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Indexology Magazine: Winter 2020

Talking Points: Capturing the Growth of the Australian Technology Industry

The Development of the Global Sukuk Market from an Indexing Perspective

The S&P South Africa 50: Bringing Efficiency and Diversification to the South African Market

FA Talks: Managing Retirement Hazards with Managed Indexing

Indexology Magazine: Winter 2020

Is passive investing as passive as it sounds? How do three different index-based strategies seek to boost diversification? Read the latest issue for the answers to these questions and more.

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

  1. Why is this index being introduced now?

In recent years, ASX-listed technology companies have experienced substantial growth in terms of both number of companies and market capitalization. In the past five years, the number of S&P/ASX All Technology Index constituents nearly doubled from 24 to 46, while the total market capitalization of these companies increased more than fivefold from AUD 17 billion to nearly AUD 92 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 Development of the Global Sukuk Market from an Indexing Perspective

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Jason Giordano

Associate Director, Strategy Indices

The global sukuk market has enjoyed tremendous growth since 2013. As measured by the Dow Jones Sukuk Total Return Index and the S&P Global High Yield Sukuk Index, the U.S. dollar-denominated sukuk market experienced a compound annualized growth rate of nearly 18%, driven by increased issuance from sovereigns and supranationals, as well as strong investor demand for Shariah-compliant securities.  Historically, the majority of issuance has come from Saudi Arabia and Malaysia; however, the past three years have witnessed an increasing number of issuers from new markets, as well as a deeper and broader investor base.

The recent growth of the global sukuk market is likely to accelerate, as GCC issuers are poised to refinance in order to fund increasing deficits and as new entrants continue to come to market.  Most notably, several African sovereigns will likely enter the market in 2020, and Egypt has set up a Shariah supervisory committee to oversee sukuk issuance.  Furthermore, corporate issuers in both Indonesia and Malaysia have begun to shift funding sources away from traditional bonds in favor of sukuk. 

The relatively nascent green sukuk initiative could also stimulate issuance, as efforts to combat climate change gain traction, building on the inaugural green sukuk transactions in Malaysia and Indonesia.  The most recent green sukuk transaction was a USD 750 million issuance from the government of Indonesia earlier in 2019.  The Indonesian government also issued the world's first sovereign green sukuk, a USD 1.25 billion five-year instrument, to finance green projects.

From an investor perspective, sukuk garnered some of the best performance of all global fixed income asset classes over the past five years.  As of Oct. 31, 2019, the Dow Jones Sukuk Total Return Index had a YTD performance of 10.14%, while the S&P Global High Yield Sukuk Index returned 11.75%.  Compared to the S&P Global Developed Aggregate ExCollateralized Bond Index, the Dow Jones Sukuk Investment Grade Total Return Index outperformed by over 300 bps over the same period.  Taking volatility into account, the Dow Jones Sukuk Total Return Index had a fiveyear risk-adjusted return that was more than triple that of the S&P Global Developed Aggregate Ex-Collateralized Bond Index. 

The strong risk-adjusted performance could be attributed to a number of factors inherent to sukuk, including the quality of most sukuk issuers and the characteristics of the sukuk securitization process.  Many sukuk issuers are sovereign nations, supranationals, and other government-related entities.  The high-quality nature of issuers supports the strong credit fundamentals of the underlying sukuk structure.  Some market participants also point to the Shariah prohibition of riba (interest) and gharar (uncertainty).  In lieu of interest, the return to an investor must be linked to profits and derived from a shared risk assumed by both the issuer and investor, unlike traditional bonds, in which the degradation of an issuer’s credit fundamentals materially affects the probability of repayment of interest or principal.

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This article was first published in Islamic Finance news Investors Report 2020.


The S&P South Africa 50: Bringing Efficiency and Diversification to the South African Market

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John Welling

Director, Equity Indices

INTRODUCTION

The S&P South Africa 50 represents the South African equity market by selecting 50 of the largest companies listed on the Johannesburg Stock Exchange, including both South African and foreign-domiciled firms.  To reduce risk from large exposures, no company can account for more than 10% of the index weight at each rebalance.

In comparison with the often used FTSE/JSE Top 40, the S&P South Africa 50 provides broader coverage and greater diversification, which contribute to its historically lower volatility and higher risk-adjusted returns.

EFFECTIVE CORE EXPOSURE

Accessing the target market through a limited number of stocks is a hallmark of efficient investable indices.  The S&P South Africa 50 addresses the need for an efficient index for product tracking that remains representative of the characteristics of the broad market S&P South Africa Composite.

Exhibit 1 illustrates the historical returns of the S&P South Africa 50 against the backdrop of S&P South Africa Composite and the FTSE/JSE indices, which attempt to reflect a similar target universe.  The S&P South Africa 50 effectively captures the return profile of the broader market.

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FA Talks: Managing Retirement Hazards with Managed Indexing

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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