IN THIS LIST

Talking Points: Adding ESG Transparency to Real Estate

Blending Factors in Smart Beta Portfolios

Sector Primer Series: Information Technology

Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

Factor Strategies in Brazil: A Practitioner's Guide

Talking Points: Adding ESG Transparency to Real Estate

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Michael Orzano

Senior Director, Global Equity Indices

Adding ESG Transparency to Real Estate

More and more investors are integrating ESG risks into their investment process. Given the large size and specialized nature of real estate assets, the investment community has demanded sophisticated tools to more accurately identify real estate companies that own more sustainable properties and integrate this information seamlessly into their investment process.

S&P Dow Jones Indices has collaborated with GRESB, a leader in evaluating ESG characteristics of real estate companies, to create the Dow Jones Green Real Estate Indices. The indices, which utilize data from GRESB, are designed to be representative of the investment characteristics of conventional real estate benchmarks, but with an improved sustainability profile.

Index Offering

  • Dow Jones Global Green RESI
  • Dow Jones U.S. Green REIT Index
  • Dow Jones Global Ex-U.S. Green RESI
  • Dow Jones Japan Green RESI

1. Why do real estate companies require a specialized approach to quantifying sustainability?

Sander: While sustainability considerations affect all industries, they are particularly relevant for the real estate sector. With an estimated 40% of all global carbon emissions being driven by the construction and operation of buildings, real estate is a particular industry of focus among ESG investors. Buildings are long-lived and typically cannot be moved to another place, which leaves them exposed to the direct localized consequences posed by sustainability risks: more stringent regulatory requirements; changing societal preferences for places to work, live, and play; and exposure to climate-related events such as flooding, water scarcity, and extreme weather conditions.

There’s a growing recognition by companies and investors that ESG matters are fundamental to business performance and should be disclosed in financial reports. Businesses are also coming to realize that integrating ESG concerns into core business and financial decisions will generate new streams of data that can be used to enhance growth and sustainability.

Real estate is a complex business with varying degrees of control on construction quality and operational excellence. The GRESB framework is specifically tailored to real estate companies that seek to embrace industry best practices on the full range of ESG issues that can be material to shareholders.

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Blending Factors in Smart Beta Portfolios

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Tianyin Cheng

Senior Director, Strategy Indices

In recent years, smart beta strategies have seen a significant increase in popularity.  These systematic strategies seek to measure factors in order to harvest the associated long-term risk premium.  Many empirical studies show that smart beta strategies have historically outperformed their capweighted benchmarks.  However, different single factors tend to outperform in different market environments.1  Therefore, holding a combination of factor strategies in a blended portfolio could provide a powerful source of diversification and more stable excess returns.

This paper briefly reviews the definition and performance characteristics of the S&P 500® Single-Factor Indices, demonstrates their historical cyclicality and correlation, and presents a few examples of how market participants could potentially use investment vehicles tracking these single-factor indices as part of their own factor allocation, either as strategic or tactical plays.  These examples expand the traditional asset allocation frameworks to factors, including optimal allocation frameworks, heuristic allocation frameworks, and a trend-based timing framework.

1. SINGLE FACTORS

The S&P Single-Factor Indices comprise four key factors: low volatility, momentum, value, and quality.  A rules-based selection and non-marketcap-weighting approach is used to construct the indices, and diversification and investability are taken into consideration.

The indices are constructed from the universe of S&P Dow Jones Indices’ (S&P DJI) headline global indices, including the S&P 500, S&P Europe 350®, S&P Global BMI, and regional and country benchmarks.  Approximately one-fifth of the universe is selected by applying liquidity criteria.  The constituents are then weighted two ways: by the inverse of volatility in the case of low volatility indices, and by the product of factor score and market cap for the momentum, value, and quality factors.  The indices are rebalanced semiannually except for the low volatility indices, some of which are rebalanced quarterly.  Exhibit 1a provides an overview of the S&P Single-Factor Indices.

In this paper, we will focus on the S&P 500 Single-Factor Indices.  Exhibit 1b provides the description of the four long-only, single-factor indices, together with a dividend index and an equal-weight index, built on the S&P 500 universe.

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Sector Primer Series: Information Technology

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Louis Bellucci

Senior Director, Index Governance

INTRODUCTION

Developed in 1999 and jointly managed by S&P Dow Jones Indices and MSCI, the Global Industry Classification Standard® (GICS®) assigns companies to a single classification at the sub-industry level according to their principal business activity using quantitative and qualitative factors, including revenues, earnings, and market perception. The sub-industry is the most specific level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries, as of Dec. 31, 2018.

Companies primarily engaged in Software & Services, Technology Hardware & Equipment, and Semiconductors & Semiconductor Equipment are classified into industry groups that make up the Information Technology sector. It includes, but is not limited to, companies that develop and produce software, manufacture electronic equipment and instruments, provide commercial electronic data processing, and manufacture semiconductors and related products, as well as those that manufacture communication equipment and products including LANs, WANs, routers, telephones, switchboards, and exchanges.

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Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

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Andrew Innes

Head of EMEA, Global Research & Design

INTRODUCTION

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change.  Carbon prices are already implemented in 40 countries and 20 cities and regions.  Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.[1]

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

The key points included in the index concept are as follows: 

  • Carbon pricing risk from a growing array of new policies and taxes leading to potentially significant increased costs for companies.
  • Every company having a different carbon emissions profile—its total greenhouse gas (GHG) emissions footprint and where geographically these emissions occur.
  • Carbon pricing risk could vary substantially among companies operating in the same business sector.

This development is an example of the broader move toward incorporating environmental, social, and governance (ESG) considerations in asset management.

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Factor Strategies in Brazil: A Practitioner's Guide

WHAT ARE FACTOR INDICES?

Capturing market idiosyncrasies and desired risk/return characteristics has been a fundamental component in the active management space for decades. Taking the fundamental ideology behind an investment strategy and democratizing them within an index allows for these rules-based portfolios to provide at minimum a gauge for relative performance and at best the ability to systematically capture alpha.

When looking at factor strategies in Brazil, we will be focusing on four different strategies.

Enhanced Value: At the most basic level, the goal of investing in value stocks is to buy stocks that are “cheap” or trading at a discount relative to their peers based on company fundamentals.

Momentum:The goal of momentum investing is to capture the stocks that have had the highest price appreciation relative to their peers with the expectation that they will further outperform in a rising market.

Quality: Investing in companies that have quality characteristics seeks to capture stocks that have fundamentals that exemplify a well-run company relative to their peers.

Low Volatility/Inverse-Risk Weighted: Low volatility or inverse-risk weighted strategies allow for participation in the market even during turbulent or volatile times. Each strategy has its own risk/return characteristics that we will discuss throughout this paper.

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