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Bubbles and Housing

Asian Asset Owners Are Leapfrogging Into ESG

Australian Markets: Mid Caps a Sweet Spot for Investors

U.S. Yield Curve Moved by Europe

Understanding the Value Spectrum

Bubbles and Housing

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Home prices nationally are rising two to three times faster than inflation. They are up 5.5% from a year ago with some cities rising at double-digit rates. Looking at the chart of the S&P Corelogic Case-Shiller Home Price Indices, many are wondering if we’re in another housing bubble.

While prices are rising, the following charts do not point to any bubble.  The next charts cover sales and the visible supply of existing single family homes. Both show a sharp peak immediately before and during the financial crisis followed by a drop.  Home sales have recovered to an annual rate between four and five million units despite stable visible supply of about four months. Condominium sales are roughly flat.

New home supply and sales appear weaker than existing homes.  The supply of new homes is measured by homes on the market, not months-supply and shows that supply remains low. Annual sales are close to the pre-bubble range but far below anything that the peak in 2005.  A similar pattern is seen in housing starts which measure construction activity.

The next S&P Corelogic Case-Shiller release is Tuesday July 25th.

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

Asian Asset Owners Are Leapfrogging Into ESG

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Tianyin Cheng

Senior Director, Strategy and Volatility Indices

S&P Dow Jones Indices

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Sustainable investing has become particularly popular in Europe, across many countries.  In the Asia Pacific region, certain countries such as Japan and Australia have shown stronger interest in ESG thanks to asset owner demand, availability of ESG data, and regulatory pressures.  In the last couple of years, we have seen some of Japan’s largest institutional investors, including the Government Pension Investment Fund, which is the biggest pension fund in the world, incorporating ESG into their investment practices.  This has had a major trickle-down effect on the investment value chain, from asset managers to providers of data.

According to a new report launched in May 2017 by BNP Paribas, asset owners and asset managers in the Asia Pacific region have leapt ahead of their European and North American counterparts when it comes to incorporating ESG-related strategies into their investing.  The report, “Great Expectations: ESG – what’s next for asset owners and managers,” found that “84% of the Asia Pacific-based institutional investors surveyed currently incorporate ESG into their investment decision making, compared with 82% in Europe, and only 70% for North America.  And while a fifth of APAC institutional investors currently market a majority of their funds as ESG-compliant, more than 60% expect to do so within two years, highlighting the world’s fastest-growing region is also moving fast in the direction of sustainability.  At present, the largest markets for sustainable investing in Asia, excluding Japan, are Malaysia (30%), Hong Kong (26%), South Korea (14%) and China (14%).”

In terms of strategy, green bonds, sustainable bonds, thematic funds, and investing based on ESG profiles are most popular, although there are some regional differences.

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

Australian Markets: Mid Caps a Sweet Spot for Investors

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John Welling

Director, Equity Indices

S&P Dow Jones Indices

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We have previously taken a dive into performance differences between Australian market cap segments and observed that mid caps offer a “sweet spot” for market participants.  Year-to-date, this message continues to resonate—the S&P/ASX MidCap 50 has returned 10.1% as of July 13, 2017.  Meanwhile, corresponding large-, small-, and broad market indices have returned measurably less (see Exhibit 1).

Examining some differences between the indices, the S&P/ASX MidCap 50 has a more diverse sector representation than the large-cap and broad market Australian benchmarks, which are dominated by banks.  As shown in Exhibit 2, the financials sector makes up 43% of the S&P/ASX 50, while only representing 19% of the S&P/ASX MidCap 50.  The mid-cap and small-cap indices also have higher proportions of exposure to consumer discretionary stocks, while The S&P/ASX Mid-Cap 50 has higher allocations to health care, industrials, and materials than the other market cap indices.

Due to large allocations to financials among large-cap and broad market indices, these segments have been more negatively affected by new bank levies.  These levies aim to tax the liabilities of the country’s five largest banks, which account for 36% of the value of the S&P/ASX 50 and are subsequently excluded from mid-cap and small-cap indices.  Amid these forces, Australia’s financial sector, as measured by the S&P/ASX 200 Financials, has underperformed the broad market, limited to a gain of 1.8% for the year.

Meanwhile, despite having relatively diversified sector exposures and a lower allocation to the financials sector, small-cap stocks still lag the other market cap segments year-to-date.

The mid-cap segment of the Australian stock market is often overlooked and underappreciated.  Pure mid-cap investing is not common, and often, mid- and small-cap companies are lumped together for investment purposes, diluting the unique characteristics of mid-sized companies.  Those looking for an edge in Australian equities might note that mid caps tend to offer a unique balance between the high growth (and therefore higher risk) of small caps and the stability (but slower growth) of large caps, which has led to meaningful outperformance year-to-date.

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

U.S. Yield Curve Moved by Europe

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Kevin Horan

Director, Fixed Income Indices

S&P Dow Jones Indices

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The U.S. Treasury yield curve, as represented by the S&P U.S. Treasury Bond Current Indices, ended June 14, 2017, tighter (lower in yield) than the previous day.  The importance of June 14 is that it was the day on which the U.S. Federal Reserve raised the target rate by 25 bps, from 1% to 1.25%.  The following day, the yield curve increased, but only by an average of 2 bps.

The yield on the two-year bond, as measured by the S&P U.S. Treasury Bond Current 2-Year Index, remained consistent and actually ended June at 1.37%, only 1 bp higher than the day after the rate hike.  As shown in Exhibit 1, the spread between the 2-year and the 30-year U.S. Treasury bond trended downward for most of June.  The yield of the 30-year bond was 2.86% the day prior to the rate hike and moved as low as a 2.70% on June 26, 2017, before moving back up to close the month at 2.83%. The result of this was a flatter yield curve for most of June and can be seen in Exhibit 2 as the comparison between the yellow and navy yield curves.

Exhibit 1: 2-year versus 30-year U.S. Treasury Spread

Source: S&P Dow Jones Indices, LLC. Data as of July 10, 2017. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Exhibit 2: Yield Curve

Source: S&P Dow Jones Indices, LLC. Data as of July 10, 2017. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

The pivotal point for the U.S. Treasury curve happened on June 27, 2017, and the influence on valuation came not from the U.S., but from Europe.  Mario Draghi, President of the European Central Bank (ECB), made comments in regard to the ECB’s ability to adjust its policy tools of sub-zero interest rates and bond purchases as the economic condition improves in Europe.  Draghi’s comments resulted in higher yields and speculation that the ECB and possibly others were poised to start withdrawing monetary policy stimulus.

Since June 27, 2017, yields across the curve have continued to rise (see Exhibit 2) and the curve flattening has ended.

Exhibit 3: Index Data

Source: S&P Dow Jones Indices LLC. Data as of July 10, 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes.


 

 

 


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

Understanding the Value Spectrum

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Aye Soe

Managing Director, Global Head of Product Management

S&P Dow Jones Indices

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Value investing, made famous by Benjamin Graham in his book Intelligent Investor nearly 70 years ago, is possibly the most well-known investment strategy.  Although the strategy may appear simple at first glance—buying securities with prices that are trading at discount multiples than their fundamental values—it can be tricky to implement.  For example, value can be captured via different metrics including, but not limited to, book-to-price ratio, earnings yield, dividend yield, and cash flow-to-price ratio.[1]  Market participants must decide which value metrics closely align with their investment view.  In addition, returns from value strategies can differ meaningfully, depending on the stock selection process and portfolio construction.

We can highlight the last point using two value indices formed from the same underlying domestic large-cap universe, the S&P 500 Value and S&P 500 Enhanced Value Index.  The index mechanics of both indices are outlined in Exhibit 1.  Also important to note is the weighting mechanism employed by the two indices.  The S&P 500 Value simply weights securities by market cap, whereas the selection process and the weighting scheme of the S&P 500 Enhanced Value Index assigns higher weights to those securities with bigger value attributes.

Since the metrics used to capture value premium are identical for both indices, our analysis evaluates the impact of security selection and weighting mechanism.  In Exhibit 2, we show the annualized risk/return profiles of the two value strategies since Dec. 31, 1994.  In this period, the S&P 500 Enhanced Value Index delivered higher returns but with higher volatility than its broader, market-cap-weighted counterpart.

Based on the index construction and the risk/return profiles, we can conclude that the two value indices serve different purposes for the investment community.  The S&P 500 Value can be viewed as a broad-based value benchmark, representing an entire opportunity set and returns of value style investing.  On the other hand, the S&P 500 Enhanced Value Index is more representative of a high conviction, more concentrated value strategy.  In that light, it is worthwhile to compare the returns of the value indices to those of actively managed large-cap value managers.  Exhibit 3 compares the returns of actively managed large-cap value mutual funds to the two value indices.[1]

Across all measurement horizons, more than half of the active large-cap value funds have trailed the two value indices.  It comes as no surprise that the percentage of active value funds underperforming the S&P 500 Enhanced Value Index tends to exceed those underperforming the broad-based S&P 500 Value across all time periods,[2] given that the former has outperformed the latter across all measurement periods.

Exhibit 4 highlights the return dispersion among large-cap value managers from year-end 1994 through May 2017.  Returns among active value strategies vary quite meaningfully, reflecting the differences in managers’ approaches to value definition, stock selection, and portfolio construction.  For example, the return spread per year on an annualized basis over the 15-year period amounted to 1.57%.

Value investing, although considered a timeless investment strategy, may not be as straightforward as it seems.  Market participants aiming to implement the strategy should carefully consider the metrics used to capture the factor, constituent selection process, and strategy construction.

  

[1] We use the Center for Research and Security Prices (CSRP) mutual fund database as the underlying data source for actively managed large-cap value managers’ returns.

[2] The three-year figure is the only exception but the difference in the percentage of managers underperforming the benchmark amounts to only 0.63%.

[1] Depending on the type of metrics used, value portfolios can potentially have different performance.

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