Investment Themes

Sign up to receive Indexology® Blog email updates

In This List

Not All Bonds Are A Sell, Even High Yield Is Split

Consistency is Bliss

How Some Financial Advisors Embrace SPIVA®

The Gold:Oil Ratio Is Speaking

Actively Managed Bond Funds Should Outperform Their Benchmarks, Right?

Not All Bonds Are A Sell, Even High Yield Is Split

Contributor Image
Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

two

The yield of the S&P/BGCantor Current 10 Year U.S. Treasury Bond Index started the week of March 9, 2015, at 2.20% and continued lower, closing the week at a 2.12%.  The majority of this move is credited to the European Central Bank’s (ECB) purchasing of debt to support its economy.  The ECB’s U.S. Federal Reserve-style purchasing drove yields lower globally, along with moving the euro currency from 1.08 to an almost-parity with the U.S. dollar of 1.04.  European investor demand for the higher yields of U.S. Treasuries led to the successful auctioning of 3-, 10-, and 30-year Treasuries totaling USD 58 billion in par amount.

Riding the line between investment grade and high yield, the S&P Crossover Rated Corporate Bond Index, which seeks to measure the performance of U.S. corporate bonds rated from “BBB+” down to “BB-“, has returned -0.66% MTD and 1.40% YTD, as of March 13, 2015.

The S&P U.S. Investment Grade Corporate Bond Index is down 0.61% MTD and has returned 1.10% YTD, as of March 13, 2015.  The past week saw new issuance of at least USD 42 billion, as deals across all maturities came to market.  Zimmer Holdings, along with financial firms such as Toronto Dominion, Barclays Plc, ING Bank N.V., and Lloyds Bank, all contributed to the amount of investment-grade outstanding debt.

Issuance is not unique to the investment-grade sector, as U.S. municipal bonds have also experienced a surge of new issuance by cities, states, and government entities.  According to Aaron Kuriloff’s article,[1] USD 68.5 billion of municipal bonds have been sold this year.  The S&P National AMT-Free Municipal Bond Index is down 0.38% MTD and is returning 0.28% YTD.

The high-yield bond market, as measured by the S&P U.S. Issued High Yield Corporate Bond Index, had recently been clawing its way up in performance for 2015.  January’s mild return of 0.80%, coupled with a February return of 2.25%, was heading in the right direction, but March has been fatal so far.  The index has returned -1.01% MTD, bringing its YTD return to 2.03% as of March 13, 2015.

Tom Lydon’s recent article[2] discusses the pull back in the high-yield market and mentions new issuance as a factor.  Additional supply has had an effect on pricing, though the effect of oil prices and the size of the energy sector within this market should not be forgotten.  Exhibit 1 shows the energy sector (14%) of the S&P U.S. Issued High Yield Corporate Bond Index in comparison with movements in oil prices.

Investors’ need for yield may have enticed them back into high yield bonds at the end of January, as oil moved from USD 45 to USD 53 a little too early.  Even as the news reports increases in retail gasoline prices, the USD 54 price of oil in mid-February has slowly moved down to a price of USD 44 on the NYMEX WTI crude future contract in mid-March.

As mentioned in the Lydon article, the SPDR Barclays Short Term High Yield Bond ETF has attracted USD 96.5 million in assets.  Shorter duration, high-yield bonds, such as those captured in the S&P 0-3 Year High Yield Corporate Bond Index, are up 0.09% MTD and 1.85% YTD (as of March 13, 2015), as investors move down the curve in order to reduce rate volatility and term risk exposure.

Exhibit 1: The S&P U.S. Issued High Yield Corporate Bond Index Energy Sector Versus the NYMEX Crude Oil Future
S&P U.S. Issued High Yield Corporate Bond Index (Energy Sector by GIC code)

Source; S&P Dow Jones Indices LLC, NYMEX. Data as of March 13, 2015.  Charts and tables are provided for illustrative purposes.  Past performance is no guarantee of future results. 

 

[1]   Aaron Kuriloff.Muni Bonds Headed for a Rough Patch, Higher Interest Rates, Surge in Issuance Pressure Prices.” The Wall Street Journal, http://www.wsj.com/articles/muni-bonds-headed-for-a-rough-patch-1425838695

[2]   Tom Lydon. “Investors Grow Wary of High-Yield, Junk Bond ETFs.” ETF Trends. March 16, 2015: http://www.etftrends.com/2015/03/investors-grow-wary-of-high-yield-junk-bond-etfs/?utm_source=iContact&utm_medium=email&utm_campaign=ETF%20Trends&utm_content=

 

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

Consistency is Bliss

Contributor Image
Chris Bennett

Director, Index Investment Strategy

S&P Dow Jones Indices

two

Following three consecutive weeks of declines for the S&P 500®, pundits are asserting that investors have more to fear than simply the Ides of March.  As of the market close on Friday the 13th, the S&P 500 had declined 3% in March on a total return basis.

Defensive strategies can provide some protection from market fluctuations.  Specifically, low volatility strategies thrive in volatile markets.  The concept is fairly simple: select stocks that have been historically less risky in an attempt to capture some market upside, while limiting the potential downside.

Capture

We refer to these as upside and downside captures.  The S&P 500 Low Volatility Index, for example, has managed to capture 72% of the upside of the S&P 500 while only capturing 48% of the downside since 1991.  This means that in a period when the S&P 500 gains 10%, the S&P 500 Low Volatility Index may gain about 7%, while in a period when the S&P 500 is down by 10%, the S&P 500 Low Volatility Index would typically decline about 5%.  As of the close on March 13, 2015, the S&P 500 Low Volatility Index was down 2% MTD.

While it seems counterintuitive, lower volatility strategies have actually outperformed the market over the long term.  This is often referred to as the “low volatility anomaly”, and it may be due to downside protection: Investors win by playing defense, or simply by not losing.

Capture

Low-risk approaches are not as exciting as their high-risk counterparts.  They certainly do not enjoy the full rush of market gyrations.   When it comes to results, however, consistency is bliss.

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

How Some Financial Advisors Embrace SPIVA®

Contributor Image
Shaun Wurzbach

Managing Director, Global Head of Financial Advisor Channel

S&P Dow Jones Indices

two

When we began our Financial Advisor Channel initiative 5 years ago we had doubts about how some advisors would take to SPIVA.  SPIVA is our index vs active research and stands for S&P Indices Versus Active.  Published every six months, SPIVA compares S&P index benchmarks against all mutual funds of the same size and style classification. The concern we had centered on how predominantly financial advisors were using managed mutual funds. Would they view our attempts to show them our SPIVA results as a challenge to the way they invested money for clients?

We decided to move forward with SPIVA education for advisors very humbly. Many of the advisors we met with had run their practice successfully for decades. Then and now, we listen to how they manage money, and where appropriate, we share the results of SPIVA with them. We continue to find that many advisors are familiar with SPIVA, and most agree that SPIVA shows them that it is hard for mutual fund managers to outperform the S&P 500. The degree to which they believe that indexing works in other asset classes varies. But if they tell us that they believe indexing works a little, then that opens the door for us to continue to have discussions with them and to send them SPIVA research every 6 months.

As we traveled across the US, we found some financial advisors using SPIVA in exciting ways that we really hadn’t expected to see.

Phil Dodson, a Houston, Texas-based Merrill Lynch Private Banking and Investment Group Advisor, began to use Exchange Traded Funds (ETFs) in earnest around 2003 following the NASDAQ collapse and due to disappointment with active managers through the 2000-2002 bear market. He and his partner developed rules-based strategies using ETFs to provide downside protection while capturing as much upside growth as possible. Phil uses S&P SPIVA data to show potential clients how effective ETFs which track S&P size and style are as investment tools.   Within his presentation, Phil also uses data from our S&P Persistence Scorecard. That research demonstrates how difficult it is for top-quartile and top-half performing mutual funds to maintain that ranking over the course of time. Phil’s point being that if it is difficult to outperform the benchmark, and those which do find it difficult to maintain, then why not adopt the method of investing by using the index-based ETFs rather than mutual funds as the primary building blocks for asset allocation?

In the second part of this blog series, I will share how two other Financial Advisors embraced SPIVA.

Our 2014 end of year US SPIVA report, published this week, breaks new ground. For the first time, we present 10-year numbers. This new section of our US SPIVA analysis will enable financial advisors to perform robust analysis across business cycles of comparative performance of index vs active.

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

The Gold:Oil Ratio Is Speaking

Contributor Image
Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

two

As a believer in the power of diversification and inflation protection a basket of commodities can provide in a passive index framework, it is hard to grasp how much investors love oil and gold. It must be that oil is the biggest, most economically significant commodity, and gold is the shiniest, most prized metal – arguably a currency in its own right. From the largest pensions in the world to the smallest mom-and-pop retail investors, oil and gold dominate the conversation.

In Taipei this week, gold and oil were louder than ever. It is an exciting time for greater China as the first commodity futures ETFs are soon to be launched. This opens the possibility for investors in this region to get access more easily to the commodities they love, but for the commodity lady that loves passive, singling out gold and oil is a difficult task. Besides the star-power of these two commodities, why are they worth highlighting differently than the rest?

Gold lost -28.3% in 2013, its worst drop since 1981, and it has been relatively flat since. Oil clearly is top of mind from the price drop of 58.4% that most analysts did not expect. Taken together these historical drops, for some, create the buying opportunity of a lifetime. While these two commodities may not represent the entire asset class, (Brent and WTI) crude oil is most heavily weighted at about 40%, and has provided the most inflation protection of any commodity since it is the most volatile component of the Consumer Price Index (CPI) and is required to produce other commodities. Further, oil has had little correlation of 0.3 to the S&P 500 in the past 10 years while gold has had almost zero correlation to the S&P 500 – plus oil and gold have had only 0.2 correlation with each other. There is a diversification and inflation case using gold and oil if an investor is only buying two commodities.

However, understanding the implications of the ratio of gold to oil is important if choosing to use only the two commodities. Comparing the relative value of the two has revealed some interesting insights as I discussed in a video with Bluford Putnam, Managing Director and Chief Economist of the CME Group. The gold:oil ratio now suggests the oil price collapse may be more driven by supply than demand and that fears of deflation may be exaggerated.

Below is a chart of the ratio of the S&P GSCI Gold in terms of the S&P GSCI Crude Oil with the index levels overlaid. Notice the red arrows showing that gold is remaining stable while oil falls.

Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results.  Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.
Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results. Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.

This in conjunction with the changing term structure of oil from contango to backwardation in 2013-14 suggests the recent oil price drop oil is more of a production story than a consumption one.

Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results.  Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.
Source: S&P Dow Jones Indices LLC. All information presented prior to the index launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Past performance is not a guarantee of future results. Please see the Performance Disclosure at http://www.spindices.com/regulatory-affairs-disclaimers/ for more information regarding the inherent limitations associated with back-tested performance.

It follows that if deflation is mostly due to production increases, including commodities, then a mild deflation may not indicate a future global recession. Still many believe with the decelerating growth in China, the slow growth in emerging markets and stagnation in Europe that the demand side is weak.

Even with a growth of around 6.5%, China’s real GDP growth rate still exceeds virtually all other major mature industrial countries. The world is not in a global recession, and with the exception of the oil-producing emerging market countries, there are signs of incremental increases in real GDP growth for 2015, according to Blu in this paper.

If oil prices remain low versus gold for an extended period of time, as was the case in the 1986-88 period, the elevated gold:oil ratio may indicate that the energy production boom (whether U.S. or Saudi Arabia) is much more responsible for oil’s price collapse than fears of global deflation, lack of demand, and recession, which probably would have caused the gold price to fall too. That said, it doesn’t mean gold is protected from the pressures of economic growth, an interest rate hike, and the highly accommodative monetary policies of Europe and Japan.

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

Actively Managed Bond Funds Should Outperform Their Benchmarks, Right?

Contributor Image
J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

two

The facts are that over the long term actively managed bond funds don’t outperform their benchmark and in the short term, only some asset classes outperformed their benchmarks.

This is all counter intuitive.  Actively managed bond funds have the people, data and tools for credit selection, can adjust for term structure and duration risk and have control over the timing of bond purchases and sales. Based on this the majority of actively managed bond funds should be consistently outperforming their benchmarks over both the short and long term.  A quick look at performance trends according to the most recent S&P Dow Jones Indices SPIVA U.S. Scorecard for year-end 2014 gives us a reality check.

The Scorecard shows:

  • 2014 was a period of strength for the long end of the bond curve as interest rates moved lower.  It would make sense that high quality long term bond funds would also show strength as well.  That is not what happened.   Over 97% of long term U.S. Treasury bond funds and over 98% of long term investment grade bond funds underperformed their benchmarks for the 2014 calendar year.  Over longer periods of time such as a 5 and 10 year periods the statistics are equally telling with over 95% of long term bond funds underperforming.
  • High yield bond funds have consistently underperformed their benchmarks for the 1, 3, 5 and 10 year periods of time.  Over 73% of high yield bond funds underperformed their benchmark in 2014.  Over the 5 and 10 year periods that underperformance was 88% and 92% respectively.
  • Actively managed senior loan funds haven’t done much better.  60% of actively managed loan funds underperformed their benchmark in 2014.  Over a 3 year period, over 69% of those funds underperformed their benchmark.
  • Investment grade intermediate bond funds had good results with only 30% of the actively managed funds underperforming verses their benchmark in 2014.  Still over the 10 year period 49% of those funds have underperformed.
  • The over the counter and less liquid U.S. municipal bond market could be an area where actively managed funds shine.  Over 39% of the actively managed municipal bond funds underperformed their benchmark in 2014.  It seems to be hit or miss in the 5 year period as over 45% of those funds underperformed.  However, over a 10 year period of time over 70% of those funds have underperformed their benchmark.

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