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Latest Healthcare Cost Analysis Shows Individual Market Trends in Line With Employer Trends! – Part 1

It’s Now Easier to Strengthen Your Core With Municipal Bonds

Are You Looking for Outperforming Funds?

SPIVA® Europe Mid-Year 2016: Performance of Active Managers Has Been Disappointing This Year

Crude Reality of Enhanced and Excess Returns

Latest Healthcare Cost Analysis Shows Individual Market Trends in Line With Employer Trends! – 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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There are many in the healthcare market who have speculated that the Affordable Care Act (ACA) was doomed to fail due to high-cost individuals with pre-existing conditions driving up the average cost of care, while the healthy population that needed to support the cost of care for the sick remained on the sidelines with little-to-no incentives to become insured.  The S&P Healthcare Claims Indices supported this theory throughout 2015, when the average cost of care for a patient with an individual health insurance policy topped out at USD 415.15 versus USD 388.70 for an employee covered under an ASO type policy by their employer, or USD 338.92 for an employee covered under a large group type policy by their employer (see Exhibit 1).  That is, USD 26.45 more to treat a patient covered by an individual policy versus a self-insured type policy, and a whopping USD 76.23 more to cover an individual policy patient versus a patient covered by a large group policy by their employer.  Under both the self-insured and large group structure, the employer requires all employees to maintain insurance, which in effect forces a suitable population of healthy people to pay for unhealthy people.

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What Has Changed?

As seen in Exhibit 1, we can see a drop in the average cost of care for a patient covered under an individual policy starting in 2016.  Now that costs for individual policies are in line with those of employers, one can argue that this is how the ACA was envisioned to work.  With everybody having access to care, everybody paying their fair share, average costs should be in line with that of the overall market.  However, a more in-depth study is needed to understand the reasoning behind individual policy costs coming in line with the employer market.  We envision several potential reasons for the larger drop in average costs relative to the employer market.  In this edition, we will focus on one possible explanation.

When plan enrollees approach the end of a plan year, they often review their total out of pocket costs for that given year.  In a year where plan members have hit their maximum out of pocket costs, they are more likely to continue to spend and try to get all elective health issues addressed in the current year rather than carry them over to the next plan year where their maximum out of pocket costs will reset.  If we think about how the ACA enticed many uninsured individuals with pre-existing conditions to enter the market, buy insurance, and utilize that coverage to address their existing needs, it only makes sense that they will try to address all of their pre-existing conditions in the same plan year to avoid unnecessary out of pocket expenses.  If this is the case, then 2015 should be an anomaly, and moving forward we should see average individual costs stay in line with employer costs, assuming the ACA is working the way it was intended to work.

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

It’s Now Easier to Strengthen Your Core With Municipal Bonds

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Shaun Wurzbach

Managing Director, Global Head of Financial Advisor Channel

S&P Dow Jones Indices

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We all know we should work on and improve our core, but how many of us have the discipline to do it?  I interviewed two financial advisors who are strengthening their core by using municipal bond indices and the ETFs that track them.

Matt Papazian is founding partner and CIO at Cardan Capital Partners of Denver, Colorado, and Tom Cartee is a financial advisor and portfolio manager at Sheets Smith Wealth Management of Winston-Salem, North Carolina.

S&P DJI: Has the availability of indices or beta for municipal bonds changed the way that you are able to use municipal bonds?

Matt: Yes.  The ability to move weightings seamlessly between credit and duration is a great benefit of these new offerings.  We are now able to access the high-yield municipal bond space with ease, something we would not normally do with individual bonds.  Because of the historically low default rate in the municipal bond space, including high-yield bonds, we view access to different segments of the municipal bond market as an integral part of how we invest.

Tom: I agree with Matt.  I like to use equity ETFs based on broad indices as the core building blocks of client portfolios.  Municipal bond ETFs enable me to use a similar low-cost, broadly diversified approach to fixed-income allocation within taxable accounts.

S&P DJI: We’ve observed robo-advisors using core municipal bond ETFs within even the most basic asset allocations and at every level of client investment.  Are you finding it easier to deliver this asset class to the smaller clients you work with?

Matt: For smaller market participants, ETFs provide a substantially more efficient way to invest in tax-free bonds.  Small trades in bonds are generally quite expensive for small market participants, even if they don’t see the fee, so ETFs have leveled the playing field for them.

Tom: Trading small lots of individual municipal bonds is not very efficient.  The liquidity available with municipal bond ETFs offers a compelling reason to emphasize ETFs over individual bonds in smaller accounts.

S&P DJI: What are your thoughts on combining index-based municipal bonds with individual municipal bonds?

Matt: Although the majority of our municipal bond investing is done with ETFs, we view individual bonds as a valid way to get exposure to the space for larger investors, but we prefer ETFs for their liquidity and low transaction cost.  We also avail ourselves of closed-end funds when the values are compelling.

Tom: Again, I agree with Matt.  ETFs offer many advantages.  Because tax rates vary from state to state and liquidity needs vary among market participants, advisors may decide to use municipal bond ETFs alongside individual bonds in certain accounts.  The key is to recognize that municipal bond ETFs can be the core, given their favorable characteristics.

My thanks to Matt and Tom for participating in this interview and in a recent webinar on core municipal bond investing that is now available in our webinar archive.

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

Are You Looking for Outperforming Funds?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

S&P Dow Jones Indices

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When one is paying management fees for the investment in active funds, one might reasonably expect the funds to outperform benchmarks and resist downturn when the market is volatile.  However, results from our S&P Indices Versus Active (SPIVA®) Scorecards[1] suggest this expectation is often not met.  SPIVA reports across different regions, including the U.S., Canada, Europe, Mexico, Chile, Brazil, South Africa, Australia, Japan, and India, show that benchmark indices outperformed the majority of their comparable actively managed funds over the five-year period ending June 30, 2016.

Since we published the first SPIVA Australia Scorecard in 2009, we have observed that the majority of Australian active funds in most categories have failed to beat comparable benchmark indices over three- and five-year horizons (with the exception of the Australian Equity Mid- and Small-Cap category).  As of June 2016, 69% and 38% of Australian Equity General (large-cap) and Mid- and Small-Cap funds underperformed the S&P/ASX 200 and S&P/ASX Mid-Small indices, respectively, over the five-year period.  The results for Australian Equity A-REIT, Australian Bonds, and International Equity General fund categories were far more disappointing; 92%, 89%, and 92% of funds in the three categories lagged their respective benchmark indices, respectively.

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Though only a small portion of funds beat the benchmark indices in most fund categories, one might still attempt to find those outperforming funds.  However, based on our performance persistence analysis on Australian active funds, it is extremely challenging to pick winning streaks, as we found that few Australian active funds were consistent top performers.

Out of 181 top-quartile Australian active funds selected as of June 2012, only three (1.7%) managed to remain in the top quartile by June 2016.  There were 75 Australian large-cap equity funds and 13 Australian bond funds in the top quartile in June 2012, but just 2.7% (two funds) and 7.7% (one fund), respectively, remained in the top quartile four years later.  None of the top-quartile candidates from the Australian Equity Mid- and Small-Cap, Australian Equity A-REIT and International Equity General categories managed to stay in the top quartile over the next four consecutive years.

Similar results were observed in the performance consistency analysis of U.S. active funds over consecutive years.  According to the S&P Dow Jones Indices Persistence Scorecard: August 2016, less than 1% of U.S. domestic funds that began as top-quartile performers in March 2012 ended up in the top quartile almost four years later.  This indicates that actively managed funds may have difficulty remaining in the top quartile over a five-year period.

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Based on results from the SPIVA Scorecards, identifying outperforming active funds is no easier than selecting winning securities.  While there are decades of research on factor-based or trading strategies attempting to beat the market, there is much less analysis and research on selecting outperforming funds.  Considered together with the observed inconsistency of active fund performance, finding funds that beat the benchmark for several consecutive years may appear an inconceivable mission.

[1]   Twice a year, we publish SPIVA Scorecards, which track the number of active funds that beat their comparable benchmarks over one-, three-, and five-year timeframes in different regions.

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

SPIVA® Europe Mid-Year 2016: Performance of Active Managers Has Been Disappointing This Year

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Daniel Ung

Director

Global Research & Design

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European equity markets fared poorly over the one-year period ending June 30, 2016, with the S&P Europe 350® decreasing 10.47%.  This underwhelming performance was brought on by heightened volatility following the U.K.’s vote to exit the European Union, as well as the negative interest rate policy in Europe.  Normally, these conditions might be considered ideal for active managers to perform well, but they actually underperformed in most categories analyzed in the SPIVA Europe Mid-Year 2016 report.  Overall, about 57% of active fund managers investing in pan-European equities underperformed their benchmark over the one-year horizon ending June 30, 2016 (see Exhibit 1).  This statistic deteriorated over the long run, with over 87% of active managers underperforming their benchmark over the 10-year period.

In regard to active funds invested in emerging markets, global equities, and the U.S., the statistics were even starker.  Over 98% of active managers investing in global equities lagged their respective benchmark over the 10-year period ending June 30, 2016, and over 96% of active managers invested in emerging market equities trailed their corresponding benchmark over the same period.

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

Crude Reality of Enhanced and Excess Returns

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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(“Excess Return” does not mean any additional return on the ETF’ s performance) is a footnote in an ETF provider’s investment objective about an ETF that tracks the S&P GSCI Crude Oil Excess Return.  That disclaimer is true but never explains what excess return means in terms of additional performance.  After all, excess means more, and more return is good OR is anything in excess likely to be bad?

The “excess return” name describes the version of the indices that measures the change in the spot price of the futures contract plus the return from rolling the expiring futures contract into a new one.  In other words, the excess return is the additional return from holding futures contracts through time rather than the spot commodity.  Back in 1991, when the S&P GSCI was launched, excess return was positive.  However, since 2005, the premium has mostly turned into a discount that makes holding futures contracts more expensive than the spot. The “excess return” meaning switched from more return to less return.

Source: S&P Dow Jones Indices.
Source: S&P Dow Jones Indices.

Shortages were prevalent before 1991, causing a premium on the futures contracts with nearby expiration dates.  This is since processors are willing to pay extra to have immediate access to a commodity during a shortage. For example, a refiner is likely to pay a premium to have oil when there is a shortage so that its production of gas is not disrupted. The chart below shows the less inventory available, the more one will pay for the convenience of owning the commodity.

Source: “The Long and Short of Commodity Index Investing”, by Jodie Gunzberg and Paul Kaplan, Intelligent Commodity Investing, edited by Hilary Till and Joe Eagleeye 2007.
Source: “The Long and Short of Commodity Index Investing”, by Jodie Gunzberg and Paul Kaplan, Intelligent Commodity Investing, edited by Hilary Till and Joe Eagleeye 2007.

In response to a world in fear of running out of resources, producers raced to supply commodities they thought the market needed. Inventories grew into excess circa 2005 just before the global financial crisis dried up demand.  The reality of an ending Chinese super-cycle in the face of an oil supply war, together with a range of unfavorable macro factors like a strong U.S. dollar, low interest rates, low inflation, and low growth plagued the last decade for commodities. This left an abundance of oil driving the excess return to be negative, the condition that still holds today.

In response to the negative excess returns, a myriad of new indices emerged to modify contract selections and rolling strategies to reduce the loss. One of the early but still popular strategies is called “enhanced”. The S&P GSCI Crude Oil Enhanced Excess Return selects whether to hold the nearby most liquid contract, or the later-dated December contracts (of the current year (Jan-Jun) or next year (Jul-Dec)) based on the amount of contango (or excess inventory leading to negative excess return) and rolls in the 1st-5th business days of every month, rather than the typical 5th-9th.

Since 1995, the enhanced modification has added 0.54% per month on average that equates to a 7.49% annualized return for the S&P GSCI Crude Oil Enhanced ER versus -0.33% annualized return for the S&P GSCI Crude Oil ER.

Source: S&P Dow Jones Indices
Source: S&P Dow Jones Indices. ER stands for Excess Return

Just like “excess” means more, “enhanced” means better.  However, just like excess return can be negative, enhanced can underperform. For the third consecutive month (as of Oct. 21, 2016,) the S&P GSCI Crude Oil Enhanced ER is underperforming the S&P GSCI Crude Oil ER, so investors are wondering why the enhanced strategy not not working.

There are four conditions to evaluate how the enhanced oil strategy works. 1. Crude oil is negative and excess return is negative, 2. Crude oil is negative and excess return is positive, 3. Crude oil is positive and excess return is negative, and 4. Crude oil is positive and excess return is positive.  The major outperformance of the enhanced oil happens in the case where oil is negative and the excess return is negative. This makes sense since the strategy was designed to reduce the loss from negative excess returns. There is minimal impact when excess return is positive since the enhanced index holds the front contract that is the same as in the original strategy. Some performance difference can be attributed to the different rolling days and some difference happens in months where the term structure changes mid-month before the enhanced index can move to the contract assigned for the condition. The worst scenario for the crude oil enhanced is when crude oil is positive but the excess return is still negative. This happens since as the oil price is increasing, it takes time for the excess inventory to draw down, that drives the excess return to remain negative until a shortage happens. The enhanced rules have a 0.5 contango (or negative excess return) threshold to push the contract out to a later expiration, so there are months in the transition where a smaller negative excess will force the enhanced version into the nearby most liquid contract despite some contango from the remaining abundance.

Source: S&P Dow Jones Indices. Monthly data from Jan 1995.
Source: S&P Dow Jones Indices. Monthly data from Jan 1995.

The crude oil positive and excess return negative is the condition now that is underlying the S&P GSCI Crude Oil Enhanced ER underperformance.  How long might that last is the next question investors want to know. Historically, there have been five major periods of this condition lasting on average 13.8 months with the shortest period lasting 5 months and the longest lasting 34 months.

Source: S&P Dow Jones Indices
Source: S&P Dow Jones Indices

After 9 months since the bottom of oil and a persistent abundance, the tide might be turning. The excess return is the smallest negative it has been at since July 2015, and is now just under 1%. The outcome of OPEC’s effort to cut production and the ability of non-OPEC to keep supplies low will impact how long this recovery takes. The key risks are that OPEC’s cuts are too little too late – or they don’t agree on a production cut at all, and China may increase oil imports more before the price rises even higher  – that will reduce demand later and possibly extend recovery time, especially if they start exporting more to turn a profit. Also, US inventories need to decline, the weather needs to get cold, China’s growth needs to pick up to help the oil market rebalance.

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