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Millennials and the Investment Shift

An Index with a Scary Name and a Serious Return

Water Risk for Business – Three Key Questions

Most Major Islamic Indices Have Outperformed Conventional Benchmarks in 2016

What Is Your Retirement Number?

Millennials and the Investment Shift

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Emily Ulrich

Former Senior Product Manager, ESG Indices

S&P Dow Jones Indices

Lately, it seems like millennials have been everywhere: in the news, peppered throughout pop culture, and a serious topic of debate among the investment and financial landscape.

So—who are the millennials and why do they matter?  What impact will their wealth and world views have on sustainable investing?

“Millennials” refers to the generation born between 1980 and 2000.  They are crucial to shaping the future of global investment landscape, as they are expected to compose more than 50% of the workforce by 2020.[1]  It is also estimated that over the next several years, they will be on the receiving end of a generational transfer of personal wealth of USD 59 million.[2]

So what can we expect them to do with that wealth?

We know that millennials have grown up in an economic recession and this has had an impact on both their trust in the economy (and investing in particular) and their loyalty to employers.

In a 2008 survey of millennials, [3] PWC found that, of those surveyed, 75% believed they would have two to five employers, whereas in 2011, that number dropped to 54% and more than 25% reported that they expect to have six employers or more, compare with only 10% who felt the same in 2008 – thereby revealing the nomadic traits of the workplace. This decrease in loyalty may also spread to financial institutions. In a 2015 survey, LinkedIn and Ipsos found that 57% of millennials would be open to try financial offerings from non-financial brands.[4]

In a 2011 survey of millennials, PWC found that, of those surveyed, 54% expected to have two to five employers in their lifetime, whereas, in 2008, 75% believed they would have two to five employers.  In the 2011 survey, more than 25% reported that they expect to have six employers or more, compared with only 10 % who felt the same in 2008—this reveals the nomadic traits of the new generation in the workplace.

Both PWC and LinkedIn also found that millennials care deeply about their personal values and morals.  This is crucial to the future of sustainable investing.  Millennials, who value their moral compasses so highly, will also care deeply about where their money goes.  Sustainable investing is the perfect solution to address many of those concerns. It is incredibly important for financial providers to recognize these concerns, particularly as millennials have signaled an openness toward non-traditional financial offerings.

In the current passive investment space, market participants can choose from a wide range of indices that relate to personal values, including human capital, climate change mitigation, long-termism, faith based, and social responsibility.  Looking toward the future, millennials could be expected to be key drivers of sustainable investment.






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

An Index with a Scary Name and a Serious Return

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Reid Steadman

Former Managing Director, Global Head of ESG & Innovation

S&P Dow Jones Indices

Passive investors do not buy and sell single securities, but they are often active in another way, in their search for indices that provide compelling return profiles. This is why I’m befuddled that a certain index – which is up 300% over the past 5 years – attracts so little attention.

I have a few theories why this is so. Here’s the simplest one: this index’s name convinces people that it is beyond comprehension. This is the name:

S&P 500 VIX Mid-Term Futures Inverse Daily Index

Now that you’ve digested this, here is the case, in one chart, for studying this index:


Despite this impressive record relative to the S&P 500, only $74 million tracks this index, all in a single exchange-traded note (“ETN”) launched in 2010. What gives?

The Strategy
Aside from the surface-level problem of the index name, another issue that inhibits use of this index is that it covers an asset class, volatility, which is out of many investors’ comfort zone. But the basics of this index are simpler than you would expect.

The essence of the S&P 500 VIX Mid-Term Futures Inverse Daily Index is that it takes a short position in futures contracts based on the CBOE Volatility Index, better known as VIX. Because investors buy VIX futures contracts to protect their portfolios against steep market declines, taking the other side of this transaction and shorting VIX futures is essentially selling insurance.

The economics of the car or home insurance markets are similar to those of the VIX futures market. Buyers of VIX futures contracts pay a premium – in the form of a roll cost – and sellers of VIX futures contracts collect this. Insurance providers and VIX futures sellers lose big time when disaster hits, but the proceeds accumulated during periods of calm can make systematic selling profitable, as the chart above shows.

The S&P 500 VIX Mid-Term Futures Inverse Daily Index shorts a specific set of futures, those that are four to seven months from expiration. This is where the “Mid-Term” comes from. An investor selling VIX futures is betting that the price of market insurance will not spike up in the months ahead, negating gains.

Yes, Volatile, but Less Volatile
Another reason investors might shy away from the S&P 500 VIX Mid-Term Futures Inverse Daily Index is that it is volatile. Though it is true that this index is more volatile than the S&P 500, this index is much less volatile than a similar index, the S&P 500 VIX Short-Term Futures Inverse Daily Index, which has over $500 million tracking it in an ETN that trades on average 24.5 million shares a day.

The chart below shows the index histories for the Mid-Term and Short-Term indices since they became investable when ETNs launched in 2010. These indices have achieved close to the same return in this time frame, but the S&P 500 VIX Mid-Term Futures Inverse Daily Index took a smoother path.

Investors Should Care About This Index
So the index name and methodology provide an initial scare, but there is a good reason to settle down and take this index seriously. Over certain periods, the S&P 500 VIX Mid-Tem Futures Inverse Daily Index has allowed investors to collect a rather rich insurer’s premium. It is indeed subject to serious drawdowns, as the second chart in this post shows, but those declines are less severe than users of the more popular Short-Term Index experience. Because of this, the Mid-Term Index may be ideal for investors not seeking to buy or sell at every turn in the market, but those wanting to profit from longer-term trends in volatility.

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

Water Risk for Business – Three Key Questions

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Neil McIndoe

Head of Environmental Finance


Water crises are the top societal global risk in terms of impact, according to The World Economic Forum’s Global Risk Report 2016.

There is of course no lack of water; the risk is around availability of fresh water which constitutes just 2.5% of the world’s water. This has broadly been the case for millennia – what’s new is the enormous growth in demand for fresh water.

Rising water demand is largely influenced by population growth and its food and energy needs. The world population of 7 billion today is projected to grow to over 10 billion by 2050 and the United Nations predicts an associated 55% rise in global water demand.

Companies need to answer three questions to ensure they have resilient business models:

  1. How dependent is my business on water throughout the value chain?
  2. Are any of these dependencies in water stressed areas?
  3. Do I make sufficient profit from my local use of water to compete with other users?

Water Dependency

Companies need to understand their dependency on water throughout the value chain. Many companies – not unnaturally – focus on their own direct use of water. Fig 1 represents the water footprint of a fruit juice company along the value chain. Previously, the majority of their water initiatives were in the bottling process, which accounted for just 3% of water use. Once this was understood, a number of different mitigation strategies were deployed to improve resilience where it most mattered in the fruit growing stage, including long term contracts with farmers in areas of more robust water supply and joint investment in water irrigation efficiency.


Water Stress 

Water stress is not simply a consideration for companies operating in the world’s hotter countries. The UK is not often thought of as an area for concern but a 2013 government study classified 9 out of the 24 water company areas as having “serious” water stress.

This stress can translate into business risks in two main ways. Firstly, there is simply insufficient water for the business to operate, or to operate at its optimum capacity. The mining industry is one that frequently has this issue. But it is the second that will increasingly become a standard business concern – that of cost.

Water /Profit

While water has historically been plentiful and inexpensive, this is not the future outlook. Increasing competition for a scarce resource will require companies to make sufficiently good economic use of water to enable them to secure supplies as costs rise.

In Australia’s Murray River basin, where water trading has taken place for a number of years, we have seen water rights sold off by agriculture concerns to other sectors such as mining who use the water more profitably.

To understand and mitigate future risk for both themselves and investors, companies need to understand where in their value chains water presents the biggest risk, alongside competition for water in the river basins in which they operate.

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

Most Major Islamic Indices Have Outperformed Conventional Benchmarks in 2016

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Most S&P Dow Jones Indices Shariah-compliant benchmarks outperformed their conventional counterparts through the end of September 2016, with financials—which is largely absent from Islamic indices—significantly underperforming and information technology—which tends to be overweight in Islamic indices—performing well (see Exhibit 1).


The S&P Global BMI Shariah and Dow Jones Islamic Market World Index each gained 6.4% YTD as of Sept. 30, 2016, outperforming their conventional counterparts by 120 bps and 140 bps, respectively.  Meanwhile in the U.S., the S&P 500® Shariah gained 6.2% over the same period, slightly outperforming the conventional S&P 500.  The Dow Jones Islamic Market Europe Index posted the largest outperformance relative to its conventional counterpart; its exclusion of the embattled European banking sector boosted its relative performance.

Emerging Markets Rebound, Supported by Low Rates

Supported by low and declining global interest rates, emerging market equities and currencies have bounced back in 2016, with the Dow Jones Islamic Market World Emerging Markets Index gaining 12.9% YTD as of Sept. 30, 2016, outpacing all other major regions.  European equities have lagged, as economic malaise continues to weigh on the region and the Brexit vote added to uncertainty.  U.S. and Asian markets each gained about 6% YTD as of Sept. 30, 2016, supporting the overall growth in global equities.


MENA Equities Extend 2015 Losses

Despite a rebound in oil prices earlier in the year, MENA equities were sharply in the red as of Sept. 30, 2016, with the S&P Pan Arab Composite Shariah down nearly 9% YTD.  The conventional S&P Pan Arab Composite declined slightly less, aided by its relatively lower weight to Saudi Arabia, which has experienced double-digit losses.

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

What Is Your Retirement Number?

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Philip Murphy

Former Managing Director, Global Head of Index Governance

S&P Dow Jones Indices

Wealth drawdowns and volatility of returns are not the only risks facing defined contribution (DC) retirement plan participants.  Those relying primarily on 401(k)s and other DC plans for retirement income also need to address longevity, inflation, and variability in the price of income.  Furthermore, many traditional guidelines for withdrawal policies are simply insufficient for real-life application.  We hear a lot of debate around withdrawal rates expressed as a starting percentage of capital that is adjusted up each year for inflation—should the initial rate be 3%, 4%, or even 5%?  Such rules are naïve in that they fail to take into account the changing price of income, and they tend to be backward looking.  They are also usually accompanied by statements of probability—e.g., there is a 95% chance you will not run out of money, etc.

Can investors relate to statistical confidence levels?  If you tell someone that she has a 95% chance of not running out of money, this may sound pretty good.  However, if you tell that person that if she had 100 lives, you would expect her to run out of money in five of them, so things may not look so good.  The results in those five trials are too catastrophic for comfort.

Retired investors generally seek to retain control over their capital, and they need sensible strategies for funding consumption throughout their lives.  Sustainable systematic withdrawal policies must regularly take asset value and the price of income into account.  M. Barton Waring and Laurence B. Siegel do a great job of explaining this in a 2015 Financial Analysts Journal article titled “The Only Spending Rule Article You Will Ever Need.”

How variable is the affordability of income?  In conjunction with the S&P STRIDE index series, S&P DJI seeks to calculate the cost of inflation-adjusted income starting at specific points in time.  Exhibit 1 shows the U.S. dollar price of inflation-adjusted income starting in January 2030 and lasting 25 years.  It illustrates how many U.S. dollars would be required at the end of each year from 2005 to 2015 to lock in USD 1 of real income per year starting in 2030.  The table also shows annual total returns of the S&P 500, as well as the wealth and income performance of a hypothetical investment in the S&P 500.

We begin with USD 500,000 invested in the S&P 500 at the end of 2005.  At that time, 2030 income cost USD 12.35 per future real U.S. dollar, so I could have spent my USD 500,000 to lock in USD 40,490 per year (starting in 2030).  However, I thought I could eventually end up with more future income by investing in the stock market.  After one year, my wealth had grown to USD 578,950, and the price of 2030 income dropped from USD 12.35 to USD 11.03.  I could have sold my stocks to lock in USD 52,490 of future income, but I stayed invested.  I did this every year; by 2015, my wealth grew to USD 1,011,874, and the income I could afford to lock in grew to USD 56,154.

However, there are some striking observations buried within the table.  First, during the entire period, my account value grew at an annual rate of 7.3%, but my future income grew at an annual rate of only 3.3%.  Next, as recently as 2012 and in spite of the fact that my wealth had grown to USD 663,127, I would have been better off locking in future income in 2005, when I could have acquired USD 40,490 per year rather than only USD 29,702!

Changes in wealth do not proportionally translate into changes in future income.  For retirement savers, keeping an eye on expected future income may be just as important as account balances—if not more so.  Since no one knows the future sequence of investment returns or income cost, the wisest policy may be to lock in future income a little bit at a time.


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