Investment Themes

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New ESG concepts evolved; Decarbonization was the word in 2015

The Rieger Report: Apple Inc.: Stock & Bonds Move on Different Tracks

Looking for Incremental Yield

European Bond Markets Closing 2015 on Steady Ground, But Needs to Watch Its Step

The Rieger Report: Municipal Bond Market Winners and Losers Through Dec. 17 2015

New ESG concepts evolved; Decarbonization was the word in 2015

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Julia Kochetygova

Head of Sustainability Indices

S&P Dow Jones Indices

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New concepts of ESG are evolving
The biggest shift since the beginning of 2015 has been that the asset owner ideology has changed to involve concepts such as “Impact Investing”, “Natural Capital”, and “Universal Owner”. We have seen initiatives from pension investors that provoked a visible shift away from a purely financial viewpoint to one where longer-term stakeholder value is critical, for example:

  • One of Sweden’s largest pension plans, AP4’s decarbonization strategy
  • France’s public service pension scheme, ERAFP’s proactive ESG integration
  • France’s public pension reserve fund, FRR’s tender for the asset manager who is able to deliver value from ESG, and
  • Canada’s largest pension plan, CPPIB’s initiative to focus investment objectives entirely on long-term performance

In this model, more integrated approaches to ESG and better stewardship exercised over ownership will be present, as highlighted in the Towers Watson Report published in February 2015.

There are more and more investors who are actively considering ESG as a risk factor: reputational, as well as financial. Mercer European Study 2015 has stated that those who do not consider such risks now represent 36% versus 48% in 2014. And there is more evidence coming from index providers and their analytical partners showcasing that ESG has actually been able to deliver alpha. RobecoSAM has been able to identify these trends by quantifying the impact of ESG separately from all other factors (see their “Smart ESG Integration” whitepaper published in September).

Climate change talks dominated sustainability discussion in 2015 as COP21 approached
Finally, as we approached COP21 in Paris this year, the core of sustainability discussion was increasingly centered on climate change, which has received a consensus priority status as both the most important and the most pressing subject. The Montreal Carbon Pledge that was adopted in September 2014, whereby signatories agree to measure and publicly disclose the carbon footprint of investment portfolios annually, has reached $10 trillion of assets by the time of COP21, and the Portfolio Decarbonization Coalition whereby members will drive GHG emissions reductions on the ground by decarbonizing their portfolios has accumulated $600 billion. The Mercer report “Investing in the time of Climate Change” presented a very solid and quantified investment case, with Coal and Oil industries being the biggest losers under various climate scenarios and Renewable Energy being the only winner.

2015 saw investors divesting from fossil fuels and green projects were on the rise
Many asset owners have been divesting from fossil fuels, particularly coal. Coupled with the sinking oil prices, this has resulted in a decline of the S&P Global BMI Energy Index by more than 25% YTD.

In contrast, supported by the falling cost in the renewable energy sector and increased investor interest towards sustainability, we have seen a rise in the number and scope of green projects.  The issuance of green bonds has grown to $41 billion dollars by early December (compared to $37 billion in FY2014), but what is more important, the unlabelled green climate-aligned projects have been growing in many parts of the world, starting from Californian solar farms to railways in China. Climate Bond Initiative calculated the size of climate-aligned bond-financed projects at $532 billion in their report “Bond and Climate change: State of the Market 2015” issued in July.

The impact of COP21 and beyond
COP21 brought a ray of hope to those who have been keen to minimize the carbon-related risks.  Supported by the initiatives of public climate leaders, particularly the President of France, Francois Hollande, 195 nations’ delegations have been able to reach a legally binding and universal agreement targeting to get the climate change constrained within 2 degrees beyond the pre-industrial level and aiming to explore the possibility of 1.5 degrees.  The agreement sets a coordination framework for individual governments, government and supranational agencies and NGOs in road mapping and implementing a transition to low carbon economy. This will require approximately $1 trillion dollars to be invested annually in low-carbon technologies and continued technological innovations, shift of funds from developed countries to developing countries.  Part of the solution is in activating long-term and low cost financial solutions for public and private sector. Low carbon indices are clearly important part of this toolkit, as it helps the industry measure the performance of the low carbon market.

Among other positive news, 27 global investors representing over $11.2 trillion of total AUM issued the Paris Green Bonds Statement. Signatories have committed to support policies that drive the development of long term, sustainable global markets in green bonds as part of climate finance solutions. Furthermore, Climate Bonds Initiative (CBI) and UNEP Financial Inquiry Launch Green Bond Policy Report ‘Scaling Green Bond Markets – Guide for the Public Sector’, offer detailed action plans and best-practice examples from around the world for how to grow green bond markets.

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

The Rieger Report: Apple Inc.: Stock & Bonds Move on Different Tracks

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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We all know stocks and bonds are rarely correlated.  The recent steep decline in the price of Apple Inc. stock illustrates this vividly.  Since the end of November the price of Apple Inc. stock has fallen by over 10%.  Apple has also become one of the larger U.S. corporate bond issuers.  Those bonds have barely moved during this time period.

As of December 18th 2015:

  • Apple Inc bonds in the S&P 500 Bond Index represent over $36.9billion in market value.
  • These bonds represented just under 1% of the bonds in the index (as measured by market value).
  • There are 18 different Apple Inc. bond issues in the S&P 500 Bond Index.
  • The weighted average bond price of Apple bonds in the index was 94.4 verses 94.7 at the end of November.
  • The  weighted average yield to worst (YTW) of Apple bonds in the index was 2.5% verses 2.48% at the end of November.

The investment grade U.S. corporate bond market tracked in the S&P 500 Investment Grade Corporate Bond Index has had a modest negative return of 0.29% month-to-date so Apple bonds appear to be moving in line with the rest of the bond market.

The S&P 500 Bond Index tracks the fixed rate debt of the blue chip issuers in the iconic S&P 500 Index.

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

Looking for Incremental Yield

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Lucas Chiang

Associate, Product Management

S&P Dow Jones Indices

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Over the past few years, corporations have taken advantage of the low interest rate environment and have thereby increased the size of the corporate bond market considerably.  Many of these bonds, however, are subject to the effects of rising interest rates.  In fact, anticipation of this change in interest rates alone has already started to shake parts of the market.

Credit spreads—the difference between the yield on a corporate bond and the yield on a treasury security of similar maturity—can be viewed as a reflection of the risk of default.  Typically, wide corporate credit spreads indicate a riskier lending environment, as bondholders generally will only take on a greater risk of default in exchange for a greater yield.  As the economy grows and companies’ financial health improves, credits spreads tend to narrow.

In examining the subparts of the S&P 500® Bond Index, we can take a deeper look at how credit spreads have changed for AA- and BB-rated corporate bonds issued by constituents of the S&P 500.  Until recently, credit spreads had been narrowing to unusually tight levels over the past several years; low interest rates had starved fixed income investors from the yields available in years past.  However, in recent months, there has been a widening of credit spreads in spite of low rates.  In 2014, AA spreads ranged from 0.09% to 0.43%, while BB spreads ranged from 2.26% to 3.37%.  In 2015, AA spreads ranged from 0.30% to 0.81%, while BB spreads ranged from 2.55% to 4.67%.  Tight spreads meant that bonds cost more and yielded less.  So, with the prospect of a greater payoff, this low-rate environment has become increasingly attractive to investors.  The demand for incremental yield has started to outweigh the traditional risk/return model in the corporate bond market, as investors have begun taking on a relatively high amount of risk for a relatively low amount of incremental yield.

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

European Bond Markets Closing 2015 on Steady Ground, But Needs to Watch Its Step

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Heather Mcardle

Director, Fixed Income Indices

S&P Dow Jones Indices

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After much anticipation, the US Fed hiked rates 25bps on Wednesday.  The US Fed indicated further moves would be dependent on global factors and oil prices – a key detail signifying that future rate hikes seem likely to develop on a slower scale, causing a European government bond market rally on Thursday, sending yields lower in the region.  This is quite a different result than earlier this year, when European bond market bonds sold off in fear that a Fed rate hike would lead to a shift away from European government bond markets to the higher yields and high quality of the US government bond market.  On Thursday, European government bond market yields moved lower with the S&P U.K. Gilt Bond Index tightening 10bps, the S&P Greece Sovereign Bond Index tightening 18bps, and most other European government bond market yields tightening around 5bps. (See table below).

Performance levels year-to-date vary across Europe.  On the higher end, it’s with no surprise that while Greece had a rocky road, high risks are met with high rewards.  The S&P Greek Sovereign Bond Index ytd performance is 21.95%.  The S&P Italy Sovereign Bond Index ytd return performance is 4.27% and the S&P Portugal Sovereign Bond Index ytd performance is at 3.48%.  The S&P Switzerland Sovereign Bond Index comes in at 3.25% performance ytd, while the S&P Germany Sovereign Bond Index has a 0.73% ytd performance.

Since the beginning of the year, yields in the region are largely ending up higher, with a few exceptions.  (See table below).  2015 saw considerable volatility with back and forth movement between risk and safety, as well as the launch of the ECB’s QE program.  S&P Greece, Ireland, Italy and Luxembourg Sovereign bond indices yields are lower.  (See table below).

European bond markets will be keeping a close eye on global factors, as a pick up in the US fed rate hike policy could significantly change Europe’s steady ground, and ultimately hurt a sluggish economy.

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

The Rieger Report: Municipal Bond Market Winners and Losers Through Dec. 17 2015

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J.R. Rieger

Head of Fixed Income Indices

S&P Dow Jones Indices

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Some parts of the U.S. municipal bond market is doing well in 2015 but others are struggling.  Let’s start with which states are hot and which are not.   Guam is the leader but that tiny issuer is really not a far measure.  Smaller issuers like municipalities in Iowa, North Dakota have done well and supply may play a factor.  Underperformers have been led by Puerto Rico.  The S&P Municipal Bond Puerto Rico Index is down 8.6% year-to-date.  Despite the negative headlines about pension shortfalls Illinois and New Jersey bonds are both are underperforming the overall bond market but not by all that much.   By comparison the investment grade tax-free muni market tracked in the S&P National AMT-Free Municipal Bond Index is up 2.98%.

State Performance 12 17 2015

Sectors of the municipal bond market outperforming include the much tobacco settlement bond sector up 11.8% year-to-date.  These bonds have huge obligations in the future but they often are long dated so the short term risks are very different then the long term prospects of repayment.  Healthcare related sectors of the bond market have outperformed the rest of the market as well.  Underperforming is the defaulted sector down nearly 3.8% but what is extremely telling is the performance of the U.S. Government Bond backed Prerefunded and Escrowed to Maturity sector.  These bonds have done little in 2015 due to the low yields of these high quality and often short term bonds.

Sector Performance 12 17 2015

 

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