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SPIVA® Latin America Year-End 2016 Results

Better Carbon Disclosure Is the First Step Toward Meeting Japan’s Energy Transition Challenge

Measuring ESG Improvement: Impact Reporting Versus Impact Measurement

Monetary Cycles and the Fixed Income Market – How Does the Slope Affect Returns?

15 Years of SPIVA – Where Does the Active Versus Passive Debate Go From Here?

SPIVA® Latin America Year-End 2016 Results

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Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

S&P Dow Jones Indices

Equity markets in Latin America saw gains across the board in 2016, with Brazil being one of the leaders, as the S&P Brazil BMI (BRL) returned 37.90%.  The Chilean market saw the largest yearly return since 2010, with a return of 13.53% for the S&P Chile BMI (CLP), while the S&P Mexico BMI (MXN) returned 6.99%.

As shown in Exhibit 1, the majority of active fund managers in Latin American markets were unable to outperform their respective benchmarks for all categories measured—one-, three-, and five-year periods.

Exhibit 2 shows the rolling five-year underperformance numbers reported in the SPIVA Latin America Scorecard since it was introduced in 2015.  For all categories, the majority of managers underperformed their benchmark for a five-year time horizon, regardless of the report end date.  “Consistent underperformance” is a suitable characterization.

For more details of the SPIVA Latin America Year-End 2016 Scorecard, please click here.

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

Better Carbon Disclosure Is the First Step Toward Meeting Japan’s Energy Transition Challenge

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Neil McIndoe

Head of Environmental Finance


Japan’s Nationally Determined Contribution (NDC) under the United Nations Framework Convention on Climate Change is a 26% reduction in greenhouse gas emissions by 2030 from 2013 levels.1 To achieve this, the Japanese government has set carbon targets for all sectors backed up by a national carbon tax and Tokyo emissions trading scheme. In the first period up to 2015, the average cost of a tonne of carbon was USD 95.2

The challenge is significantly higher for Japan following the 2011 earthquake and tsunami which lead to the shutdown of many nuclear power plants. Japan is the fourth-highest country globally in terms of generation of coal fired power.3

Exhibit 1 shows greenhouse gas emissions per million U.S. dollars invested in various S&PDJI indices. Given Japan’s level of 331 tonnes, only the Latin American and emerging market indices are more carbon intensive. The fact that Japan is already a relatively efficient economy means reductions in emissions will require greater effort. Japanese companies should be conscious of the likely implications of polices required to achieve the reductions to meet Japan’s NDC.

Room for improvement on disclosure

A key element in any country’s program to manage GHG emissions is reliable data from emitters. Exhibit 2 takes the same set of indices and looks at the disclosure levels of listed companies for carbon emissions. Trucost data provides complete coverage for every index shown—but the extent to which Trucost has to use the model estimates (in grey) or do further calculation (in yellow) shows that the level of disclosure in Japan is lower than for Europe and the U.S.

Companies in Japan with poor disclosure might need to reconsider their approach. Market participants are increasingly demanding better carbon data disclosure and greater transparency on how they are responding to the energy transition challenge. The recent Japanese Stewardship Code says market participants should “monitor investee companies so that they can appropriately fulfil their stewardship responsibilities with an orientation towards the sustainable growth of the companies.”4

As a member of the G20 Financial Stability Board (FSB), Japan understands that “addressing new and emerging vulnerabilities in the financial system, including those associated with conduct, correspondent banking and climate change” is a priority.5 The FSB’s Task Force on Climate-Related Financial Disclosures is developing recommendations that look set to bring carbon disclosure into the mainstream.6

Financial architecture is emerging to reward carbon efficient companies. The S&P/TOPIX 150 Carbon Efficient Select Index, powered by data from Trucost, is designed to measure the performance of companies in its underlying index, the S&P/TOPIX 150, while excluding companies with the largest relative carbon footprint. While the index is optimized to closely track the performance of its underlying index, its carbon footprint is less than one-half that of its benchmark.

Japanese companies that respond constructively by disclosing robust carbon data and developing an effective climate change strategy can demonstrate to market participants, policy makers and customers that they are getting ready for business in a carbon-constrained world.



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

Measuring ESG Improvement: Impact Reporting Versus Impact Measurement

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Kelly Tang

Former Director

Global Research & Design

As the importance of ESG investing grows, especially in the U.S., the ability to quantify and measure the impact of an ESG-incorporated portfolio will become more relevant.  In evaluating performance, traditional investors focus on standard metrics such as return, risk, tracking error, and other familiar modern portfolio theory statistics; however, ESG investors require all of these metrics plus more.  They seek ways to quantify the impact of their ESG investing; therefore, it’s beneficial to know the basics of how providers are reporting impact.

There is a difference between impact reporting and impact measurement.  Impact reporting refers to a holdings-based calculation using company-level ESG data and scores provided by the major ESG ratings providers.  Some providers calculate ESG ratings based on a numerical score from 0 to 100, while others employ a letter-based ranking scale from AAA to CCC.  Those using the numerical method calculate the overall portfolio score using the below formula and report the weighted average portfolio and benchmark ESG scores.  The improvement in the portfolio’s ESG score compared with the benchmark’s constitutes the percentage improvement, or the “ESG save.”

The letter-based ratings approach reports ESG improvement in a binary fashion, whereby stocks are bucketed into two categories: “AAA to A” or “BBB to CCC.”  Accordingly, the percentage of stocks in the top bucket (e.g., 60% of the portfolio) is then compared to that of the benchmark index (e.g., 38% of the benchmark), which is then stated as a percent improvement in the ESG score (22%, for our example).  However, one should note that whether they use the numerical or letter-based rating system, providers do not generally disclose the distribution ranges or statistics of their scores, which would be useful and serve as a helpful reference.

The methods described above are considered impact reporting, which is meaningfully different from impact measurement.  Impact reporting gauges the sustainability practices of a company and represents an operational perspective, while impact measurement is an outward assessment aiming to quantify the impact of a company beyond the realm of the environment to include its broader impact on society.

Initiatives such as Principles for Positive Impact Finance, launched earlier this year in Paris, are working to incorporate impact measurement in alignment with the 17 Sustainable Development Goals (“SDGs”).  The endeavor itself is honorable but presents a host of considerable challenges.  Global companies have a multitude of businesses and can find themselves making numerous products—some that are deemed positive and others deemed negative.  An attempt to arrive at an overall score that quantifies such an impact can be problematic; perhaps, at least in the early stages, the emphasis should be on working out whether an investment has a broadly positive or negative impact, rather than trying to calculate a number.

Impact reporting is a step in the right direction, and as investors become more familiar with gauging impact, the momentum to assess, evaluate, and measure impact will only continue to grow.

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

Monetary Cycles and the Fixed Income Market – How Does the Slope Affect Returns?

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Dennis Badlyans

Former Associate Director, Global Research & Design

S&P Dow Jones Indices

In an earlier blog post, we provided a brief survey of recent monetary policy cycles in the U.S., showing that a higher Fed funds rate doesn’t necessarily affect the yield on Treasury bonds in the same way.  Policy rate changes affects short-term bond yields much more directly than longer-term yields (see Exhibit 1).  We argued that the difference in impact is likely a result of other macroeconomic factors that affect longer-term rates and segmentation in the market.  In this follow up note, we focus our attention on the shape of the yield curve and returns over various tightening cycles.

But what does curve flattening mean for returns?  As a bond’s yields increase, the price of the bond drops.  Consider the yield curve just before the beginning of the 2004 tightening cycle versus the curve shape at the end of that cycle (see Exhibit 2).  It seems that the price of a 20-year bond should be little changed, and longer-term bonds generally outperform shorter term bonds—at least in terms of yield.

Over this period, the S&P U.S. Treasury Bond 10+ Year Index did indeed outperform, providing a total return of 9.7% versus the S&P U.S. Treasury Bond 1-5 Year Index, which returned 3.5%.  Total return, however, is comprised of both price change and interest income.  The 10+ year index provided 12.5% of interest income over the period, cushioning the 2.5% price decline.  The short-term index, on the other hand, provided 7.9% of interest income, offset partially by 4.1% price decline.

So, longer duration bonds are a good thing when rates are rising?  There are many underlying market conditions and cycle characteristics that can affect returns.  Factors including the starting level and shape of the curve, as well the speed and magnitude of the policy changes, need to be considered.  Concerns about a brewing housing bubble had driven the front end of the Treasury curve 100 bps higher (June 2003 to June 2004) and the curve remained steep.  A higher starting point meant more interest income to cushion against price depreciation.  The steepness of the curve increases the chance of a more meaningful flattening.  The protracted cycle (consecutive 17 meetings) was gradual (25 bps/meeting), which meant less abrupt changes in price.

With the exception of the one-off surprise hike in 1997, there have been four tightening cycles, each slightly different in starting points and cycle characteristics.  The Treasury curve flattened in all cases, however in the 1994 and 1999 cycles, the outset of the cycle caught markets by surprise; adjustment was much quicker and the curve didn’t flatten sufficiently, with longer-term bonds underperforming in price terms.  Exhibit 3 compares returns of the S&P Sector Indices over the policy cycle periods.

The pace of the current hiking cycle and the modest flattening of the yield curve over the past two years have been positive for long duration bonds.  Market participants continue to expect two additional hikes in 2017.  Technical drivers may become more relevant for medium- and long-term yields as the Federal Reserve begins plans to reduce its balance sheet (unwinding QE).

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

15 Years of SPIVA – Where Does the Active Versus Passive Debate Go From Here?

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Aye Soe

Former Managing Director, Global Head of Core and Multi-Asset Product Management

S&P Dow Jones Indices

In the inaugural publication of the Journal of Portfolio Management in 1974, Nobel Laureate Paul Samuelson wrote that there is no “brute fact” that “there could exist a subset of decision makers in the market capable of doing better than the averages on a repeatable, sustainable basis.”[1]  That article partly inspired John Bogle to launch the first index mutual fund.[2]  Even though over four decades have passed since Paul Samuelson penned the article, his words remain relevant to today’s world of investing.

This year marks the 15th anniversary of S&P Dow Jones Indices publishing the SPIVA® U.S. Scorecard.  A lot has changed in the asset management industry since we started reporting on the active versus passive debate.  The proliferation of index-linked investment products and the low-cost, efficient ways they can provide exposure to desired asset classes and markets have been disruptive, adding a tremendous amount of pressure on active managers in terms of fees and performance.  At the same time, the line between what has traditionally been considered beta versus alpha has blurred, with the passive side continuing to innovate and replicate strategies that once sat predominantly in the active realm.

Amid that shifting landscape, the SPIVA Scorecard has maintained its objective voice as an independent scorekeeper of the active versus passive debate.  It has demonstrated that over a long-term investment horizon, average active managers across market cap segments and styles have underperformed their respective benchmarks.  Exhibit 1 shows the rolling three-year relative performance of actively managed domestic large-, mid-, and small-cap funds against their respective benchmarks[3].

Moreover, the outperformance that winning active managers have generated has been shown to be fleeting.  Through a number of studies, we have found that managers that outperform their benchmarks in a given year or are in the top quartile of their peer groups are unlikely to repeat their winning streak repeatedly.[4]  For example, we studied over 789 large-cap, 383 mid-cap, and 511 small-cap funds on average on a rolling quarterly basis from March 31, 2003, to Sept. 30, 2016 (see Exhibit 2).  We found that out of the 20%-30% of funds that outperformed their benchmark in a given year, only a small subset were able to repeat that outperformance in the subsequent three years (see Exhibit 2).[5]

Taken together, these findings indicate that market participants may face substantial difficulty in identifying a winning manager in advance.  They also pose the challenging question of how one should go about measuring the success of active management.  If net-of-fees returns (and, in many equity markets, gross-of-fees returns)[6] are not high enough to overcome benchmark returns across all market cycles and the outperformance produced is fleeting, what should constitute the evaluation framework for active management?

With that, the active versus passive debate turns a new chapter.  Given that fees contribute partly to managers’ underperformance,[7] it seems clear that closet indexing at high costs cannot be sustainable.  For active management to add value and separate themselves from passive strategies, focusing on differentiated portfolio construction or strategies in which managers take compensated bets, along with outcome-oriented investment solutions, can serve as ways to promote their skills.

Only time will tell whether these differentiated strategies can deliver higher risk-adjusted returns than their passive counterparts.  It seems clear that the active versus passive debate is evolving and heading in a new direction in which active management could become more active.

[1]   Paul Samuelson, “Challenge to Judgement”. The Journal of Portfolio Management 1974.

[2]   John C Bogle, “Lightning Strikes: the Creation of Vanguard, the First Index Mutual Fund, and the Revolution It Spawned”. The Journal of Portfolio Management. Special 40th Anniversary Issue

[3] See the SPIVA U.S Year-End 2016 Scorecard

[4]   See the Persistence Scorecard.

[5]   See Fleeting Alpha: Evidence from the SPIVA and Persistence Scorecards.

[6]   See Institutional SPIVA Scorecard – How Much Do Fees Affect the Active Versus Passive Debate?

[7]   See Institutional SPIVA Scorecard – How Much Do Fees Affect the Active Versus Passive Debate?

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