In This List

Blending Factors in Smart Beta Portfolios

Sector Primer Series: Information Technology

Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

Factor Strategies in Brazil: A Practitioner's Guide

Value: A Practitioner's Guide

Blending Factors in Smart Beta Portfolios

Contributor Image
Tianyin Cheng

Senior Director, Strategy Indices

In recent years, smart beta strategies have seen a significant increase in popularity.  These systematic strategies seek to measure factors in order to harvest the associated long-term risk premium.  Many empirical studies show that smart beta strategies have historically outperformed their capweighted benchmarks.  However, different single factors tend to outperform in different market environments.1  Therefore, holding a combination of factor strategies in a blended portfolio could provide a powerful source of diversification and more stable excess returns.

This paper briefly reviews the definition and performance characteristics of the S&P 500® Single-Factor Indices, demonstrates their historical cyclicality and correlation, and presents a few examples of how market participants could potentially use investment vehicles tracking these single-factor indices as part of their own factor allocation, either as strategic or tactical plays.  These examples expand the traditional asset allocation frameworks to factors, including optimal allocation frameworks, heuristic allocation frameworks, and a trend-based timing framework.

1. SINGLE FACTORS

The S&P Single-Factor Indices comprise four key factors: low volatility, momentum, value, and quality.  A rules-based selection and non-marketcap-weighting approach is used to construct the indices, and diversification and investability are taken into consideration.

The indices are constructed from the universe of S&P Dow Jones Indices’ (S&P DJI) headline global indices, including the S&P 500, S&P Europe 350®, S&P Global BMI, and regional and country benchmarks.  Approximately one-fifth of the universe is selected by applying liquidity criteria.  The constituents are then weighted two ways: by the inverse of volatility in the case of low volatility indices, and by the product of factor score and market cap for the momentum, value, and quality factors.  The indices are rebalanced semiannually except for the low volatility indices, some of which are rebalanced quarterly.  Exhibit 1a provides an overview of the S&P Single-Factor Indices.

In this paper, we will focus on the S&P 500 Single-Factor Indices.  Exhibit 1b provides the description of the four long-only, single-factor indices, together with a dividend index and an equal-weight index, built on the S&P 500 universe.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Sector Primer Series: Information Technology

Contributor Image
Louis Bellucci

Senior Director, Index Governance

INTRODUCTION

Developed in 1999 and jointly managed by S&P Dow Jones Indices and MSCI, the Global Industry Classification Standard® (GICS®) assigns companies to a single classification at the sub-industry level according to their principal business activity using quantitative and qualitative factors, including revenues, earnings, and market perception. The sub-industry is the most specific level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries, as of Dec. 31, 2018.

Companies primarily engaged in Software & Services, Technology Hardware & Equipment, and Semiconductors & Semiconductor Equipment are classified into industry groups that make up the Information Technology sector. It includes, but is not limited to, companies that develop and produce software, manufacture electronic equipment and instruments, provide commercial electronic data processing, and manufacture semiconductors and related products, as well as those that manufacture communication equipment and products including LANs, WANs, routers, telephones, switchboards, and exchanges.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

Contributor Image
Andrew Innes

Head of EMEA, Global Research & Design

INTRODUCTION

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change.  Carbon prices are already implemented in 40 countries and 20 cities and regions.  Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.[1]

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

The key points included in the index concept are as follows: 

  • Carbon pricing risk from a growing array of new policies and taxes leading to potentially significant increased costs for companies.
  • Every company having a different carbon emissions profile—its total greenhouse gas (GHG) emissions footprint and where geographically these emissions occur.
  • Carbon pricing risk could vary substantially among companies operating in the same business sector.

This development is an example of the broader move toward incorporating environmental, social, and governance (ESG) considerations in asset management.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Factor Strategies in Brazil: A Practitioner's Guide

WHAT ARE FACTOR INDICES?

Capturing market idiosyncrasies and desired risk/return characteristics has been a fundamental component in the active management space for decades. Taking the fundamental ideology behind an investment strategy and democratizing them within an index allows for these rules-based portfolios to provide at minimum a gauge for relative performance and at best the ability to systematically capture alpha.

When looking at factor strategies in Brazil, we will be focusing on four different strategies.

Enhanced Value: At the most basic level, the goal of investing in value stocks is to buy stocks that are “cheap” or trading at a discount relative to their peers based on company fundamentals.

Momentum:The goal of momentum investing is to capture the stocks that have had the highest price appreciation relative to their peers with the expectation that they will further outperform in a rising market.

Quality: Investing in companies that have quality characteristics seeks to capture stocks that have fundamentals that exemplify a well-run company relative to their peers.

Low Volatility/Inverse-Risk Weighted: Low volatility or inverse-risk weighted strategies allow for participation in the market even during turbulent or volatile times. Each strategy has its own risk/return characteristics that we will discuss throughout this paper.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Value: A Practitioner's Guide

Contributor Image
Karina Tjin

Analyst, Strategy Indices

WHAT IS VALUE?

The foundational lessons of Graham and Dodd provide a recipe for market participants to look at stocks based on a valuation framework and to understand the relative cheapness of stocks. This framework has been used throughout the years, and many have adapted or adjusted it to meet their investment styles or views.

At the most basic level, the goal of investing in value stocks is to buy stocks that are trading at a discount relative to their peers (based on company financials) but have upside potential. How someone measures the relative “cheapness” and determines how much of a portfolio to put in a “cheap” stock are key items to consider when looking at value.

Using company financial metrics, the S&P Enhanced Value Indices seek to measure stocks with attractive valuations based on three key fundamentals.

  1. Price-to-Earnings Ratio: Calculated as a company’s trailing 12-month earnings per share divided by its share price. A key metric used for company valuation, we use this ratio to identify companies with earnings that may not be reflected in their share price when compared with other companies.

  2. Price-to-Book Value Ratio: Calculated as a company’s latest book value per share divided by its share price. This metric is key in understanding what proportion of a company’s assets are priced into the shares of a company.

  3. Price-to-Sales Ratio: Calculated as a company’s trailing 12-month sales per share divided by its share price. This metric is used to identify companies that might not have consistent earnings but still maintain robust sales growth relative to their share price appreciation. These three ratios were selected to identify the stocks that could have the most potential upside value relative to their share price. For each stock in the underlying index and for each metric, a risk-adjusted z-score is calculated and a simple average of these three z-scores is taken.

These three ratios were selected to identify the stocks thatcould have the most potential upside value relative to their share price. For each stock in the underlying index and for each metric, a risk-adjusted z-score is calculated and a simple average ofthese three z-scores is taken.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Processing ...