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

FAQ: DJIM Target Risk Indices

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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FAQ: DJIM Target Risk Indices

Multi-Asset, Shariah-Compliant Indices for Global Investors

The Dow Jones Islamic Market (DJIM) Target Risk Indices are a series of multi-asset benchmarks that combine core equity, sukuk, and cash components, allowing market participants to choose an allocation framework that best reflects their investment style.

  1. What role do the DJIM Target Risk Indices serve in the market? Use of multi-asset, Shariah-compliant benchmarks has increased significantly in recent years, as Islamic market participants have sought tools to manage risk while generating growth and income.  Each index in this series combines core equity, sukuk, and cash components in differing predefined allocations in order to target various risk/return profiles.  The indices can serve as performance benchmarks for multi-asset, Shariah-compliant funds or as underlying indices for passive investment vehicles.

  2. How do the indices work? The DJIM Target Risk Indices combine various equity indices, the Dow Jones Sukuk Index, and a cash component at fixed allocations.  Each series consists of five indices, each targeting a different risk profile (see Exhibit 1).

    The index weights are reset to the fixed allocations on a quarterly basis, effective after the close of the third Friday in March, June, September, and December—coinciding with the rebalancing schedule for the Dow Jones Islamic Market Indices.

  3. How are the equity allocations composed? Beyond asset-class target allocations, the DJIM Target Risk suite offers flexibility to users with varying approaches to the equity allocation.  The DJIM Target Risk Series offers a global, market-cap-weighted approach, using developed and emerging market equity indices, as well as the Dow Jones Sukuk Total Return Index (exReinvestment), as shown in Exhibit 2.

A second approach, the DJIM Target Risk (Fixed Allocation) Series, fixes weights between equity components in order to better reflect the typical investment style of U.S.-based investors, while offering further granularity within U.S. equity subsets.  Regional equity allocations are fixed at 70% U.S. and 30% international.  Exhibit 3 illustrates the full allocation of each component index within the series.  There is also a U.S. subset of the fixed allocation series that excludes non-U.S. equity.  Each series uses the Dow Jones Sukuk Total Return Index (exReinvestment) in order to reflect exposures to global Shariah-compliant fixed income and allocates to cash in order to further reduce volatility.

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