Over the past two decades, real estate investment trusts (REITs) have emerged as a popular and efficient way for investors of all stripes to access the real estate asset class. Strong long-term total returns, combined with other key investment characteristics such as liquidity, high dividend yields, their potential to increase diversification and to hedge against inflation have contributed to the appeal of REITs.

Source: S&P Dow Jones Indices LLC; Barclays Capital. Data as of Sept. 30, 2014. Returns are based on total return index levels. REITs, Stocks, Bonds and Commodities are represented by the Dow Jones U.S. Select REIT Index, the S&P 500, Barclays Capital U.S. Aggregate Index and the S&P GSCI, respectively. Charts and tables are provided for illustrative purposes. Past performance is no guarantee of future results

REITs were established in the U.S. in the 1960’s and have evolved into a mature asset class here. However, outside of a handful of other early adopters such as Australia and Canada, the REIT structure had not been widely adopted globally until recently. In the past several years, REITs have gained traction globally as more and more countries around the world have enacted legislation authorizing REITs. In 2000, only 6 countries were eligible for SPDJ REIT indices. Today, twenty four are eligible with recent growth concentrated in Europe and Emerging Markets.

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Source: S&P Dow Jones Indices LLC. Data as of Sept. 30, 2014. Charts and tables are provided for illustrative purposes.

Although the U.S. remains by far the world’s largest REIT market by value, it now represents only about half of the global opportunity set for listed real estate securities.

To learn more about the REIT structure, their evolution as an asset class, and their investment characteristics see our paper REITs: Making Property Accessible.

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

Colombia — Innovation in Indexing

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Jasmit Bhandal

Index Specialist

Horizons ETFs Management (Canada) Inc.

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If the world were a simpler place, we would have one index per market. However, this is far from the case. Markets have multiple indices, and deciding which index provides the best exposure is no easy feat. This is especially true in developing markets like Colombia, where multiple indices are jockeying to be the “market benchmark.”

Looking back at the early days of indexing, the formula for the Dow Jones Industrial Average (DJI) was as simple as aggregating the prices of the largest stocks in the U.S. market and then dividing by the number of stocks. Times have changed. The level of complexity involved with index construction has increased, and thus, determining the choice of benchmark is a challenging task.

Currently, there are various indices representing the local Colombian market such as the COLCAP Index and the S&P Colombia Select. The COLCAP Index is managed by the local equity exchange and was relaunched with new methodology in 2013. The S&P Colombia Select Index is new on the scene and launched earlier this year.

Typically, a traditional market capitalization index with robust liquidity and market cap screens will usually suffice as a market benchmark. Using a GICS® framework for comparison, only 6 of the 10 sectors are reflected in either Colombian index (see Exhibit 1). These indices do not include securities from sectors such as healthcare, consumer discretionary or telecommunications.

This creates potential sector and company risk due to concentration within the index. The S&P Colombia Select Index mitigates some of this risk by placing caps on the stock and sector concentrations. Stocks are limited to a 15% weight in the index, while sectors are capped at 40%. Energy is the sector with the biggest difference in weight between the two indices. The S&P Colombia Select Index has a significantly lower energy weight at 12.13% versus 18.51% for the COLCAP Index.

When constructing an index, there is a tradeoff between representativeness and investability. In markets such as Colombia, this is the single biggest determinant of risk exposure and liquidity of the constituents. The trick is to then construct an index that seeks to measure Colombian equities while also mitigating significant sector and liquidity risks. One of the unique aspects of the S&P Colombia Select Index is its innovative weighting technique, which considers trading volumes in order to improve the liquidity profile of the index. This helps support low-cost replication in a relatively illiquid market.

We are starting to see the evolution of index construction; index providers are recognizing that the key determinants of an index’s effectiveness are controlling risk and efficiently replicating index constituents.

A pure market cap weighting approach can be highly effective in many developed market indices. However in smaller markets, where concentration and liquidity risks are more common problems, it’s imperative that the index take these factors into account.

The above table has applied GICS sector classification to the COLCAP index for illustrative purposes only. The COLCAP index does not use the GICS system. The COLCAP index uses its own proprietary industry classifications for classifying securities. GICS is an industry classification scheme jointly developed and administered by S&P DJI and MSCI.

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

A Quick Look at SPIVA India

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Utkarsh Agrawal

Associate Director, Global Research & Design

S&P Dow Jones Indices

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The SPIVA India Scorecard reports on the performance of actively managed Indian mutual funds versus that of their benchmarks, showing equal-weighted peer averages.  The mid-year 2014 scorecard, the latest SPIVA India report, has revealed that while active funds may be able to outperform their benchmarks in the short term, it becomes more likely for active funds to be outperformed by their benchmarks over the three- and five-year periods.

SPIVA Table 1

Some of the key findings from the report including the following.

  1. The Indian stock market has remained bullish over the one-year period ending in June 2014. During this time horizon, the S&P BSE 100, the S&P BSE 200 and the S&P BSE MID CAP gained 35.37%, 36.43% and 59.93%, respectively.  Over the same one-year period, 34.18%, 22.22% and 44.93% of the active funds in the Indian equity large-cap, Indian ELSS and Indian equity mid-/small-cap categories underperformed their respective benchmarks.
  2. Over the five-year period ending in June 2014, 54.36% of the active funds in the Indian equity large-cap category underperformed their benchmark, and close to 17% of the funds were merged or liquidated.
  3. Over the same five-year period, active funds in the Indian equity mid-/small-cap category had a survivorship rate of only 77.33%, given the higher volatility of this market segment. In contrast, the active funds in the Indian ELSS category had a survivorship rate of 97.14%, which is not surprising given the fact that there is a lock-in period of three years for this group.
  4. The S&P India Government Bond Index and the S&P India Bond Index gained 3.78% and 4.24%, respectively, over the one-year period ending in June 2014. Over the same one-year period, 59.62% and 29.82% of the active funds in the Indian government bond and the Indian composite bond categories underperformed their respective benchmarks.
  5. The percentage of active funds in the Indian government bond category that underperformed the benchmark over the five-year period ending in June 2014 was 78.18%, which can partly be attributed to higher interest rates.
  6. Over the same five-year period, the survivorship rate of the active funds in the Indian composite bond category was 92.86%, but the number of funds that underperformed the benchmark was 53.01%.

SPIVA Table 2

Let’s also look at shorter time periods ending in June 2014.

SPIVA Table 3

  1. Most of the active funds in the Indian equity large-cap category and the Indian ELSS category were able to outperform their benchmarks over the one-, three- and six-month periods, and they outperformed the benchmark over the one-year period ending in June 2014, as well.
  2. Active funds in the Indian mid-/small-cap category lagged the benchmark over the one- and three-month periods.
  3. As interest rates remain high, most active funds in both the Indian government bond and Indian composite bond categories underperformed their benchmarks over the three- and six-month periods.
  4. The survivorship rate was 100% only for the Indian ELSS and the Indian government bond funds over the six-month period.
  5. The number of funds available to investors in the Indian composite bond category has increased by almost 7% over the six-month period ending in June 2014.

SPIVA Table 4

 

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

The VIX is at a crossroads - mind the gap.

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Tim Edwards

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

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As you, dear patient reader, have no doubt noticed, volatility is back. The VIX® has reached levels not seen since the peak of the Eurozone crisis over two years ago. The exact reasons might be debatable, but either way October is living up to its perennial reputation as the cruelest month for equities.

VIX

Source: CBOE

Each time in recent history that the VIX closed above 20, it has rapidly collapsed (see above). And duly following the principle of induction, spikes in volatility are now interpreted as a selling opportunity (in respect of the VIX) by the average punter.  One example of this demand: the largest exchange-traded product providing a short exposure to VIX futures has doubled in shares outstanding in the last few days:

XIVSO

Source: Bloomberg, as of Oct 15th 

Yet volatility levels are not guaranteed to fall. If the U.S. Federal Reserve’s largess was indeed the primary cause of the suppressed levels of volatility seen in the first three quarters of this year, the seat-belts are off. QE3 is expected to end in the next few weeks; history was not kind to equity investors in the periods immediately following the last two rounds:

QE3

Source: S&P Dow Jones Indices

It requires an unusual degree of foresight, bravery or foolishness to take short positions in the VIX; there are, notoriously, considerable stings in the tail. Moreover, it is a bet framed in terms of death or glory: the VIX rarely resides in the low 20s, instead historically it is brief staging post on the way to crisis or back to recovery.  And despite the enthusiasm for selling volatility at current levels, losses can escalate very quickly if it continues to spike. At some point, those short investors will capitulate; the risk is then a material short squeeze. 

Hypothetically, such a short squeeze would trigger large purchases in volatility futures just as it is already shooting up. A jump from 25 to 35 in such circumstances is not entirely unfeasible. Investors would be wise to mind the gap. 

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