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The SPIVA® Scorecard: More Than the Sum of Its Parts

The Current Dispersion-Correlation Map …and Brexit

REITs Rising Up

How the Brexit Affected Rates and Currencies in LatAm

The S&P 500® Dynamic Gold Hedged Index Increased in Reaction to Friday’s Brexit Vote

The SPIVA® Scorecard: More Than the Sum of Its Parts

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Aye Soe

Managing Director, Global Head of Product Management

S&P Dow Jones Indices

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The active versus passive debate has been going on for years and has inspired passionate supporters on both sides.  As a way to provide market participants with objective information, S&P Dow Jones Indices started publishing the S&P Indices Versus Active (SPIVA) Scorecard for the U.S. in 2002.  The scorecard measures the performance of actively managed domestic equity funds across various market capitalizations and styles, as well as fixed income funds, relative to their respective benchmarks.

After more than 14 years, SPIVA is now a global publication.  The scorecard is published for eight countries and regions: Australia, Canada, Europe, India, Japan, Latin America, South Africa, and the U.S.  It has presence on every continent.  The popularity of the scorecard is a testament to its ability to allow market participants—both retail and institutional—make informed decisions using the findings.  It is also a sign that investors around the world are starting to understand the benefits of passive investing.

We find that the financial media and the majority of our users focus heavily on results from Report 1 of the SPIVA publications, which calculates the percentage of managers underperforming or outperforming their respective benchmarks.  Undoubtedly, Report 1 embodies the theoretical underpinning that lies at the heart of active versus passive investing: that active management in aggregate tends to underperform passive management, after accounting for fees.

At the same time, the rest of the SPIVA Scorecard contains helpful statistics that should be part of a market participant’s decision-making toolkit.  For example, the asset-weighted versus equal-weighted performance figures seek to establish if fund size plays a role in delivering excess returns over the benchmark.  Are investors better off choosing a firm with larger AUM over a smaller one, all being else equal?  What are the asset classes or countries in which fund size plays a role in establishing winners versus losers?  The SPIVA Scorecard helps answer those questions.

The fact that this scorecard  is published in eight regions—in both developed and emerging markets—also means users can perform cross-country comparisons for the same asset class or investment style.  For example, do Japanese managers investing in large-cap U.S equity have a harder time outperforming the benchmark than Canadian managers investing in the same opportunity set?  Is large-cap U.S. equity a universally tough space for active managers to deliver meaningful excess returns?

The SPIVA Scorecard and its related content are more than the sum of their parts.  The scorecard contains a wealth of information that market participants can slice and dice in many different ways to conduct due diligence, make informed decisions, and keep tabs on the active versus passive debate.

If you would like more information on the scorecard, visit www.spdji.com/spiva, a new interactive tool for financial professionals and investors that brings SPIVA to life. The site features key data sampled from SPIVA Scorecards for Australia, Canada, Europe, India, Japan, Latin America, South Africa and the U.S., allowing visitors to compare active and passive performance around the globe.

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

The Current Dispersion-Correlation Map …and Brexit

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Fei Mei Chan

Director, Index Investment Strategy

S&P Dow Jones Indices

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As an exercise in understanding market volatility, we recently introduced the dispersion-correlation map to see how volatility manifests in dispersion and correlation. We saw very high levels of correlation at the beginning of January for both the S&P 500 and S&P Europe 350; the S&P Pan Asia BMI also sat at above average correlation then. We’ve often said that high correlations indicate fragile markets, as indicated by the sharp declines that took place in the following month for all three indices.

Following the results of the June 23rd Brexit referendum, volatility spiked around the globe. In the U.S., correlation is almost as high as it was at the beginning of the year, and dispersion is slightly higher. Similar readings can be seen in Pan Asia where correlation is high but dispersion is below average. The situation in Europe is different. As of the end of June, dispersion for the S&P Europe 350 was well above average, as was index correlation.

Paradoxically, wider dispersion in the S&P Europe 350 also means that there are more places to hide. Current European dispersion levels reflect considerable room to add (or subtract!) value by stock or sector selection.

Heightened correlations make for fragile markets.  Investors in the U.S., Europe, and Asia should prepare for the possibility of a rough ride.

 

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Source: S&P Dow Jones Indices LLC.  Data from Dec. 31, 1990, through June 30, 2016.  Past performance is no guarantee of future results.  It is not possible to invest directly in an index, and index returns do not reflect expenses an investor would pay.  Chart is provided for illustrative purposes.

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

REITs Rising Up

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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REITs used to be seen as step-children – unusual securities with special tax treatments and slightly different accounting. Some investors weren’t sure if REITs were really common stocks. Then in 2002 for the first time a REIT was added to the S&P 500. That recognition attracted attention and investors began to see REITs as a bit more main stream. As housing began to boom in the early 2000s, real estate was more widely talked about. While some people were buying second and third homes as investments, a few others were focusing on buying real estate on the stock market with REITs or real estate development companies.

Analysts following REITs use GICS, the Global Industry Classification Standard, and track REITs and real estate as part of the financial sector.  GICS classifies all publicly traded companies into sectors, industry groups, industries and sub-industries.  While housing and home ownership went through a boom and a bust, REITs and real estate equities continued to garner increasing attention from investors. In the last few years with very low interest rates, REITs have enjoyed renewed attention due to their attractive dividend yields.  The chart shows the weights of real estate and non-real estate financials in the S&P 500 and the continuing growth of the soon-to-be new real estate sector in GICS.

Source: S&P Dow Jones Indices, Monthly data
Source: S&P Dow Jones Indices, Monthly data

The rise of REITs did not go unnoticed by S&P Dow Jones Indices and MSCI during their annual reviews of the GICS structure.  In recognition of the growing importance of these stocks, a major change is coming: in September real estate development companies and REITs will leave the financial sector behind and become a new 11th sector in GICS. This is the first time since GICS was introduced in 1999 that a new sector is being created. For investors in REITs and real estate developers and for issuers of these securities, this will be a major change.  REITs will have more prominence as the weights of REITs in the S&P 500 and other major indices become more widely recognized.

Many portfolio managers and mutual funds compare their equity asset allocation against the current 10 sectors in GICS.  When real estate becomes its own sector, these portfolio managers may be busy rebalancing to assure their real estate exposure isn’t too far from the benchmark.  The table shows what the S&P 500 would look like were REITs a sector today.

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Source: S&P Dow Jones Indices, Data as of June 30, 2016

Need more information? S&P Dow Jones is hosting a webinar next week on GICS, REITs and real estate.  The link is here.

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

How the Brexit Affected Rates and Currencies in LatAm

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Jaime Merino

Director, Asset Owners Channel

S&P Dow Jones Indices

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After Brexit polls said that the referendum would end with a stay in the European Union (EU), all markets reacted as if that would be the outcome on voting day.  After the announcement that the U.K. would no longer be part of the EU, all markets were shocked, and the emerging markets of Latin America suffered consequences as well.

Exhibit 1 shows the movement on yield in bps between June 22-23, 2016, and June 23-24, 2016, in different parts of the sovereign curve for Brazil, Chile, Colombia, Mexico, and Peru.

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On average, Chile was affected the least in terms of movements in its sovereign curve.  In contrast, Peru had a significant gain in prices in the long part of its curve, but the day after the vote it returned to normal.  Brazil also saw gains before the referendum, and the day after the vote it stayed flat.  Mexico had gains in all parts of the curve on the day of the vote and the next day it closed with upward movements in the short end of the curve, following a possible hike in policy rate by the country’s central bank, there was an upward movement of 50 bps on Thursday, June 30, 2016.  Another budget cut of MXN 31,700 million was announced.

On the FX side, we have seen many movements since the vote.  Exhibit 2 shows the percentage change of the spot prices against the U.S. dollar between June 22-23, 2016, and June 23-24, 2016.

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In all cases, Thursday’s close presented an appreciation of most currencies against the U.S. dollar; Mexico’s currency benefited the most, with an appreciation of 1.14%.  However, one day later, it was the most negatively affected of the currencies in Exhibit 2, closing with a depreciation of 3.01%—at midnight local time, it was down more than 7%.

In contrast with currencies, real rates, as measured by the regional components of the S&P Global Emerging Sovereign Inflation-Linked Bond Index, had varying movements between each country.  Exhibit 3 shows the daily returns of the inflation-linked indices of each country, with Chile and Colombia flat, Mexico with positive returns on both days, and Brazil and Peru with losses on Thursday and gains on Friday.

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

The S&P 500® Dynamic Gold Hedged Index Increased in Reaction to Friday’s Brexit Vote

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Tianyin Cheng

Senior Director, Strategy and Volatility Indices

S&P Dow Jones Indices

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Gold often rallies in times of intense market turmoil, as the safe-haven asset is perceived as a hedge against economic and financial risk.  This was one of the rationales for constructing the S&P 500 Dynamic Gold Hedged Index.  What happened on Friday, June 24, 2016, clearly demonstrated the effectiveness of the strategy in terms of providing diversification when it is most needed.  On that single day, the S&P 500 (TR) returned -3.59% (the 50th largest single-day drop in the past 30-year period), while the S&P 500 Dynamic Gold Hedged Index returned 0.91%.  Would this happen again if Trump were elected president of the U.S. in November?  That would be interesting to see.

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In addition to the potential diversification benefit, the S&P 500 Dynamic Gold Hedged Index could possibly protect portfolio returns from the effects of currency devaluation.  This is especially relevant with the current market conditions, as some market participants might conclude that central banks could respond to the Brexit vote by adding more monetary stimulus.  In the immediate aftermath of Brexit, the Bank of England said it was well prepared and ready to provide an additional GBP 250 billion in liquidity.

Another thing to note is that the S&P 500 Dynamic Gold Hedged Index is designed to reflect the strategic overlay approach that may provide a more efficient way to gain exposure to gold.  The approach pairs a core investment (the S&P 500) with a portfolio hedge applied through a derivative instrument (gold futures).  With this approach, market participants do not need to cut their equity exposure in order to increase their holdings in gold.  As a simple illustration, if a market participant sold 50% of their S&P 500 holdings and bought into GLD ETF, this 50/50 portfolio ETF would have generated a return of 0.66% Friday, June 24, 2016, 25 bps lower than that of the S&P 500 Dynamic Gold Hedged Index, and this does not include transaction costs.

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