In This List

InsuranceTalks: A Multi-Asset Solution for Navigating Volatile Markets

The S&P/ASX 200 ESG Index: Integrating ESG Values into Core in Australia

FATalks: Factors, Risk, and Why Passive Outperforms over Time

Spotlight on Japan: How Carbon-Efficient Indices Can Shape the ESG Landscape

TalkingPoints: How Diversification and Index Innovation Are Powering Passive in India

InsuranceTalks: A Multi-Asset Solution for Navigating Volatile Markets

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.

Rhonda Elming is Senior Vice President, Annuity Product Development at Sammons Financial Group. Based in West Des Moines, Iowa. Elming is responsible for fixed annuity product strategy, including new product development and managing the profitability and risk profile of the company’s inforce block of business.

S&P DJI: Tell us a bit about your role at Sammons Financial Group and how you serve the insurance space.

Rhonda: I lead a team of actuaries and analysts that are focused on creating innovative fixed annuity product solutions to help people prepare for retirement, while also helping the company understand and manage financial risks. I work closely with each of our distribution channel leadership teams to identify and understand its unique business and client needs. Through that process, we do a lot of ideation to arrive at a product design that meets the needs of the target market and fits within the desired risk and profitability requirements for the company. My team is responsible for the pricing, regulatory filings, and implementation efforts to bring the products to market.

In my product management role, I have the responsibility of effectively managing the risk and profitability of both the annunity new business and the in-force block. Annunities are a spread business; a large part of this role is setting interest-crediting rate or index parameters on the products.

S&P DJI: Is risk management more of a focus now for Sammons Financial Group in the current market environment?

Rhonda: Yes, the current economic environment is a challenge! Market volatility and historically low interest rates have resulted in widespread adjustments to product portfolios including lowering crediting rates or policy benefits. In some cases, insurers have also suspended sales of products with unfavorable risk or profitability profiles.

Planning for a prolonged low interest rate environment—with the potential for negative interest rates—has been a high priority for a while now. A “lower-for-longer” outlook, particularly for longer duration assets, may lead to higher levels of spread compression on in-force blocks of business and put pressure on insurers’ ability to continue to offer longer liabilities, like guaranteed living benefit riders or guaranteed universal life insurance.

The pandemic has also created unique challenges, with most insurance company employees and distributors working from home. Annuity sales have fallen this year due to shelter-in-place restrictions, record unemployment, and volatile economic conditions. Agility is the name of the game, as insurers adapt to new work arrangements, regulatory changes, and a heightened need to help policy owners, distribution partners, and their local communities through this difficult time.

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The S&P/ASX 200 ESG Index: Integrating ESG Values into Core in Australia

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Daniel Perrone

Director and Head of Operations, ESG Indices

EXECUTIVE SUMMARY

  • The S&P/ASX 200 ESG Index is designed to align investment objectives with environmental, social, and governance (ESG) values.
  • It can serve as a benchmark as well as the basis for index-linked investment products. Historically, the index’s broad market exposure and industry diversification has resulted in a return profile similar to that of the S&P/ASX 200.
  • The index uses the S&P DJI ESG Scores (see page 4) and other ESG data to select companies, targeting 75% of the market capitalization of each GICS® industry group within the S&P/ASX 200.
  • The S&P/ASX 200 ESG Index excludes thermal coal, tobacco, controversial weapons, and companies with low UN Global Compact (UNGC) scores. In addition, those with S&P DJI ESG Scores in the bottom 25% of companies globally within their GICS industry groups are excluded.
  • Our methodology results in an improved composite ESG score compared with the S&P/ASX 200.

INTRODUCTION

An increasing number of investors require indices that are aligned with their investment objectives and their personal or institutional values.  The S&P/ASX 200 ESG Index was designed with both of these needs in mind.

The S&P/ASX 200 ESG Index is broad and constructed to be part of the core of an investor’s portfolio, unlike many ESG indices that have preceded it, which were thematic or narrow in their focus.  By targeting 75% of the S&P/ASX 200’s market capitalization, industry by industry, the S&P/ASX 200 ESG Index offers industry diversification and a return profile in line with Australia’s leading benchmark .

Yet the composition of this new index is meaningfully different from that of the S&P/ASX 200 and more compatible with the values of ESG investors.  Exclusions are made related to thermal coal, tobacco, controversial weapons, and alignment with UNGC principles.  Furthermore, companies with low ESG scores relative to their industry peers around the world are also excluded.  The result is an index suitable for investors moving ESG from the fringe of their portfolio to the core.

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FATalks: Factors, Risk, and Why Passive Outperforms over Time

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

Larry Swedroe is Chief Research Officer of Buckingham Wealth Partners. Since joining the firm in 1996, Larry has spent his time, talent, and energy educating investors on the benefits of evidence-based investing with enthusiasm few can match.

Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books, co-authored eight more, and has had articles published in the Journal of Accountancy, Journal of Investing, AAII Journal, Personal Financial Planning Monthly, and Journal of Indexing.

S&P DJI: You recently participated in a webinar geared toward financial advisors titled “How Did COVID-19 Affect Active vs. Passive Performance?” in which SPIVA® results through the initial wave of the pandemic were analyzed. What were your biggest takeaways from the analysis of this data?

Larry: One of the biggest myths that Wall Street wants and needs investors to believe in order to keep them playing the game of active management and paying higher fees is, “Active management maybe doesn’t win in bull markets due to a cash drag, but these managers will protect you in bear markets.” I might be willing to accept a lower return in the long run if I get insurance in the really bad market environments, especially if I’m a retiree in the withdrawal phase. The truth is, active managers generally tend to actually do a little bit worse in bear markets than bull markets. One study found[1] that in every single turning point in the market, the average active manager got it wrong. For example, when the market was at a peak in March 2000, active managers had the least amount of cash and at the bottom in 2008-2009, they had the most cash.

This data is in line with the period we examined in the webinar. During the initial stages of the COVID-19 crisis, even though active managers had the ability to go to cash, almost two-thirds still underperformed. Every year, I hear that this is a stock picker’s year, but it has never overall been a stock picker’s year when you adjust for risk appropriately.

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Spotlight on Japan: How Carbon-Efficient Indices Can Shape the ESG Landscape

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Mona Naqvi

Senior Director, Head of ESG Product Strategy, North America

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Ryan Heslin

Analyst, ESG Indices

INTRODUCTION

The S&P Global Carbon Efficient Index Series is designed to reduce carbon exposure while maintaining similar levels of risk/return to the benchmark.  Most notably, the index series incentivizes behavioral change among companies by uniquely encouraging two things:

  • Greater corporate transparency by rewarding companies that disclose greenhouse gas (GHG) emissions with a 10% boost in index weight; and
  • The diversification of company business models toward low-carbon alternatives as companies seek to improve their standing in the index.

The latter is achieved by assessing the carbon performance of companies (based on GHG emissions data from Trucost), sorting them into deciles within GICS® industry groups, and reweighting accordingly.  However, since some industries are inherently more GHG emitting than others, our methodology considers the spread of possible emissions within an industry group and increases or decreases company weights by either a greater or lesser extent, depending on how much a company can feasibly improve given current available technologies.

For example, a highly carbon-efficient Energy company in the top decile of the broad-ranging Energy industry is likely to be far ahead of its peers and, thus, deserves a significant weight increase of 120%.  Conversely, a Media company in the top decile of the smaller-ranging Media industry only receives a small weight increase of 20%, as it is only slightly ahead of its peers.  Vice versa, a high-emitting Energy company in the bottom decile would get a weight reduction of 90% versus just 15% for a Media company in the same position (see Exhibit 1).  As such, companies are incentivized to both disclose and decarbonize to boost their overall standing—to the extent that they are able to. 

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The S&P Global Carbon Efficient Index Series is designed to measure financial markets worldwide and offers market participants the opportunity to reduce their exposure to carbon risk.  The methodology is also sector neutral, amounting to a carbon reduction of 20%-60% relative to the underlying benchmarks, with low tracking errors and comparable returns, thereby demonstrating that there need not be an inherent trade-off between investment performance and decarbonization.  In theory, the carbon performance of the S&P Global Efficient Carbon Index Series should further improve over the long term, as companies adapt their behavior and as the indices continue to grow in popularity among market participants.  Indeed, our initial results to date suggest that they are already heading in that direction.

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TalkingPoints: How Diversification and Index Innovation Are Powering Passive in India

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Koel Ghosh

Head of South Asia

Passive investing continues to climb in India, with a CAGR of 49% over the last decade. As regulations and markets continue to evolve, how large is the potential of passive in India and what strategies are in the mix that could fuel this upward trajectory?

1. What are the main drivers of passive investing in India?

Koel: The passive investment space is in its nascent stage in India, though it is growing steadily. At over USD 25 billion assets under management and nearly 86 products, this space accounts for a small percentage of the USD 6 trillion global passive market. The potential of passive is slowly being unleashed through education and awareness, along with government support. The Employee Provident Fund’s allocation to ETFs and the disinvestment program routed through the same passive option has created the opportunity for more visibility and understanding for investors. Further, the underperformance of active funds in particular categories reflected in our bi-annual S&P Indices vs. Active (SPIVA®) research, continues to fuel interest in passive strategies in the region.  

2. What kinds of passive strategies are Institutional Investors using in India and where do you see potential for future innovation?

Pratik: Asset managers in India have embraced passive innovations, using strategies designed to access sectors and industries like banking, and themes including Environmental, Social, and Governance (ESG) and consumption are gaining traction. Smart beta (or factor-based investing) as a category has also seen continued innovation, both in single- and multi-factor strategies. The biggest impediment for the success of passive funds has been education and awareness. With higher awareness, we would expect interest in traditional index-based and smart beta products to increase in the future. Vanilla products may have a larger role to play in building the marketplace before more innovative products take off. Due to regulations and liquidity factors, large-cap ETFs are currently the preferred passive instruments for institutional investors. 

3. Can you discuss the importance of diversification and how indices can inform asset allocation decisions?

Koel: Diversification is a well-established investment approach for minimizing risk. Indices provide an ideal avenue for assessing the performance of a market segment and, when underlying an index-based product, for accessing a basket of securities that is aligned with an investment objective thanks to the transparency of S&P DJI’s index methodologies. Indices cover a wide range of market segments and strategies that vary from regional equity benchmarks like the S&P 500® for the U.S. and the S&P BSE SENSEX for India, sectors like Healthcare and Information Technology, factors like low volatility and quality, different asset classes, or strategies combining factors, or those tracking themes such as dividends. 

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