“Trying to pick individual stocks is a trap. I can’t do it. Warren Buffett can, but hardly anyone else can beat the indexes over a long period of time.”
The above quote is proof that Ben Stein seems to understand the merits and traits of indices and index-linked products. There is a varied range of investment strategies that are at play today that can help achieve targeted objectives. Coupled with constantly shifting market dynamics, these strategies are continuously changing as well, though some of the basics are the same—whether the strategy is active or passive, dynamic or tactical, core or satellite. Asset allocation strategies are always interesting, as they vary based on investment objectives, market dynamics, investor profile, and so on. At times, there are stock-specific strategies, or sometimes strategies are based on sectors, themes, or even factors. However, index-based strategies or investments offer the advantages of a diversified basket of stocks that is designed by an independent index provider based on a transparent, rules-based methodology. The advantage of indexing is now being further highlighted with statistics that support how active funds are being outperformed by their benchmark indices. The SPIVA® India Scorecard, which has been publishing data since 2013, displays this growing trend.
One of the areas where this trend is escalating in India is the large-cap segment. Exhibit 1 displays significant outperformance in the five-year category over the past four years. In the last two years, more than 50% of active funds underperformed the benchmark S&P BSE 100.
|Exhibit 1: SPIVA India Reports – Percentage of Indian Equity Large-Cap Funds Outperformed by the S&P BSE 100|
|PERIOD||ONE-YEAR (%)||THREE-YEAR (%)||FIVE-YEAR (%)||TEN-YEAR (%)|
Source: S&P Dow Jones Indices LLC. Data as of year-end 2017. Past performance is no guarantee of future results. Table is provided for illustrative purposes.
This offers an opportunity to evaluate the large-cap segment using a passive strategy. The S&P BSE suite of indices offers options in this segment via the S&P BSE SENSEX, S&P BSE SENSEX 50, S&P BSE SENSEX Next 50, S&P BSE 100, and S&P BSE LargeCap. These indices provide options from choosing a core set of 30 constituents, as in the S&P BSE SENSEX, to increasing that exposure to 50 stocks in the S&P BSE SENSEX 50, to further extending to 100 with the S&P BSE 100 if the goal is more diversification. Even though they all belong to the same large-cap segment, each index displays different returns and trends based on its characteristics. Hence, for shifting asset allocation strategies, there is a complete range to choose from.
|Exhibit 2: S&P BSE Indices in the Large-Cap Segment|
|ANNUALIZED RETURNS (%)|
|S&P BSE SENSEX||15.08||9.84||13.89||9.54|
|S&P BSE SENSEX 50||14.48||10.52||14.44||9.93|
|S&P BSE SENSEX Next 50||4.44||10.52||16.83||10.44|
|S&P BSE 100||12.82||10.47||14.61||9.71|
|S&P BSE LargeCap||13.19||9.98||14.22||9.61|
Source: Asia Index Private Limited. Data as of May 31, 2018. Index performance based on total returns. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. The S&P BSE SENSEX 50 was launched on Dec. 6, 2016. The S&P BSE SENSEX Next 50 was launched on Feb. 27, 2017. The S&P BSE LargeCap was launched on April 15, 2015.
The recent guidelines from the Securities Exchange Board of India have formalized the large-cap space as the top 100 stocks by market capitalization. Hence, it’s worth considering the indexing route to large-cap exposure as a low-cost, transparent, and flexible mode to achieve allocation to the large-cap segment.
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