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Impact of the Affordable Care Act (ACA) on Enrollment

How Two Robo-Advisors Define Core

How did South African active managers perform against their benchmarks in 2014?

Asia Fixed Income: Opening of the China Onshore Repo Market

The Smarter Investor

Impact of the Affordable Care Act (ACA) on Enrollment

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John Cookson

Principal, Consulting Actuary

Milliman

Given the sharp uptick in individual trends in 2014, which have peaked at 45% on a three-month moving basis, our operative scenario is that some of these new enrollees are crowding out care on the LG/ASO lines of business. The reason is that these new enrollees, many of whom have not had insurance and others who have had very limited insurance in the past, have accumulated a backlog of urgent medical needs. Whereas those with traditional insurance are most likely dealing with elective care except for newly emerging urgent needs. Thus, the backlog of urgent needs of the newly insured both in individual/commercial and Medicaid insurance is deferring more of the elective care in the LG/ASO lines of business. This is lowering the LG/ASO trends from what they might otherwise be while simultaneously substantially increasing the individual trends as shown in the S&P Healthcare Claims Indices.

These effects are further confounded by other effects of the ACA.  For example, large groups, and even small groups, are shifting to ASO products to avoid some of the ACA taxes and fees.  Furthermore, some small employers, and even larger ones, may have cut coverages and forced their employees into the individual exchanges.

For 2015, we would expect a drop in the trends shown in individual since some of the unmet needs will have been taken care of in 2014. We could even see negative trends depending on the level of new enrollments and their level of needs. However, SG enrollment has increased under the ACA as the electronic enrollment and exchanges for SG have opened in 2015.  We don’t expect such a significant impact on SG trends in 2015 as occurred on individual in 2014. However, if they do have a significant increase in trend, albeit less than individual excess trend rates, this could continue to have a depressing effect on LG/ASO trend levels.

THE REPORT IS PROVIDED “AS-IS” AND, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW, MILLIMAN DISCLAIMS ALL GUARANTEES AND WARRANTIES, WHETHER EXPRESS, IMPLIED OR STATUTORY, REGARDING THE REPORT, INCLUDING ANY WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, TITLE, MERCHANTABILITY, AND NON-INFRINGEMENT.

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

How Two Robo-Advisors Define Core

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Shaun Wurzbach

Managing Director, Head of Commercial Group (North America)

S&P Dow Jones Indices

I was intrigued by the recent Barron’s cover story on robo-advice.  The Barron’s article described example portfolios for Betterment, Charles Schwab, Vanguard Personal Advisor Services, and Wealthfront.  As I mentioned in my last post, robo-advisors are power-users of indexing and ETFs.  So I thought that it would be interesting to compare and contrast some of the ETF holdings of two of these robo-advisors, with my assumption being that the portfolios that these robos would construct will be bare-bones, no frills core portfolios. Emerging and mass affluent clients currently are underserved with regard to strategic asset allocations.

The Barron’s article had me expecting to find that the RIAs Betterment and Wealthfront held 10-12 ETFs for their clients.  Not the case.  I was surprised by the breadth of their ETF holdings and by the percentage of assets which they have committed to index-trackers.

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Cerulli data from EOY 2014 indicates that RIAs, on average, have approximately 80% of client assets in ETFs.  So these two robo-advisors are at roughly 400% of the average.

Next, I wanted to see how these two robo-advisors are using indexing and ETFs to create core portfolios.  To be clear, I can only see the aggregate of their holdings, not individual client accounts.  Based on their average client size ($20,192 for Betterment and $75,636 for Wealthfront) and the amount of AUM in certain ETFs, I can draw some conclusions about the ETFs which are most commonly recommended by these two robo-advisors:

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First, the ETF holdings of both robo-advisors do show a focus on core building blocks such as total market solutions and capturing entire asset classes in a single ETF.  Such an approach is a simple and inexpensive way to deliver market exposure.  Both robo-advisors show a willingness to use an emerging markets debt ETF for exposure to that asset class.  And interestingly, both choose the same ETF for exposure to municipal bonds.  The large AUM which each robo-advisors hold in a muni bond ETF reflect widespread use of indexing as the method to deliver diversified and national exposure to munis.  Key differences are seen in some of the ETFs used, which may reflect different trading costs due to custodial relationships.  Wealthfront also shows Commodity, TIP, and REIT holdings at a higher level than Betterment.  Wealthfront, in the large number of different ETFs that they hold for clients, also demonstrates difference in breadth of choice or perhaps in their willingness to customize portfolios for clients.

How these two robo-advisors have defined core portfolios and strategic asset allocation with ETFs is not only interesting now, but may serve as an interesting source of data and insights for the future.  Structurally and philosophically, I assume from what I have read that the robo-advisors will not encourage frequent trading and will educate investors to stick with their algorithmically-determined investment strategy.  Will the robo-advisors eventually publish “cohort” results over time and over business cycles?  If so, it will be interesting to see how effective these strategic asset allocation portfolios are in wealth accumulation and preventing the type of actual investor results which have been documented in years of DALBAR Quantitative Analysis of Investor Behavior studies.

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

How did South African active managers perform against their benchmarks in 2014?

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Daniel Ung

Former Director

Global Research & Design

Following the success of the SPIVA (S&P Indices versus Active) in the U.S., Australia, Canada, India, Japan, Europe and Latin America, we are now starting coverage on South Africa. Like the reports covering other regions, we aim to shed some light on the ongoing active vs. passive debate.  SPIVA South Africa will be published twice a year, mid-year and at the end of the year.

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

Overall, 2014 was somewhat mixed for South Africa, owing to labor disputes, electricity shortages and weak domestic demand. However, the performance of ZAR-denominated domestic equities, as measured by the S&P South Africa Domestic Shareholder Weighted (DSW) Index, held up reasonably well and went up by 16% over the year. However, they still lagged global equities as a whole.

Given the volatility over the year, we would have expected active managers to outperform their benchmarks but this did not turn out to be the case. Indeed, South African active equity managers underperformed their benchmarks in all equity fund categories and over all time horizons. (see Report 1 below).

In regards to fixed income, the results were less consistent. While active managers beat their respective benchmark in the short-term bond category, this was not the case in the longer-term diversified/aggregate category.

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

Asia Fixed Income: Opening of the China Onshore Repo Market

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Michele Leung

Former Director, Fixed Income Indices

S&P Dow Jones Indices

On June 3, 2015, the PBoC announced the opening of the China onshore repo market; the offshore RMB-clearing and participating banks will be allowed to trade bonds on repos in the onshore interbank bond market.  This is an important development for the offshore RMB market, as it will broaden the offshore RMB supply and support further RMB capital account reform.

By connecting the onshore and offshore money markets, the difference in interest rates between the two markets is expected to narrow.  In fact, if we look at the yield performance of the offshore market, represented by the S&P/DB ORBIT Index, and the onshore market, represented by the S&P China Bond Index, we see that the spread has significantly reduced from 206 bps in early 2014 to 17 bps as of June 3, 2015.  The offshore yield has traded above the onshore yield since 2014, on the back of the weakening currency and tightening liquidity in the offshore market.  Beyond the convergence, their responses to market conditions have also become more in-sync, particularly during the recent rate cut.  It is interesting to note that the correlation between the two yield performances was -0.8 in 2014, whereas in 2015 YTD, it rose to 0.8; this implies that the two markets may be becoming more correlated.

Nevertheless, some differences remain. For example, in the perspective of monetary policy and liquidity, the onshore and offshore RMB money markets have different market dynamics. Additionally, in terms of market structure, some of the issuers in the offshore market are foreign names and a portion of the offshore RMB bonds received international bond-level ratings, whereas the onshore market is dominated by domestic issuers, and they are rated by local ratings agencies only.

Please see the yield chart in Exhibit 1 and index performance in Exhibit 2.

Source: S&P Dow Jones Indices LLC. Data as of June 9, 2015. Past performance is no guarantee of future results. Chart is provided for illustrative purposes. Note: S&P/DB ORBIT SQS Index is the S&P/DB ORBIT Sovereign and Quasi-Sovereign Index.
Source: S&P Dow Jones Indices LLC. Data as of June 9, 2015. Past performance is no guarantee of future results. Chart is provided for illustrative purposes. Note: S&P/DB ORBIT SQS Index is the S&P/DB ORBIT Sovereign and Quasi-Sovereign Index.
Source: S&P Dow Jones Indices LLC. Data as of June 9, 2015. Past performance is no guarantee of future results. Table is provided for illustrative purposes. Note: S&P/DB ORBIT SQS Index is the S&P/DB ORBIT Sovereign and Quasi-Sovereign Index.
Source: S&P Dow Jones Indices LLC. Data as of June 9, 2015. Past performance is no guarantee of future results. Table is provided for illustrative purposes. Note: S&P/DB ORBIT SQS Index is the S&P/DB ORBIT Sovereign and Quasi-Sovereign Index.

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

The Smarter Investor

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Chris Bennett

Former Director, Index Investment Strategy

S&P Dow Jones Indices

Investors have spoken: There is a world outside of traditional indexing, and they want in.

“Smart beta” or factor indices bridge the gap between active and passive management by allowing investors to tilt toward specific investment attributes – for example, low volatility or high dividend yield.  These indices use factors in a rules-based, transparent manner to determine index composition and/or weighting. Smart beta products give passive investors access to factor exposures that were once only available through active management.

Smart beta has flourished, attracting more assets than ever before. According to our 2014 Survey of Indexed Assets, AUM in products linked to S&P DJI smart beta indices grew 55% in 2014.  As the demand for factor indices has increased, so too has their availability. We’ve created indices to provide a wide variety of exposures, while still maintaining the advantages of passive management.  The growth of ETFs as a delivery vehicle has complemented the growth of factor indices, enabling investors to seek new opportunities.

That said, demand for smart beta has not been cannibalistic; passive investment in traditional exposures has also increased. AUM growth in products indexed to the S&P 500 outpaced the growth of the index, indicating positive net flows into traditional cap-weighted investments. The demand for first-generation indexed investments has not decreased in the wake of new “smart” offerings.

Much research (including our SPIVA reports) confirms that most active managers underperform most of the time. The probability that an active manager beat his benchmark is low, and the probability that he did it consistently is even lower. Positive inflows into passive vehicles indicate that investors have heeded these data, and that the smarter investor prefers better odds.

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