In This List

Talking Points: A New Way to Look at Corporate Bonds

Looking Beyond Traditional Benchmarks to Add Value in Emerging Markets

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

Talking Points: A New Way to Look at Corporate Bonds

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Jason Giordano

Associate Director, Strategy Indices

The S&P 500/MarketAxess Investment Grade Corporate Bond Index seeks to measure the performance of the largest, most frequently traded bonds issued by high-quality companies in the S&P 500.

1. How does this index compare to broader U.S. investment-grade corporate bond indices?

The S&P 500/MarketAxess Investment Grade Corporate Bond Index captures similar characteristics of the broader U.S. investment-grade market, such as total return, yield, and duration. However, by focusing on the largest, most frequently traded bonds of well-known companies in the S&P 500, the index provides improved relative liquidity versus issues in the broader corporate bond market.

2. How is the S&P 500/MarketAxess Investment Grade Corporate Bond Index constructed?

The S&P 500/MarketAxess Investment Grade Corporate Bond Index is a subindex of the larger S&P 500 Investment Grade Corporate Bond Index. The index was created in an effort to identify the largest, most frequently traded, high-quality bonds issued by members of the S&P 500. The first step in designing the index was to isolate only high-quality issuers.

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Looking Beyond Traditional Benchmarks to Add Value in Emerging Markets

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Michael Orzano

Senior Director, Global Equity Indices

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John Welling

Director, Equity Indices

INTRODUCTION

As emerging markets have grown in size and importance, emerging market equities have become a core part of many portfolio allocations. In addition, the increased diversity and liquidity of emerging equity markets have made strategies commonly used to manage developed market portfolios (such as tactical allocations across regions and size segments) much more accessible to emerging market investors.

Despite these trends, the use of more complex asset allocation strategies within emerging market equities remains quite limited, as the vast majority of market participants continue to gain exposure to this asset class either via index-linked products that track traditional benchmarks or through active managers with mandates closely tied to those benchmarks. While accessing emerging markets through a single holding linked to a conventional benchmark can be an effective, low-cost way to obtain unbiased exposure to this asset class, evidence indicates that using a more discerning approach to managing emerging market portfolios may potentially add value in the same ways it can in the U.S. and other developed markets.

ALL EMERGING MARKET BENCHMARKS ARE NOT CREATED EQUAL

While most broad emerging market benchmarks tend to be highly correlated, there are methodological differences that can result in substantive performance differentials over time.  Therefore, it is important to understand how emerging market benchmarks are constructed.  For example, in the trailing 15-year period ending Feb. 28, 2018, the S&P Emerging BMI gained 580% on a cumulative total return basis, while the MSCI Emerging Markets Index gained a comparatively smaller 540% for the same time period.  Analysis shows that the difference in performance was driven by two main factors.  First, the MSCI Emerging Markets Index has an approximate weight of 15% in South Korea, while South Korea has been ineligible for the S&P Emerging BMI since 2001, when it was reclassified as a developed market. South Korea has underperformed 11 of the 16 countries that have been classified as emerging markets by S&P Dow Jones Indices over the 15-year period studied.  Second, the S&P Emerging BMI has significantly broader coverage, including large-, mid-, and small-cap stocks, while the MSCI Emerging Markets Index includes only large- and mid-cap stocks.  Over this period, the S&P Emerging SmallCap outperformed the S&P Emerging LargeMidCap by more than 146%. 

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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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