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In This List

Capturing and Evaluating Intentionality in Funds

A Look at Mexican Industries and the Potential Impact of the USMCA

Royal Commission, Regulation, and Rocky Markets

Factor Use is Growing Among Financial Advisors and Institutional Investors

2018 Mid-Year SPIVA® Canada Scorecard – Challenging Times for Active Equity Managers

Capturing and Evaluating Intentionality in Funds

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Kelly Tang

Former Director

Global Research & Design

One of the most salient themes in this year’s 29th Annual SRI Conference was intentionality. The topic of intentionality has jumped to prominence in ESG discussions—particularly in regard to ESG ratings for mutual funds—and understanding what it means is important for ESG market participants.

In ESG terms, intentionality aims to evaluate whether a given fund or strategy has policies and procedures in place that demonstrate that the investment management process makes a concerted effort to address environmental, social, and governance issues.

Recently, fund analytics and financial information providers began to assign ESG ratings to over 34,000 funds using their proprietary scaling mechanisms and scores. Such methodologies involve a holdings-based scoring system of rolling up individual companies’ ESG ratings into a single mutual fund rating.

The reception to this type of ESG ranking for funds has been mixed, with criticism centering around the fact that the fund’s sustainability score fails to fully capture the ESG intentions of that strategy. In particular, the key concern has been that a holdings-based approach does not take into account the full arsenal of tools available to portfolio managers and investors, such as investor engagement and shareholder proposal voting.

Another criticism directed toward the rolling up method is the lack of consideration for the overarching strategies of the institution (i.e., intentionality) and the limitation in using data-based “snapshots” of funds’ holdings in isolation. For example, the situation may exist whereby a fund has invested in and is working with low ESG score companies in an effort to improve their behavior. Yet in the current scoring system, despite this particular fund’s intention to promote ESG, this fund would register as a low-ranking ESG fund. With this is mind, melding a fund’s intentionality score with the quantitative holdings data would be the preferred method in rating a fund on its ESG performance.

Therefore, the question then becomes: what would be the best way to craft an intentionality score that encompasses a qualitative and quantitative lens for the fund manager? Although there are no easy answers to that question, it has been suggested that an intentionality score should ideally focus on the past actions of the fund and review how managers have voted historically on environmental or broader ESG resolutions at major companies.

Given these concerns about a fund score based on holdings, competitors for mutual fund ESG ratings are introducing methods that are more contextualized and nuanced. For example, some providers rank funds by their initiative on ESG strategy (depth and performance), shareholder engagement, public sphere advocacy, and performance.

It is important to note that these discussions and critiques around the existing methods to evaluate intentionality highlight the transition that ESG is undertaking as it evolves from emerging to mainstream status. The mainstreaming of ESG data into fund rankings is a positive development, as discussions have moved from pinpointing the weaknesses in a company’s ESG data to those at the fund level.

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

A Look at Mexican Industries and the Potential Impact of the USMCA

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Maria Sanchez

Director, Sustainability Index Product Management, U.S. Equity Indices

S&P Dow Jones Indices

After more than a year of negotiations, the United States-Canada-Mexico Agreement (USMCA) is scheduled to be signed on Nov. 30 2018, at the G20 Summit in Argentina. The deal represents the new trade agreement between the former North American Free Trade Agreement (NAFTA) countries.

Market participants who want to gain more insight into the potential impact of the new agreement on the Mexican economy and capital markets can use the geographic revenue data to estimate the percentage of Mexican equities that derive their revenues domestically, and those that derive their revenues from the U.S. and Canada.

Using the constituents of the S&P/BMV IPC CompMx as of Oct. 31, 2018, we look at the revenue exposure of the constituents based on trailing 12-month figures. We found that the majority of Mexican companies derived their revenue locally (66.72%). Roughly 9.79% of revenues came from the U.S., and the remainder came from Canada or South American countries (see Exhibit 1).

Canada accounted for less than 1% of the revenues. Including Canada, approximately 10.74% of S&P/BMV IPC CompMx companies’ revenue exposure (roughly more than a third of the 32.3% foreign revenue) came from the former NAFTA countries.

Beyond the headline revenue exposure breakdown by country, it is potentially worthwhile to dive deeper into individual industries, as trade agreements tend to affect certain industries more than others.

In Exhibit 2, we present a detailed breakdown of the Mexican industries that have exposure to the U.S. and Canada. The top three industries in descending order based on revenue exposure are Materials (43.4%), Food, Beverage & Tobacco (25.2%), and Telecommunication Services (15.5%).

It is not by coincidence that the automobile industry is a contentious topic in the new trade deal. Of the 10.74% revenue coming from the U.S. and Canada, the Automobiles & Components Industry (GICS Code 2510) is the fifth-largest in terms of weighted revenue exposure. However, based on our analysis, we find it likely that Materials and Food, Beverage & Tobacco are the two industries that would be most affected in Mexico, more so than the headline-grabbing automobile industry.

It remains to be seen who will take the biggest losses and gains in the new USMCA deal, and whether this is a step forward in international trade. At a minimum, using geographic revenue provides a rough picture of Mexican industries that have the potential to be affected.

Revenue exposure[1] gives us an additional tool to have a better understanding of what´s inside the index, characteristic, and risks that are not visible at a first glance.

[1] We used the FactSet Geographic Revenue Exposure (GeoRevTM) dataset to calculate revenue exposure. It provides a geographic breakdown of revenues at the country level for all companies with available data.

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

Royal Commission, Regulation, and Rocky Markets

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Stuart Magrath

Former Senior Director, Channel Management, Australia and New Zealand

S&P Dow Jones Indices

Over the past few months, there has been a flurry of activity in the financial advisor segment of Australia. In mid-September 2018, S&P Dow Jones Indices (S&P DJI) hosted an exchange-traded fund (ETF) seminar in Perth, Western Australia. This was S&P DJI’s second foray in the West, and with Perth being one of the world’s most isolated cities, financial advisors were appreciative to have Easterners head to the West Coast.

Since the end of the mining investment boom, Western Australia has sought to realign its economy. Housing in Australia is one of the pillars of the retirement system, together with superannuation, non-superannuation assets, and the Age Pension from the federal government. With a fall in housing prices in the West, advisors have been looking for upside in other asset classes.

Advisors who attended our Perth seminar were eager to hear how they could diversify their clients’ portfolios in a cost-effective and compliant manner. One of the seminar highlights was hearing hear from local advisors as to how ETFs can revolutionize financial advisor practices. The message came through loud and clear that stock-picking or selecting managed funds to achieve particular client outcomes has become increasingly difficult and that forward-thinking advisors are reorienting from actively managed fund selection to ETF selection in order to access particular asset classes. For example, an advisor seeking Australian Equity exposure for a client would recommend investing in an ETF that tracks an S&P/ASX index rather than selecting a range of shares listed on the ASX, or selecting an Australian large-cap active fund. The SPIVA® Australia Scorecard Mid-Year 2018 and Persistence of Australian Active Funds September 2018 Scorecard continue to show that most active funds failed to outperform their respective benchmarks the majority of the time. If advisors want to spend more time with their clients, the shift to ETFs as the core building block of a client’s portfolio could assist in this regard, while also potentially delivering the additional benefits of lower cost, greater transparency, and easy tradability.

The growth of the ETF market in Australia to just over AUD 40 billion in assets is a testament to the increasing preference of Australian financial advisors, self-managed super fund trustees, and retail investors to consider ETFs as part of a portfolio. While most assets are held in core products that track either an S&P/ASX index or the S&P 500®, in order to secure exposure to the U.S. market, there is increasing interest in smart beta or factor-based strategies. We can expect to see ETFs that track these exposures launch in Australia. In the interim, Australian advisors can learn more by referring to How Smart Beta Strategies Work in the Australian Market.

The Financial Services Royal Commission was also a hot topic at the seminar, and also at the recent ASX Adviser Development Workshop. The concern among advisors is that the Royal Commission may recommend a slew of additional regulatory requirements, further burdening advice practices and reducing the time advisors spend with clients. Together with the new education requirements being laid down for Australian advisors, the constant rate of regulatory change in the past few years might be set to continue.

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

Factor Use is Growing Among Financial Advisors and Institutional Investors

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Vincent de Martel

Solutions Strategist


Factor investing is growing rapidly — not only are more investors adopting factor strategies, but as investors gain experience, they increase their use of them. This is one of the key findings from our recent Global Factor Investing Study, which is based on face-to-face interviews and discussions with more than 300 institutional and wholesale factor investors around the world — including financial advisors, pension funds, private banks and insurance companies.

Investors are adopting more factor strategies, but still in small doses
Factors are measurable characteristics of a security that help explain its performance. Our study found that while an asset owner often commences their factor journey with a single strategy, it is uncommon for them to stop there. The institutional and wholesale investors surveyed in the study have gone on to implement from two to four factor strategies on average.

However, factor allocations generally represent a small proportion of the asset classes they are being applied to. In the vast majority of cases (looking at equities and fixed income), allocations to factor strategies remain in the 0% to 20% range. This means that even for factor adopters, most still have over 80% of their equity and fixed income allocations in traditional active and/or market-cap-weighted passive strategies.

For those institutional investors who described themselves as “sophisticated” factor users, this segment reported nearly double the average allocation to factor strategies than the less sophisticated segment, at nearly 20%. This trend also applies to wholesale investors, where the more sophisticated users reported average factor allocations of 15%.

Which factor is the most used?
Our study found that Value continues to be the most commonly utilized style factor in portfolios and is particularly ubiquitous in institutional portfolios — which is notable given the extended underperformance of equity value strategies in recent years. Other key style factors include Low Volatility, Momentum, Size and Quality.

Respondents noted that they tend to start their factor journey with equities, and look to extend into fixed income and multi-asset applications.

Single or multi-factor?
When it comes to applying a single or multi-factor approach, our study found that equity single factors are the most common approach, closely followed by equity multi-factor. Some distance behind are multi-asset approaches, followed by single- and multi-factor fixed income.

The reasons behind these choices are relatively clear and rational.

  • For institutions, single factor approaches are driven by the desire to reduce or minimize complexity and to keep costs low. This is particularly relevant for newer factor investors and smaller institutions with limited internal resources.
  • Institutions favoring multi-factor approaches have different motivations — control of risk, factor tilting and enhancement of performance were cited by respondents as much more important than costs. Multi-factor strategies tend to be deployed by larger investors that have significant scale and lower cost ratios.
  • For wholesale investors, the drivers are very similar, with lower costs cited as an even stronger driver for single factor usage.

Learn more about how institutions and wholesale investors are using factor strategies.

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

2018 Mid-Year SPIVA® Canada Scorecard – Challenging Times for Active Equity Managers

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

The latest Canada SPIVA® scorecard landed recently.  While data up to the end of June 2018 was consistent with results from previous SPIVA Canada scorecards – active management once again found it challenging to beat the passive benchmarks – there were pockets of success.  Here are a few highlights.

Active managers found it difficult to beat the Canadian equity benchmark.

Although trade tensions and concerns over global economic growth threatened the upward trajectory of the Canadian equity benchmark S&P/TSX Composite earlier this year, an accompanied rise in dispersion did not lead to an improvement in relative performance by active Canadian equity funds.  A chunky 93.22% of Canadian equity funds underperformed the S&P/TSX Composite’s 10.41% rise in the 12-month period ending in June 2018.  As exhibit 1 makes clear, such underperformance was unrivalled across other regions globally.

Exhibit 1: Percentage of Funds that underperformed their respective benchmarks.

Source: S&P Dow Jones Indices.  Data as of June 30, 2018.  Chart shown for illustrative purposes only.  Past performance is no guarantee of future results.

Canadian managers did not fare well in international equities either.

In further signs that active managers may have found it difficult to navigate the impacts of trade tensions and concerns over a global economic slowdown, International Equity funds recorded a notable increase in underperformance over the last 12- months.  Nearly 90% of category’s funds lagged the S&P EPAC LargeMidCap (versus 73.08% reported in our year-end Canada SPIVA scorecard).  Underperformance also rose among funds investing in U.S. equities: only 27.59% of managers beat the S&P 500 (CAD) over a one-year horizon, compared to 30.59% from our year-end 2017 scorecard.

Dividend-focused active equity funds yielded better results.

Although the majority of funds in six of our seven categories lagged their respective benchmarks since the end of June 2017, Canadian Dividend & Income Equity Funds offered the exception.  Perhaps helped by avoiding sizeable negative contributions from a handful of S&P/TSX Canadian Dividend Aristocrats® constituents, an impressive 67.57% of active funds beat the benchmark.  But we will have to wait and see if this pattern continues: 100% of the category’s funds lagged the benchmark over a ten-year horizon, demonstrating that performance can vary from year-to-year.

Exhibit 2: The majority of fund categories lagged their respective benchmarks

As a result, while some market participants may hope that the future holds better prospects for active management, our SPIVA scorecards continue to show how difficult it can be to (persistently) beat passive benchmarks.

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