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Can Dividends Yield a Better Retirement?

15 Years of SPIVA®, the De Facto Scorekeeper of the Active vs. Passive Debate

S&P/TSX Geographic Revenue Exposure Indices: Where’s Your Exposure?

Exploring the S&P/TSX Capped REIT Income Index

Is Smart Beta Getting Smarter?

Can Dividends Yield a Better Retirement?

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Howard Silverblatt

Senior Index Analyst, Product Management

This piece originally appeared in the December 2017 edition of Indexology Magazine.

If you're getting up there in age, as I am, you are looking to eventually retire. And while that does not necessarily mean you will stop working, it does likely mean a reduction in current and expected income. It also means needing to live on what you will now be generating and protecting that income and principal.

Looking for income in today’s lowrate environment, where the Fed has increased rates twice this year and is expected to do so one more, is a relatively poor search, as interest rates have actually declined yearto-date (the 10-year is at 2.30%, compared to 2.45% at year-end 2016 and 2.27% at year-end 2015). While some bank instruments have inched up, it is not enough to change the risk/reward tradeoff, as they remain uncompetitive with yields, especially given the reduced tax treatment of qualified dividends. Bonds yields are competitive, but with no tax advantage, and unless you are able to hold them until maturity, higher interest rates could erode your principal if you need to sell them; additionally, fixed rate instruments do not necessarily move up with interest rates. Preferred issues also tend to have a higher yield, but their rate may not be impacted by interest rates increases, with most not having a tax advantage. In the current environment, income seekers have very few choices, with dividends having very little in the way of competition, which could be adding to their lower growth rate. Adding to the current dividend bandwagon is the market, where the aging bull continues on, setting new highs, and companies slowly play catch-up with their yields, which have declined as prices outpaced dividend increases.

The way I look at it, dividends could become my “paycheck” in retirement, and while pay raises are nice, the paycheck needs to continue to come in, even without the raise. That means I could look to companies with a history of paying and increasing dividends, as well as sufficient earnings and cash flow (can’t write a check against proforma earnings) from current operations to cover the dividend and grow the business. The company doesn’t have to do great or even set records, but they do need to have a stable product line that I am comfortable with going forward, and the potential upside of longer-term capital appreciation (so they can increase the dividend).

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15 Years of SPIVA®, the De Facto Scorekeeper of the Active vs. Passive Debate

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Aye Soe

Managing Director, Global Head of Product Management

Few people know the ins and outs of the SPIVA (S&P Indices Versus Active) Scorecard better than Aye Soe, Managing Director of Research & Design. A few months after SPIVA’s 15th birthday, Emily Wellikoff, Indexology Magazine Editor-in-Chief, sat down with her to discuss how the report has grown over the last decade and a half, its most surprising findings, and what’s changed since factor investing started blurring the lines between active and passive.

EMILY: Fifteen years, or one-and a-half market cycles, since SPIVA launched, what’s the most important lesson you’ve learned about active and passive investing?

AYE: The most important thing we’ve learned is that the average manager hasn’t been able to beat the benchmark across most equity and fixed income categories over the long term. There may be a small number of managers who are able to beat the benchmark in any given year, but the likelihood of those managers repeating the same success consistently in the years that follow is small, less than a random coin toss.

EMILY: What are some common misconceptions or myths about the active versus passive debate that you have come across in the last 15 years?

AYE: In equities, many people see small-cap and emerging markets as areas where market inefficiencies may provide opportunities for active management. However, near-, mid-, and long-term results for the two categories show that average active managers do not necessarily fare better than their benchmarks. In fact, over 1-, 3-, 5-, and 10-year periods, the majority of active managers in those two categories have overwhelmingly underperformed. Market inefficiency may exist in those asset classes, but the results dispel the myth that an average active manager has historically been able to deliver higher relative returns than the benchmark.

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S&P/TSX Geographic Revenue Exposure Indices: Where’s Your Exposure?

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John Welling

Director, Equity Indices

Our geographic revenue exposure indices target Canadian or U.S. markets by capturing the performance of S&P/TSX 60 companies with revenues that center on these countries. The top one-half of those companies with the highest proportion of revenues within the target region are selected for inclusion within the relevant index. Constituents are then weighted by float market cap times the revenue exposure score. By creating the S&P/TSX 60 Canada Revenue Exposure Index, we are able to increase exposure to Canadian-centered companies, delivering an index that is designed to provide comparably higher exposure to Canadian-based revenues. Likewise, the S&P/TSX 60 U.S. Revenue Exposure Index shifts focus toward companies with U.S.-centered revenues.

Sector weight and composition differences have contributed to performance differences within each index and include the following.  

  • The domestic revenue nature of Canadian banks tilts the financials sector weight away from the U.S., while Brookfield Asset Management somewhat offsets this due to the nature of its foreign- and U.S.-based revenues.
  • Telecommunication services companies (primarily BCE Inc.) generate a majority of their revenues domestically, favoring exposure to Canada.
  • Materials companies gain a higher proportion of revenues from within the U.S.
  • Exploration- and production-focused energy companies generate more revenues within Canada, whereas revenues from pipeline companies are skewed toward the U.S.
  • Notably, currency fluctuations, including CAD or USD strengthening or weakening, affect the value of Canadian exports when domestic companies earn revenues in foreign currencies and convert these back into Canadian dollars.

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Exploring the S&P/TSX Capped REIT Income Index

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Smita Chirputkar

Director, Global Research & Design

EXECUTIVE SUMMARY

  • Canadian REITs have outperformed the equities and the bond markets over the past 20 years, with a similar risk level as that of equities.
  • There are potential diversification benefits of using REITs in a portfolio.

          o REITs have low correlation with equities and bonds.

          o REITs are another class of income-generating securities that tend to pay high dividends and have low correlation to other dividend-paying sectors like utilities and telecommunication services.

  • REIT securities can be further classified into eight subgroups that exhibit different risk/return profiles, as well as low-to-moderate correlations among each other, adding to the diversification benefits within a basket of REIT securities.
  • Canadian REITs have generated higher dividend yields than the broad-based domestic equity market over the past 17 years.
  • The S&P/TSX Capped REIT Income Index is designed to measure the performance of REIT companies in the S&P/TSX Composite while overweighting and underweighting companies based on their risk-adjusted income distribution yield.
  • The index is tilted in favor of securities with yields that have not fluctuated in the past 36 months.

INTRODUCTION

REITs were created in the U.S. in 1960 to give market participants a new approach to income-producing real estate securities that combine the attributes of real estate and stock-based investments.  Over the past five decades, market participants around the globe have responded to this new asset class.  The total equity market capitalization of global equity REITs has grown 16-fold in the past 20 years, from CAD 0.11 trillion to CAD 1.8 trillion as of June 2017, as measured by the S&P Global REIT.

Due to the growth and distinct properties of real estate securities, S&P Dow Jones Indices and MSCI created a new sector classification—real estate—in August 2016.  Listed equity REITs and other real estate companies from the financials sector moved to the newly created real estate sector.

The Canadian REITs industry celebrated its 20th anniversary in 2013. Canadian REITs were born after the recessionary period in the late 1980s and early 1990s.  There were five REITs in the Canadian market as of late 1996.  From 1998 to 2000, when technology stocks were soaring, REITs were trading at a discount in Canada.  After the burst of the technology bubble, market participants were searching for companies that owned the hard assets, and REITs became a widely accepted vehicle, as they owned or managed the physical assets and satisfied the income needs of investors at that time.  The total market capitalization of Canadian REITs grew from CAD 16 billion in June 2005 to over CAD 56 billion as of June 2017, as measured by the S&P Canada REIT (see Exhibit 1). 

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Is Smart Beta Getting Smarter?

Paul Murdock, Indexology Magazine Editor, recently sat down with Vinit Srivastava, Managing Director, to trace the origins of smart beta indexing. From early days, before it even had a name, to recent developments in multi-factor indexing, Vinit shares his perspectives on each step of the journey and weighs in on where smart beta may be headed.

PAUL: What were the first factors tracked by indices?

VINIT: Before the recent wave of single- and multi-factor indices (over the last five to seven years), dividend, value, and equal-weight indices had already been widely adopted. These indices and the funds tracking them sought to provide exposure to yield, value, and size—all well-established factors that have been known to have a risk premium. One of the reasons for the success of these early strategies was their simplicity, both in their construction and their implementation. In fact, many of these factor strategies were adopted by active managers long before passive solutions were available.


PAUL: How has the factor index landscape evolved since then?

VINIT: Over the last decade, we’ve seen the creation of single-factor indices, which seek to provide exposure to well-known risk factors like low volatility, quality, size, momentum, value, and yield. These have allowed market participants to take views on factors and combine them strategically or tactically. As the market has evolved, multi-factor strategies that provide exposure to multiple risk factors in a single package have become more common.

One of the main drivers of this was asset owners’ need for costeffective strategies that meet their objectives in an era when long-term return expectations from most asset classes are lower than they have been historically. In this kind of environment, the right risk/return characteristics are essential to meeting long-term liabilities.

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