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Breaking Down Volatility

Momentum Bubble Deflating?

Ways To Avoid Getting Pink-Slipped In Retirement

Housing Slows

Beyond the SPIVA® Europe Mid-Year 2018 Headlines – Delving Deeper Into the Data

Breaking Down Volatility

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Fei Mei Chan

Director, Index Investment Strategy

S&P Dow Jones Indices

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“Data! Data! Data!” he cried impatiently. “I can’t make bricks without clay.”

– Sherlock Holmes (in “The Adventure of the Copper Beeches”)

Despite yesterday’s hand wringing loss for equity markets— the S&P 500 dropped 3.3%—the index is still up 5.8% year to date 2018. Nevertheless, losing in one day a third of what the equity market achieved in 9 months can, justifiably, cause alarm. In the not too distant past, the market experienced a similar trauma. Then, as now, volatility ticked up. But we also pointed out that in the broader context, the volatility jump in February 2018 was not too significant. Yesterday’s increase was even less so.

Breaking down volatility into its contributing components offers even more reassuring insight. The dispersion-correlation map offers a look at the two factors that drive volatility. The chart below maps the daily rolling 21-day dispersion and correlation levels since the beginning of August. The jump in both dispersion and correlation on October 10 was quite precipitous, but the levels are still lower than those we saw in February.

However, as the chart below reflects, from a broader context, yesterday’s market took us to above average levels for correlation, but dispersion is still under its 27-year average. This may seem striking given the particularly sleepy year in 2017, but these levels are still quite far from those in the tumultuous years of the technology bubble deflation and the financial crisis.

High dispersion does not guarantee weak markets, but in our data no severe market pullback has occurred in the absence of high dispersion.

 

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

Momentum Bubble Deflating?

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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Yesterday’s decline in the U.S. and global stock markets is striking not simply because of its magnitude but also because it represents a radical reversal of factor returns from the first three quarters of 2018.

Readers of our quarterly factor dashboard will recognize this graph, which shows the total return of the S&P 500 and a set of factor indices derived from it for the 12 months ended September 30, 2018:

Momentum and Growth dominated the rankings for the first nine months of 2018 (as they had done in calendar 2017 as well).

Since the beginning of October, however, there has been an amazingly-abrupt (less than two weeks!) reversal of fortune, as today’s daily dashboard shows:

The winners so far in October were the first three quarters’ laggards, with previously-high flying momentum and growth names falling behind.  We pointed out several months ago that Momentum is uniquely self-reinforcing – until it suddenly isn’t.  And when the worm turns, Momentum’s underperformance can be particularly striking:

Will defensive factors assume market leadership while Momentum and Growth have a well-deserved respite?  Ten days do not a trend make, but what we see so far in October represents such a potential regime shift.

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

Ways To Avoid Getting Pink-Slipped In Retirement

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Jodie Gunzberg

Managing Director, Head of U.S. Equities

S&P Dow Jones Indices

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Maybe you can’t technically get fired after retiring, but running out of income in retirement is a real risk many people fear.  According to TIAA, 49% of Americans say their No. 1 goal for a retirement plan is to provide guaranteed monthly income in retirement, and 68% of Americans would first choose a retirement paycheck that lasts as long as they live when given a choice of income options.  Yet, 70-80% of new entrants to DC plans (defined contribution) default into predominantly mutual fund TDF’s (target date funds,) which have nothing to do with income.

Recently, S&P Dow Jones Indices had the opportunity to discuss the innovative solutions for managing risk of income shortfall in retirement with Marlena Lee, co- head of research at Dimensional Fund Advisors, and Timothy Pitney, managing director of institutional investment and endowment distribution at TIAA.  In the video below, they point out the risks in managing retirement assets focused on income that have been brought to the forefront, especially since the Pension Protection Act of 2006. 

While the intention of encouraging automation by defaulting contributions into retirement funds into Qualified Default Investment Alternatives (QDIA) are well meaning, the definitions of QDIAs often guide investments into life-cycle or retirement date funds designed around diversification, retirement age or retirement date.  However, to many participants, income requirements are the main concern in order to maintain a similar standard of living through retirement as in the working years.  To accommodate this need, there are new solutions available with different characteristics than traditional default options that are explained in summary below from the video interview.

Q. When considering an income-focused default investment, what are some of the key considerations and tradeoffs managers make?
A. Any investment approach must make tradeoffs, and that is true of target date type solutions as well as income-focused target date solutions. In either case, a tradeoff must be made between risk and expected return. There must be a balance between riskier assets that help investors grow their savings with risk-mitigating assets that help to reduce the uncertainty of meeting retirement savings goals as one approaches their retirement date. The key difference for an income-focused approach is that the risks that must be considered are related to the uncertainty of future income rather than the volatility of wealth.
Traditional target date funds typically increase fixed income exposure nearing retirement to reduce overall volatility. However, the appropriate risk management asset for an income-focused solution is one that hedges against inflation and interest rate risk and reduces the uncertainty about how much income can be expected in retirement.  TIPS (Treasury Inflation-Protected Securities) matched to the duration of future retirement income liabilities seem to be an appropriate risk management asset for an income-focused solution, utilizing Liability Driven Investing (or LDI) as the investment philosophy for the fixed income component of next generation default solutions.

Q. How does an income-focused target date fund differ from a standard target date fund?
A. When the focus of a target-date investment turns towards retirement income, a different set of risks emerge and need to be managed. The risk being managed now becomes uncertainty of retirement income, not investment account balance volatility that exists in traditional target date funds.  The factors for investment managers to consider when trying to reduce the uncertainty of retirement income are then market risk, interest rate risk and inflation risk.  An income-focused target date fund will:
-Pick an appropriate glide path to manage market risk appropriately
-Minimize interest rate risk by duration matching the income risk management securities (i.e. bonds)
-Protect the purchasing power of retirement income through inflation hedging the income risk management securities.

Communications under income-focused target date funds may also become easier for participants to understand as reporting can now be provided in terms they are used to – annual income throughout retirement.

 

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

Housing Slows

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David Blitzer

Managing Director and Chairman of the Index Committee

S&P Dow Jones Indices

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Sales of new and existing single-family homes have fallen since their recent high in November 2017 while pending home sales are flat to down so far this year.  Starts of new single-family homes are volatile but also remain below the peak seen at the end of 2017.  Recent press reports of declining activity in several major markets including Seattle, San Francisco and New York City confirm the statistics.

One factor depressing home sales is rising prices. The S&P CoreLogic Case-Shiller Home Price indices show prices rising at a 6% annual rate over the last year and a half. The pace may be welcome news to selling homeowners, but it is pricing buyers out of the market. Compared to 6% price gains, inflation is about 2% and wage gains are approaching 3%, squeezing some potential buyers out of the market. Mortgage interest rates are also creeping upward, raising monthly mortgage payments.  The recently passed Federal tax law adds further pressure. The cap of the deductibility of property tax could raise the cost home ownership.

The slowdown in housing is not good news for the economy. While residential construction is a small portion of GDP, sales and remodeling of existing homes affect large sections of the economy. Further, signs that future homebuyers are being priced out of the market will dampen consumer sentiment. Traditionally housing and auto sales follow similar patterns; auto sales are down for much of 2018 though they rebounded in September.

A positive note to end with is the first mortgage default data from the S&P/Experian Consumer Credit Default indices – defaults are lower now than before the financial crisis.

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

Beyond the SPIVA® Europe Mid-Year 2018 Headlines – Delving Deeper Into the Data

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Andrew Innes

Head of EMEA, Global Research & Design

S&P Dow Jones Indices

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The S&P Indices Versus Active (SPIVA) Europe Mid-Year 2018 Scorecard is often cited for its latest headlines surrounding the active vs. passive debate. But beyond the SPIVA headlines, there is an extensive offering of insightful data that has been carefully measured and presented to help readers dig deeper.

Let’s look at just one example from the latest SPIVA Europe Scorecard and discuss the treasure trove of information that can be gleaned from the report.

Headline: 59% of active pan-European equity funds (euro-denominated) failed to beat the S&P Europe 350 from June 2017 to June 2018.

  1. Appreciating the Longer-Term Trends

First, how does this headline figure compare to its track record over longer time periods and to other fund categories?

The proportion of funds in the category failing to beat the same benchmark rose to 87% over the 10-year period. While these figures may appear high, European active funds investing in U.S., global, or emerging market equities appeared to do markedly worse.

  1. Assessing Fund Category Performance

Contrary to what the headline may suggest, active funds investing in pan-European equities collectively outperformed the S&P Europe 350 over the one-year period. The average asset-weighted return for the active fund category was 4.02% from June 2017 to June 2018 (equal-weighted return was 3.75%). In comparison, the S&P Europe 350 one-year return was 3.46%.

Asset-weighted returns may be considered a better indicator of fund category performance compared to equal-weighted returns, since they reflect the returns of the total money invested in that particular category with more accuracy. When asset-weighted returns are higher than equal-weighted return calculations, then we know larger funds typically did better.

See how the returns compared to other fund categories in the one-year period and over longer time periods in Exhibit 2.

  1. Investigating the Distribution of Fund Returns

We already know there must be a skew in the returns across the funds in this category, since the average fund return beat the benchmark while the majority did not. Put another way, the mean was higher than the median return. The quartile breakpoint report (Report 5 in the SPIVA Europe Mid-Year 2018 Scorecard) takes this analysis one step further by giving the performance of the actual fund, which sits at the 25th, 50th, and 75th percentile by rank.

For our headline category, the third quartile fund had a performance of 0.47% in the year; nearly 3% lower than the benchmark. The first quartile fund had a performance of 5.6% in the year; just over 2% better than the benchmark. This imbalance suggests that relatively few funds may have done particularly well.

  1. Analyzing the Survivorship Rates

How does the survivorship rate compare to other fund categories and, more importantly, how consistent is it through time?

The survivorship report in the SPIVA Europe Scorecard tells us there were 1,101 funds used to calculate this headline figure. These funds represent the opportunity set available at the beginning of the period in this category. If we were to calculate the figures using only surviving fund data then any conclusions could be biased by excluding funds that would have liquidated or merged due to poor performance.

Since the headline figure counts the funds that survived and beat the benchmark index, it is also useful to see the survivorship rate in isolation. In this case, 96% of the 1,101 funds survived the one-year period of analysis. Over the 10-year period, the survivorship rate drops to just 45%. As can be seen in Exhibit 3, this is widely typical across all fund categories.

To take a look at more headlines and all of the related reports that help our readers see the full picture, please see the latest SPIVA Europe Mid-Year 2018 Scorecard.

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