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SPIVA® Scorecards: An Overview

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

ESG Index Considerations for Brazilian Pension Funds

TalkingPoints: Introducing the S&P/TSX SmallCap Select Index

The Dow Jones U.S. Select Short-Term REIT Index

SPIVA® Scorecards: An Overview

WHAT IS SPIVA?

S&P Indices versus Active (SPIVA) scorecards are semiannual scorecards published by S&P Dow Jones Indices that compare the performance of active equity and fixed income mutual funds against their benchmarks over a number of time horizons.  The inaugural scorecard was published in 2002 and focused on the U.S., but the scorecard has since been extended to Australia, Canada, Europe, India, Japan, Latin America, and South Africa.

WHAT IS UNIQUE ABOUT THE SPIVA SCORECARDS?

SPIVA scorecards are unique because they rely on datasets that address issues related to measurement techniques, universe composition, and fund survivorship.  While these issues are far less frequently discussed, they can have meaningful impacts on results.  In particular, the datasets correct for the following biases.

  • Survivorship Bias Correction: Many funds may merge or be liquidated during a given period. For someone making an investment decision at the beginning of the period, these funds are part of the opportunity set.  Unlike other comparison reports, SPIVA scorecards account for the entire opportunity set—not just the survivors—thereby eliminating survivorship bias.
  • Apples-to-Apples Comparison: Fund returns are often compared with popular benchmarks such as the S&P 500®, regardless of size or style classifications. SPIVA scorecards avoid this pitfall by comparing funds against benchmarks that are appropriate for that particular investment category.

For example, U.S. mid-cap value funds are compared with the S&P MidCap 400® Value, while the S&P SmallCap 600® Growth serves as the benchmark for U.S. small-cap growth funds.

  • Asset-Weighted Returns: Average returns for a fund group are often calculated based on equally weighting the entire fund universe. However, a more accurate representation of how market participants fared in a particular period can be ascertained by weighting each fund according to its net assets.  SPIVA scorecards show both equal- and asset-weighted averages
  • Style Consistency: U.S., Canada, and India SPIVA scorecards measure consistency for each style category across different time horizons. Style consistency is an important metric because style drift (the tendency of funds to diverge from their initial investment categorization) can affect asset allocation decisions.
  •  Data Cleaning: SPIVA scorecards avoid double counting multiple share classes in all count-based calculations. Typically, the share class with the highest assets under management at the beginning of the period is selected.  Since this is meant to be a scorecard for active managers, index funds, leveraged and inverse funds, and other indexlinked products are excluded.

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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

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 lowcarbon 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.

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%-50% relative to the benchmarks, with less than 0.55% of tracking error 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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ESG Index Considerations for Brazilian Pension Funds

INTRODUCTION

What is ESG? How can ESG be integrated into an index, especially in smaller markets? How can the divestment versus engagement arguments affect indices? How do ESG indices perform?

ESG risks have been poking their head above the water in Brazil over recent years, from issues surrounding the Amazon rainforest fires to corruption at Petrobras (BBC, 2018) and JBS (Schipani, 2018). At S&P Dow Jones Indices (S&P DJI), we have increasingly seen demand for ESG indices in Brazil and throughout Latin America in response to specific incidents and global shifts toward more responsible investment practices.

WHAT IS ESG?

ESG stands for environmental, social, and governance. Environmental factors look at issues connected to global warming, energy usage, pollution, etc. Social factors encompass issues such as a company’s management of health and safety, human capital practices, etc. Governance factors primarily address how a company is run, with metrics used including board structure and independence, executive compensation, and many more.

There are so many different terms floating around, including responsible investment, sustainable investment, and impact investing. These are all methods of incorporating ESG, with differing objectives. Exhibit 1 shows The Spectrum of Capital, which does a good job of defining the difference between different types of integration of ESG and how they differ from investments looking for purely financial returns.

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TalkingPoints: Introducing the S&P/TSX SmallCap Select Index

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Michael Orzano

Senior Director, Global Equity Indices

  1. Why is the S&P/TSX SmallCap Select being introduced now?

Prior research has demonstrated that profitability matters for small-cap companies in the U.S.[1] For example, the S&P SmallCap 600®which includes earnings eligibility criteria—has outperformed the broader Russell 2000 Index (with lower volatility) throughout its 25-year live track record. Our new S&P/TSX SmallCap Select Index extends this phenomenon to Canadian equity markets, where we have found that a similar effect exists. Simply put, small-cap companies without a track record of generating earnings have performed poorly relative to their profitable peers and  have thus been a drag on broad small-cap indices.

  1. How does the S&P/TSX SmallCap Select Index work?

The index is a part of the S&P Global SmallCap Select Index Series. In order to be eligible for index inclusion, companies must post two consecutive years of positive earnings per share. As a buffer, companies are dropped from the index after posting two consecutive years of negative earnings. In order to improve replicability of the index, we also eliminate the 20% smallest and 20% least liquid companies. The index  is weighted by float market cap and is rebalanced semiannually in June and December.

  1. What additional indices are offered within the S&P Global SmallCap Select Index Series?

The S&P/TSX SmallCap Select Index follows the same index methodology framework utilized in our S&P Global SmallCap Select Index Series. We currently offer several regional and country indices within the S&P Global SmallCap Select Series, including those in Exhibit 1.

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The Dow Jones U.S. Select Short-Term REIT Index

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Michael Orzano

Senior Director, Global Equity Indices

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Silvia Kitchener

Director, Global Equity Indices, Latin America

The Dow Jones U.S. Select Short-Term REIT Index seeks to track REITs in sectors that typically have short-term lease durations, with the goal of creating a REIT index that is less sensitive to interest rate changes.


OVERVIEW: THE ROLE OF INTEREST RATES ON REIT INDICES

REITs are a popular and efficient way for market participants to access the real estate asset class. The potential for strong long-term total returns combined with other key investment characteristics, such as a tendency for high dividend yields, inflation-hedging properties, and a relatively low correlation with other asset classes, have contributed to the appeal of REITs. However, because they are widely considered to be rate-sensitive assets, there is substantial interest among market participants to see how REITs have performed when interest rates increased during periods of high fluctuation. Although there is evidence that REITs have typically fared well over full cycles of rising rates, U.S. REITs have often experienced sharp sell-offs in short-term periods in which interest rates have increased significantly. Given this context, there is considerable interest in a U.S. REIT index that may be less sensitive to interest rate movements.

HOW DOES THE INDEX WORK?

The Dow Jones U.S. Select Short-Term REIT Index is a subset of the Dow Jones U.S. Select REIT Index that only includes REITs in property sectors that typically have relatively short-term lease durations.  These sectors are apartments, hotels/resorts, manufactured homes, and self-storage.  Theoretically, REITs with shorter lease durations should be less sensitive to interest rates, given that they can more quickly reprice their rental agreements.  For example, a hotel effectively has overnight leases and can rapidly respond to market changes.  Similarly, apartment owners typically engage in one-year leases with tenants, making the average lease duration of apartment REITs under one year.  On the other hand, office, health care, and other major REIT sectors generally have much longer-term lease durations—giving them more bond-like cash flow characteristics.  Exhibit 1 shows the different Dow Jones U.S. Select REIT Term Indices with their sub-sectors and the typical average lease duration.  The indices also employ a 5% cap on stock weights to reduce single-stock concentration.

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