IN THIS LIST

Shariah in a Fast-Changing World

Institutional Talks: The Rise of Passive Strategies in Public Pensions

How to Manage Water Risk in Your Growing Business

Leveraged Strategies: Benefits of Implementing a Moderate Amount of Leverage

Improving the 60/40 Policy Benchmark: Diversifying Within Equity Allocations

Shariah in a Fast-Changing World

2017 was a strong year for equity markets globally, but we saw even stronger performance from Shariah equity markets.  While the S&P Global BMI (an all-cap global index) rose 24.8% for the year, its global Shariahcompliant counterpart rose 27.4% (see Exhibit 1).  In the U.S., the S&P 500® saw a gain of 21.8%, while the Shariah-equivalent U.S. index rose 22% for the year.  Since 2008, when financial stocks were in the doldrums, the outperformance of broad Shariah-based indices has highlighted their absence from the market.  In 2017, the performance of the global financials sector was an impressive 24.1%, indicating that there were some other factors at work.

A closer look revealed that the information technology sector, which reflected over 30% of the weight of global Shariah equities, grew 41.3%, far overtaking the financials gain and making up for the loss that Shariah indices suffered due to the absence of financials.  Information technology and financials make up the largest difference of sector weights between broad-based global equities and their Shariah-compliant counterparts (see Exhibit 2).

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Institutional Talks: The Rise of Passive Strategies in Public Pensions

Marc Levine has served as Chairman of the Illinois State Board of Investment (ISBI) since 2015. He is a Certified Public Accountant with over 25 years of investment experience and was the founding principal of Chicago Asset Funding LLC.

S&P DJI: Tell us a bit about ISBI, your role there, the participants you serve,  and ISBI’s investment philosophy.

Marc: The Illinois State Board of Investment (ISBI) manages assets on behalf of more than 140,000 state employees. ISBI manages the Defined Benefit (DB) assets of the State Employees’ Retirement System, the General Assembly Retirement System, the Judges’ Retirement System of Illinois, and the Illinois Power Agency. The DB plan has about USD 18 billion in assets. We also manage the State of Illinois Deferred Compensation (DC) Plan, which has about USD 4 billion in assets. The choices in the  DC plan are made by the employees directly and there’s no employer match.

I spent my life in the financial markets. I was an investment banker and I owned my  own boutique financial firm. I believe that simple is better, and that’s our approach  at ISBI too.

In my role as Chairman, I work with our board to make sure we’re working toward our  goal of returning long-term value to our beneficiaries. That means keeping costs low  and making sure that our target allocations are designed to meet our risk-adjusted return goals. We believe that adhering to a simple, diverse, strategic asset allocation plan over the long term is what drives returns.

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How to Manage Water Risk in Your Growing Business

Water is essential to the production and delivery of nearly all goods and Senior Analyst services.  Pollution and overconsumption of water are making clean water an increasingly scarce resource, putting business and economic growth at risk.  Companies can manage these risks by accounting for water-related impacts, understanding the financial implications of water scarcity, and integrating water management into decision-making.

WATER RISK IS FINANCIAL RISK

Economic development, population growth, and climate change are putting increasing pressure on water resources and water quality, creating risks for all sectors.  For example, about 40% of power plants in India are in areas of high water stress, and 14 of the country’s 20 largest power plants experienced at least one shutdown due to water shortages between 2013 and 2016.[1]  The World Economic Forum’s Global Risks Report said that microscopic particles of plastic waste were found in 83% of tap water supplies, and people eating seafood could be ingesting up to 11,000 pieces of microplastic each year.[2]

The price of water does not reflect its true cost.  In many regions of the world, even where fresh water is scarce, water is underpriced and does not reflect the social and environmental costs of water pollution and scarcity (see Exhibit 1).  A Trucost study found that if the full cost of water availability and water-quality impairment had to be absorbed by companies, average profits would be cut by 18% for the chemicals industry, 44% for the utilities sector, and 116% for food and beverage companies.[3]

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Leveraged Strategies: Benefits of Implementing a Moderate Amount of Leverage

I.   INTRODUCTION

Leveraged strategies started to make their way to the consumer market in 2006.  The investment thesis underpinning the strategy is simple and intuitive.  As the name indicates, it allows market participants to express their bullish or bearish views in a packaged solution format. 

The goal of a leveraged index-linked product is to generate a multiple of the return (through borrowing) of the underlying reference index.  Therefore, there are two inputs to the strategy: the underlying instrument and the leverage factor.  The underlying may be from equities, bonds, or commodities.  The leverage factor is a number that, when multiplied by the underlying daily return, will give you the daily return of the leveraged strategy (minus explicit costs and market frictions).

Due to the well-known compounding issues that leveraged strategies face, they are not without controversy.  Part of this stems from the inaccurate expectation that the strategy will maintain its leverage factor over any time horizon.  Therefore, education is critical when trying to understand the appropriateness of the strategy.  This paper seeks to increase the awareness of leveraged strategies and their implementation.  It also explores the potential benefits of a small amount of leverage being used within a single strategy as well as a diversified portfolio.

II. LEVERAGED STRATEGY CONSTRUCTION

A leveraged strategy (specifically the payoff profile) can be constructed by borrowing a percentage of the total portfolio in order to buy more of the underlying.  This results in the market participant receiving a daily return that is equal to the leverage factor multiplied by the return of the underlying, minus the cost of the funds borrowed.

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Improving the 60/40 Policy Benchmark: Diversifying Within Equity Allocations

Contributor Image
Tianyin Cheng

Senior Director, Strategy Indices

Asset owners are faced with a number of external drivers, which may have important consequences for their asset allocation.  Among these, low central bank rates, low discount rates/higher liabilities, lower expected returns across many asset classes, and potentially important downside risks may be the most influential.  Moreover, despite concerns about potentially full valuations for listed equities following recent strong performance, asset owners still typically rely on this asset class to provide the bulk of return generation, given the greater scalability and relatively lower cost of access.[1]

This paper will demonstrate the potential investment efficiency improvement to the equity component of a traditional policy benchmark of 60% market-cap-weighted equities and 40% value-weighted fixed income. We explore how the risk-adjusted return characteristics of various combinations of non-market-cap-weighted and thematic equity indices might provide a more balanced exposure to listed equities.  The alternatives to market-cap-weighted equity indices we considered include: a multi-factor quality, value, and momentum index; equal-weighted indices; low volatility and minimum volatility indices; dividend indices; listed private equity; listed infrastructure; and listed real estate indices. 

In upcoming research papers, we will explore differentiation opportunities versus the traditional fixed income policy benchmark and index-based approaches to access alternative strategies like volatility, carry, and commodities.

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