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How Now The Dow? A Q1 Retrospective.

SPIVA® India Year-End 2016 Scorecard: Underperformance of Active Funds Versus S&P BSE Benchmark Indices

Rising Interest Rates – Boon or Bane for Pan Asian Dividend Strategies?

Bridging the Volatility Gap between IG and HY

Reading between the lines of China’s “Twin sessions”

How Now The Dow? A Q1 Retrospective.

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Jamie Farmer

Chief Commercial Officer

S&P Dow Jones Indices

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With March in our rear view mirror, let’s take a quick look at some highlights from the Dow Jones Industrial Average’s performance during the first quarter of 2017:

  • In Short – The Dow Jones Industrial Average ended the first quarter of 2017 at 20,663.22 – up 900+ points for a 4.56% YTD return.
  • Biggest Themes – expectations of an economic revival, infrastructure spending, tax reform, deregulation and related themes drove the markets in the wake of the election and inauguration of Donald Trump.
  • Leader & Laggard – Apple (AAPL) made the biggest point contribution while Chevron (CVX) had the most negative impact.
  • Sector Performance – Information Technology, on the back of the aforementioned AAPL return, made the largest contribution.
  • Best Day YTD (In Points & Percent) – March 1st, after Trump’s address to Congress.
  • Worst Day YTD (In Points & Percent) March 21st, anxiety about Trump’s ability to be a change agent sets in.
  • Big Moves – or rather, the lack thereof. Q1 saw very few days of significant movement in the Average.  Further, the spread between the quarter’s High and Low closing index values is 1,383.15 points, the tightest spread since 2005.  Here again, we see the evidence of a period of muted volatility.
  • Advancement – The Dow hit 15 new highs during Q1 and broke through both the 20,000 and 21,000 point levels.

For more about the DJIA during Q1, a complete report card is available here.

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

SPIVA® India Year-End 2016 Scorecard: Underperformance of Active Funds Versus S&P BSE Benchmark Indices

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Akash Jain

Associate Director, Global Research & Design

S&P BSE Indices

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Various events during the second half of 2016, both global—such as the U.S. Federal Reserve rate hike and the U.S. elections—and domestic—such as passage of the GST bill in Parliament and demonetization—kept Indian markets volatile.  Over the one-year period ending December 2016, Indian equity markets underperformed Indian bond markets.  The S&P BSE 100, which seeks to measure the large-cap equity market in India, ended in the black, at 5.02%.  The mid-cap equity market, as measured by the S&P BSE MidCap, returned 9.28% over the same period.  The S&P BSE India Government Bond Index delivered a total return of 13.51%.

The S&P Indices Versus Active (SPIVA) India Scorecard, which is a biannual report, attempts to capture the performance of active funds (both equity and debt funds) domiciled in India against S&P BSE benchmarks over different time horizons.  The study reveals that over the one-year period ending December 2016, 66.29% of Indian Equity Large-Cap funds, 64.29% of Indian ELSS funds, and 71.11% of Indian Equity Mid-/Small-Cap funds underperformed their respective benchmark indices.  Additionally, the majority of the Indian Composite Bond funds underperformed the S&P BSE India Bond Index over 1-, 3-, 5-, and 10-year periods, whereas the majority of Indian Government Bond funds underperformed the S&P BSE India Government Bond Index over 3-, 5-, and 10-year periods (see Exhibit 1).

Exhibit 1: Funds that Underperformed the Benchmark

Source: S&P Dow Jones Indices LLC, Morningstar, and Association of Mutual Funds in India.  Data from December 2006 to December 2016, based on the SPIVA India Year-End 2016 Scorecard.  Past performance is no guarantee of future results.  Chart is provided for illustrative purposes and reflects hypothetical historical performance.

Over the five-year period ending December 2016, apart from Indian ELSS funds, none of the categories (across equity and debt) had a 100% survivorship rate.  Over the 10-year period, Indian Equity Large-Cap funds showed a survivorship rate of 66.7%, whereas Indian Equity Mid-/Small-Cap funds had a 65.1% survivorship rate.  Over the same period, the Indian Government Bond and Indian Composite Bond funds had even lower survivorship rates, at 51.7% and 58.7%, respectively.

Over the 10-year period, style consistency was fairly low for Indian Equity Large-Cap funds (30.6%) and Indian Equity Mid-/Small-Cap funds (28.6%).  This is particularly important because a market participant may want to understand not only whether a fund has survived the investment horizon but also the percentage of funds that stayed consistent to their initial investment categorization.  Globally, style classification is an important metric that can guide market participants in their asset allocation decisions.  On the other hand, Indian ELSS funds have largely been style consistent.  Not only have a large number of these funds managed to outperform the benchmark, but they have done so with a higher margin over the three- and five-year horizons than any other category, at 3.9% and 2.5%, respectively.

As Indian markets have matured, we have observed convergence to global mature markets in terms of outperformance of benchmark indices and fees.

To discover more about the performance of Indian active funds versus their benchmarks, check out the SPIVA India Year-End 2016 Scorecard.

Exhibit 2: Asset-Weighted Outperformance of Funds Versus Respective Benchmarks

Source: S&P Dow Jones Indices LLC, Morningstar, and Association of Mutual Funds in India.  Data from December 2006 to December 2016, based on the SPIVA India Year-End 2016 Scorecard.  Past performance is no guarantee of future results.  Chart is provided for illustrative purposes and reflects hypothetical historical performance.

Exhibit 3: Equal-Weighted Outperformance of Funds Versus Respective Benchmarks

Source: S&P Dow Jones Indices LLC, Morningstar, and Association of Mutual Funds in India.  Outperformance measured in INR.  Data from December 2006 to December 2016, based on SPIVA India Year-End 2016 Scorecard.  Data from December 2006 to December 2016, based on the SPIVA India Year-End 2016 Scorecard.  Past performance is no guarantee of future results.  Chart is provided for illustrative purposes and reflects hypothetical historical performance.

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

Rising Interest Rates – Boon or Bane for Pan Asian Dividend Strategies?

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Utkarsh Agrawal

Associate Director, Global Research & Design

S&P Dow Jones Indices

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In December 2016, the U.S. Fed raised the interest rate for the second time in the current rate hike cycle.  Three more rate hikes were expected for this year, one of which took place in March.  In a low interest rate environment, companies that have increasing dividends or offer high dividend yields look attractive to income-seeking market participants.  But the yield offered by these companies may be considered less competitive in a rising interest rate environment.  Exhibit 1 shows how various S&P DJI Asian dividend and REIT indices have performed in U.S. interest rate cycles since 2004.

During the U.S. rate hike cycle that began June 30, 2004, and lasted until the first rate cut on Sept. 18, 2007, the three S&P Dow Jones Asian Dividend Indices examined, as well as the S&P Pan Asia REIT Index, significantly outperformed the Pan Asia equity benchmark, the S&P Pan Asia BMI, and the S&P U.S. Treasury Bond 7-10 Year Index (see Exhibit 1).  However, in the next rate cut cycle lasting from Sept. 18, 2007, to Dec. 17, 2015, the performance trend of these indices reversed, most likely due to the impact of the global financial crisis.  The returns of all three Asian dividend indices and the S&P Pan Asia REIT Index lagged the equity benchmark and the S&P U.S. Treasury Bond 7-10 Year Index.  The Dow Jones Asia/Pacific Select Dividend 30 Index even recorded negative returns in this rate cut cycle.

In the most recent rate hike cycle starting Dec. 17, 2015, the three Asian dividend indices and the S&P Pan Asia REIT index again delivered significant excess returns compared to the S&P Pan Asia BMI and the S&P U.S. Treasury Bond 7-10 Year Index.

Exhibit 2 shows the yield spread of various dividend indices versus the yield-to-maturity of the S&P U.S. Treasury Bond 7-10 Year Index since Dec. 17, 2015.  Apart from the S&P Pan Asia Dividend Aristocrats, both the Dow Jones Dividend Indices and the S&P Pan Asia REIT Index maintained yield spreads of more than 2% after three rate hikes.  The S&P Pan Asia REIT Index maintained the most stable yield spread throughout the period studied.

While market participants may expect interest rate hikes to negatively affect Asian high-yield stock performance, it is notable that their performance has been much more sensitive to economic cycles than to U.S. interest rate cycles over the past decade.  For the Dow Jones Asian Dividend Indices and the S&P Pan Asia REIT Index, it appears there is still a lot of room for rate hikes before their yield spread will vanish.

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

Bridging the Volatility Gap between IG and HY

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Hong Xie

Senior Director, Global Research & Design

S&P Dow Jones Indices

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The goal of the S&P U.S. High Yield Low Volatility Corporate Bond Index is to construct a high-yield bond portfolio with low credit risk and low return volatility by applying a low volatility factor.  Does the index methodology truly deliver the effect of reducing volatility?  The back-tested results of the 17-year period ending Feb. 28, 2017, show that the S&P U.S. High Yield Low Volatility Corporate Bond Index may offer an intersection that bridges the volatility gap between the high-yield and investment-grade bond sectors, with increased return efficiency.

Exhibit 1 shows annualized volatility across the equity and fixed income sectors from Jan. 31, 2000, (the first value date of the index) to Feb. 28, 2017.  As expected, the S&P U.S. High Yield Low Volatility Corporate Bond Index sat between the high-yield and investment-grade bond sectors in the volatility spectrum.

Exhibit 2 illustrates the return/volatility trade-off among various sectors.  The fact that the S&P U.S. High Yield Low Volatility Corporate Bond Index is located above the straight line linking the investment-grade and high-yield bond sectors demonstrates that the index outperforms the return frontier established by the two bond sectors.  This increased return efficiency can also be seen from the S&P U.S. High Yield Low Volatility Corporate Bond Index’s higher ratio of return-to-volatility than that of the broad-based, high-yield index (see Exhibit 3).

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

Reading between the lines of China’s “Twin sessions”

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Vania Pang

Capital Markets and Investment Solutions, Index and Quantitative Investment

ICBC Credit Suisse Asset Management (International) Company Limited

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China’s National People’s Congress, the annual plenary session of China’s legislature, is done and dusted. No major policy upheaval ahead the 19th Party Congress in November. Nonetheless, the shift in tone in the government work report have shed some light on China’s policy direction.

1. Tone shifted from “maintaining growth” to “containing risk”
The theme of stability, focusing on risk control and deleveraging have been reinforced by Premier Li Keqiang in the government work report. This tone was well set at the Central Economic Work Conference in December 2016.

The economic growth target in 2017 is softened to “6.5% or higher” while both the M2 and total social financing growth target were set at 12% in 2017, 1ppt lower than that of 2016. These targets reflect the government’s intention to contain rising leverage and pursue a prudent monetary policy.

A “neutral and prudent” monetary policy stance is further backed by the recent rate hikes in China together with regulation tightening. Reuters reported PBOC began taking into account off-balance sheet financing to its Macro Prudential Assessment (MPA) at the beginning of 2017. Furthermore, PBOC plans to tighten capital adequacy requirement by removing the “tolerance indicator”, according to sources[1]. The measures would make the expansion of risk assets by commercial banks more costly.

2. Stress on “real economy” and “innovation”
Both President Xi Jinping and Premier Li stressed that the real economy is the foundation for China’s development. The government work report stated that greater efforts will be made this year to upgrade the real economy through innovation.

It is noteworthy that the term “Artificial Intelligence” has been mentioned in the government work report this year, for the first time, saying that AI is one of the emerging industries where development will be accelerated. Many internet companies have been investing heavily on AI. By adopting AI, manufacturing companies could reduce cost and improve efficiency. According to The National Bureau of Statistics, in the first two months of 2017, the investment in high-tech industry grew by 18.4% yoy, or 9.5 ppt higher than the growth rate of total investment.

3. Why a “Total China” approach is the way forward?

Striving a balance between achieving growth target and reducing financial risks would pose both opportunities and challenges to the companies in China. In order to capture the growth story as well as mitigate the risk, a “Total China” approach to index investing should be considered.

The S&P China 500 Index offers a more comprehensive coverage of the top 500 Chinese companies, while approximating the sector composition of the broader Chinese equity market. All Chinese share classes, including A-shares, H shares, US listed ADRs are eligible for inclusion, subject to meeting minimum size and liquidity requirements.

As a result, the S&P China 500 Index offers a more diversified representation across sectors compared to existing major China indices (Figure 1). As of Dec 31, 2016, S&P China 500 has a weight of only 23.6% in the financial sector, much less as compared to FSTE A50 (66.4%), CSI300 (35.48%), and MSCI China (27.04%).  More weights are distributed to new economies such as Information Technology or Consumer Discretionary sectors, offering a more forward-looking representation of China’s economy in the new paradigm where technology-driven consumption plays a significant role.

Historical performance of the diversified S&P China 500 Index has demonstrated better risk-adjusted returns (Figure 2).  During the period from 31-Dec, 2008 to 31-Dec, 2016, the S&P China 500 Index generated an annualized return of 9.6% and a Sharpe ratio of 0.4, both are the highest among the major onshore and offshore China indices.

The S&P China 500’s all-inclusiveness and not biased towards any sector or large SOE mitigates the concentration risks and create a more balanced yet diversified China exposure.

[1] Source: Reuters, 9 March, 2017 http://www.reuters.com/article/china-finance-mpa-idUSL3N1GM2IU

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DISCLAIMERS
The S&P China 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by ICBC Credit Suisse Asset Management (International) Co., Ltd. (ICBCCSI), © 2016 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.  S&P, SPDR and S&P 500 are registered trademarks of Standard & Poor’s Financial Services LLC, a division of S&P Global (“S&P”). DOW JONES is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks together with others have been licensed to S&P Dow Jones Indices LLC. Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission. This document does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates (collectively “S&P Dow Jones Indices”) do not have the necessary licenses. All information provided by S&P Dow Jones Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow Jones Indices receives compensation in connection with licensing its indices to third parties. Past performance of an index is not a guarantee of future results. Neither S&P Dow Jones Indices LLC, Dow Jones, S&P, and their respective affiliates (“S&P Dow Jones Indices”) nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.
In this document, ICBC Credit Suisse refers to ICBC Credit Suisse Asset Management Company Limited and its subsidiary, ICBC Credit Suisse Asset Management (International) Company Limited (“ICBCCSI”). ICBCCSI is a regulated entity under the Hong Kong Securities and Futures Commission.
No account has been taken of any person’s investment objectives, financial situation or particular needs when preparing this document. This is not an offer to buy or sell, or a solicitation or incitement of offer to buy or sell, any particular security, strategy, investment product or services nor does this constitute investment advice or recommendation.
The views and opinions expressed in this document, which are subject to change without notice, are those of S&P Dow Jones Indices LLC, ICBC Credit Suisse and/or its affiliated companies at the time of publication. While S&P Dow Jones Indices LLC, ICBC Credit Suisse and/or its affiliated companies (collectively as “we” or “us”) believe that the information is correct at the date of this presentation, no warranty of representation is given to this effect and no responsibility can be accepted by us to any intermediaries or end users for any action taken on the basis of this information. Some of the information contained herein including any expression of opinion or forecast has been obtained from or is based on sources believed by us to be reliable as at the date it is made, but is not guaranteed and we do not warrant nor do we accept liability as to adequacy, accuracy, reliability or completeness of such information.  The information is given on the understanding that any person who acts upon it or otherwise changes his or her position in reliance thereon does so entirely at his or her own risk without liability on our part.
This material has not been reviewed by the Hong Kong Securities and Futures Commission.  Issuer of this material: ICBC Credit Suisse Asset Management (International) Company Limited. This material shall be distributed in countries where it is permitted.
INDEX PERFORMANCE DISCLOSURE
The S&P China 500 was launched on August 28, 2015. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index methodology details are available at www.spdji.com. Please read S&P Dow Jones Indices LLC’s DISCLAIMERS.

 

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