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Have Passive AUMs Eclipsed Active?

Saudi Oil Attacks - A Text Book Supply Shock

2018 Institutional SPIVA®: A Couple of Takeaways

Happy 20th Birthday to the DJSI!

S&P High Yield Dividend Aristocrats Part II: Risk/Return

Have Passive AUMs Eclipsed Active?

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Craig Lazzara

Managing Director and Global Head of Index Investment Strategy

S&P Dow Jones Indices

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“You all did see that on the Lupercal
I thrice presented him a kingly crown,
Which he did thrice refuse.”

Julius Caesar, Act 3

This morning’s Wall Street Journal declared that “Index Funds Are the New Kings of Wall Street.”  The coronation, and similar notes of the “end of an era,” were prompted by Morningstar data showing that, for the first time, the assets invested in index-tracking mutual funds and ETFs exceed the AUM of actively-managed funds which aim to outperform.  As index providers, we’re gratified to see the extent of investor acceptance of our services, but, like Caesar, we renounce the crown.

In any event, it’s important to understand the extent of our putative domain.  The Morningstar data are based on mutual fund and ETF assets under management.  This is a popular data set because it’s easy to access – funds are legally required to report their AUM.  Pensions, endowments, individuals, etc. have no such requirement, at least not on a continuous basis.  As the WSJ article notes, indexed mutual funds, though 50% of mutual fund and ETF assets, account for only 14% of the value of the entire U.S. equity market.

This estimate is consistent with our own research, which suggests that indexing amounts to between 20% and 25% of the U.S. equity market.  Even this lower figure is remarkable given that index funds did not exist 50 years ago; the growth of indexing surely counts as one of the most significant developments of contemporary financial history.

Indexing started because active management overpromised and underdelivered, as our SPIVA reports have consistently demonstrated.  The challenges to active management in the last 50 years are arguably a product of its success in the decades prior.  Active investing is intrinsically a zero-sum game; the only source of outperformance for one investor is the underperformance of another.  As they came to dominate global markets, it became impossible for professional investors as a group to deliver above-index performance.

As indexing has grown, the benefits to investors – in terms of underperformance avoided and fees saved – have been substantial.  The bars in the chart above show the growth of assets tracking the S&P 500, S&P MidCap 400, and S&P SmallCap 600.  As of December 2018, those assets totaled nearly $3.9 trillion.  The green line represents our estimate of the cumulative savings in management fees over the past 23 years; the savings cumulate to $287 billion.

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

Saudi Oil Attacks - A Text Book Supply Shock

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Fiona Boal

Head of Commodities and Real Assets

S&P Dow Jones Indices

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The attacks on Sept. 14, 2019, on Saudi Arabia’s oil facilities have put the oil market back in focus for investors and policy makers alike. The event was reported to have been the largest single supply disruption in the oil market for half a century, crippling half of Saudi oil production and temporarily halting production of 5.7 million bpd or approximately 5% of global oil production. This is a textbook example of a supply shock in a commodity market.

It remains to be seen exactly how long it will take this oil production to come completely back online and what the attack may mean in terms of further instability in the region, as well as the escalation of geopolitical risks in the global oil market.  But from an investor’s perspective, there are two interesting observations to highlight regarding the price response in the immediate aftermath of the supply shock.

  1. The price response on the first trading day following the attack was extreme but could also be viewed as an aberration. The S&P GSCI Brent Crude Oil closed 14.2% higher on Sept. 16, 2019, the biggest one-day percentage gain since at least 1989, while the energy-heavy S&P GSCI was up 7.9%. Exhibit 1 offers a visual representation of the size and rarity of this one-day price move in the S&P GSCI Brent Crude Oil.
  2. Not all energy assets are created equal when it comes to their immediate responsiveness to a supply shock. Exhibit 2 illustrates the range of price moves across a variety of S&P DJI energy indices on Sept. 16, 2019. As expected, the supply shock caused by the Saudi attacks had a relatively muted impact on the major equity and fixed income energy indices. The speed and extent to which a physical oil supply shock flows through the balance sheets of companies in the energy sector can vary greatly depending on hedging activity, balance sheet structure, geographic location, financial health, position in the supply chain, asset mix, level of supply chain integration, government regulation and historical beta to the broader equity and debt markets among others.

It remains to be seen what long-term impact, if any, the Saudi attacks will have on oil prices and the value of energy companies’ equity and debt. At one end of the spectrum, the 1990 oil price shock, in response to the Iraqi invasion of Kuwait, saw the S&P GSCI Crude Oil increase 140% between the end of July 1990 and mid-October 1990. On the other hand, there have been numerous short-lived supply-related spikes in oil prices – admittedly not of the size that was witnessed on Sept. 16, 2019 – that were quickly reversed and locked safely in the annals of history.

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

2018 Institutional SPIVA®: A Couple of Takeaways

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Hamish Preston

Associate Director, U.S. Equity Indices

S&P Dow Jones Indices

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S&P Indices Versus Active (SPIVA) scorecards provide mainstay performance comparisons between active managers and benchmarks.  Our latest Institutional SPIVA scorecard shows once again how difficult active managers found it to beat benchmarks, net- or gross-of-fees.  Here are a couple of highlights.

2018 proved challenging for institutional equity managers, although institutional fixed income managers showed some strength.

The fourth quarter of 2018 witnessed a complete turnaround in sentiment, as uncertainty over Fed policy and renewed trade tensions between the U.S. and China contributed to a rise in volatility.  Although such conditions are commonly believed to favor active managers, the data suggests otherwise: in most categories, a majority of institutional equity funds underperformed their benchmarks last year, even gross-of-fees.

However, institutional active fixed income managers navigated the turbulence more surefootedly: a majority of managers beat their benchmarks, before fees, in 11 out of the 17 fixed income categories in 2018.

 

Incorporating a profitability screen in small cap benchmarks would have made them harder to beat.

We have written quite recently about the potential benefits of incorporating a profitability screen in small caps and S&P Dow Jones Indices launched the S&P Global SmallCap Select Index Series earlier this year in order to allow benchmark comparisons.  Exhibit 2 shows the impact on the SPIVA statistics when switching our international small cap benchmark to one of these small cap select indices – the S&P Developed Ex-U.S. SmallCap Select Index.

Over every timeframe, more funds beat the S&P Developed Ex-U.S. SmallCap Index (which does not require small cap companies to have a track record of positive earnings) than the corresponding small cap select index (which does).  And over the 5- and 10-year periods ending December 2018, such a switch in benchmarks would convert the international small cap category from one in which a majority of institutional active funds outperformed, to a one in which a majority underperformed.

To find out more about the latest results and for more information on the active versus passive debate, visit out SPIVA microsite.

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

Happy 20th Birthday to the DJSI!

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Manjit Jus

Head of ESG Ratings

RobecoSAM

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On Friday, Sept. 13, 2019, the annual rebalancing of the Dow Jones Sustainability Indices (DJSI) took place. This year marks the 20-year anniversary of the DJSI World, the oldest and most iconic global corporate sustainability benchmark in existence. For the companies that have been selected for this index each year over the last two decades, this is a significant accomplishment. It reflects their sustained commitment to driving forward the improvement of sustainability-related issues across all aspects of their business, and their transparency in disclosing their performance, to become sustainability “pioneers” within their respective fields.

This year, 1,166 companies actively provided detailed insights into their corporate sustainability efforts through the SAM Corporate Sustainability Assessment (CSA). This record-breaking participation in the SAM CSA is a clear sign that the topic of sustainability has firmly cemented itself in the core business strategies of companies, and that the demand from investors for sustainability data is greater than ever.

The sustainable investment space is growing more rapidly than ever, and the variety of products, services, and benchmarks available to investors has increased significantly since the DJSI World was launched in 1999. Despite this fast-paced change, the DJSI remains the leading sustainability benchmark in the world, and after two decades it continues to serve as an important compass for companies, investors, employees, and other stakeholders as they navigate through emerging sustainability issues.

As part of the annual review of the CSA methodology, RobecoSAM focused on key financially relevant themes that are shaping the corporate sustainability landscape, including adding Cybersecurity and Privacy Protection to a number of new industries, as companies are finding themselves affected by new technology risks. Questions around product offerings in the areas of Sustainable Finance were enhanced in the Banking, Diversified Financials, and Insurance industries. Similarly, questions for companies in the Oil & Gas industry were updated to refocus on transition risks and the resilience of current business models. In addition, growing concern from investors around agricultural themes like palm oil and other raw materials led to changes in the Raw Material Sourcing criterion.

For a number of years, we have observed a growing interest from our clients and other stakeholders in the “living wage.” This is a theme that is at the heart of the UN Sustainable Development Goals —holding corporates accountable for paying their employees in an equitable and fair way, improving the livelihoods and living standards of employees and families. This year, we introduced questions on the living wage in order to collect unique data on the topic while raising awareness amongst corporates. The calculation of living wages in different countries and regions is complex, and the calculation methodologies have not yet been standardized. Based on our assessment of company responses, we see that they are only starting to tackle this topic and efforts in this area will mature over time.

We have again prepared our Annual Scoring & Methodology Review document, providing deeper insights into the major methodology changes. You can read the document here.

For more about the CSA, visit www.robecosam.com/csa.

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

S&P High Yield Dividend Aristocrats Part II: Risk/Return

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Bill Hao

Director, Global Research & Design

S&P Dow Jones Indices

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From Dec. 31, 1999, to June 30, 2019, the S&P High Yield Dividend Aristocrats® generated a total return of 590.3%. Of the contribution, about 57% was from dividend income, while 43% came from price appreciation. In this blog, we will look at the risk/return characteristics in detail.

Favorable Risk-Adjusted Returns

The S&P High Yield Dividend Aristocrats delivered significant outperformance against its benchmark, the S&P Composite 1500®, over the long-term horizon. Rebasing both indices to 100 on Dec. 31, 1999, the S&P High Yield Dividend Aristocrats reached 690.30 on June 30, 2019, whereas the S&P Composite 1500 reached 315.15 over the same period, as shown in Exhibit 1.

Exhibit 2 shows the detailed risk/return profile of the S&P High Yield Dividend Aristocrats versus the S&P Composite 1500. Over the studied period, the S&P High Yield Dividend Aristocrats outperformed the S&P Composite 1500 by 4.3% on an annualized return basis. The reduced volatility helped the strategy deliver a much better risk-adjusted return (0.75) than the S&P Composite 1500 (0.41). Furthermore, the S&P High Yield Dividend Aristocrats also had superior risk-adjusted returns over the 5-, 10-, and 15-year periods.

Defensive Characteristics

The S&P High Yield Dividend Aristocrats demonstrated defensive features during the down markets of the studied period, with the strategy having a smaller maximum drawdown, less loss, and a lower beta than the S&P Composite 1500, as shown in Exhibit 3.

Upside Participation and Downside Protection

Another defensive feature of the S&P High Yield Dividend Aristocrats was that it participated in the upside when the market[1] was up and provided downside protection when the market was down. As illustrated in Exhibit 4, the S&P High Yield Dividend Aristocrats, on average, participated in 88.2% of market returns during the up months. On the other hand, it experienced only 59% of market drops during the down months. Overall, the strategy tended to outperform, with a persistent hit ratio[2] of 75.9% in down markets and 37.8% in up markets.

In the next blog, we will discuss the performance attributions of the S&P High Yield Dividend Aristocrats.

For more information, please see the first part of this blog series here.

[1] The market is defined as the monthly performance of the S&P Composite 1500 from Dec. 31, 1999, to June 30, 2019.

[2] The persistent hit ratio is defined as the total number of periods when the strategy outperforms the benchmark and is expressed as a percentage.

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