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InvestorTalks: Using AI to Measure Market Mood with Indices

FAQ: S&P Solvency II Capital Efficiency Corporate Bond Index

360° of Climate – Indices for Every Objective

Sector Primer Series: Materials

The S&P Global BMI: Providing Consistent Insights into Global Equity Markets since 1989

InvestorTalks: Using AI to Measure Market Mood with Indices

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

Indexing and artificial intelligence (AI) are democratizing access to institutional quality risk management. The S&P Riskcasting® Indices are designed to help keep risk in check, using AI to track signals of investor views on market risk and systematically adjusting allocations based on the signals received. S&P DJI joins Arnaud de Servigny to discuss how these innovative indices track the mood of the market to dynamically capture potential opportunities.

What's inside the S&P Riskcasting Index Series, and what is it designed to do?

S&P DJI: The index series is a rules-based, systematic multi-asset strategy that incorporates equity and fixed income. It uses a risk aversion signal to determine three different market states: bullish, neutral, or bearish. Based on the determined market state, the S&P Riskcasting Indices will allocate to different equity or fixed income indices. For example, the S&P 500® Riskcasting Index uses the S&P 500 and the S&P 10-Year Treasury Note Futures Index as its components, whereas the S&P 500 Low Volatility Riskcasting Index uses the S&P 500, S&P 500 Low Volatility Index, and S&P 10-Year Treasury Note Futures Index as its three components.

How does the risk aversion signal use S&P 500 options to measure the mood of the market?

Arnaud de Servigny: Generally, looking at risk in the finance industry, we tend to have backward-looking information on volatility and things like that. In a way, it is like looking in the rearview mirror while driving a car. What we want to do, however, is to look at what is going on right now or in the near future, and for this type of analysis we look at option markets. In the option markets, there are many different participants with many different views, and it is the diversity of these views that is interesting. If the overall market mood evolves in one direction or another, then this is something that is likely to have an impact on market performance, especially the equity market, which is what we want to capture.

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FAQ: S&P Solvency II Capital Efficiency Corporate Bond Index

The S&P Solvency II Capital Efficiency Corporate Bond Index seeks to track the performance of qualifying global corporate infrastructure bonds that meet the criteria under Solvency II.  The index utilizes an independent third-party assessment to determine eligibility for each security.

  1. What is Solvency II?  The Solvency II regime provides a framework for insurance providers in the European Union (EU).  This also applies to global insurance regulators that adhere to the Solvency II framework.  Like the Basel framework for banking institutions, it focuses on three pillars to assess capital requirements, set risk management procedures, and perform supervisory reporting for adherence to the regime.

  1. To receive preferential capital requirements, securities must qualify for capital relief.  What are the criteria for qualifying for capital relief?

    The primary requirements include the following.

    • The entity “provides or supports essential public services.”
    • More than 75% of its revenues come from infrastructure investing.
    • The level of output or the usage and price are contractually fixed.
    • The main payers are entities with an External Credit Assessment Institutions (ECAI) rating and a credit quality step of at least 3.
    • The investing entity should be able to hold the investment to its maturity.
    • There is diversification in terms of location.
    • A substantial majority of the revenues come from infrastructures located in the Organisation for Economic Co-operation and Development (OECD).

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360° of Climate – Indices for Every Objective

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Jaspreet Duhra

Senior Director and Head of EMEA Environmental, Social, and Governance (ESG) Indices

SUMMARY

  • There is a pressing need for the world to reduce its greenhouse gas emissions to decrease the risks and impacts of climate change. Responsible action is required by all stakeholders, including investors.
  • S&P DJI is at the forefront of innovative climate index design, leveraging the strength of climate datasets created by Trucost, part of S&P Global.
  • S&P DJI’s climate change index offerings cater to a broad range of investor climate objectives, from divestment, decarbonization, and de-risking to holistic, science-based 1.5°C

WHY CREATE CLIMATE CHANGE INDICES?

The Scientific Facts

The Intergovernmental Panel on Climate Change (IPCC) has stated that “Human activities are estimated to have caused approximately 1.0°C of global warming above pre-industrial levels.” While current global climate policies aim to reduce baseline emissions, temperatures are still projected to rise by 3.0°C by 2100. The IPCC suggests limiting global temperature rise to 1.5°C from pre-industrial levels.

Impacts on natural and human systems from global warming have already been observed.  Some impacts may be long lasting or irreversible, such as the loss of ecosystems.

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Sector Primer Series: Materials

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Sherifa Issifu

Analyst, Index Investment Strategy

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Hamish Preston

Associate Director, U.S. Equity Indices

The Global Industry Classification Standard® (GICS®) assigns a company to a single business classification according to its principal business activity. This assignment uses quantitative and qualitative factors, including revenues, earnings, and market perception. The sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

Within the GICS framework, Materials companies include those that are primarily engaged in:

  • Producing and manufacturing chemical products, including industrial chemical products;
  • Manufacturing construction materials, containers, and packaging;
  • Mining metals and the production of related products; and
  • Manufacturing paper and forest products.

COMPOSITION

The S&P 500® Materials comprises all companies in the S&P 500 that are assigned to the Materials sector by GICS. Created in 1957, the S&P 500 was the first broad U.S. market-cap-weighted stock market index. Today, it is the basis of many listed and over-the-counter investment instruments.

The Materials sector is the smallest by capitalization of the 11 sectors in the S&P 500, representing 2.53% of the index as of May 29, 2020. This compares to 6.04% and 4.95% for the S&P MidCap 400® and S&P SmallCap 600®, respectively. Overall, the Materials sector accounts for 2.72% of (and 146 securities within) the S&P Total Market Index; only the Energy sector (2.70%) accounts for less, by index weight.

With a total float-adjusted market capitalization of USD 641.43 billion, the S&P 500 Materials sector comprised 28 companies as of May 29, 2020. The two largest companies in the sector were Linde plc (LIN) and Ecolab Inc (ECL), with float-adjusted market caps of USD 108.69 billion and USD 53.31 billion, respectively. There were no Materials companies in the top 10 of the S&P 500—Linde plc ranked as the 53rd largest stock, representing 0.43% of the index. The mean market cap of S&P 500 Materials stocks was USD 22.91 billion, the median market cap was USD 13.79 billion, and the lowest market cap was USD 4.23 billion.

The largest five constituents accounted for 48.64% of the weight of the Materials sector, placing it seventh in the S&P 500 in terms of concentration.

Within the S&P 500 Materials, Chemicals was by far the largest industry, accounting for 71.24% of the sector as of May 29, 2020. The remaining sector weight was distributed across the Containers and Packaging (13.13%), Metals and Mining (11.52%), and Construction Materials (4.11%) industries. There were no companies in the Paper and Forest Products industry as of May 29, 2020. The three largest sub-industries were Specialty Chemicals (30.70%), Industrial Gases (25.25%), and Paper Packaging (9.50%)—the first two belong to the Chemicals industry.

A key feature of GICS is that it can evolve: its structure is intended to reflect the current state of the equity investment universe. S&P Dow Jones Indices and MSCI conduct annual reviews to ensure that the structure remains fully representative of the current global market. Although there have been few significant changes to the Materials sector—Chemicals has always been the largest industry, for example—the Paper & Forest Products industry weight in the S&P 500 declined since 1999, from 20% to 0%.

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The S&P Global BMI: Providing Consistent Insights into Global Equity Markets since 1989

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Michael Orzano

Senior Director, Global Equity Indices

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John Welling

Director, Equity Indices

Over the past few decades, best practices for global equity benchmark construction have converged on a few key principles.  First, a properly constructed global index series must fully capture the investable equity opportunity set.  In order to do so, it should include large-, mid-, and small-cap companies, incorporate minimum size and liquidity requirements, and be float adjusted so that it only includes shares available for purchase.  Second, it should utilize a modular, building block approach that allows the global opportunity set to be decomposed into subsets without gaps or overlaps.  Last but not least, it should apply a consistent methodology across markets and have continuity in its approach over time.  These principles are critical to ensuring a fair and robust benchmark that can be utilized by market participants to support key aspects of the investment process such as performance measurement, asset allocation, and index replication.

Established in 1989, the S&P Global BMI (Broad Market Index) Series pioneered these core benchmarking principles.  Ahead of its time in many respects, the S&P Global BMI lays claim to a number of important firsts in the global indexing industry; the most important of these being that it was the first to incorporate float adjustment and to include large-, mid-, and small-cap companies in a single modular global benchmark.  As a result, the S&P Global BMI is used by some of the world’s largest and most sophisticated asset managers and asset owners, who value it as a comprehensive and trusted data set.

In this paper, we will cover the following major points.

  • With more than 30 years of seamless history, the S&P Global BMI provides a consistent universe for historical market analysis and back-testing investment strategies.
  • Over the years, other major global equity indices have converged to follow the S&P Global BMI framework—in particular its float adjustment and modular inclusion of large-, mid-, and small-cap securities in a single index series.
  • The S&P Global BMI’s deep small-cap segment provides the most comprehensive measure of global small-cap securities.
  • Differing country classifications for South Korea among major index providers may lead to meaningfully different representations of the emerging market opportunity set.
  • Other competitors’ indices, such as MSCI EAFE, may inadvertently create a gap in coverage by excluding Canadian securities. An alternative, such as the S&P Developed ex-U.S. BMI, eliminates that gap.

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