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Survivorship Bias

The Rieger Report: Defaulted municipal bonds return -1.5% year-to-date

The Rieger Report: Junk Bond Market Performance Varies in 2015

Two ugly views of the energy debt markets

International Corporate Bond Exposure

Survivorship Bias

Contributor Image
Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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This morning’s Wall Street Journal interviews Peter Lynch, the legendary and erstwhile manager of the Fidelity Magellan Fund, who, unsurprisingly, turns out to be an advocate of active equity management.  “People accept that active managers can’t beat the market and it’s just not true,” says Mr. Lynch, who certainly did beat the market in his day.

In support of this view, we learn that “a Fidelity spokesman says about three-quarters of its 49 equity funds managed by the same portfolio manager for at least five years were beating their benchmark over the manager’s tenure…”  A casual perusal of Fidelity’s website reveals a total of 110 actively-managed equity funds (41 U.S., 25 international, and 44 sector-specific), which means that less than half have had the same manager for five years.  If Fidelity wished to do so, they could implement a policy of changing the manager of any fund which hadn’t outperformed over the manager’s tenure (perhaps after a five-year probationary period).  Then their spokesman could announce that 100% of the funds managed by the same portfolio manager for at least five years had beaten their benchmark.  It would be a more impressive sound bite, but just as meaningless a statement about the nature of active management.

Otherwise said: suppose two new portfolio managers take over new funds this year, and after four years one is outperforming her benchmark while the other is underperforming.  Which of the two do you think has the better chance of making it to year five?  The Fidelity statistic is a classic illustration of survivorship bias.  When we control for survivorship, as in our SPIVA reports, the majority of active managers underperform most of the time.

What is true across the population of active managers does not mean that individual managers cannot be exceptions.  Indeed, Peter Lynch is famous precisely because his performance was exceptional.   If most active managers could outperform consistently, we wouldn’t celebrate the few who do.

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

The Rieger Report: Defaulted municipal bonds return -1.5% year-to-date

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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As the Puerto Rico municipal bond saga continues it may be helpful to look at how other distressed municipal bonds have performed through Friday December 4th 2015.

The S&P Municipal Bond Default Index tracks municipal bonds that have entered default by not paying all or part of the promised principal or interest when due.  It currently tracks over 250 bonds with a par value of over $5.4 billion.   Within the index there are several sectors which have historically had the majority of defaults take place.  Those sectors are the  land backed, health care, corporate Backed and multifamily sectors.

Table 1: Municipal bond indices tracking defaulted bonds:

Municipal Default 12 2015

So far, the S&P Municipal Bond Default Index is in negative territory with a return of -1.54%.  Corporate backed municipal bonds have seen a positive return of over 5.4%.  Smaller sectors such as the health care and multifamily sectors have seen significant negative results with health care bonds being crushed by over 35% in 2015.

If and as the Puerto Rico bonds default it can be expected that they will be added to the S&P Municipal Bond Default Index during a monthly index rebalancing and if they do they may have a significant weight in this index.

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

The Rieger Report: Junk Bond Market Performance Varies in 2015

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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The junk or high yield bond markets in the U.S. have seen diverse returns so far in 2015.  Municipal junk bonds are out performing both the senior loan and fixed rate corporate high yield segments of the market.  While municipal bonds are being buffeted by Puerto Rico corporate bonds and loans are seeing more significant head winds.

Table 1:  Select indices tracking below investment grade segments of the debt markets.

High Yield Asset Classes 12 2015

When looking a little deeper into  ratings categories within these segments the municipal bond market has continued to shine.  Starting with the investment grade BBB ratings category, municipal bonds have had a return of nearly 3.5% year-to-date while the large entities tracked in the S&P 500 BBB Investment Grade Corporate Bond Index has recorded a negative 0.46%.  Moving into the below investment grade category of BB+ and below municipal bonds are still outpacing their corporate counterparts.  The BB quality range is being impacted by energy bond issues, such as those from Chesapeake Energy, which are playing a big role in dragging down the corporate bond junk sector in 2015.

Table 2: Select indices representing specific ratings categories of the debt markets.

High Yield Ratings Categories 12 2015

 

 

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

Two ugly views of the energy debt markets

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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The impact of low energy prices is rippling through the debt markets for bonds issued by energy related companies.  The S&P 500 Bond Index has returned a modestly negative total return of -0.31% year-to-date while the energy bond sector tracked in the S&P 500 Energy Corporate Bond Index is down 5.79% year-to-date.

Table 1: Select Sector Indices from the S&P 500 Bond Index family:

500 bond sectors 12 2015

The credit default market also has reacted.  The cost of buying default protection on the debt of the 10 entities in the S&P/ISDA CDS U.S. Energy Select 10 Index has shot upward by over 150% since May 1st 2015 from 213bps to end December 3rd 2015 at 539bps.  This could be an indication that market participants are expecting more downward pressure for this sector over the near term.

Chart 1: Select S&P/ISDA U.S. CDS Indices

Energy CDS 12 2015

Table 2: The 10 entities in the S&P/ISDA U.S. Energy Select 10 Index as of December 3rd 2015:

 Anadarko Petroleum Corp.
Apache Corp
Chesapeake Energy Corp.
ConocoPhillips
Devon Energy Corporation
Halliburton Company
Kinder Morgan Energy Partners LP
Peabody Energy Corporation
Valero Energy Corp.
Williams Companies, Inc./The

 

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

International Corporate Bond Exposure

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Lucas Chiang

Associate, Product Management

S&P Dow Jones Indices

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Consistency and balance are often essential qualities for a strong portfolio. In the fixed income space, investors can look to the S&P International Corporate Bond Index to bolster the stability and diversity of their investments through exposure to investment grade corporate debt outside the United States.

International corporate bonds are issued in a variety of non-U.S. dollar currencies, which helps mitigate U.S. dollar risk. In an environment where the U.S. dollar is weakening, having a basket of non-U.S. dollar securities tends to add to total return after currency translation. Beyond that, international bonds have demonstrated a relatively low correlation with the domestic and global equity marketplace, as well as with fixed income. Diversifying with international corporate bonds can potentially reduce exposure to market variations of a single currency, issuer, and asset class.

When comparing the S&P International Corporate Bond Index to indices of different asset classes and even similar indices within the same asset class we can find additional reasons to take interest in international bonds. Historically, the S&P International Corporate Bond Index has demonstrated relatively lower volatility than equity and commodity indices such as the   S&P 500® and the S&P GSCI®.  In addition, as of November 30th, the average rating quality of the S&P International Bond Index outranks that of the S&P U.S. Issued Investment Grade Corporate Bond Index with average weighted ratings of A/A- and A-/BBB+, respectively.  While high quality ratings often imply lower yields, the S&P International Corporate Bond Index has a weighted average yield-to-worst of 2.16%, which is higher than the average yields of U.S. treasuries and comparable to the 2.26% yield of the S&P 500 AAA Investment Corporate Bond Index. In all, international corporate bonds can be a dependable and important part of an investor’s portfolio.

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