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TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

The Case for Information Technology Dividend Growers

Talking Points: Capturing the Growth of the Australian Technology Industry

Indexology Magazine: Winter 2020

The Development of the Global Sukuk Market from an Indexing Perspective

TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

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Silvia Kitchener

Director, Global Equity Indices, Latin America

When it comes to small-cap equities, profitability matters. Over the past 25 years, the S&P SmallCap 600® has outperformed the Russell 2000 by almost 1.7% on an annual basis. A key driver of this outperformance was the quality bias that comes from the profitability screen that is built into the S&P SmallCap 600. What  happens when that same methodology is applied to small caps  in other markets? 

1. What are the characteristics of small-cap stocks and how have market participants used them traditionally?

An important characteristic of small-cap stocks is that they are considered growth stocks, because they have a higher potential for growth. Historically,  small caps have outperformed large caps over the long term. Studies have  shown that stocks with attractive price valuation and good growth prospects tend to outperform. Small-cap stocks also tend to be focused more domestically, offering a purer local play on Brazil growth. Furthermore, in smaller markets  like those in the Latin American region, small-cap indices can actually help develop the overall market by drawing attention to the smaller stocks, which may help create more demand for direct or indirect investment, either through individual stocks or through index-based strategies tracking small-cap indices.

2. The S&P/B3 SmallCap Select Index is part of a broader index series, the S&P Global SmallCap Select. What type of small-cap stocks do these indices track?

Small cap can be defined based on either a fixed market size or on a relative  size range, the latter being what we use in Brazil. We start with a broad view of  the market, with our country index taking into account all Brazilian companies that trade on B3 and meet the minimum size and liquidity criteria. We segment those by total market cap and then take the cumulative weight of the floatadjusted market cap to categorize the different segments. We use 70%, 15%, and 15%. The top 70% represents the large caps, the next 15% the mid caps,  and the bottom 15% the small caps.

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The Case for Information Technology Dividend Growers

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Karina Tjin

Analyst, Strategy Indices

It was once thought that companies from the Information Technology sector do not pay dividends.  While this may have been the trend a long time ago, it certainly has not been for the last decade.  Over the past 10 years, within the Information Technology sector of the S&P 500®, 26 companies initiated dividend payments and 59 companies increased their dividends at various points throughout those years, for a total of 376 dividend increases in the sector.

During the same period, with an increasing number of Information Technology companies paying dividends, the contribution to S&P 500 total return by these companies rose from 9.07% in 2009 to 16.33% in 2019 (see Exhibit 1).

This change in the Information Technology sector creates a need to measure the performance of its dividend growers.  To do this, S&P Dow Jones Indices recently launched the S&P Technology Dividend Aristocrats® Index, which seeks to track the performance of Tech companies that have a history of consistently increasing dividends.  

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Talking Points: Capturing the Growth of the Australian Technology Industry

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Michael Orzano

Senior Director, Global Equity Indices

The new S&P/ASX All Technology Index highlights a unique and innovative segment of the Australian market.

  1. Why is this index being introduced now?

In recent years, ASX-listed technology companies have experienced substantial growth in terms of both number of companies and market capitalization. In the past five years, the number of S&P/ASX All Technology Index constituents nearly doubled from 24 to 46, while the total market capitalization of these companies increased more than fivefold from AUD 17 billion to nearly AUD 92 billion.

In a market heavily concentrated in banks and natural resource companies, there is significant demand for an index that captures the Australian technology sector in a comprehensive yet precise way. Importantly, the technology segment measures a unique, innovative part of the market that remains a small portion of the broader Australian share universe. We also expect the index to increase the visibility of technology-related businesses listed on the ASX, which should support further growth of the sector over time.

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Indexology Magazine: Winter 2020

Is passive investing as passive as it sounds? How do three different index-based strategies seek to boost diversification? Read the latest issue for the answers to these questions and more.

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The Development of the Global Sukuk Market from an Indexing Perspective

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Jason Giordano

Associate Director, Strategy Indices

The global sukuk market has enjoyed tremendous growth since 2013. As measured by the Dow Jones Sukuk Total Return Index and the S&P Global High Yield Sukuk Index, the U.S. dollar-denominated sukuk market experienced a compound annualized growth rate of nearly 18%, driven by increased issuance from sovereigns and supranationals, as well as strong investor demand for Shariah-compliant securities.  Historically, the majority of issuance has come from Saudi Arabia and Malaysia; however, the past three years have witnessed an increasing number of issuers from new markets, as well as a deeper and broader investor base.

The recent growth of the global sukuk market is likely to accelerate, as GCC issuers are poised to refinance in order to fund increasing deficits and as new entrants continue to come to market.  Most notably, several African sovereigns will likely enter the market in 2020, and Egypt has set up a Shariah supervisory committee to oversee sukuk issuance.  Furthermore, corporate issuers in both Indonesia and Malaysia have begun to shift funding sources away from traditional bonds in favor of sukuk. 

The relatively nascent green sukuk initiative could also stimulate issuance, as efforts to combat climate change gain traction, building on the inaugural green sukuk transactions in Malaysia and Indonesia.  The most recent green sukuk transaction was a USD 750 million issuance from the government of Indonesia earlier in 2019.  The Indonesian government also issued the world's first sovereign green sukuk, a USD 1.25 billion five-year instrument, to finance green projects.

From an investor perspective, sukuk garnered some of the best performance of all global fixed income asset classes over the past five years.  As of Oct. 31, 2019, the Dow Jones Sukuk Total Return Index had a YTD performance of 10.14%, while the S&P Global High Yield Sukuk Index returned 11.75%.  Compared to the S&P Global Developed Aggregate ExCollateralized Bond Index, the Dow Jones Sukuk Investment Grade Total Return Index outperformed by over 300 bps over the same period.  Taking volatility into account, the Dow Jones Sukuk Total Return Index had a fiveyear risk-adjusted return that was more than triple that of the S&P Global Developed Aggregate Ex-Collateralized Bond Index. 

The strong risk-adjusted performance could be attributed to a number of factors inherent to sukuk, including the quality of most sukuk issuers and the characteristics of the sukuk securitization process.  Many sukuk issuers are sovereign nations, supranationals, and other government-related entities.  The high-quality nature of issuers supports the strong credit fundamentals of the underlying sukuk structure.  Some market participants also point to the Shariah prohibition of riba (interest) and gharar (uncertainty).  In lieu of interest, the return to an investor must be linked to profits and derived from a shared risk assumed by both the issuer and investor, unlike traditional bonds, in which the degradation of an issuer’s credit fundamentals materially affects the probability of repayment of interest or principal.

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This article was first published in Islamic Finance news Investors Report 2020.


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