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DJSI – A temperature gauge for Sustainability Investing

The CPSE Story

Metals Never Had An August This Hot

Knowing Your Geographic Revenue Exposure: Lessons From Brexit

Asian Fixed Income: Two Growth Segments in China’s Bond Market

DJSI – A temperature gauge for Sustainability Investing

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Aris Prepoudis



On September 7, the review of the renowned Dow Jones Sustainability Index (DJSI) series will be announced. Now in its 19th year, the index family continues to be the gold standard of large cap ESG performance, and serves as an effective engagement platform for investors who want to encourage companies to improve their corporate sustainability practices.

As sustainability thinking grew in popularity, what started out as a single index, the DJSI World in 1999, gave birth to a number of regional index family members such as the DJSI Europe, the DJSI North America, and DJSI Emerging Markets, as well as a number of other index families such as the DJSI Diversified and S&P ESG Factor Weighted indices.

But it is really only very recently that we can speak of a real boom for ESG indices. The current economic and political climate combined with growing environmental concerns have spurred investors to more seriously consider Sustainability Investing. They recognize that companies with strong ESG performance make sustainable long-term investments, and that Sustainability Investing does not mean sacrificing performance.[1] And for those seeking a passive investment solution that integrates sustainability thinking, ESG indices are a natural fit.

Growth in ESG indices across regions and strategies demonstrates that global investors are exploring ways to integrate ESG factors into their investments – aiming to generate not only positive return but also positive impact. Indices are often used by global sustainability investors to define the investment universe for their region of interest and test out investment strategies with ESG indicators.[2]

Furthermore, the increasing popularity of ESG indices also reflects improved ESG disclosure and provides motivation for companies to disclose more and higher quality data, including material non-financial information, to compete with their peers. This is something that we at RobecoSAM witness first-hand via the Corporate Sustainability Assessment (CSA), our annual ESG assessment of over 3,900 listed companies. The data we collect has a multitude of uses, one of which is to determine the components of the DJSI. Participation rates in the CSA were a record high this year, with many new companies from markets where ESG is quickly gaining traction.

Investors and companies are eagerly awaiting the updated component lists to be published. Which companies will be added or deleted to the indices? What observations can be made about the state of sustainability in the corporate world? What does this mean for Sustainability Investing? These are just a few of questions and topics that the annual DJSI review will address. After all, the DJSI is not just another ESG index family, it is a temperature gauge for the state of Sustainability Investing.



Important legal information: The details given on these pages do not constitute an offer. They are given for information purposes only. No liability is assumed for the correctness and accuracy of the details given. The securities identified and described may or may not be purchased, sold or recommended for advisory clients. It should not be assumed that an investment in these securities was or will be profitable. Copyright© 2017 RobecoSAM – all rights reserved.

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

The CPSE Story

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Koel Ghosh

Former Head of South Asia

S&P Dow Jones Indices

The recent announcement by the Indian Finance Minister about the new Central Public Sector Enterprise (CPSE) ETF created waves of excitement and anticipation in the market and among market participants.  In order to understand and dig deeper into what this new ETF means for the Indian markets, it would be good to understand the background of the disinvestment story.

The disinvestment plan was initiated post-1991 and started with the setting up of the Department of Disinvestment and plan to start with select public sector undertakings (PSUs).  In 1991, it began with a few disinvestments and further increased to INR 21,163 cores in 2001.  The amount for fiscal year 2016-2017 was over INR 43,000 crores.  This journey of disinvestment was via various routes like Initial Public Offering (IPO), Further Public Offering (FPO), Offer for Sale (OFS), strategic sale, and ended with a revolutionary step for the country by using the route of ETFs.  VSNL was the first CPSE to be divested by way of a public offer in 1999-2000.  ONGC’s public offer in 2003-2004 was the largest CPSE FPO, raising INR 10,542 crore.  Coal India’s public offer in 2014-2015 was the largest CPSE OFS, raising INR 22,557.63 crore.  The maximum number of applications received in a PSU IPO/FPO since 2003-2004 was in CIL (15.96 lakhs)[1].  The first ETF was the Goldman Sachs CPSE ETF, which was launched on March 28, 2014, since acquired and hence managed by Reliance Mutual Fund.

ETFs formed a convenient vehicle for the government as they offered an opportunity to create a basket of stocks that market participants could invest in at a low cost and offered the flexibility of a stock along with transparency while the constituents and its prices were available live as markets traded.

The first CPSE ETF was a success and was well received by market participants.  This encouraged the Department of Disinvestment (DOD), now Department of Investment and Public Asset Management (DIPAM), to offer the market another option.  The S&P BSE Bharat 22 Index is the underlying index for the new ETF of 22 companies, including central public sector enterprises, government banks, and some holdings of the government’s investment arm SUUTI.  The new ETF will aim to help the government sell its equity stakes in those select companies and aid in moving forward in its objective to raise its disinvestment target for the current financial year.

The S&P BSE Bharat 22 Index is designed to measure the performance of the select companies that offer a well-diversified basket of PSUs with three SUUTI companies (primarily Axis Bank, L&T, and ITC), three PSBs, and is balanced across 16 other selected CPSEs.

Exhibit 1:Stocks That Form Part of the S&P Bharat 22 Index
Axis Bank Ltd SUUTI Finance
Larsen & Toubro Ltd SUUTI Industrials
Bank of Baroda PSB Finance
Indian Bank PSB Finance
State Bank of India PSB Finance
National Aluminium Co Ltd CPSE Basic Materials
Bharat Petroleum Corp Ltd CPSE Energy
Coal India Ltd CPSE Energy
Indian Oil Corp Ltd CPSE Energy
Oil & Natural Gas Corp Ltd CPSE Energy
Power Finance Corp Ltd CPSE Finance
Rural Electrification Corp Ltd CPSE Finance
Bharat Electronics Ltd CPSE Industrials
Engineers India Ltd CPSE Industrials
NBCC (India) Ltd CPSE Industrials
Gail India Ltd CPSE Utilities
NHPC Ltd CPSE Utilities
NLC India Ltd CPSE Utilities
NTPC Ltd CPSE Utilities
Power Grid Corp of India Ltd CPSE Utilities
SJVN Ltd CPSE Utilities

Source: S&P Down Jones Indices LLC.  Data as of August 2017.  Table is provided for illustrative purposes.

The index offers a diversified sectoral balance across six sectors: basic materials, energy, finance, fast-moving consumer goods, industrials, and utilities.

To ensure that the index is well balanced, individual stock weights are capped at 15% and sector weights are capped at 20%.

The Bharat 22 ETF offers market participants another option to participate in the government disinvestment program via the ETF route.

[1] Source: DIPAM

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

Metals Never Had An August This Hot

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Jodie Gunzberg

Former Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

In August, the Dow Jones Commodity Index Total Return gained 0.7%, reducing its year-to-date loss to -1.4%, and the S&P GSCI Total Return lost 0.8%, increasing its year-to-date loss to -6.9%.  Industrial metals and precious metals were the only positive sectors, up 8.6% and 4.0%, respectively, while agriculture was the worst performing sector, losing 7.4%, posting its worst month since July 2015.  Wheat was the worst performing commodity, losing 13.6% from record supplies, while Chinese demand and the falling US dollar helped nickel gain 15.4%, the most of any commodity in August for its best month since Sep 2012.  In addition to nickel, 12 other commodities gained including all the metals and 5 of 6 energy commodities.   Brent crude’s excess return was positive in August for the first time since June 2014, showing the move from contango to backwardation as inventories draw down; WTI Crude’s roll was still negative but only by 0.3%, the least since Dec. 2014.  It is possible the refinery disruptions and trade issues from Hurricane Harvey contributed to the slower inventory draw of the domestic oil in August.

Source: S&P Dow Jones Indices

August 2017 was the first August on record that all the metals gained together (since 1995 – the earliest year all seven metals were included in the index,) and it was the first month every metal gained together since Sep. 2016. As a result, the S&P GSCI All Metals Total Return gained 7.3% in August, posting its best August ever since 1995.  Now the all metals index is up 19% year-to-date, and is on pace to have its best year since 2009, and its third best year on record.

Source: S&P Dow Jones Indices

Many of the metals hit multi-year highs in August, and given the cyclical nature and economic sensitivity of industrial metals, they are interesting to examine further.  Below is a table of recent high dates and when they are the highest since.  Note the S&P GSCI Industrial Metals spot index is at its highest since Sep. 8, 2014.  Zinc hit its highest since 2007, while aluminum and copper are also at notable highs since 2013 and 2014, respectively.

The S&P GSCI Industrial Metals is up 56.2% from its bottom on Jan 12, 2016.  All industrials are up significantly from their bottoms with zinc up almost 200% from its bottom in 2008, but is up 114.8% from a more recent (but higher) bottom on Jan. 12, 2016.

Source: S&P Dow Jones Indices, Spot returns.

The main reason these metals are moving together and are hitting new highs are from the falling U.S. dollar, Chinese demand growth and supply disruptions.

Since commodities are priced in U.S. dollars and industrial metals is one of the most economically sensitive sectors, it moves oppositely from the falling dollar, rising on average 2.3% for every 1% the dollar drops.  The dollar fell 9.3% year-to-date through August, so if the sector is moving as it has historically, its sensitivity to the falling dollar accounts for most of 2017’s gain.   Lead and copper are most sensitive to the dollar’s drop, rising on average 6.2%, and 3.5%, respectively, for every 1% the dollar falls.

Source: S&P Dow Jones Indices. Uses monthly year-over-year spot returns for 10 years ending Aug 31, 2017.

Also, in the World Economic Outlook,  the IMF now expects Chinese demand growth between 2017 and 2021 to average 6.4%, compared to 6.0% last year.  This growth can drive industrial metals up significantly, 4.4% on average for every 1% rise in Chinese demand growth.  On an individual basis, most of the metals gain even more.  Nickel and lead benefit most historically gaining 9.2% and 12.2% on average for every 1% Chinese demand growth increase.

Source: S&P Dow Jones Indices. Uses monthly year-over-year spot returns.

It will be interesting to watch the metals in September, but energy is at an interesting point from Hurricane Harvey and the upcoming OPEC meeting.  It is possible the policy may be influenced by the hurricane disruption, and that while U.S. inventories may remain high, the domestic transportation issues may help reduce the Brent crude inventories, enabling OPEC’s decisions to be temporarily more influential.





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

Knowing Your Geographic Revenue Exposure: Lessons From Brexit

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Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

S&P Dow Jones Indices

The so-called “Brexit” referendum result in the UK on June 23, 2016, came as a shock to financial markets, with the S&P United Kingdom LargeMidCap (GBP) falling by over 3% the following day.  As the political and economic outlook became uncertain, the British pound sterling had steep declines against other major currencies including the U.S. dollar (-8%), the euro (-6%), and the yen (-11%).[1]  Not surprisingly, many companies in the index fell in price, as nearly 30% of constituents declined by 10% or more.  However, it was interesting to note that despite the overall market declining, some constituents actually rose, including 8 of the top 10 companies in terms of market capitalization.

Was there an underlying theme as to why certain companies did well when the overall market precipitously declined?  To investigate this, we first look at the average stock return on June 24, 2016, within each sector for any potential insight (see Exhibit 1).  With a general understanding of the commercial characteristics of each sector, it becomes quite clear—sectors that had significant revenue outside of the UK performed relatively better than sectors with substantial domestic revenue.

Several underlying reasons could have a played role in the high dispersion of returns.  First, the higher uncertainty of the future outlook of the UK economy could understandably affect companies with high domestic revenues compared to companies with more diversified and/or foreign sources of revenue by geographic region.  Secondly, the drop in the British pound sterling relative to other global currencies could benefit companies with high foreign revenues, as sales in foreign markets are typically completed in foreign currency.  As companies translate foreign revenues back into a domestically weaker currency, these revenues would be worth more in local currency terms than originally expected (note: this is with an assumption that the company did not employ currency hedging practices).

To investigate the hypothesis further, we formed two hypothetical portfolios, grouped based on the percentage of revenue coming from domestic versus foreign sources, using the S&P United Kingdom LargeMidCap as the underlying universe.  Available geographic revenue data was aggregated for all constituents in the index, and then the universe was separated into quartiles based on each company’s percentage of sales coming from the UK.  The top quartile, which comprised the companies with highest domestic revenues, were compiled into a “domestic revenue” portfolio and the bottom quartile compiled into a “foreign revenue” portfolio.  The portfolios were weighted by each company’s percent of revenue to the targeted geographic area; for the domestic revenue portfolio, companies with the highest revenue exposure to the UK had the highest weights, and for the foreign revenue portfolio, companies with the highest foreign revenue exposure had the highest weights.

To understand how the resulting geographic revenue distribution differed among both portfolios and the benchmark, Exhibit 2 breaks down the weighted average sales percentages in several categories.

The benchmark, composed of only UK-domiciled companies, had total revenues from the UK of just 18%.  The hypothetical portfolios showed a stark contrast in the resulting revenue sources, with the domestic portfolio having 98% exposure to the UK and the foreign portfolio with just 4% of revenue coming from the UK.

We tested to see how the three portfolios have performed since the Brexit vote (see Exhibit 3).

We can see that there has been a significant difference in performance between the domestic and foreign revenue portfolios since Brexit, with the former outperforming the latter by 38%.  Furthermore, the foreign revenue portfolio also outperformed the broad-based UK market during the same period.  The findings highlight the importance of incorporating geographic revenue information into a strategy, in particular if market participants wish to express their views on geographically driven thematic events.

[1] Source: FactSet.  Rounded percentage change of mid-quote for each currency pair on June 24, 2016.

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

Asian Fixed Income: Two Growth Segments in China’s Bond Market

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Michele Leung

Former Director, Fixed Income Indices

S&P Dow Jones Indices

China’s bond market continued to expand in 2017.  The local currency bond market, as tracked by the S&P China Bond Index, grew over 19% in the past year.  As of June 30, 2017, the S&P China Bond Index tracked 9,342 bonds with a market value of CNY 51 billion.  Two segments that recorded robust growth were the provincial and corporate bonds.

The S&P China Provincial Bond Index seeks to measure the performance of local government bonds, which have experienced significant growth since the municipal replacement program in 2015 (see previous blog on this subject).  The index market value increased from less than CNY 1 trillion in 2015 to its current value of CNY 10 trillion.  The infrastructure investment is the main driver of the funding demand.  Yet, the strong issuance also underscored the heightening risk, as the indebtedness of the local government surged.  According to the index, the most indebted provinces are Jiangsu, Zhejiang, and Shandong.

The market value of the S&P China Corporate Bond Index also gained 15% in the past year. On the back of the deleveraging campaign and rising default risks, market participants tend to seek high quality bonds.  The S&P China High Quality Corporate Bond 3-7 Year Index is designed to measure high-quality corporate bonds, according to our two-tier screening approach.  First, issuers must be rated investment grade by at least one of the international rating agencies; and second, securities must be rated ‘AAA’ by at least one of the local Chinese rating agencies.  The index proved its resilience in a recent sell-off versus its parent index.

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