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Greece And The ECB: What Precedent Will Be Set For The Eurozone?

Disruptive Opportunities for Nimble Advisors

Show Me The Muni: Q2 2015

The U.S. Celebrates its Independence While Greece Displays its Dependence on Debt

Manufacturing: India needs it to spur its growth rate

Greece And The ECB: What Precedent Will Be Set For The Eurozone?

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Heather Mcardle

Director, Fixed Income Indices

S&P Dow Jones Indices

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Greece has voted “no” to a referendum on further austerity measures proposed by the ECB. Greek PM Tsipras wanted this result, in order to gain more bargaining power with creditors. The ECB reacted accordingly, and placed steeper haircuts on collateral for emergency funding.   This puts additional pressure on a banking system that is already in deep distress. Today, finance ministers from across Europe are meeting to discuss next steps.

On Monday, European government bond markets reacted as expected, with a flight to quality and a sell-off of riskier assets. The reaction was more subdued outside of Greece, than one would expect, as a Grexit seems more probable. The S&P German Sovereign Bond Index rallied, with yields tightening 3bps, while the S&P Portugal Sovereign Bond Index sold off, with yields widening 10bps. The S&P Spain Sovereign Bond Index widened 10bps, and the S&P Italy Sovereign Bond Index widened 8bps. The Greek Sovereign Bond Index continues its descent, with yields widening 452bps to close at 20.74%.

The performance of these markets indicates that systemic contagion is not a huge concern. What is a concern, however, is the precedent that will be set for other Eurozone countries with struggling economies. If Greek’s hardball tactics end up giving them a degree of debt relief, and/or looser austerity measures, there could be incentive for Portugal, Spain and Italy to change their compliance with austerity measures. This has serious implications for the euro’s stance as a reserve currency.

A growing concern in Europe, is a possible shift in power to anti-austerity political parties outside of Greece. Portuguese Deputy PM Paulo Portas felt the need to comment Monday, saying that his government is committed to austerity plans and intends to stay on track. Portas was responding to Portugal’s socialist leader Antonio Costa, who is calling for Portugal to show more solidarity with Greece. Spain has a very outspoken, rising anti-austerity party called the Podemos. The Podemos, the second largest political party in Spain, is gaining momentum as it appeals to a society that has engaged in years of unpopular austerity measures. Spanish elections are set for late fall, and the ECB’s actions over the next few days will surely be scrutinized.

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

Disruptive Opportunities for Nimble Advisors

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Adam Butler

CEO

ReSolve Asset Management

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On June 24th, I had the privilege of participating in the inaugural Canadian S&P Dow Jones Indices ETF Masterclass conference on the topic “ETFs as a Catalyst for Canadian Advisory Growth”. While conversations orbited the general themes of ETFs and indexation, panelists and speakers touched on many topics Advisors are, or should be, thinking about as we approach a time of profound change in wealth management.

In recognition that Advisors’ time is valuable, and that many Advisors who might have been interested in attending the conference were unable to be there, I thought it might be useful to share the messages my colleagues and I thought were most surprising and important.

  1. Beth Hamilton Keen, CFA, Incoming Chair of the CFA Institute Board of Directors, shared a recent study that showed asset management ranking last, behind bankers, auto salespeople, and insurance brokers, in terms of perceived integrity. When prompted, the public pointed to a lack of ethical culture within financial firms as the primary source of concern. The CFA Institute, and other similar organizations like fi360, are rallying behind a proposal to “Put Investors First” to help the wealth management industry earn back investors’ trust. CRM2 regulations in Canada and proposed fiduciary standards for advisors in the U.S. are consistent with this objective. Advisors who continue to subordinate client needs to quarterly sales targets risk legal consequences and eventual obsolescence.
  2. There is a creeping recognition that the active managers Advisors have counted on for decades to help them differentiate their practice have not delivered. Clients are increasingly familiar with the low-cost, passive nature of ETFs, and are expressing a preference for Advisors who can speak intelligently about how to incorporate them into portfolios. Slowly but surely, Advisors who have no index/ETF based offerings are likely to find clients abandoning them for Advisors who do. Raymond Kerzérho, Director of Research at PWL Capital, discussed how his firm constructs globally diversified passive portfolios of ETFs to help take the emotions out of the investment process. Deborah Frame, VP and Portfolio Manager at Dundee Global Investment Managed described how her firm is taking an active approach to asset allocation through ETFs.

Panelists generally agreed that the proliferation of ETF offerings covering every corner of the equity, fixed income and alternative asset space represents an opportunity for those equipped to assemble products into coherent solutions. In some ways, it’s never been easier to build a diversified global portfolio. On the other hand, some advisors acknowledged that the ‘paradox of choice’ might lead to ‘paralysis by analysis’ as clients and advisors alike struggle to keep up with all the new offerings.

  1. There was a grudging agreement among all but the most die hard ‘pacifists’ (i.e. zealous passive investors) that a potential low return future across most asset classes would require a more active approach to asset allocation in order to meet client needs. Robyn Graham from Hahn pointed to her firm’s track record of navigating major global macroeconomic trends with diversified ETF portfolios to suit different client preferences. Deborah Frame presented a compelling case for quantitative approaches to asset allocation, which is well supported by research from firms like AQR.  James Morton highlighted some unique ‘quirks’ about ETFs that can trip up inexperienced advisors, and reminded everyone of the large and growing reporting burden for foreign holdings.

For our part, I explained how our product lineup is a continuum extending from the truly passive global market cap weighted portfolio at one end, through risk parity type and approaches, to pure tactical solutions at the ‘active’ extreme. I also made the point that portfolios can benefit from non-correlated strategies, such as CTA funds, for so-called ‘tail protection’ when things get ugly.

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

Show Me The Muni: Q2 2015

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Tyler Cling

Senior Manager, Fixed Income Indices

S&P Dow Jones Indices

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The S&P Municipal Bond North Dakota Index (0.47% QTD) was the only U.S. state or territory index to finish the second quarter in the black.  The bonds tracked by the S&P Municipal Bond Puerto Rico Index (-8.22% QTD) have been in the focus of the mainstream media this week following public statements from their governor that the island territory cannot meet their USD 72 billion in outstanding debt obligations.  Since Governor Padilla declared the commonwealth’s debt “not payable” on Monday, June 29, 2015, the total return on Puerto Rico muni debt has fallen 7.2%, with the YTW spiking to 9.82%.

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The S&P Municipal Bond Puerto Rico General Obligation Index, which includes debt from the Puerto Rico Electric Power Authority (PREPRA), fell 7.85% in 48 hours, with the YTW finishing the quarter at 11.67%.  Investors who had been enjoying high yields throughout the Puerto Rico muni saga are finally shoving off the island to safer shores.

The S&P Municipal Bond Single Family Index, which tracks single-family housing debt, was the only sector-based muni index to finish the quarter in the black, returning 0.10% QTD.  In contrast, the S&P Municipal Bond Dedicated Tax Index, which features property, sales, excise, service, motor, etc., was down 1.93%.  The highest-returning sector in Q1 2015, the S&P Municipal Bond Tobacco Index (3.66% Q1 2015), joined dedicated tax municipals on this quarter’s loser list after falling 1.11% in Q2 2015, shaving the YTD return to 2.50%.

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When examining yields and returns on tax-free municipals, it can be important to consider the tax benefit.  The investment-grade issues in the S&P National AMT-Free Municipal Bond Index have a tax-equivalent yield of 3.36%, which is superior to the S&P U.S. Issued Investment Grade Corporate Bond Index yield of 3.13%.

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

The U.S. Celebrates its Independence While Greece Displays its Dependence on Debt

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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Closing out a short week before the U.S. fourth of July holiday, the yield-to-worst of the S&P/BGCantor Current 10 Year U.S. Treasury Index closed at 2.38% on Thursday, July 2, 2015.  The yield-to-worst was 9 bps lower than the 2.47% close of the previous Friday (June 26, 2015), as concerns over the Greek bailout vote on July 5, 2015, moved some investors to the safety of treasuries.  The index lost 1.86% for June, and it was down 0.26% for the first two days of July.  The YTD return of the index has been in negative territory since June 3, 2015, and the index had returned -0.54% YTD as of July 2, 2015.

The past week’s news affected the S&P U.S. Investment Grade Corporate Bond Index similarly, as the yield-to-worst closed before the holiday at 3.19%, 3 bps lower than the previous Friday’s 3.22%.  Investment-grade yields followed U.S. Treasury yields lower, as investors reacted to continued information about the negotiations between Greece and its creditors.  The index closed out June down 1.53%.  For the beginning of July, the index had returned -0.25% MTD and -0.71% YTD as of July 2, 2015.

High-yield issuance was slow before the holiday weekend, as two smaller deals came to market, pricing on June 30, 2015.  SS&C Technologies Inc. issued USD 600 million of an eight-year bond with a coupon of 5.875%.  The second deal was issued by DAE Aviation Holdings and was USD 485 million of an eight-year bond with a coupon of 10%.  High-yield bonds, as measured by the S&P U.S. High Yield Corporate Bond Index, lost 1.41% in June, but the index had returned 0.25% for the first two days of July and 3.58% YTD.

Unlike the high-yield index’s -1.41% slide in June, the S&P/LSTA U.S. Leveraged Loan 100 Index was down for the past month, but by only 0.86%.  As of July 5, 2015, the index had returned 0.15%, while it was returning 1.91% YTD.
Index Return Comparison

Source: S&P Dow Jones Indices LLC.  Data as of July 2, 2015.  Leverage loan data as of July 5, 2015.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes.

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

Manufacturing: India needs it to spur its growth rate

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Mahavir Kaswa

Associate Director, Product Management

S&P BSE Indices

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MACRO-ECONOMIC OVERVIEW: 

Over the last couple of decades (1994-2013), China noted an average GDP growth rate of 10%, while India noted an average GDP growth rate of a little less than 7% during the same period.  However, over past few years, China has noted a steady decline in its growth rate.  If the estimates of the International Monetary Fund (IMF) are to be believed, India is soon expected to become the fastest-growing large economy in the world.

Exhibit 1: GDP Growth Rate – IMF Database: Measured in Constant Prices (Local Currency)

gdp

Source: IMF, World Economic Outlook Database, www.imf.org.  Data as of April 2015.  Chart is provided for illustrative purposes.

Historically, India’s growth has been primarily lead by a boom in the services sector, which contributed 47.4% to India’s GDP in 2013 (increasing from 41% in 1994).  “Others”[1] was the second-largest contributor to India’s GDP, which contributed 36.7% to India’s GDP in 2013.  Gains noted by the services sector was at the expense of the “others” category, which has noted declining GDP contribution numbers over past 20 years.  Manufacturing has consistently been the smallest contributor to India’s GDP, ranging between 13%-17%; the sector’s contribution in 2013 was 15.9% of GDP.

China has also noted a similar level of contribution to its GDP by the services sector as India, as well as a similar steady decline of the “others” sector in its contribution to its GDP.  However, unlike India, China has traditionally experienced a higher GDP contribution from the manufacturing sector.  In order to spur its GDP growth rate, India may need to increase the contribution of the manufacturing sector to GDP.

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Source: World Bank, http://www.worldbank.org.  Table is provided for illustrative purposes.

[1] “Others” is plug figure, and it includes anything other than services and manufacturing; it also includes agriculture and other small industries/sectors.

Exhibit 3: Sector Contributions to GDP by Country 

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Source: World Bank, http://www.worldbank.org.  Data as of year-end 2013.  Charts are provided for illustrative purposes.

At present, India appears to be in a sweet spot of the economic cycle, with a recent fall in major commodities prices (including crude oil), resultant low inflation, reductions in the key interest rate by the Reserve Bank of India (RBI) (there has been a total reduction of 75 bps in interest rates).  Also contributing to recent economic success in India are the government’s renewed efforts to boost the economy by way of economic reforms, a low current account deficit, and positive sentiments by  global and domestic investors due to all of the aforementioned factors.

India also has a large pool of young hands with good skill sets.  This, combined with low commodities prices (including crude oil), low inflation, and low interest rates, is conducive for the growth of the manufacturing sector.  Manufacturing has great potential for direct and indirect job creation, and it may help to create a strong middle class population—a must for any strong economy.  With the unveiling of the National Manufacturing policy in 2011, India has set an ambitious goal to increase the contribution of the manufacturing sector to 25% (from the level of less than 17% in 2011) in order to help create 100 million jobs by 2022.

S&P BSE INDIA MANUFACTURING INDEX:

The S&P BSE India Manufacturing Index is a first-of-its-kind equity index in India.  The index is designed to measure the performance of the top 30 liquid and investable companies in production and manufacturing activities in the country.

The constituents are selected from the S&P BSE LargeMidCap, a sub-index of the S&P BSE AllCap.  Issues eligible for inclusion are common stocks with a listing history of at least six months.  Each stock must be issued by a company that is identified as part of the manufacturing and production BSE Industry Sub-Groups, which are listed in the index methodology.  The index is calculated in real time.

The S&P BSE Manufacturing Index is diversified, with the maximum weight of a sector being capped at 30% and the maximum weight of an individual stock being capped at 10%.  The index is reconstituted semi-annually, in March and September, and index values are available in Indian rupees and the U.S. dollar; the first value date of the index goes back to Sept. 16, 2005.

INDEX PERFORMANCE CHARTS AND TABLES:

Exhibit 4: Index Performance Since Inception: 

ex 4

Source: Asia Index Private Limited.  Returns used are total returns in INR.  Data from September 2005 to May 2015.  Symbol ‘~’ denotes partial caledar year returns.  First value date of the S&P BSE India Manufacturing Index is Sept. 16, 2005.  It is not possible to invest directly in an index.  Past performance is no guarantee of future results.  Charts are provided for illustrative purposes and reflect hypothetical historical performance.

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Source: Asia Index Private Limited.  Returns used are total returns in INR.  Data from September 2005 to May 2015.  Symbol ‘~’ denotes partial caledar year returns.  First value date of the S&P BSE India Manufacturing Index is Sept. 16, 2005.  It is not possible to invest directly in an index.  Past performance is no guarantee of future results.  Table is provided for illustrative purposes and 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.

Exhibit 6: Risk/Return Profile

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Source: Asia Index Private Limited.  Returns used are total returns in INR.  Data from September 2005 to May 2015.  First value date of the S&P BSE India Manufacturing Index is Sep. 16, 2005.  It is not possible to invest directly in an index.  Past performance is no guarantee of future results.  Charts are provided for illustrative purposes and 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.

Exhibit 7: Sector Weights

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Source: Asia Index Private Limited.  Data as of May 29, 2015.  Chart is provided for illustrative purposes.

HOW COULD THE S&P BSE INDIA MANUFACTURING INDEX HELP INVESTORS?

The S&P BSE India Manufacturing is a thematic index, and historically, the manufacturing theme has been cyclical in nature.

We have few tools that measure manufacturing activities in India, such as the Index of Industrial Production (IIP), the HSBC India Manufacturing PMI, or the SBI Composite Index; however, these tools don’t measure share price performances and are not investable.  The S&P BSE India Manufacturing Index may complement all of these indices, as it is designed to measure the equity share price performance of companies generating revenue from manufacturing and production activities.  The design of the index takes care of investability, and the index is likely suitable for low-cost investment products such as ETFs or index funds.

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