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Next Week’s FOMC Decision A Watershed Event? High Yield Doesn’t Seem To Think So.

The VIX Takes a Hairpin Turn

The Great Barrier To Commodities Down Under

Asia Fixed Income: Dim Sum – What is on the Menu?

Active vs. Passive: How to keep score of the ongoing debate

Next Week’s FOMC Decision A Watershed Event? High Yield Doesn’t Seem To Think So.

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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Unlike Treasuries and investment grade corporates, the high yield market as measured by the S&P U.S. Issued High Yield Corporate Bond Index touch a low point for yield earlier in the month at a 5.87% on October 6th.  This market was in the process of selling off and had a yield of 6.51% on October 15th, up 65 basis points from the 6th and 38-basis point higher than the 6.13% start to the month.   High yield’s reaction posts October 15th was “risk on” as yields since then moved 60 basis points lower to a current level of 5.91%.  Month-to-date the total return of the index is 1.09% and for the year has returned 4.66%.

After having dropped to a low of 2.13% on October 15th, the yield of the U.S. 10-year as measured by the S&P/BGCantor Current 10 Year U.S. Treasury Bond Index has risen by 14 basis points to its current 2.28%.  Year-to-date yields are 75 basis points lower than the start of the year.  Though 2.13% is the lowest point for 2014, it is not the lowest for the index which was 1.39% back on July 25th of 2012.  If the trend is your friend, then expect lower yields in the near future.  If however you think next week’s FOMC meeting will be the event that turns the tides then now would be the inversion point.
Yield-to-Worst History of the S&P-BGCantor Current 10 Year U.S. Treasury Bond Index

Like Treasuries, the yield of the S&P U.S. Issued Investment Grade Corporate Bond Index (2.77%) is 14-basis point higher than the 15th of the month.  At mid-month, the year-to-date total return of investment grade corporates was at 8.02% but has dropped down to its current 7.03% with the slight move up in yield.  The index is still comparable in return to recent years past, which have ended the year up above 8% except for 2013 in which the index spend most of the year in negative territory.

Source: S&P Dow Jones Indices, 10/23/2014

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

The VIX Takes a Hairpin Turn

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Reid Steadman

Managing Director, Global Head of ESG

S&P Dow Jones Indices

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I have a neighbor who is cooler than me. He is braver than me. He also has more expansive and expensive medical and auto insurance than I do. How do I know all this? Well, he races street motorcycles.

The other day I asked him what was the fastest he had ever gone. His answer: “Very fast, but that’s not where the thrill is. The adrenaline rush comes from handling and powering through the curves.”

The movements in the CBOE Volatility Index (VIX) the past few weeks have made me reflect on this conversation. We know the VIX’s approximate top speed — somewhere around 80 — but it’s the changes in direction, the twists and turns, which test your skill.

Recently, the VIX took investors on a treacherous hairpin turn. It looked like this:

VIX Price

Did you get thrown off your motorcycle? It seems that many investors handled this deftly, seeing this jump in the VIX as a wicked but ultimately short-term movement. We know this by the performance of the VIX futures market.

VIX Futures in Times of Big Crises
First, to get some context, let’s look at the behavior of the VIX futures during the standard for all recent crises, the 2008 meltdown. In that time, when the whole market went to heck, the VIX shot up and the futures term structure went into backwardation across all maturities.

Capture

The VIX futures term structure assumed a similar shape during the standoff over the government debt ceiling in 2011.

Capture

The Hairpin Turn
Now let’s see what happened during the recent shakes and tremors in the market. The term structure shifted up and developed a kink around the second and third months, after which the rest of the term structure remained upward sloping, in contango. The shift up indicated that investors expected greater volatility across all periods, but the kink showed that they didn’t necessarily expect the very high levels the VIX had reached to persist.

Capture

Over the next few days, investors became even less worried about high volatility in the S&P 500 continuing. The VIX futures curve shifted downward and adjusted back into its most typical shape, which is contango across all maturities.

Capture

The investors betting on volatility subsiding to a degree have turned out to be right, at least for now. But there will undoubtedly be more turns on the way – both hairpin and more traditional curves – to test their driving skills.

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

The Great Barrier To Commodities Down Under

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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This week I am in Australia meeting with investors about commodities.  Usually when I visit a heavy natural resource producing country, the conversations flow easily since the locals understand commodities.  We have been discussing farms, coal, iron ore and tin – subjects that engulf the culture of the locals.  The Australians seem to know all about the public companies and private deals and are comfortable about the commodity exposure in their portfolio via their stock market, the S&P ASX 200.  You can see in the chart below that 16.4% of the Australian stock market is in Materials and 6.5% is in Energy.

Based on GICS® sectors The weightings for each sector of the index are rounded to the nearest tenth of a percent; therefore, the aggregate weights for the index may not equal 100%. AS OF SEP 30, 2014
Source: S&P Dow Jones Indices. Based on GICS® sectors. The weightings for each sector of the index are rounded to the nearest tenth of a percent; therefore, the aggregate weights for the index may not equal 100%. AS OF SEP 30, 2014

Given this profile, many Australian investors dismiss commodities as an asset class since they feel they already have exposure through equities.  Although the local commodities consist mainly of dry bulks like coal and iron ore that are not yet part of the global futures markets that make up the asset class, there is a great barrier to overcome the perception that the Australian stock market is highly correlated to global commodities.

In order to test the potential benefits of commodities to Australian investors, we evaluated diversification and inflation protection, the benefits many international and domestic US investors realize.  The results were different than what I expected.

First, the correlations of commodities to two major stocks BHP and RIO were only 0.16 and 0.18, respectively. That is not terribly surprising since these companies don’t produce agriculture or crude oil and also since coal and iron ore are not in the commodity benchmarks.  What was surprising is that the US stock market is over 3 times more correlated to commodities than the Australian stock market and that Australian stocks never saw a correlation spike from the global financial crisis.

Great Barrier correlation spike

Australian Commodity Correlation

The next question is whether the low correlation of 0.135 between the S&P ASX 200 and the S&P GSCI can overcome the low returns of commodities post the global financial crisis for an increase in portfolio efficiency.  While commodities didn’t add much to the Australian stock portfolio, they didn’t hurt. That is impressive even with a major allocation of 10% through the worst drawdown in history.

AUD Portfolio

Notice the heavier oil in the S&P GSCI helped more than the more well diversified S&P GSCI Light Energy.  Another question around oil is whether the global commodity basket hedges inflation in Australia given the market doesn’t produce much crude oil. This answer wasn’t so surprising since it it not quite as strong as the inflation protection for Europe or the US, but for a small investment, it is still possible to get a great inflation protection as shown by its inflation beta.

Australian Inflation

SOURCE: S&P Dow Jones Indices
SOURCE: S&P Dow Jones Indices

In conclusion, commodities as an asset class as represented by the global futures market has historically provided the diversification and inflation protection specifically to the Australian market.  The great barrier to commodity investing in Australia shouldn’t be so great, especially with the offering of products that enable the locals to access this market.

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

Asia Fixed Income: Dim Sum – What is on the Menu?

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Michele Leung

Director, Fixed Income Indices

S&P Dow Jones Indices

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As tracked by the S&P/DB ORBIT Index, the size of the offshore renminbi bond market rose 66% year-to-date (YTD) and reached CNY 280 billion*, which reflected the robust supply in 2014. And if we look at the index exposure by issue year, the new issues in 2014 represent 53% of the index.

Exhibit 1: Index Exposure by Issue Year: The S&P/DB ORBIT Index

Source: S&P Dow Jones Indices. Data as of October 22, 2014. Charts are provided for illustrative purposes
Source: S&P Dow Jones Indices. Data as of October 22, 2014. Charts are provided for illustrative purposes

While it is not surprising to see the index is dominated by Chinese issuers at 89%, there is a continuous trend of country diversification within the index. For example, some of the new index inclusions this year are Fonterra, a multinational dairy company from New Zealand and Cagamas, the national mortgage corporation from Malaysia.

There are also signs that the offshore renminbi bond market is developing into a more matured market. Bonds with longer tenors tapped into the market, i.e. the Beijing Enterprise, the Export and Import Bank of China and the Chinese government all issued with 10-year. In terms of the rating profile, 46% of index exposure is rated by at least one of international rating agencies, whereas the investment grade rated bonds account for 41% of the index.

Looking at the index performance, the S&P/DB ORBIT Index delivered a total return of 2.32% YTD, or 1.23% in USD. On the sector level, the S&P/DB Orbit Credit Index rose 2.40% YTD, which outperformed the S&P/DB ORBIT Sovereign and Quasi-Sovereign Index that gained 2.19% in the same period.

*Data are as of Oct 22, 2014.

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

Active vs. Passive: How to keep score of the ongoing debate

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Aye Soe

Managing Director, Global Head of Product Management

S&P Dow Jones Indices

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At the heart of the active versus passive management debate lays the theoretical underpinning that the average return of both actively and passively managed assets must equal the aggregate market, thereby making it a zero-sum game. Since the costs of active management typically exceed those of passive management, the average actively managed dollar will underperform the average passively managed dollar after accounting for costs (Sharpe 1991). Over the past few decades, this debate has inspired many passionate believers on both sides, exhibiting its staying power as one of the more hotly contested financial theories.

As a way to keep score of the ongoing debate, S&P Dow Jones Indices (S&P DJI) started publishing the S&P Indices Versus Active (SPIVA®) Scorecard for the U.S in 2002. The scorecard measures the performance of actively managed domestic equity funds across various market capitalizations and styles, as well as fixed income funds, relative to their respective benchmarks. Results can vary on a year-over-year basis due to market conditions, with indices losing out to active funds in one year but winning in a subsequent year. However, the scorecard shows that over a longer-term investment horizon, most active managers have a difficult time outperforming their respective benchmarks. The five-year performance figures show the consistent losing pattern across most equity and several fixed income categories. In addition, the report dispels myths surrounding “inefficient” markets such as small caps and the emerging markets equities, the two areas in which active investing is perceived to offer opportunities due to the mispricing of securities.

Join us for a webinar on Wednesday, “Are Low-Cost, Passively Managed ETFs the Solution to Performance Challenges?” for an opportunity to hear in-depth discussion around active versus passive debate and the SPIVA Scorecard results from various global markets.

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