IN THIS LIST

Indexing Liquid Alternatives

Talking Points: Capturing the Growth of the Australian Technology Industry

The S&P/B3 Brazil ESG Index: A New Benchmark for Sustainability and Investment

FAQ: S&P IPSA ESG Tilted Index

InsuranceTalks: Participating and Protecting Using Dividends

Indexing Liquid Alternatives

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Fiona Boal

Head of Commodities and Real Assets

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Phillip Brzenk

Head of Multi-Asset Indices

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Rupert Watts

Senior Director, Strategy Indices

INTRODUCTION

Alternative investment strategies, including absolute return long-short, risk parity, global macro, or relative value, have historically been used only by the most sophisticated market participants, such as institutional investors and hedge funds.  Market participants often seek alternative investments to improve diversification in portfolios, since these strategies tend to exhibit low correlations to the more traditional financial market asset classes of equities and fixed income.  Better diversification may lead to higher risk-adjusted returns and lower drawdowns in a portfolio relative to one that only holds stocks and bonds.

However, a drawback of some alternative investments is that they can be relatively illiquid and only appropriate for long-term investment horizons without short-term liquidity needs.  Conversely, investing in alternative strategies through liquid instruments, such as exchange-traded futures contracts, can reduce the illiquidity risk, making them a good fit for a broader range of market participants.  These strategies, commonly referred to as liquid alternatives, give market participants better access to alternative investments.  Additionally, liquid alternatives in an index format provide a systematic rules-based methodology, transparency in pricing, and typically lower cost structure.

There is a wide range of liquid alternative strategies with differing characteristics or key properties as the underlying rationale for construction.  A liquid alternative strategy could vary from directional to market neutral to trend following.  Directional strategies are typically long-only with low-to-moderate correlation to broad equities, seeking higher risk-adjusted returns relative to the market over the long term.  Market-neutral strategies seek to provide purer exposure to certain risk premia in the marketplace by stripping out the market beta.  These are typically long-short and target a zero beta, and thus tend to exhibit a low correlation to broad equities.  A trend-following strategy seeks to capture price trends by going long or short different assets based on recent price movements, and its correlation to broad equities varies from positive to negative over time.  To have a large opportunity set and proper diversification, a trend-following strategy often incorporates multiple asset classes, such as equities, fixed income, currency, and commodities.

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Talking Points: Capturing the Growth of the Australian Technology Industry

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Michael Orzano

Senior Director, Global Equity Indices

The S&P/ASX All Technology Index highlights a unique and innovative segment of the Australian market.

  1. Why was this index introduced?

In recent years, ASX-listed technology companies have experienced substantial growth in terms of both number of companies and market capitalization. In the past six years, the number of S&P/ASX All Technology Index constituents nearly tripled from 24 to 69, while the total market capitalization of these companies increased tenfold from AUD 17 billion to about AUD 170 billion.

In a market heavily concentrated in banks and natural resource companies, there is significant demand for an index that captures the Australian technology sector in a comprehensive yet precise way. Importantly, the technology segment measures a unique, innovative part of the market that remains a small portion of the broader Australian share universe. We also expect the index to increase the visibility of technology-related businesses listed on the ASX, which should support further growth of the sector over time.

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The S&P/B3 Brazil ESG Index: A New Benchmark for Sustainability and Investment

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Laura Assis Iragorri

Analyst, Global Research & Design

S&P Dow Jones Indices

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María Sánchez

Director, ESG Index Product Strategy, Latin America

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Reid Steadman

Managing Director, Global Head of ESG & Innovation

INTRODUCTION

Indices that integrate environmental, social, and governance (ESG) data are moving from the margins to the mainstream, as investors increasingly seek to align their values with their investments.  A new type of ESG index is emerging to facilitate this change in Brazil: the S&P/B3 Brazil ESG Index.  Jointly developed by S&P Dow Jones Indices (S&P DJI) and the Brazilian stock exchange (Brasil Bolsa Balcão [B3]), this index not only highlights strong ESG companies—as ESG indices have traditionally done—but it also enables allocation to such companies without requiring investors to take on major risks relative to the market.

THE EVOLUTION OF ESG INDICES

In 1999, S&P DJI launched the first global ESG index, the Dow Jones SustainabilityTM World Index (DJSI World).  By including the top 10% of companies, industry by industry, according to their ESG performance, as determined by the Corporate Sustainability Assessment (CSA) conducted by S&P Global, this groundbreaking index encouraged companies to incorporate many ESG factors in their decisions, extending beyond short-term financial considerations.

In the years that followed, other indices, including regional versions of the DJSI World, such as the DJSI Emerging Markets, were launched with this same philosophy in mind: to highlight best-in-class companies and thereby inspire companies to improve their ESG approaches in order to qualify for inclusion in these indices.

Though these indices have been successful and have indeed inspired companies to change in positive ways, aspects of their methodologies present challenges for many investors.  Some strategies can be too narrow for investors who want to remain broadly diversified.  Though many high-conviction investors use the narrow, best-in-class indices for investment, we saw a need from market participants for ESG indices with the potential to provide returns more in line with the broader market, while providing a more sustainable portfolio of companies.  An example of an index that launched in 2019 that typifies this investor-oriented methodology is the S&P 500® ESG Index.

With the launch of the S&P/B3 Brazil ESG Index, Brazil now has an investor-oriented ESG index of its own.  This index maintains a large portion of the companies in its underlying index, the S&P Brazil BMI, thereby staying broad and diverse while still screening out companies involved in certain business activities and controversies, as well as those with sustainability profiles that run counter to ESG investors’ preferences.

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FAQ: S&P IPSA ESG Tilted Index

COMPANY BACKGROUND

  1. Who is S&P Dow Jones Indices?  S&P Dow Jones Indices (S&P DJI) is home to iconic financial market indicators, such as the S&P 500® and the Dow Jones Industrial Average®. The largest global resource for essential index-based market concepts, data, and research, it is a major investor resource to measure and trade the markets.

    S&P Dow Jones Indices has been a pioneer in environmental, social, and governance (ESG) indexing for 20 years, starting with the 1999 launch of the Dow Jones Sustainability World Index. Today, we offer an extensive range of indices to fit varying risk/return and ESG expectations, from core ESG and low-carbon climate approaches, to thematic and fixed income ESG strategies.

  2. Who is SAM?  SAM, was founded in 1995 and has been a partner of the S&P Dow Jones Indices since 1999, when they worked together to launch the Dow Jones Sustainability Index (DJSI) Series. SAM provides ESG Research and Benchmarking and conducts the annual SAM Corporate Sustainability Assessment (CSA). SAM was formerly a part of asset mananger RobescoSAM. In January 2020, it became a part of S&P Global.

S&P IPSA ESG TILTED INDEX

  1. What is the S&P IPSA ESG Tilted Index? The S&P IPSA ESG Tilted Index is designed to measure the performance of eligible securities in the S&P IPSA that meet sustainability criteria, while attempting to improve the overall S&P DJI ESG Score with respect to the S&P IPSA by overweighting or underweighting ("tilting") companies based on their S&P DJI ESG Scores.
  2. What are the S&P DJI ESG Scores? S&P DJI ESG Scores are environmental, social, and governance scores that robustly measure ESG risk and performance factors for corporations, with a focus on financial materiality. The S&P DJI ESG Scores are used in the constituent weighting process in the S&P IPSA ESG Tilted Index. They are a second set of ESG scores calculated by SAM, in addition to the S&P Global ESG Scores (formerly known as SAM ESG Scores) that are used to define the Dow Jones Sustainability Indices constituents.

    The S&P DJI ESG Scores are the result of some further scoring methodology refinements to the S&P Global ESG Scores. They are based on SAM’s annual Corporate Sustainability Assessment (CSA), a bottom-up research process that aggregates underlying company ESG data to score levels. The scores contain a total company-level ESG score for a financial year, comprising individual environmental (E), social (S), and governance (G) dimension scores, beneath which there are on average 21 industry-specific criteria scores that can be used as specific ESG signals (see Exhibit 1).

  3. faq-spdji-esg-scores-exhibit-1

    A company’s total ESG score is the weighted average of all criteria scores and their respective weights. Each individual ESG dimension score (e.g., a company’s “E” score) is the weighted average of all criteria scores and weights within a specific ESG dimension. Total ESG scores range from 0-100, with 100 representing best performance.

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InsuranceTalks: Participating and Protecting Using Dividends

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

Joyana Pilquist, CFA is Vice President, Head of Derivatives at American Equity Investment Life Insurance Company.

S&P DJI: What is your role at American Equity, and how do you serve the insurance space?

Joyana: I am Vice President and Head of Derivatives at American Equity. My team and I hedge the embedded derivatives in our fixed index annuity liabilities for American Equity Investment Life Insurance Company and Eagle Life Insurance Company.

S&P DJI: What considerations are top of mind as you and your team are considering what index will be at the center of a fixed index annuity (FIA)?

Joyana: The most immediate consideration when contemplating a new index is whether we think the index design and objectives can help us potentially create higher risk-adjusted and stable returns for our policyholders over the long term, while still maintaining option costs. Renewal rate integrity is something that American Equity has always deemed an essential business philosophy, so stabilizing costs to hedge policyholder returns is important. It is also important to us that the index be reliable and understood with relative ease. It must fill a gap in the policyholders’ ability to potentially increase account values in different economic regimes.

S&P DJI: Earlier in 2020, we saw periods of extreme volatility and sharp declines in the market. How do you try to plan for and protect against these conditions as you’re developing new FIAs?

Joyana: Selecting the right type of index is an important part of our plan. We’ve found risk control indices to be an effective tool in mitigating the effects of extreme volatility and sharp market downturns in an investment portfolio. Volatility tends to increase as the market decreases. The risk control mechanism decreases the allocation to the underlying index as volatility increases and, therefore, mitigates its effects on the overall index. This, in turn, tends to lessen sharp declines in the risk control index compared to indices without the risk control mechanism.

S&P DJI: American Equity uses the S&P 500® Dividend Aristocrats® Daily Risk Control 5% Index within one of its FIAs. What characteristics did this index have that made it well suited for use within an FIA?

Joyana: We added the S&P 500 Dividend Aristocrats Daily Risk Control 5% Index to our index offerings back in 2014. The index was simple to understand with two components (equity and cash). We appreciated how the underlying index, the S&P 500 Dividend Aristocrats, which represents the equity component, was a proven index with a demonstrated track record for performance. The companies that make up the underlying index are all highly rated (investment grade), large (at least USD 3 billion market cap), diversified across market sectors, and have a long history (25 years minimum) of paying and increasing dividends. It was expected that, as more of the baby boom generation retires, demand for dividend-paying stocks would increase and, historically, those stocks have provided some downside protection in volatile markets. These reasons, along with the addition of the risk control mechanism, make the index attractive for our use.

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