Indexology^® Blog

U.S. Equities’ Predominance

U.S. equities represent 59.1% of the total global equity market in terms of float market capitalization (FMC) and at least 50% of the weight in 8 of the 11 GICS sectors globally. Given trends and narratives, U.S. equities seem to have an outsized role in explaining performance globally and may help investors to understand market dynamics.

Real Estate Sector Evolution

U.S.-domiciled companies accounted for 60% of the global Real Estate sector’s float-market capitalization as of Sept. 30, 2022, and Real Estate companies within the U.S. market have increased in number and size over the past decade. For example, Exhibit 2 shows there were 113 Real Estate companies in the S&P Composite 1500^® at the end of September 2022, with a collective FMC of USD 1,060 billion, up from 35 companies with USD 142 billion of FMC at the end of 2005.

Long-Term Risk/Return Characteristics

The S&P IPSA, the Chilean large-cap benchmark, has shown strong returns YTD. But over the long term, the U.S. Real Estate Select Sector and the S&P 500^® outperformed with lower return volatility.

Combined with the relatively low average five-year rolling correlation (0.33) between the Real Estate Select Sector and the S&P IPSA, historically, Chilean market participants may wish to consider the potential diversification of incorporating U.S. Real Estate and U.S. equities more broadly.

The Real Estate Select Sector has grown in recent years and has offered higher dividend yield than the S&P 500 and many of its GICS sector segments. Hence, this sector and the U.S. equities market may be of interest to Chilean investors, especially in the current inflationary environment.

The semiannual S&P Indices Versus Active (SPIVA^®) Scorecards¹ measure the performance of actively managed funds against their corresponding benchmarks in various markets around the world. According to the latest SPIVA MENA Mid-Year 2022 Scorecard, the majority of MENA active equity managers outperformed their benchmarks, despite a turbulent second quarter and geopolitical tensions.

Performance across the cap spectrum was mixed, as we observe in Exhibit 1, which divides the S&P Pan Arab Composite constituents into quartiles by their index weight and calculates the weighted average constituent return for each. Quartiles 1 and 4, the smallest and largest quartile, comprised the worst performers, while Quartiles 2 and 3 outperformed. As a result, active managers who targeted the mid-sized quartiles might have had a better probability of outperformance. The underperformance of the largest names perhaps boded well for active managers, whose portfolios have tended to be closer to equal weighted than cap weighted.²

But simply targeting the mid-sized quartiles may not have been sufficient. For example, Emirates Telecommunications Group Company PJSC was the worst contributor to the S&P Pan Arab Composite’s performance and happened to be in one of the mid-sized quartiles. A rise in stock-level dispersion or cross-sectional volatility created opportunities to add value from stock selection.³ Further, the spread among sectoral performances trended higher over the past year (see Exhibit 2), which could have made sector allocation more valuable. Not coincidentally, avoiding Communication Services and gaining exposure to Financials was important for success. Within Financials, exposure to Alinma Bank and avoidance of Al Rajhi Bank was rewarded.

As a result of these tailwinds, the average fund return outperformed the benchmark return across all fund categories. To put these results in context, we compare the average fund excess return (relative to the benchmark) versus the median fund excess return.

Exhibit 3 illustrates that fund performance was characterized by negative skewness. The dashed grey diagonal identifies an equal median and average return. Across categories, results were above and to the left of the diagonal line, meaning that the average excess return was lower than the median excess return. We can interpret this to mean that, while more than one-half of active managers outperformed, there were more big losers than big winners.

Although the first half of 2022 was characterized by higher volatility in the MENA region, fortuitous factors, including the underperformance of mega caps along with higher stock and sector dispersion, aided the outperformance of active managers. For more insights on MENA, you can access the latest report here.

¹ For more information, see SPIVA Scorecards: An Overview. https://www.spglobal.com/spdji/en/education/article/spiva-scorecards-an-overview

² Ganti, Anu, “Mutual Fund Portfolio: Equal Weight or Cap Weight?” Indexology^® Blog, July 2017, https://www.indexologyblog.com/2017/07/27/mutual-fund-portfolios-equal-weight-or-cap-weight/.

³ Ganti, Anu, “Opportunity to Outperform,” Indexology Blog, June 2022, https://www.indexologyblog.com/2022/06/09/opportunity-to-outperform/.

Global equities dropped 6.6% in Q3 2022, as measured by the S&P Global BMI, accumulating a loss of 25.6% YTD. Meanwhile, Shariah compliant benchmarks, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, managed to outperform their conventional counterparts by 0.6%.

Overall, regional broad-based Shariah and conventional equity benchmarks accumulated further losses this quarter, as interest rates continued to rise, leading to the strengthening of the U.S. dollar and further impacts on non-U.S. equities. The Pan Arab region remained unaffected, as the Shariah benchmark finished the quarter with marginal gains.

Drivers of Shariah Index Performance in Q3 2022

While this year’s broad negative trend continued through Q3, sector compositions can provide some explanation for this quarter’s results. Higher exposure to growth-oriented Information Technology stocks within Islamic indices contributed most to the negative performance, as growth-oriented IT shares sank 6.9% in Q3.

Health Care and Communication Services also had a significant negative impact on the S&P Global BMI Shariah, dropping 6.4% and 13.4% during the quarter, respectively.

Energy continued to be an outlier sector, as it was the sole sector to manage gains during the period. However, due to its low weight of 3.6% in Islamic indices, the impact was minimal.

Mixed Results in MENA Equities

MENA regional equities experienced mixed results in Q3. The regional S&P Pan Arab Composite increased marginally by 0.5% in Q3, accumulating a minor loss of 0.5% YTD. GCC country performance was generally positive, with significant gains in Oman (up 9.3%) and Bahrain (up 6.8%) and major losses in Kuwait (down 6.7%). The case of Oman is notable, as it is one of the world’s best-performing country indices, with a YTD gain of 21.3%.

For more information on how Shariah-compliant benchmarks performed in Q3 2022, read our latest Shariah Scorecard.

This article was first published in IFN Volume 19 Issue 41 dated Oct. 12, 2022.

What a year it is turning out to be for Latin American equities. Despite the turbulence of the past three quarters, Latin America has been resilient. As shown in Exhibit 1, the S&P 500^® and S&P Emerging BMI have declined in every quarter of 2022 and have lost more than 20% each YTD as of Sept. 30, 2022. Meanwhile, the S&P Latin America BMI gained 3.6% in Q3, edging into positive territory YTD.

While returns have been mixed across countries and quarters, it’s clear that Chile and Brazil’s stellar performance contributed to Latin America’s overall gains. Moreover, among global country indices Chile and Brazil ranked among the top five best performers for Q3 and YTD.¹

The story in the region has not changed much since last quarter, with inflation, rising interest rates, the Russia-Ukraine conflict and domestic political uncertainty continuing to loom over the region. Despite these headwinds, markets in general have done relatively well in Q3. Except for Colombia and Mexico, all other equity markets gained during the quarter, with Argentina’s S&P MERVAL posting the largest gains of 57% in ARS. Chile’s S&P IPSA ended the quarter up 3% in CLP, and it was the only index with positive returns for every quarter of 2022. The S&P Brazil BMI’s strong returns of nearly 12% offset Mexico’s S&P/BMV IRT loss of 6%.

In terms of sectors, most ended on a positive note, with top performers Information Technology, Consumer Discretionary and Energy posting gains of 27.5%, 18.6% and 16.6%, respectively. The Financials sector, which gained 8.3%, and the Energy sector, up 16.6%, were the largest contributors to the overall returns for the region. Materials (-6.0%), the second-largest sector in the region after Financials, had the largest negative impact on the region’s returns for the quarter.

The top 10 largest companies by index weight, representing over 30% of the index, had a significant impact on performance in Q3. Specifically, Brazilian giants Petrobras and Itau Unibanco were major drivers in leading the region to positive territory. Mining companies like Brazil’s Vale, Mexico’s Grupo Mexico and Peru’s Southern Copper were significantly affected by the drop in metal prices for iron ore and copper, which were down 18.3% and 22.0% YTD, respectively.² Communication Services ended the quarter at the far end of the negative side, driven by Mexico’s America Movil’s price drop of nearly 13% for Q3.

Despite the ups and downs of the markets, Latin American equities have remained resilient so far. As we enter Q4, it will be interesting to see if the region can hang on to these gains and hopefully add some more as the year comes to an end.

For more information on how Latin American benchmarks performed in Q3 2022, read the latest Latin America Scorecard.

¹ S&P Global Equity Indices Monthly Update. Sept. 30, 2022. sp-global-equity-indices-monthly-update.pdf

² Source: S&P Capital IQ Pro. Data as of Sept. 30, 2022. Iron Ore 62% FE (CME-NYMEX). Copper (COMEX).

One of the benefits of indexing is its low cost relative to active management. As indexing has grown, investors have benefited substantially by saving on fees and avoiding active underperformance. We can estimate the fee savings each year by multiplying the difference between the average expense ratios of active and index equity mutual funds by the total value of indexed assets for the S&P 500^®, S&P 400^® and S&P 600^®. When we aggregate the results of these annual computations, we observe that the cumulative savings in management fees over the past 26 years is USD 403 billion (see Exhibit 1).

Of course, this USD 403 billion estimate understates the full cost savings of the index industry, since it encompasses indices only from S&P Dow Jones Indices (and not all of those). Our recent Annual Survey of Indexed Assets shows a 30% surge in assets tracking the S&P 500 since 2020 to USD 7.1 trillion as of December 2021. Exhibit 2 illustrates that since 1995, this growth (CAGR of 11.1%) has outpaced the growth due to market gains (CAGR of 8.2%), indicating a substantial increase in flows.

To provide context on the size of the passive market, Exhibit 3 divides S&P 500 indexed assets historically by the float-adjusted market capitalization of the S&P 500. This percentage has stabilized at approximately 17% since 2018, indicating that the potential for future passive growth is promising.

Obviously, the cost savings generated by the shift from active to passive management would be inconsequential if investors lost more in performance shortfalls than they gained in reduced fees. As readers of our SPIVA^® reports are well aware, of course, that’s decidedly not the case: most active managers underperform most of the time. In the 20 years ending in 2021, 94% of all large-cap U.S. managers lagged the S&P 500. Mid- and small-cap results were almost equally disappointing. The rise of passive management has been a notable consequence of active performance shortfalls.