FA Talks: Managing Retirement Hazards with Managed Indexing

Understanding REIT Sectors

ESG Index Considerations for Brazilian Pension Funds

TalkingPoints: Introducing the S&P/TSX SmallCap Select Index

The Dow Jones U.S. Select Short-Term REIT Index

Education - Jan 27, 2020

FA Talks is an interview series where industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing

Accelerated Wealth (AW) is one of the fastest-growing wealth management firms in Colorado, with 9 offices around the U.S. AW, a hybrid planning firm specializing in both insurance and investment-based planning, just celebrated its first decade in business, and has won The Colorado Springs Gazette’s “Best of Colorado Springs” for financial planner 5 years in a row. As it is one of the few advisory firms we are seeing that are combining fixed indexed annuities and index-based investment management, S&P Dow Jones Indices (S&P DJI) recently interviewed senior leadership at AW to learn more about how indexing plays a role in how they plan and manage retirement risk.

S&P DJI: Tell us what holistic wealth management means for Accelerated Wealth?

AW: We created a process meant to bring as much peace to our clients’ lives as possible. Through our Keys to the City client service model, our process begins with holistic financial planning. This process includes a full evaluation across various financial strategies such as social security, income planning, required minimum distributions, investment portfolio analysis, life insurance and annuity inventory, health insurance, property and casualty insurance, identity and cyber security protection, estate planning, wealth transfer, and asset protection. We take great pride in our focus on building financial plans as opposed to running a business that is financial product centric.

The second step of the Keys to the City process is referred to as family legacy. In this process, we focus in on the family unit of our client. We want to do everything we can to ensure that the legacy that our clients are leaving are a blessing, and do not turn into a curse. We offer training on personality preference and emotional intelligence, and we help create an understanding for our clients as it relates to who they are as investors. We find that by providing this type of training, the family unit naturally begins to improve in their communication, conflict management, and decision-making.

If a wealth management firm is going to speak to holistic planning, we believe there is a mandate to provide offerings that do not just focus on the mechanics of the financial plan itself, but must also provide offerings that equip the client to execute the plan behaviorally.

As it relates to the financial plan itself, we want to ensure that we are not biased in the financial instruments we utilize by our licensing or past experiences. We want to know that our advisors have the ability to choose from the entire universe of asset classes when building their clients’ plans.

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Education - Jan 15, 2020

Understanding REIT Sectors

Qing Li

Director, Global Research & Design

S&P Dow Jones Indices

Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

INTRODUCTION

In recent years, the U.S. real estate sector expanded to include a wide range of companies that own and operate a diverse set of assets. As recently as 2010, the sector was dominated by companies that owned traditional commercial properties such as office buildings, apartment complexes, warehouses, and shopping centers. However, the recent growth of specialized REITs—like those that own cell towers, data centers, and timberland, among other non-traditional real estate assets—has transformed the sector into a complex array of companies that derive income from highly distinct assets. While all REITs share certain characteristics such as offering relatively high dividend yields, the fundamental differences in the underlying assets owned by REITs across sectors have led to different investment characteristics and patterns of returns and volatility.

REIT SECTOR OVERVIEW

There are two main types of REITs: equity REITs and mortgage REITs. Equity REITs own and operate income-producing real estate and typically earn income through rents. Mortgage REITs lend money directly to real estate owners and operators, or indirectly through the purchase of mortgages or mortgage-backed securities, and they earn income from the interest on these investments. Based on the property type each equity REIT owns, we can further categorize it by its sector. Most REITs specialize in a single property type, while some manage portfolios that include multiple types of properties. Exhibit 1 provides an overview of the main equity REIT sectors.

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Education - Dec 18, 2019

ESG Index Considerations for Brazilian Pension Funds

INTRODUCTION

What is ESG? How can ESG be integrated into an index, especially in smaller markets? How can the divestment versus engagement arguments affect indices? How do ESG indices perform?

ESG risks have been poking their head above the water in Brazil over recent years, from issues surrounding the Amazon rainforest fires to corruption at Petrobras (BBC, 2018) and JBS (Schipani, 2018). At S&P Dow Jones Indices (S&P DJI), we have increasingly seen demand for ESG indices in Brazil and throughout Latin America in response to specific incidents and global shifts toward more responsible investment practices.

WHAT IS ESG?

ESG stands for environmental, social, and governance. Environmental factors look at issues connected to global warming, energy usage, pollution, etc. Social factors encompass issues such as a company’s management of health and safety, human capital practices, etc. Governance factors primarily address how a company is run, with metrics used including board structure and independence, executive compensation, and many more.

There are so many different terms floating around, including responsible investment, sustainable investment, and impact investing. These are all methods of incorporating ESG, with differing objectives. Exhibit 1 shows The Spectrum of Capital, which does a good job of defining the difference between different types of integration of ESG and how they differ from investments looking for purely financial returns.

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Education - Dec 05, 2019

TalkingPoints: Introducing the S&P/TSX SmallCap Select Index

Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

Why is the S&P/TSX SmallCap Select being introduced now?

Prior research has demonstrated that profitability matters for small-cap companies in the U.S.^{^[1]} For example, the S&P SmallCap 600 ^®—which includes earnings eligibility criteria—has outperformed the broader Russell 2000 Index (with lower volatility) throughout its 25-year live track record. Our new S&P/TSX SmallCap Select Index extends this phenomenon to Canadian equity markets, where we have found that a similar effect exists. Simply put, small-cap companies without a track record of generating earnings have performed poorly relative to their profitable peers and have thus been a drag on broad small-cap indices.

How does the S&P/TSX SmallCap Select Index work?

The index is a part of the S&P Global SmallCap Select Index Series. In order to be eligible for index inclusion, companies must post two consecutive years of positive earnings per share. As a buffer, companies are dropped from the index after posting two consecutive years of negative earnings. In order to improve replicability of the index, we also eliminate the 20% smallest and 20% least liquid companies. The index is weighted by float market cap and is rebalanced semiannually in June and December.

What additional indices are offered within the S&P Global SmallCap Select Index Series?

The S&P/TSX SmallCap Select Index follows the same index methodology framework utilized in our S&P Global SmallCap Select Index Series. We currently offer several regional and country indices within the S&P Global SmallCap Select Series, including those in Exhibit 1.

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Education - Dec 02, 2019

The Dow Jones U.S. Select Short-Term REIT Index

Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Dow Jones Indices

Michael Orzano

Senior Director, Global Equity Indices

S&P Dow Jones Indices

The Dow Jones U.S. Select Short-Term REIT Index seeks to track REITs in sectors that typically have short-term lease durations, with the goal of creating a REIT index that is less sensitive to interest rate changes.

OVERVIEW: THE ROLE OF INTEREST RATES ON REIT INDICES

REITs are a popular and efficient way for market participants to access the real estate asset class. The potential for strong long-term total returns combined with other key investment characteristics, such as a tendency for high dividend yields, inflation-hedging properties, and a relatively low correlation with other asset classes, have contributed to the appeal of REITs. However, because they are widely considered to be rate-sensitive assets, there is substantial interest among market participants to see how REITs have performed when interest rates increased during periods of high fluctuation. Although there is evidence that REITs have typically fared well over full cycles of rising rates, U.S. REITs have often experienced sharp sell-offs in short-term periods in which interest rates have increased significantly. Given this context, there is considerable interest in a U.S. REIT index that may be less sensitive to interest rate movements.

HOW DOES THE INDEX WORK?

The Dow Jones U.S. Select Short-Term REIT Index is a subset of the Dow Jones U.S. Select REIT Index that only includes REITs in property sectors that typically have relatively short-term lease durations. These sectors are apartments, hotels/resorts, manufactured homes, and self-storage. Theoretically, REITs with shorter lease durations should be less sensitive to interest rates, given that they can more quickly reprice their rental agreements. For example, a hotel effectively has overnight leases and can rapidly respond to market changes. Similarly, apartment owners typically engage in one-year leases with tenants, making the average lease duration of apartment REITs under one year. On the other hand, office, health care, and other major REIT sectors generally have much longer-term lease durations—giving them more bond-like cash flow characteristics. Exhibit 1 shows the different Dow Jones U.S. Select REIT Term Indices with their sub-sectors and the typical average lease duration. The indices also employ a 5% cap on stock weights to reduce single-stock concentration.

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