In This List

The Development of the Global Sukuk Market from an Indexing Perspective

The S&P South Africa 50: Bringing Efficiency and Diversification to the South African Market

FA Talks: Managing Retirement Hazards with Managed Indexing

Discover Material Insights with S&P DJI ESG Data

The S&P 500® ESG Index: Integrating Environmental, Social, and Governance Values into the Core

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.


The S&P South Africa 50: Bringing Efficiency and Diversification to the South African Market

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John Welling

Director, Equity Indices

INTRODUCTION

The S&P South Africa 50 represents the South African equity market by selecting 50 of the largest companies listed on the Johannesburg Stock Exchange, including both South African and foreign-domiciled firms.  To reduce risk from large exposures, no company can account for more than 10% of the index weight at each rebalance.

In comparison with the often used FTSE/JSE Top 40, the S&P South Africa 50 provides broader coverage and greater diversification, which contribute to its historically lower volatility and higher risk-adjusted returns.

EFFECTIVE CORE EXPOSURE

Accessing the target market through a limited number of stocks is a hallmark of efficient investable indices.  The S&P South Africa 50 addresses the need for an efficient index for product tracking that remains representative of the characteristics of the broad market S&P South Africa Composite.

Exhibit 1 illustrates the historical returns of the S&P South Africa 50 against the backdrop of S&P South Africa Composite and the FTSE/JSE indices, which attempt to reflect a similar target universe.  The S&P South Africa 50 effectively captures the return profile of the broader market.

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FA Talks: Managing Retirement Hazards with Managed Indexing

FA Talks is an interview series where industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing

Accelerated Wealth (AW) is one of the fastest-growing wealth management firms in Colorado, with 9 offices around the U.S. AW, a hybrid planning firm specializing in both insurance and investment-based planning, just celebrated its first decade in business, and has won The Colorado Springs Gazette’s “Best of Colorado Springs” for financial planner 5 years in a row. As it is one of the few advisory firms we are seeing that are combining fixed indexed annuities and index-based investment management, S&P Dow Jones Indices (S&P DJI) recently interviewed senior leadership at AW to learn more about how indexing plays a role in how they plan and manage retirement risk.

S&P DJI: Tell us what holistic wealth management means for Accelerated Wealth?

AW: We created a process meant to bring as much peace to our clients’ lives as possible. Through our Keys to the City client service model, our process begins with holistic financial planning. This process includes a full evaluation across various financial strategies such as social security, income planning, required minimum distributions, investment portfolio analysis, life insurance and annuity inventory, health insurance, property and casualty insurance, identity and cyber security protection, estate planning, wealth transfer, and asset protection. We take great pride in our focus on building financial plans as opposed to running a business that is financial product centric.

The second step of the Keys to the City process is referred to as family legacy. In this process, we focus in on the family unit of our client. We want to do everything we can to ensure that the legacy that our clients are leaving are a blessing, and do not turn into a curse. We offer training on personality preference and emotional intelligence, and we help create an understanding for our clients as it relates to who they are as investors. We find that by providing this type of training, the family unit naturally begins to improve in their communication, conflict management, and decision-making.

If a wealth management firm is going to speak to holistic planning, we believe there is a mandate to provide offerings that do not just focus on the mechanics of the financial plan itself, but must also provide offerings that equip the client to execute the plan behaviorally.

As it relates to the financial plan itself, we want to ensure that we are not biased in the financial instruments we utilize by our licensing or past experiences. We want to know that our advisors have the ability to choose from the entire universe of asset classes when building their clients’ plans.

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Discover Material Insights with S&P DJI ESG Data

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Mona Naqvi

Senior Director, Head of ESG Product Strategy, North America

  1. INTRODUCTION

A quarter of all professionally managed assets now incorporate environmental, social, and governance (ESG) considerations,[1] from the impact of climate change to equality and human rights.  The rich history of S&P Dow Jones Indices (S&P DJI) in this area began in 1999 by pioneering ESG indexing with the launch of the Dow Jones Sustainability Index (DJSI), which marks its 20th anniversary in 2019.

S&P DJI continues to lead sustainable indexing solutions with a suite of more than 150 headline ESG benchmarks, shaping the sustainable investing landscape.  The industry has changed considerably over the past 20 years, from a focus on sector exclusions borne out of the socially responsible investment (SRI) movement, to more nuanced approaches to broad market ownership that reweight based on company performance on ESG.  These are largely driven by the improved availability and quality of ESG data, amplified by the launch of S&P DJI ESG Scoresa rigorous new ESG dataset cultivated over 20 years of sustainable investment experience by our partner, RobecoSAM (through its SAM[1] brand), that are now available to the market for the first time. 

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The S&P 500® ESG Index: Integrating Environmental, Social, and Governance Values into the Core

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Daniel Perrone

Director and Head of Operations, ESG Indices

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Reid Steadman

Managing Director, Global Head of ESG

EXECUTIVE SUMMARY

  • The S&P 500 ESG Index aligns investment objectives with environmental, social, and governance (ESG) values.
  • It can serve as a benchmark as well as the basis for index-linked investment products. The index’s broad market exposure and industry diversification result in a return profile similar to that of the S&P 500.
  • The index uses the new S&P DJI ESG Scores (see page 4) and other ESG data to select companies, targeting 75% of the market capitalization of each GICS® industry group within the S&P 500.
  • The S&P 500 ESG Index excludes tobacco, controversial weapons, and companies not in compliance with the UN Global Compact (UNGC). In addition, those with S&P DJI ESG Scores in the bottom 25% of companies globally within their GICS industry groups are excluded.
  • Our methodology results in an improved composite ESG score compared with the S&P 500. This holds true in all industries.

INTRODUCTION

An increasing number of investors require indices that are aligned with their investment objectives and their personal or institutional values.  The S&P 500 ESG Index was designed with both of these needs in mind.

The S&P 500 ESG Index is broad and constructed to be part of the core of an investor’s portfolio, unlike many ESG indices that have preceded it, which were thematic or narrow in their focus.  By targeting 75% of the S&P 500’s market capitalization, industry by industry, the S&P 500 ESG Index offers industry diversification and a return profile in line with the U.S. largecap market.

Yet the composition of this new index is meaningfully different from that of the S&P 500 and more compatible with the values of ESG investors.  Exclusions are made related to tobacco, controversial weapons, and compliance with the UNGC.  Furthermore, companies with low ESG scores relative to their industry peers around the world are also excluded.  The result is an index suitable for investors moving ESG from the fringe of their portfolio to the core.

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