Get Indexology® Blog updates via email.

In This List

Can SDGs Shape the Future of Corporate Disclosure?

What Are Large-Cap Active Managers Up To? A Decomposition of Their Active Sector and Factor Bets (Part I)

As Markets Await Fed Chair Nomination, U.S. Treasury Curve Continues to Flatten

S&P STRIDE Target Date Funds: Making STRIDEs in Evaluating the Performance of Retirement Solutions

Sustainability Landscape in Brazil

Can SDGs Shape the Future of Corporate Disclosure?

Contributor Image
Libby Bernick

Global Head of Corporate Business

Trucost, part of S&P Dow Jones Indices

Businesses are showing increasing interest in using the Sustainable Development Goals (SDGs) to inform and enhance their social and environmental programs and ultimately their business strategies.  The SDGs were adopted by the United Nations in 2015 and include 17 ambitious goals and 169 targets aimed at ending poverty, protecting the planet, and ensuring prosperity for all.

The appeal of the SDGs for companies and financial institutions is that they harmonize the social, environmental, and economic aspects of sustainable development and—perhaps most importantly—provide a clear vision of what the international community wants to achieve.  They give meaning and purpose, not just to corporate sustainability programs, but to an organization’s business objectives.

There are also pragmatic business reasons for pursuing the SDGs.  Achieving the goals could create over USD 12 trillion per year in business value in clean and efficient energy, affordable housing and access to healthcare, and material efficiency and waste management.

But there are challenges with the SDGs.  Although three-quarters of companies under the UN Global Compact say they are taking action to meet the SDGs, this is often for a single goal—usually ones pertaining to creating good jobs, economic growth, health, and well-being.  Moreover, some of these companies only choose to report against goals that correspond to existing environmental or social targets.

A few multi-stakeholder organizations have developed SDG reporting frameworks to help companies and financial institutions, including the Cambridge Institute for Sustainable Leadership, the Dutch SDG Investing Agenda, the GRI and UN Global Compact, Earth Security Group with HSBC, and the Sustainable Development Investment framework.  Although they are a great first step, some are too generic and lacking in precise metrics, while others are more detailed but struggle to address global goals or the need to create business value.

Building on almost 20 years of experience working with companies and financial institutions on measuring ESG performance and integrating it into business and investment decisions, Trucost considers that a successful SDG framework should be based on the following best practice principles.

  • Total value creation: incorporate financial, social, and environmental value creation to assess materiality and quantify impacts.
  • Material: focus on SDGs that are financially relevant and where the business has potential to make the most significant positive or negative impact.
  • Quantifiable outcomes: include specific metrics that can be measured so that companies and investors can quantify impacts and track performance over time.
  • Measurable against targets: focus on contributing toward specific SDGs, taking into account geographic differences.
  • Market context: relatable to current responsible investment and ESG reporting frameworks already in use in different sectors.
  • Value chain: consider the full range of positive and negative activities across a corporate value chain from supplies of raw materials to manufacturing operations and the use and disposal of products and services.
  • Comparable: allow investors and other stakeholders to compare performance within and across industry sectors as well as assets classes.

Trucost believes that an SDG framework based on these principles would strike the right balance between being applicable to a wide range of sectors, yet adaptable to sector-specific issues; holistic to incorporate social, environmental, and economic aspects of sustainable development, yet focused to capture the most significant impacts for a business; idealistic to inspire business leaders and employees, yet pragmatic to make good business sense.

Trucost will set out its thinking on SDGs in more detail in a forthcoming discussion paper entitled Moving Forward with SDGs: Metrics for Action.  Go to for more information.

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

What Are Large-Cap Active Managers Up To? A Decomposition of Their Active Sector and Factor Bets (Part I)

Contributor Image
Aye Soe

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

S&P Dow Jones Indices

The SPIVA U.S. Mid-Year 2017 Scorecard shows that the relative performance of actively managed domestic equities funds across large-, mid-, and small-cap segments has improved in recent months.  For example, only 56.56% of large-cap equity managers underperformed the S&P 500® for the one-year period, whereas 84.62% underperformed the benchmark at mid-year 2016.[1]  More importantly, when measured on an asset-weighted basis using all the share classes in the large-cap universe, the one-year composite return of active large-cap managers (19.43%) actually outpaced the S&P 500 return (17.90%), leading to an excess return of 1.53% (see Exhibit 1).

Large-cap equity is an asset class that is typically considered to be highly efficient and has historically been difficult for active managers to outperform.  The asset-weighted composite of large-cap active managers outperforming the benchmark over the one-year period has led us to closely examine the sources of (or detractors from) active returns.  Using the holding of actively managed large-cap funds, we look at the traditional sources of long-only active management alpha—sector allocation decisions, security selection, and factor bets—to conduct the performance attribution analysis.

Allocation effect – the decision to overweight and underweight outperforming sectors relative to the benchmark—is a key component of active managers’ value proposition.  To determine allocation effect, we compare the average weight in each of the 11 GICS® sectors held by active large-cap managers relative to the S&P 500 during the measurement period, and the sector contribution to benchmark return as well as the portfolio return.[2]

Over the one-year period, information technology was the largest and best-performing sector in the S&P 500, thereby making it the biggest contributor to benchmark return.  It is almost too convenient to assume that improvement in the relative performance of large-cap active managers stems from overweighting that sector.  However, the data shows that, on average, large-cap managers have been maintaining neutral to slight underweight relative to the S&P 500 in information technology (see Exhibit 2).  In fact, the slight underweight in the sector has detracted from managers’ excess returns, as shown by the negative allocation and total effects.

Moreover, in the five sectors that contributed the most to the benchmark returns, large-cap active managers had higher returns than the benchmark, indicating that stock selection skills were at work.  An attribution analysis confirmed that in fact most of the excess return came from selection effect,[3] in which active managers demonstrated their ability to pick winning stocks within each sector.  The 1.74% excess return over the S&P 500[4] came exclusively from stock selection, given that the allocation effect was slightly negative.

In a follow-up blog, we will provide additional framework through which active factor bets taken by large-cap active managers are evaluated.  Similar to the sector attribution analysis, we will use the holdings of large-cap active managers to decompose their risk factor exposures relative the S&P 500.  Together, this series of blogs allow us to better understand the drivers behind the improvement in relative performance of large-cap managers over the past year.

[1] The SPIVA methodology calls for the inclusion of the largest share class per fund in the universe to avoid double counting.

[2] The relationship is mathematically expressed as Allocation Effect = , where W = average weight, p = aggregated average large-cap portfolio, b = benchmark, R = returns, and i =  selected sector or grouping.

[3] The relationship can be mathematically expressed as Selection Effect =  .  We assume that managers are basing their security selection process from the ground up, and therefore we grouped the interaction effect part of the attribution together with the selection effect.

[4] It should be noted that the attribution analysis is conducted from the ground up using the holdings, and the effects are compounded daily; the excess return from the attribution analysis of 1.74% differs from the composi   te level excess return of 1.53%.

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

As Markets Await Fed Chair Nomination, U.S. Treasury Curve Continues to Flatten

Contributor Image
Jason Giordano

Director, Fixed Income, Product Management

S&P Dow Jones Indices

President Trump said he will make an announcement during the week of Oct. 30, 2017, regarding his nomination for who will replace Chairwoman Janet Yellen when her term ends in January 2018.  Most reports suggest current Fed Governor Jerome Powell will get the nod over Stanford University economics Professor John Taylor.  Mr. Taylor could still be named to the role of vice chair; however, an announcement on that position is weeks away.  While Mr. Taylor would most likely provide a more hawkish influence, Mr. Powell offers a status quo approach from a monetary policy perspective.  The FOMC continues to communicate its intentions to gradually raise interest rates and normalize its balance sheet while working in a low unemployment, low inflationary environment.

Nearly two years into the current (albeit slow) tightening cycle, the bond market continues to question the prospects for long-term growth.  On Dec. 15, 2015, the Fed raised its rates for the first time since 2005.  Since then, there have been three more rate hikes, for a total of 100 bps.  The two-year yield has increased 115 bps (see Exhibit 1), however the long end of the curve has fallen, producing a much flatter yield curve.  The yield on the 30-year on-the-run bond is actually 17 bps tighter than it was in October 2015 despite the lift in short-term rates.

Using the series of S&P U.S. Treasury Bond Current Indices, which is a series of security indices that seek to measure the most recently issued bond for each maturity, we can view yield spreads between key maturity ranges of the yield curve (see Exhibit 2).  In normal economic times, spreads between longer-dated maturities and shorter-dated maturities should be positive, representing a combination of positive growth expectations, positive inflation expectations and, in general, an indication of stable or improving economic conditions.  Conversely, spreads that are contracting may indicate market anticipation of slowing growth, slowing inflation, or worsening economic conditions.

Almost every segment of the yield curve is flatter now than at any time over the past 10-year period (see Exhibit 2).  The 2/30 spread, which represents the majority of the total yield curve, has experienced the greatest amount of flattening and was 270 bps tighter as of October 2017 than its high point in January 2011.

As a result of the overall flattening, U.S. Treasury bonds have performed well in 2017 (see Exhibit 3).  Each of the 2-, 5-, 7-, 10-, and 30-year current indices had positive YTD performance, with the S&P U.S. Treasury Bond Current 30-Year Index returning 4.87% as of Oct. 27, 2017.

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

S&P STRIDE Target Date Funds: Making STRIDEs in Evaluating the Performance of Retirement Solutions

Contributor Image
Jack Towarnicky

Executive Director

Plan Sponsor Council of America

Back in the Great Recession of 2008-2009, participants experienced a dramatic stock market decline.  The S&P 500 index had a “peak-to-trough” decline of 51 percent! Coincidentally, many retirees and near-retirees were gaining their initial experience with something called a Qualified Default Investment Alternative (QDIA). The QDIA is a “safe harbor” (Department of Labor Regulation 29 CFR §2550.404c-5, 72 FR 60452 (Oct. 24, 2007) for plan sponsors allowing an investment allocation even if a participant does not provide direction. QDIAs became much more prevalent after plan sponsors took advantage of provisions added by the Pension Protection Act of 2006 (Pub. L. 109-280) and the associated Treasury Regulations §§ 1.401(k)-1(j), (k) (proposed in 2007 and finalized in 2009) to adopt automatic features. Concurrently, on October 24, 2007, the Department of Labor provided regulatory relief to fiduciaries in selecting a QDIA (Department of Labor Regulation 29 CFR §2550.404c-5 (see above).

The most prevalent QDIA is a Target Date Fund (TDF). A TDF automatically rebalances its asset allocation to follow a predetermined pattern known as a glide path to ensure the participant’s account is allocated in an ever more conservative fashion.  When used as a QDIA, a plan sponsor will typically select a TDF of the year ending in 0 or 5 that is closest to a participant’s 65th birthday. For example, someone born in 1960 might have a Target Date 2025. The TDF investment allocation is structured to anticipate benefit commencement in that target year or soon thereafter.

In 2008-2009, most participants at or near age 65 had a Target Date of 2010.

It turned out that every TDF had its own definition of more conservative, or what constitutes a lower-risk allocation. At that time, Morningstar found short-dated funds, like 2010 target date funds, had the widest range of allocations to equity investments that: “… span a startling range of equity allocations – from 72 percent to 26 percent. Unsurprisingly, series that had higher equity weightings typically trailed the more conservative offerings in 2008.” (See Morningstar, Inc. Target date Series Research Paper, 2009 Industry Survey, September 9, 2009)

The importance of such distinctions was often lost on plan sponsors, fiduciaries, and participants. Certainly, during the 2008-2009 Great Recession, Target Date 2010 fund performance varied dramatically from participant expectations, triggering hearings in the U.S. Senate Special Committee on Aging, and expert testimony to the Department of Labor, the Securities & Exchange Commission, plus representatives from the Senate Special Committee on Aging, June 18, 2009. Retirees and near retirees had experienced a drastic, abrupt decline in their account balance, sometimes in excess of 50 percent. That decline translated into a significant reduction in retirees’ and near retirees’ expectations about retirement income and consumption.

That dramatic result also helped expose a significant concern: To what extent can retirees or soon-to-retire workers rely on their Target Date Fund to be properly positioned for generating income (financing consumption)?

Since then, mutual fund providers have been analyzing alternatives that might reduce the volatility in retirement income/consumption. For example, S&P Dow Jones Indices and Dimensional Fund Advisors (Dimensional) completed a study that considered how many TDF strategies compare with a new index—STRIDE (Shift to Retirement Income and DEcumulation) Index Series. The study found that the index series is a fitting benchmark for TDF strategies that are designed to be used throughout both the accumulation and decumulation period, and that focus on reducing fluctuations in expected retirement income and consumption. STRIDE was compared against the average of 2010 Target Date funds. The period studied was 2003 – 2016, which includes the market decline during the Great Recession. Researchers identified the three main investment risks that drive uncertainty around future consumption in retirement: market risk, interest rate risk, and inflation.

These indices use a glide path that transitions from growth-seeking assets (40 years prior to the projected target date) to assets that can support a more stable level of inflation-adjusted, in-retirement income (for a 25-year period after the target date). The goal is to identify a retirement investment solution that manages uncertainty about how much in-retirement income a saver’s balance can generate.

STRIDE’s structure varies noticeably from that of the average 2010 TDF. The STRIDE glide path reduces equity allocations starting 20 years prior to the target date, where the goal allocation at the target date is 75 percent Treasury Inflation Protection Securities and 25 percent equities. Other Target Date fund allocations vary significantly, in part based on a fund’s strategy of either “to” or “through” retirement. Some TDFs have a “to” goal reflecting a higher degree of safety and liquidity – participants in these funds might use the funds to purchase an annuity.  Other TDFs have a “through” goal anticipating investors will hold onto assets after age 65, reflecting a longer time horizon.

In regards to a “to” or “through” glide path – S&P Dow Jones Indices and Dimensional found that a STRIDE structure where the target date matches the anticipated commencement of payouts may result in less volatility in a participant’s expected income/consumption in retirement. Studies show a majority of plans now use TDFs (see above (GAO), see also: ICI Factbook, Figure 7.14 ). Alternatives that may avoid wide swings in estimated retirement income/consumption may be of interest to plan sponsors as more and more participants are leaving assets in the plan following separation/retirement.

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

Sustainability Landscape in Brazil

Contributor Image
Kelly Tang

Former Director

Global Research & Design

At the annual ABRAPP (Associação Brasileira das Entidades Fechadas de Previdência Complementar, the organization representing pension fund managers in Brazil) conference, sustainability was one of the headline topics.  The conference allowed for in-depth discussions with Brazilian institutional investors, regulators, officials from B3 (formerly known as Bovespa and now the largest exchange in Latin America), trade groups promoting sustainability, and various asset managers.  The conversations with the referenced parties centered on ESG issues in Brazil and the future of ESG investing in that particular market.  What was apparent from our meetings with these market participants is that there is a great deal of genuine interest in ESG backed with extensive knowledge on the topic.  Here are the key takeaways from those conversations.

Timing Is Right for Interest in ESG-Driven Solutions

Brazil finds itself coming out of the country’s biggest corporate scandal, called Lava Jato (“car wash”), which involved Petrobras (Brazil’s largest state-owned enterprise), large contractors who were paying bribes to Petrobras to procure bids, and senior government officials who received payouts from Petrobras executives.  According to Brazilian authorities, the payouts and fees associated with Lava Jato exceed USD 2 billion.  There is clear momentum given this backdrop and it appears that corporate governance and shareholder value maximizing (i.e., long-termism or the “G” aspects of ESG) are on the top of the priority list for market participants.  In fact, the agenda and topics covered in the ABRAPP conference centered mostly on governance issues.  Given that Brazilian interest rates are coming down and stabilizing, the environment makes sustainability-driven, multi asset class solutions attractive to market participants.

Education and Brazil Focus Approach Are Instrumental to Success of ESG in Brazil

There was considerable appetite for knowledge sharing and most market participants shared that they desired to start the process of implementing sustainability in their portfolios but did not know exactly where to start.  The success of ESG in Brazil, or for that matter, anywhere, will be largely dependent upon the extent to which the active parties in the field of sustainability offer sufficient research and data on local companies and whether the right investment solutions exist.  In both cases, a more Brazil-oriented approach is needed rather than a pan-Latin American approach.  Brazilian institutional investors realize the importance of ESG investing and accept the fact that it is here to stay, and therefore the age-old misconception that ESG is return detractive did not come up as an obstacle for ESG.  What appeared to be more of a hindrance was some confusion as to how to start this process more than whether to do so.

Where to Start?

Although asset managers noted that market participants have not demanded ESG products per se, asset owners then complained that there were little ESG products or offerings for them to access.  However, one area that has the potential for growth in the immediate future is green bonds.  Overall, green bond issuance in Brazil accounts for 0.2% of the total bond market in Brazil, compared to 4.0% of issuance in the global bond market.  Brazil has made considerable progress in the past three years on green finance despite suffering a recession, and it is estimated that the second half of 2017 will see approximately USD 800 million in green bond issuance in Brazil for wind energy generation projects.

Given that many of the Brazilian market participants with whom we met are signatories to the Principles for Responsible Investment, for ESG driven investment solutions to take greater adoption will require implementation of the Principles and actually having sound ESG policies and practices in place.  As leaders in the passive ESG solution space, sharing our collective knowledge at S&P Dow Jones Indices with the Brazilian market will help speed up this process and help promote investor engagement across the globe.

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