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Practice Essentials - Understanding Commodities and the S&P GSCI®

Sector Primer Series: Consumer Discretionary

TalkingPoints: The S&P/ASX 300 Shareholder Yield Index

TalkingPoints: The S&P Listed Private Equity Index

TalkingPoints: The S&P 500® LinkUp Jobs Index

Practice Essentials - Understanding Commodities and the S&P GSCI®

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Jim Wiederhold

Director, Commodities and Real Assets

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Fiona Boal

Managing Director, Global Head of Equities

EXECUTIVE SUMMARY

S&P Dow Jones Indices has been providing index-based performance measures of real assets since 2007. Whether you prefer equity-based exposure to companies that produce commodities, or more direct exposure through futures contracts, S&P Dow Jones Indices offers tools for better understanding and accessing commodities market exposures. This paper focuses on understanding commodities as an asset class as well as the S&P GSCI, a preeminent measure of a basket of commonly traded commodities futures contracts.

WHAT ARE COMMODITIES?

Commodities such as gold and oil frequently capture media and investor attention.  So what are commodities, and why are some financial advisors considering allocating portions of their clients’ portfolios to commodities and other real assets?

Commodities are:

  • Basic, standardized real assets that are in demand and can be supplied without substantial product differentiation across markets;
  • Fungible, or in other words, considered equivalent for trading purposes despite coming from different producers; and
  • In the case of physical goods traded as commodities, widely used as production inputs.

Because commodities are fungible and traded on exchanges globally, commodity prices are driven by global supply and demand. These performance characteristics set commodities apart from equity or fixed income investments, whose returns are linked to additional market fundamentals.

Some commodities, such as precious metals, are held for their store of value characteristics. However, since the storage costs of many commodities are prohibitive, some investors may use futures contracts to gain commodities exposure and avoid physical delivery or storage costs. Still, the question remains: is it better to physically hold a commodity like gold, or be diversified across a basket of commodities futures?

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Sector Primer Series: Consumer Discretionary

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Louis Bellucci

Senior Director, Index Governance

INTRODUCTION

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. GICS was developed in 1999 and is jointly managed by S&P Dow Jones Indices and MSCI.

The Consumer Discretionary sector comprises companies primarily engaged in:

  • Manufacturing consumer products including durables, leisure products, apparel, and luxury goods;
  • Retail, as distributors, internet and direct marketing retailers, specialty retailers, and multiline retailers such as department stores;
  • Providing consumer services such as restaurants, hotels, resorts, and casinos; and
  • Manufacturing automobiles and automobile components.

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TalkingPoints: The S&P/ASX 300 Shareholder Yield Index

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Izzy Wang

Analyst, Strategy Indices

The S&P/ASX 300 Shareholder Yield Index seeks to measure the performance of 40 stocks from the S&P/ASX 300 with the highest shareholder yield, which is a combination of common dividend and common share buybacks. From December 2014 to March 2019, the index had an average trailing 12-month gross dividend yield of 5.0% and an average annual excess return of 1.18% compared with the S&P/ASX 300.

  1. What is the rationale behind the construction of the index?

Many income strategies targeting high-yield stocks struggle to address the sustainability of yield. Business risk rises as companies may fail to strike the right balance between distribution and reinvestment for future business. Moreover, the source of high shareholder distribution may come from increasing debt levels, especially in a low-interest environment.

The S&P/ASX 300 Shareholder Yield Index may provide an effective solution. It requires constituents to have free cash flow of no less than the sum of dividends and buybacks, aiming to improve payout sustainability and hence share price return.

The logic behind this is straightforward. Since dividends and buybacks are paid out of cash, a constituent company must be consistently generating more than enough free cash to pay the dividends and finance the buybacks.

Free cash flow appears to be a better indicator of cash generation than earnings (and therefore an earnings-based coverage ratio), without suffering from the pitfalls of accrualbased accounting. For instance, earnings may be boosted by accounts receivable, which is the money owed to the company but that has not been paid, and amortized capital expenditures. Dividends and buybacks cannot be paid out of either of the two.

  1. How does the index work?

The S&P/ASX 300 Shareholder Yield Index selects 40 stocks from the S&P/ASX 300 with the highest shareholder yield, which is a combination of common dividends and common shares repurchased. In order to achieve sustainable performance, the eligible stocks are screened for liquidity, free cash flow, and dividend growth.

To balance between index yield and index capacity, the 40 selected names are weighted by the product of shareholder yield and float-adjusted market capitalization. The weight of each stock within the index is capped at 10% to achieve diversification. The index is rebalanced semiannually in April and October.

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TalkingPoints: The S&P Listed Private Equity Index

The S&P Listed Private Equity Index follows the performance of the leading publicly listed private equity companies that meet specific size, liquidity, exposure, and activity requirements.

  1. What is private equity, and what is driving interest in private equity?

Private equity investments are made in operating companies that are not publicly listed or traded on a stock exchange. Such firms are known for their extensive use of debt financing to purchase companies, which they restructure and attempt to resell for a higher value.

The primary reason for investor interest in private equity is its return enhancement potential. In the 1980s, 1990s, and 2000s, each U.S. dollar invested in the average private equity fund returned at least 20% more than a U.S. dollar invested in the  S&P 500®, with outperformance of at least 3% per year. [1]

Currently an important asset class for institutions globally, private equity investment has grown significantly over the past two decades in response to low central bank rates, low discount rates and higher liabilities, and lower expected returns in public markets. [2]

  1. What are the different approaches used to access private equity?

Commitments to closed-end limited partnership structures have been the most common route to access private equity investments for qualified institutions and  high-net-worth individuals. New options are emerging, including direct investment,  co-investment, separate accounts, and listed private equity (LPE).

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TalkingPoints: The S&P 500® LinkUp Jobs Index

The S&P 500® LinkUp Jobs Index

To help investors better understand macroeconomic trends affecting U.S. and global markets, S&P Dow Jones Indices has partnered with LinkUp, a leading data-driven job search company, to create the S&P 500 LinkUp Jobs Index Series. The indices provides greater transparency into the hiring profiles of companies that are included in the S&P 500.

Headline

  • S&P 500 LinkUp Jobs Index

Sectors

  • S&P 500 LinkUp Jobs Energy Index
  • S&P 500 LinkUp Jobs Materials Index
  • S&P 500 LinkUp Jobs Industrials Index
  • S&P 500 LinkUp Jobs Consumer Discretionary Index
  • S&P 500 LinkUp Jobs Consumer Staples Index
  • S&P 500 LinkUp Jobs Health Care Index
  • S&P 500 LinkUp Jobs Financials Index
  • S&P 500 LinkUp Jobs Information Technology Index
  • S&P 500 LinkUp Jobs Communication Services Index
  • S&P 500 LinkUp Jobs Utilities Index
  • S&P 500 LinkUp Jobs Real Estate Index

  1. Why do investors have an appetite for this type of index?

Reid: The S&P 500 LinkUp Jobs Index provides a unique view inside companies. The index helps investors understand whether companies are seeking to expand their labor forces and if so, at what rate. This type of data has always been of interest to investors: the U.S. Bureau of Labor Statistics’ (BLS) monthly report on payrolls is among the most-watched economic indicators by investors. As a jobs-focused measure, the S&P 500 Linkup Jobs Index fits in the  same general category as the BLS report but is more forward looking, indicating what jobs will be filled as opposed to which jobs were filled. This new index is also timelier, updating weekly instead of monthly, and with just a single-week lag.

S&P DJI has long produced these types of measures, and they tend to be popular with investors. The best example is the  S&P CoreLogic Case-Shiller Home Price Indices. This index series is second only to the S&P 500 in terms of the amount of traffic we receive on our website. The S&P 500 LinkUp Jobs Index will sit beside this renowned home price index series as an important economic indicator.

Toby: No other index provider measures jobs; thus, the S&P 500 LinkUp Jobs Index is the first and only to provide insights into the health of the global labor market. These indices deliver predictive signals around specific events such as layoffs, closures,  product launches and discontinuations, divestitures, and store/facility openings, as well as other talent management indicators such as turnover.

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