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Can House Prices Keep Rising?

Has the Affordable Care Act Achieved its Goal of Significantly Increasing Enrollment While Making Healthcare Coverage More Affordable? Part 1

Long-Term Underperformance of European Active Management continues to play out in the active versus passive debate.

Why Oil Index Investors Should Be Flying High

Active Management in Volatile Markets

Can House Prices Keep Rising?

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Prices of existing homes rose 5.3% in the year ended December 2015, more than twice the rate of inflation.   However, the pace of price increases varies across the country with the strongest gains in the west and the weakest in the northeast, as shown by the chart.  Sales of both new and existing homes also vary across the country with more strength in the west.

The next S&P/Case-Shiller Home Price report will be releases at 9 AM Tuesday morning. It will show whether the west’s dominance continues and whether prices will keep climbing despite questions about the availability of financing.

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

Has the Affordable Care Act Achieved its Goal of Significantly Increasing Enrollment While Making Healthcare Coverage More Affordable? Part 1

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Glenn Doody

Vice President, Product Management, Technology Innovation and Specialty Products

S&P Dow Jones Indices

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The Affordable Care Act (ACA), signed on March 23, 2010, by President Barack Obama, has often been described as legislation to 1) make healthcare and health insurance more affordable, and 2) make health insurance more broadly available to Americans.  Key parts of the ACA have been discussed relentlessly in the market, in particular the requirements that people with preexisting conditions can’t be charged more or denied treatment, and the requirement that all Americans must have healthcare or face a tax penalty.  While the new rules imposed on the healthcare industry have served to increase accessibility, what has the impact been with respect to affordability?  In this two-part series, we will look at the impact of this legislation, first from the perspective of accessibility and whether enrollment has actually increased since the ACA was introduced, and then at affordability, or costs, and how overall costs in the individual market have been increasing.  We will use the S&P Healthcare Claims Indices to evaluate the success of each provision further.

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Accessibility: Do More Americans Have Healthcare Coverage Today Than When the ACA Was Introduced in 2010?

According to the S&P National Healthcare Individual Claims Index, there appears to be strong evidence that there has been an increase in private enrollment since the introduction of the ACA.  The majority of this increase occurred concurrent with the introduction of the Health Insurance Marketplace in January 2014.  Because the initial open enrollment in the Health Insurance Marketplace was plagued with administrative problems, growth in enrollment was delayed.  In fact, in early 2014, the government announced that open enrollment would be extended to March 31, 2014.  As can be seen in Exhibit 1, individuals started to take advantage of this new coverage, and between October 2013 and September 2015, total enrollment increased by over 25% on an adjusted basis,[1] as measured by the S&P Healthcare Claims Indices for the individual market.  Given that the S&P Healthcare Claims Indices represent approximately 40% of the total commercial healthcare market in the U.S., we believe that it is reasonable to conclude that the ACA has induced more individuals to buy individual health coverage.  Also notable in Exhibit 1 is an increase in the cost trend from 5% annual to over 30% in 2014 on a 12-month basis, indicating that these additional enrollees had a significant impact on costs.

In part 2 next week, we will look deeper into the impact on costs that the additional enrollment had.

[1]   The enrollment numbers have been adjusted to remove the drop in enrollment due to the removal of a plan from the S&P Healthcare Indices in October 2014.

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

Long-Term Underperformance of European Active Management continues to play out in the active versus passive debate.

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Daniel Ung

Director

Global Research & Design

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Every six months, S&P Dow Jones Indices publishes the S&P Indices Versus Active (SPIVA®) Europe Scorecard, which seeks to compare the performance of actively managed equity funds across different categories, and in the SPIVA Europe Year-End 2015 Scorecard, we expanded it to cover more individual countries and regions.  Among the new additions are Italy, the Netherlands, Poland, Spain, Switzerland, and the Nordic region, with specific data for Denmark and Sweden.  This is also the first year-end report in which 10-year data is published for Europe. .  To access the full report, please click here and for the video summarizing the major findings of the report, please click here.

Global equity markets, as measured by the S&P Global 1200, rose 10.4% over the past one-year period, as measured in euros, which could largely be attributed to the European Central Bank’s quantitative easing program.  However, this apparently positive performance masked the heightened volatility that the equity markets experienced over the course of the year, which was a consequence of anemic Chinese growth, as well as the collapse in energy and commodity prices.

Compared to the S&P Europe 350, while 68.1% of active managers outperformed the benchmark over the short run, they underperformed the benchmark over longer time horizons.  63.8% of active managers underperformed the benchmark by the end of the three-year period, 80.6% in the five-year period, and 86.3% over the 10-year period.   Exhibit 1 shows the new categories highlighted in blue.

As for the global, emerging market, and U.S. equity categories, actively managed funds—in both euro and pound sterling—underperformed substantially in the short term (one-year category) and in the long run (10-year category).  For instance, 61.2% of global equity funds underperformed their benchmark over a one-year period, and 89.08% of funds underperformed the benchmark over a 10-year period.

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

Why Oil Index Investors Should Be Flying High

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Today in the Wall Street Journal, there is an article, “Airlines Retreat on Fuel Hedging“, that highlights the losses airline companies suffered by hedging against oil and gas rises. However, the article also points out that not all airlines hedged, including American Airlines Group (NASDAQ: AAL), who enjoyed the benefit of cheaper fuel. Scott Kirby, president of AAL, was quoted, “hedging is just a rigged game that enriches Wall Street.”

Kudos to him and his shareholders for betting in the right direction. Not every commercial consumer (airline) made that choice, but the important point is that hedging against an oil price rise is a choice about managing risk. Hedging price risk to keep a company in business is not a Wall Street game, but it is possible Kirby was referring to Paul Cootner’s research from MIT in the 1960’s that explains commercial hedging as a highly specialized form of speculation.

In a letter to the FT, Hilary Till points out the futures markets exists to help companies specialize in risk taking by allowing them to use the basis risk, the difference between the spot and futures prices, to manage risk. This is helpful since the basis risk is more predictable than the commodity prices themselves. In the same article, Till points out Holbrook Working’s research from Stanford in the 1950’s showing that it is not necessarily precise daily correlation that matters for choosing a proxy hedge, but whether the proxy hedge provides a business with protection during a dramatic price move that could bankrupt a company.

However, not all companies are similarly vulnerable to bankruptcy from commodity price moves. The producers need protection against price drops more than commercial consumers need protection against price increases. So, the producers go short to protect against price drops and the consumers go long to protect against price increases, and the result is naturally more commercial shorts than longs.

Hedging Pressure

This also true specifically in oil where there has been consistently more commercial short hedging than commercial long hedging.

Source: CFTC http://www.cftc.gov/oce/web/crude_oil.htm
Source: CFTC http://www.cftc.gov/oce/web/crude_oil.htm

The reason this is the case is supported by two economic theories: 1. Hicks’ theory of congenital weakness that argues it is easier for consumers to choose alternatives so they are less vulnerable to price increases than producers are to price drops, and 2. Keynes’ theory of “normal backwardation” that argues producers sell commodities in advance at a discount which causes downward price pressure, which converges to the spot at the time of delivery.

In the futures market, this gap needs to be filled between producers and commercial consumers that are hedging, opening the door for long commodity investors to earn a return called the insurance risk premium. This is illustrated by the bigger share of non-commercial longs than shorts.

Source: CFTC http://www.cftc.gov/oce/web/crude_oil.htm
Source: CFTC http://www.cftc.gov/oce/web/crude_oil.htm

This relationship is time tested and has remained stable as examined by Bhardwaj, Gorton and Rouwenhorst. They conclude although open interest has more than doubled for the average commodity since 2004, the composition of the open interest has remained remarkably stable.

Source: Yale ICF Working Paper No. 15-18. Facts and Fantasies about Commodity Futures Ten Years Later. Geetesh Bhardwaj SummerHaven Investment Management Gary Gorton Yale University NBER Geert Rouwenhorst Yale University
Source: Yale ICF Working Paper No. 15-18. Facts and Fantasies about Commodity Futures Ten Years Later. Geetesh Bhardwaj, SummerHaven Investment Management, Gary Gorton, Yale University, NBER, Geert Rouwenhorst, Yale University. May 25, 2015.

Oil index investors that use long futures should be excited if all of the above holds true and airlines really are retreating on their hedging. The implication is that there may be a bigger risk premium to be earned as the net shorts grow (from the absence of airline long hedging.) The oil producers still hold more risk than commercial consumers and will likely pay investors to offset that risk. The timing may be perfect too with the signals that show oil may have bottomed. You can read about these two signals here and here.

 

 

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

Active Management in Volatile Markets

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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More than a year ago, a number of commentators expressed confidence that 2015 would be the year when active equity management proved its value.  After all, the market had risen steadily for six years, and with stretched valuations, market volatility was likely to rise — creating opportunities for active managers to add value by skillful risk control.

This seems like a plausible theory — if only the facts had not conspired to rebut it.  Our SPIVA report for calendar 2015 shows that the majority of actively-managed U.S. mutual funds underperformed cap-weighted index benchmarks.  Similarly, the majority of large-cap institutional portfolios tracked in the eVestment database underperformed the S&P 500 Index.

Why was 2015 so difficult for active U.S. equity managers?  Answering this question requires us to distinguish between two oft-conflated concepts: the manager’s skill at stock selection or sector rotation, and the level of opportunity to demonstrate that skill.  Beyond observing that, in a market dominated by institutional players, the average manager cannot expect to outperform the market average, we have no particular insight into manager skill.  But opportunity can be measured systematically by the market’s dispersion, and dispersion in 2015, though slightly above 2014’s level, remained quite low by historical standards.

The level of a manager’s skill is independent of dispersion, but the value of his skill is dispersion-contingent.  The graph below illustrates this by reference to the interquartile range for large-cap U.S. managers in our SPIVA database.

Source: S&P Dow Jones Indices’ SPIVA (“S&P Indices Versus Active”) scorecards . Data for 2007 are for December 31, 2006 through March 31, 2007; all other years are full calendar years. Charts are provided for illustrative purposes. Past performance is no guarantee of future results.
Source: S&P Dow Jones Indices’ SPIVA (“S&P Indices Versus Active”) scorecards . Data for 2007 are for December 31, 2006 through March 31, 2007; all other years are full calendar years. Charts are provided for illustrative purposes. Past performance is no guarantee of future results.

The bars represent the difference between top quartile and bottom quartile managers or, crudely speaking, the performance gap between “good” and “bad” managers in each year.  The line is the average level of dispersion during the year.  It’s hardly a perfect fit, but nonetheless it seems clear that managers have more scope to demonstrate their skill when dispersion is high.

In most markets, dispersion in early 2016 was higher than its average 2015 level.  If this trend continues, 2016 could at last see the long-awaited stock pickers’ market, and a widening of the gap between top and bottom performers.  If dispersion reverts to its 2015 levels, however, even good active managers will continue to face a challenging environment.

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