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Benchmarking Risk Parity Strategies

A Glance at the Performance of Emerging ASEAN Markets

Growth Is Still Hot Only In Small Caps

The Importance of Sector Diversification in a Yield-Focused Strategy – Part II

Proactive Fiscal Policy to Be More Proactive: Takeaways From China’s State Council Executive Meeting on July 23, 2018

Benchmarking Risk Parity Strategies

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Berlinda Liu

Director, Global Research & Design

S&P Dow Jones Indices

Since the launch of the first risk parity fund—Bridgewater’s All Weather fund—in 1996, many investment firms have begun offering risk parity funds to their clients. Risk parity funds became especially popular in the aftermath of the 2008 global financial crisis, when many investors witnessed the failure by traditional U.S. dollar-based asset allocation to provide downside protection.

Despite the popularity of risk parity funds, up to this point, the strategies have lacked an appropriate benchmark to measure their effectiveness and performance. Most market participants typically use a traditional 60/40 equity/bond portfolio[1] or a broad equity market index, such as the S&P 500®, to benchmark the performance.

The recent launch of the S&P Risk Parity Indices provides a suite of appropriate rules-based and transparent benchmarks for risk parity strategies. The indices also reflect the risk/return characteristics of strategies offered in this space.

Each S&P Risk Parity Index seeks to track the performance of a hypothetical portfolio that consists of 26 futures contracts from three asset classes (equity, fixed income, and commodities). Each index targets a constant level of volatility from each asset class, as well as each constituent futures contract. The series has three subindices, reflecting volatility targets of 10%, 12%, and 15%.

In this four-part blog series, we will use the S&P Risk Parity Index – 10% Target Volatility (TV) as an example to illustrate this index series’ performance, risk attribution, capital allocation, and methodology. In Part I, we will focus on the historical performance of the index.

Exhibits 1 and 2 show the cumulative returns of the index and key performance statistics. We compared it to a traditional 60/40 equity/bond portfolio. We want to point out that the latter does not completely reflect the risk/return characteristics of a risk parity strategy but is used ubiquitously in fund literature to benchmark. We also included the HFR Risk Parity Vol 10 Index as a proxy of active risk parity funds in the market. For reference, the HFR Risk Parity Indices represent the weighted average performance of the universe of active fund managers employing an equal risk contribution approach in their portfolio construction. These indices also have three volatility targets (10%, 12%, and 15%).

Historical performance shows that the S&P Risk Parity Index – 10% TV tracked the composite performance of risk parity active fund managers closer than a traditional 60/40 equity/bond portfolio did. The former had a higher correlation (0.89 versus 0.76) and lower tracking error (3.99% versus 6.54%). The overall annualized returns, realized volatility, and Sharpe ratio of the S&P Risk Parity Index – 10% TV were also close to the composite performance of active risk parity fund managers.

The S&P Risk Parity Index – 12% TV tracked the composite of risk parity active fund managers with a correlation of 0.85 and a tracking error 5.26%, and the S&P Risk Parity Index – 15% TV had a correlation of 0.87 and a tracking error of 6.09%.

The risk/return performance figures showed that the S&P Risk Parity Indices can be used as a benchmark in performance evaluation of active risk parity funds.

[1] The 60/40 equity/bond portfolio is hypothetically constructed by combining the S&P Developed BMI with 60% weight and the S&P Global Developed Aggregate Ex-Collateralized Bond Index with 40% weight, rebalanced monthly.

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

A Glance at the Performance of Emerging ASEAN Markets

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Utkarsh Agrawal

Associate Director, Global Research & Design

S&P Dow Jones Indices

In our previous blog, The Growth of Emerging ASEAN, we discussed why market participants are showing increased interest in this region. In this post, let’s take a deeper look at how the emerging ASEAN equity markets—consisting of Indonesia, Malaysia, Philippines, Thailand, and Vietnam—performed historically.

The emerging ASEAN equity markets collectively outperformed the Brazil, Russia, India, China, and South Africa (BRICS) equity markets as a whole on an absolute and risk-adjusted basis over the period from March 31, 2010, to Dec. 31, 2017 (see Exhibit 1).

The emerging ASEAN equity markets are much smaller than the BRICS markets. As of year-end 2017, their aggregate float market cap was approximately one-sixth of the size of the BRICS equity market. In general, smaller markets tend to have lower liquidity and efficiency. The largest companies in small markets tend be the most liquid. The top 100 largest and most liquid companies slightly underperformed the broad emerging ASEAN equity market over the period from March 31, 2010, to Dec. 31, 2017 (see Exhibit 2).

The portfolio of the top 100 largest companies weighted by float market cap was concentrated in stocks domiciled in Indonesia, Malaysia, and Thailand. A country-weight-capped portfolio may reduce the country-specific risk. The capped portfolio of the top 100 largest companies with a country weight capping of 25% and a stock weight capping of 8% outperformed the broad emerging ASEAN equity market over the same period (see Exhibit 3).

S&P Dow Jones Indices recently launched the Dow Jones Emerging ASEAN Titans 100 Index. It consists of companies from the emerging ASEAN equity markets based on composite rank by float market cap, revenue, and net income. The index constituents are weighted by float-adjusted market cap and subject to a country weight cap of 25% and a stock weight cap of 8% to reduce the country and stock concentration risk. It outperformed the top 100 capped portfolio purely selected by market cap over the period from March 31, 2010, to Dec. 31, 2017 (see Exhibit 4).

Historically, market participants in the emerging ASEAN equity markets tended to favor the companies with high revenue and income over other companies. The Dow Jones Emerging ASEAN Titans 100 Index outperformed the top 100 capped portfolio from the broad emerging ASEAN equity market trends in all the market cycles. The most significant outperformance was during the up market (see Exhibit 5).

Historically, the emerging ASEAN equity market outperformed the BRICS equity market. Revenue, income, or other fundamentals, along with weight limits to prevent excessive concentration in a particular country or stock, are also important when evaluating the markets for diversification purposes, in addition to market cap and liquidity.

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

Growth Is Still Hot Only In Small Caps

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Jodie Gunzberg

Former Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

In July, the total return of the S&P SmallCap 600 Growth was 3.75%, which was 1.15% higher than the total return of 2.60% generated by the S&P SmallCap 600 Value.  This is interesting since typically growth does not outperform value in small caps when value outperforms growth in large and mid caps.  (In July, the total return of S&P MidCap 400 Growth, S&P MidCap 400 Value, S&P 500 Growth and S&P 500 Value was a respective 1.38%, 2.17%, 3.44% and 4.05%.)  In 255 months, going back to May 1997, there are only 17 times when growth outperformed value in only small caps.  It is even rarer to find growth performing better than value in just small caps with the current magnitude of outperformance.  It was in Sep. 2005, almost 13 years ago, when the outperformance of small cap growth over value was this big while value outperformed growth in large and mid caps.  It is also only the 5th biggest outperformance of growth over value in small caps in a month while value outperformed growth in large and mid caps in the entire history of the data. Source: S&P Dow Jones Indices

While all eleven sectors in the S&P 600 were positive in July, the best performing sectors were industrials, materials and health care, up a respective 6.6%, 4.4% and 3.7%.  Also industrials and health care are the two most overweighted sectors in small caps when comparing growth to value.  Health care has 13.2% more weight in growth than value in small caps, while small cap industrials weigh 3.6% more in growth than value.  The weights of growth over value in these sectors are bigger for small caps than large or mid caps.

Source: S&P Dow Jones Indices.

Also, in July, small caps outperformed large caps in materials by 1.4% and energy by 0.2%.  This helped contribute to the month’s small cap growth outperformance since although the growth weight was less than the value weight, it was by less than in the bigger stocks.

Overall, the total return for the S&P 500, S&P 400 and S&P 600 was 3.7%, 1.8% and 3.2%,  respectively, in July.  All sectors in large and small caps gained with industrials, health care and financials leading, likely from growth.  Historically financials and health care are the two sectors that benefit most from GDP growth, with small caps rising on average 6.9% and 6.4% with every 1% of growth.  Large caps in these sectors also benefit, each rising on average 4.5% for each 1% of GDP growth.  Also industrials benefit highly from rising interest rates with small caps and large caps gaining 8.6% and 8.2%, respectively, on average for every 100 basis point rise in rates.  Although rates didn’t increase, the market may be looking ahead to Sept. when there is a chance for an increase.  Lastly, industrials were also helped by the renewed trade negotiations between China and the U.S.

Source: S&P Dow Jones Indices

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

The Importance of Sector Diversification in a Yield-Focused Strategy – Part II

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Qing Li

Director, Global Research & Design

S&P Dow Jones Indices

In our previous blog (The Importance of Sector Diversification in a Yield-Focused Strategy – Part I), we highlighted that sector biases in an unconstrained yield strategy could detract from portfolio returns. In this blog, we will show that addressing the sector concentration issue can improve risk-adjusted returns.

We constructed three sector-diversified portfolios—the dividend yield portfolio, free cash flow yield portfolio, and dividend yield + free cash flow yield portfolio—with each portfolio selecting the top five highest ranking stocks from each sector (see Exhibit 1). Each portfolio was rebalanced on a quarterly basis from December 1990 to December 2017 and weighted equally.

Exhibit 2 shows that, compared with non-sector-diversified portfolios, the sector-diversified portfolios had smaller deviations in active sector weights relative to the underlying broad market. This reduction in sector concentration resulted in higher positive active returns—which is the difference between the total portfolio return and the total benchmark return as measured by the S&P 500® and indicated by total effect. We see the biggest difference in the utilities sector, where the non-diversified portfolios had negative return attributions but the diversified portfolios all displayed positive total effect. In fact, the diversified portfolios showed a positive effect for all sectors in the strategies tested.  

As shown in Exhibit 3, over the long-term investment horizon, the sector-diversified portfolios displayed higher returns and lower volatility than the non-sector-diversified portfolios and the broad market, without sacrificing yield.

In addition to higher risk-adjusted returns, we also found that sector diversified income portfolios provided larger downside protection than the non-sector-diversified ones. Exhibit 4 highlights the monthly average excess returns of the sector-diversified and non-sector-diversified portfolios over the market, which is represented by the S&P 500. We can see that sector-diversified portfolios, on average, had higher average monthly excess returns than the non-sector-diversified portfolios in most market environments, including down markets.

Our analysis highlights the importance of sector diversification for yield-seeking market participants. Across all three strategies—dividend yield, free cash flow yield, and the combined dividend yield + free cash flow yield—sector-diversified portfolios historically demonstrated higher risk-adjusted returns than the non-sector-diversified portfolios, without compromising yield.


[1]   The product of the z-scores of the dividend yield portfolio and free cash flow yield portfolio forms the aggregated score.

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

Proactive Fiscal Policy to Be More Proactive: Takeaways From China’s State Council Executive Meeting on July 23, 2018

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Jack Jiang

Senior ETF Specialist, Index and Quantitative Investment

ICBC Credit Suisse Asset Management (International) Co., Ltd.

On July 23, 2018, China’s state council executive meeting hosted by Premier Li Keqiang announced that fiscal and monetary policy will be further fine-tuned to boost domestic demand. The meeting reiterated that China will strike a balance between “easing and tightening” and keep liquidity “reasonable and sufficient.” It was also stressed that China will not resort to outright stimulus.

More tax incentives to support technology upgrading:

  • On top of 1.1 trillion yuan in reductions in levies and fees in the pipeline for 2018, the state council announced that it will further expand the promised R&D tax credit (75% of cost) from small- to medium-sized companies to all companies, which will bring additional tax cuts worth 65 billion yuan.
  • The government requested to end the refund of 113 billion yuan from the drawback of the withholding tax to the qualified enterprises in advanced manufacturing and modern service industry.
  • The state council also requested an acceleration of the issuance of 1.35 trillion yuan of special local bonds and funds for infrastructure projects.

Prudent monetary policy to keep sufficient liquidity:

  • Keeping an appropriate total social fund, “reasonable and sufficient” liquidity, and a smooth capital transition mechanism were stressed.
  • The government requested the implementation of various incentives to small- and micro-enterprises (SME). Financial institutions were instructed to support SME and the initiative of the debt-to-equity swap by specific funds with RRR reduction. China also encouraged commercial banks to issue financial bonds for SME, waiving the requirement of the issuer’s consecutive profit.
  • The meeting also set up the target to increase the 140 billion yuan loan to around 150 thousand for SME every year.

Faster investment growth:

  • The government boosted private investment in transport, oil and gas, and telecommunications projects.
  • The statement also seeks to guide financial institutions to guarantee reasonable funding to Local Government Financing Vehicles so that essential projects aren’t held up to facilitate construction and planning of a number of large-scale projects that will meet development purposes and public demand.

Furthermore, clearing “zombie enterprises” and related invalid capital were also mentioned.

In general, the Chinese government stepped up the effort to support growth, confirming the move from consolidation to a more neutral stance amid the economic headwinds. It seemed like Chinese financial markets were recovering an appetite for risk not seen in months, taking cues from the government’s push to invigorate the economy. We have seen a 2.8% rally of the S&P China 500 in the first three days of the week.

Given the 726 billion yuan deficit in the first half of 2018 versus around 2.38 trillion yuan as the budgeted full-year deficit (2.6% of 2018 GDP), together with 5 trillion yuan in fiscal deposits and robust land sales revenue, there is still ample room for further fiscal easing.

As for the monetary policy, below-target inflation and a stabilizing debt mean that the government can afford to further lower the RRR. This can increase lending funds to facilitate corporate development. Market players expect additional cuts of the RRR rate in the second half of 2018.



The State Council of the People’s Republic of China, July 24, 2018,

Bloomberg, July 23, 2018,

Reuters, July 23, 2018,

Reuters, July 24, 2018,



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