In This List

Value: A Practitioner's Guide

Factor Strategies in Brazil: A Practitioner's Guide

TalkingPoints: Introducing the S&P/ASX Small Ordinaries Select Index

How Index Innovation Is Propelling Further Growth of Islamic Markets

Equal-Weight Indexing: One-Stop Shopping for Size and Style

Value: A Practitioner's Guide

Contributor Image
Karina Tjin

Analyst, Strategy Indices

WHAT IS VALUE?

The foundational lessons of Graham and Dodd provide a recipe for market participants to look at stocks based on a valuation framework and to understand the relative cheapness of stocks. This framework has been used throughout the years, and many have adapted or adjusted it to meet their investment styles or views.

At the most basic level, the goal of investing in value stocks is to buy stocks that are trading at a discount relative to their peers (based on company financials) but have upside potential. How someone measures the relative “cheapness” and determines how much of a portfolio to put in a “cheap” stock are key items to consider when looking at value.

Using company financial metrics, the S&P Enhanced Value Indices seek to measure stocks with attractive valuations based on three key fundamentals.

  1. Price-to-Earnings Ratio: Calculated as a company’s trailing 12-month earnings per share divided by its share price. A key metric used for company valuation, we use this ratio to identify companies with earnings that may not be reflected in their share price when compared with other companies.

  2. Price-to-Book Value Ratio: Calculated as a company’s latest book value per share divided by its share price. This metric is key in understanding what proportion of a company’s assets are priced into the shares of a company.

  3. Price-to-Sales Ratio: Calculated as a company’s trailing 12-month sales per share divided by its share price. This metric is used to identify companies that might not have consistent earnings but still maintain robust sales growth relative to their share price appreciation. These three ratios were selected to identify the stocks that could have the most potential upside value relative to their share price. For each stock in the underlying index and for each metric, a risk-adjusted z-score is calculated and a simple average of these three z-scores is taken.

These three ratios were selected to identify the stocks thatcould have the most potential upside value relative to their share price. For each stock in the underlying index and for each metric, a risk-adjusted z-score is calculated and a simple average ofthese three z-scores is taken.

pdf-icon PD F DOWNLOAD FULL ARTICLE

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.

pdf-icon PD F DOWNLOAD FULL ARTICLE

TalkingPoints: Introducing the S&P/ASX Small Ordinaries Select Index

Contributor Image
Michael Orzano

Senior Director, Global Equity Indices

Could incorporating earnings quality and liquidity improve risk/return in Australian small-cap equities?

  1. Why is the S&P/ASX Small Ordinaries 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) for more than 20 years. Our new S&P/ASX Small Ordinaries Select Index extends this phenomenon to Australian 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.

How does the S&P/ASX Small Ordinaries 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. The index is weighted by float market cap and is rebalanced semiannually in March and September.

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

The S&P/ASX Small Ordinaries Select Index follows the same index methodology framework utilized in our S&P Global SmallCap Select Index Series. We currently  offer the following regional indices within the S&P Global SmallCap Select Series (see below).

pdf-icon PD F DOWNLOAD FULL ARTICLE

How Index Innovation Is Propelling Further Growth of Islamic Markets

Contributor Image
Michael Orzano

Senior Director, Global Equity Indices

Contributor Image
John Welling

Director, Equity Indices

THE RANGE OF SHARIAH-COMPLIANT INDICES HAS GROWN TO MEET THE EVOLVING NEEDS OF THE ISLAMIC FINANCE INDUSTRY  

Since the introduction of the Dow Jones Islamic Market (DJIM) World Index nearly 20 years ago, there has been a tremendous amount of index innovation as the Islamic investment community has demanded increasingly granular and sophisticated investment solutions while adhering to the tenets of Islamic law. Today, S&P Dow Jones Indices publishes more than 10,000 Shariah-compliant indices each day.  In the early years, we brought to market broad benchmarks covering various regions, as well as large-cap indices focused on prominent blue-chip companies. Soon thereafter, Shariah-compliant versions of popular benchmarks such as the S&P 500® Shariah were introduced.  In the past few years, Shariahcompliant index development has expanded to include smart beta and multi-asset class strategies.

DIVIDEND STRATEGIES

Dividend indices have long been popular with conventional investors due to their income properties and indication of long-term value.  The S&P High Yield Dividend Aristocrats® was launched for conventional investors in 2005, and its success has led to the subsequent launch of its Shariah counterpart—the S&P High Yield Dividend Aristocrats Shariah Index.  The index is formed by screening companies within the S&P Composite 1500® for Shariah compliance, followed by the further selection of companies that have consistently increased their dividends over the past 20 consecutive years.  The result is a modern dividend capture index available for use by Shariah-conscious market participants.  Exhibit 1 highlights the favorable risk and return characteristics of the S&P High Yield Dividend Aristocrats Shariah Index compared with the conventional S&P High Yield Dividend Aristocrats and the S&P 500 over the past 10 years. 

pdf-icon PD F DOWNLOAD FULL ARTICLE

Equal-Weight Indexing: One-Stop Shopping for Size and Style

Contributor Image
Louis Bellucci

Senior Director, Index Governance

INTRODUCTION

The S&P Equal Weight U.S. Indices include the equal-weight versions of the widely used S&P 500®, S&P 100, S&P MidCap 400®, and S&P SmallCap 600®.  The equal-weight indices include the same constituents as their respective market-cap-weighted indices, but each company is allocated a fixed equal weight in the index at each quarterly rebalance.  The result is a simple and elegant way to access broad market returns with exposure to the size (small-cap premium) and style (value) factors.

Created in 1957, the S&P 500 was the first broad U.S. market-capweighted stock market index.  Today, it is the basis of many listed and over-the-counter investment instruments.  Launched in 1983, the S&P 100 is a sub-set of the S&P 500 and includes 100 of the largest, most stable companies in the S&P 500 with listed options.  Sector balance is considered in the S&P 100 composition across multiple industry groups.

Following research in the early 1990s by Fama and French that showed the small-cap premium,[1] demand grew for mid- and small-cap indices, especially with quality screens.  To meet this demand, the S&P MidCap 400 and S&P SmallCap 600 were created in 1991 and 1994, respectively.  Sizes are determined by unadjusted full market capitalization.  As of Nov. 30, 2018, a company’s market cap must be greater than or equal to USD 6.1 billion in order to be eligible for the S&P 500, between USD 1.6 billion and USD 6.8 billion for the S&P MidCap 400, and between USD 450 million and USD 2.1 billion for the S&P SmallCap 600.  The combination of the S&P 500, S&P MidCap 400, and S&P SmallCap 600 is measured by the S&P Composite 1500®.

In addition to the equal-weight versions of the broad U.S. benchmarks, S&P Dow Jones Indices (S&P DJI) also calculates individual sector indices based on the Global Industry Classification Standard® (GICS®) for the S&P 500, S&P MidCap 400, and S&P SmallCap 600.  Developed in 1999 and jointly managed by S&P DJI and MSCI, the GICS assigns companies to a single classification at the sub-industry level according to its principal business activity using quantitative and qualitative factors, including revenues, earnings, and market perception.  The sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Processing ...