IN THIS LIST

A Case for Dividend Growth Strategies

ETFs in Insurance General Accounts – 2021

Fleeting Alpha Scorecard: Year-End 2020

Why the S&P 500 Matters to China

Approaches to Benchmarking Listed Infrastructure

A Case for Dividend Growth Strategies

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Izzy Wang

Analyst, Strategy Indices

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Tianyin Cheng

Senior Director, Strategy Indices

Dividend strategies have gained a foothold with market participants seeking potential outperformance and attractive yields, especially in the low-rate environment since the 2008 financial crisis and the even lower-rate environment we’ve seen since early 2020 as the world deals with the economic fallout from COVID-19.

With the volatile economic situation that emerged in 2020, and market uncertainties putting pressure on corporate earnings, high-yielding companies without strong financial strength and discipline may not be able to sustain future payout and could be prone to dividend cuts and suspensions.

Stocks with a history of dividend growth, on the other hand, could present a compelling investment opportunity in an uncertain environment.  An allocation to companies that have sustainable and growing dividends may provide exposure to high-quality stocks and greater income over time, therefore buffering against market volatility and addressing the risk of rising rates to some extent.

This argument goes beyond the traditional realm of domestic large-cap stocks.  It also works for small- and mid-cap stocks and can be applied to international markets as well.

The S&P High Yield Dividend Aristocrats® is designed to track a basket of stocks from the S&P Composite 1500® that have consistently increased their dividends every year for at least 20 years.  This paper investigates the benefits of a dividend growth strategy by analyzing the characteristics of the S&P High Yield Dividend Aristocrats and comparing it to the S&P 500® High Dividend Index—a high-dividend strategy built on the S&P 500 (see the Appendix for an overview of the index’s methodology).  In addition, this paper illustrates a few indices that focus on the strongest dividend growers in global and international markets, including Canada, the eurozone, the U.K., Pan Asia, and Japan.

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ETFs in Insurance General Accounts – 2021

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Raghu Ramachandran

Head of Insurance Asset Channel

After a chaotic start to the year, U.S. insurance companies added USD 4 billion to exchange-traded funds (ETFs) to their general account portfolios in 2020. By year-end 2020, U.S. insurers increased their ETF AUM by 18% from 2019. Life companies, in particular, returned to the market and purchased large amounts of ETFs. In spite of, or because of, the volatility in the bond market, insurance companies had strong flows into Fixed Income ETFs, adding USD 5 billon in 2020.

In our sixth annual study of ETF usage in U.S. insurance general accounts, for the first time we analyzed the trading of ETFs by insurance companies (see page 37) in addition to the holding analysis. In 2020, insurance companies traded USD 63 billion in ETFs, representing a 10% growth over 2019’s trade volume. On average, insurance companies traded twice as many ETFs during the year as they held at the beginning of the year. Certain categories have substantially higher trade ratios. We also noted interesting observations about the size of insurance company trades.

HOLDING ANALYSIS

Overview

As of year-end 2020, U.S. insurance companies invested USD 36.9 billion in ETFs. This represented only a tiny fraction of the USD 5.5 trillion in U.S. ETF AUM and an even smaller portion of the USD 7.2 trillion in invested assets of U.S. insurance companies. Exhibit 1 shows the use of ETFs by U.S. insurance companies over the past 17 years.

In 2020, ETF usage by insurance companies increased 18.4%; this is a slightly higher rate than the 16.0% increase in 2019. The growth rate has remained consistent since 2004, when insurance companies began investing in ETFs (see Exhibit 2). This growth rate implies a doubling of ETF AUM roughly every four to five years (see Exhibit 3).

In 2019, the number of ETF shares held by insurance companies declined for the first time in 12 years, but in 2020, the number of shares held increased by 8.5% (see Exhibit 4).

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Fleeting Alpha Scorecard: Year-End 2020

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Gaurav Sinha

Managing Director, Head of Americas Global Research & Design

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Berlinda Liu

Director, Global Research & Design

SUMMARY

The Fleeting Alpha Scorecard combines elements of the SPIVA® U.S. Scorecard and the Persistence Scorecard to show how outperforming mutual funds from one three-year period continue to perform thereafter. The former report compares actively managed funds against their passive benchmarks, while the latter compares funds against their peers.

For the Fleeting Alpha Scorecard, we first identify funds that beat their benchmarks, based on three-year annualized returns, net-of-fees. We then examine whether these funds continue to outperform during each of the next three one-year periods.

There was significant dispersion in the likelihood of funds outperforming by category, with the most notable split occuring between growth and value funds. For example, as of Dec. 31, 2017, 84 of the 261 large-cap growth funds had outperformed the S&P 500® Growth in the previous three years. Of those winners, 21 (or 25%) outperformed for the subsequent three years. But on the value side, while 78 out of 338 funds had outperformed the S&P 500® Value as of Dec. 31, 2017, only 1 of those winners managed to continue outperforming annually through 2020 (see Exhibit 1 and Report 1).

Fleeting Alpha Scorecard: Year-End 2020 - Exhibit 1

In 4 of the 18 domestic equity categories tracked, no funds managed to repeat their outperformance, and fewer than 10% did so in an additional four categories (see Report 1).

Echoing a point from the SPIVA U.S. Year-End 2020 Scorecard, prior to the evaluation of alpha persistence, few funds beat the benchmark for the initial three years (2015-2017). In 13 of the 18 domestic equity categories, fewer than 20% surpassed the benchmark, significantly reducing the original universe into the pool of "winners" for subsequent tracking.

International equity funds had slightly higher rates of outperformance in the initial period and were more stable in their alpha maintenance across categories and time. The conspicuous exception was emerging market funds where no active manager managed to repeat their positive alpha through 2020.

We take into consideration that cyclical market conditions can unduly influence a snapshot of the performance persistence figure. The figures in Report 2 are calculated by: 1) creating a version of Report 1 for each quarter between December 2011 and December 2020, and 2) taking simple averages of the persistence figures for each of the categories.

This analysis showed that the average outperformance persistence in each of the subsequent three years fell rapidly. Across all funds in the tracking universe, the average outperformance persistence by year was 33.8%, 13.7%, and 6.7%, respectively.

The growth/value split was visible in this longer timeframe as well. As Exhibit 2 shows, while the percentage of outperforming value funds was reasonably similar to their growth counterparts in year one, their alpha proved substantially less durable, suffering a harsher decline by year three.

Fleeting Alpha Scorecard: Year-End 2020 - Exhibit 1

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Why the S&P 500 Matters to China

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Hamish Preston

Director, U.S. Equity Indices

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Jason Ye

Associate Director, Strategy Indices

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Tianyin Cheng

Senior Director, Strategy Indices

EXECUTIVE SUMMARY

Chinese investors tend to have high exposure to domestic equities and low exposure to international equities.  This home-country bias is common among investors globally.  U.S. equities represented 45% of the global equity market, as of Dec. 31, 2020.  Underallocation to international equities, including U.S. equities, means Chinese investors may be foregoing potential diversification benefits.

In this paper, we:

  • Discuss the global investment opportunities for Chinese investors and the potential results of investing globally;
  • Introduce the S&P 500 and explain how it is constructed;
  • Highlight how the S&P 500 could affect Chinese investors’ ability to diversify domestic sector biases, gain exposure to U.S. economic growth, and improve historical risk-adjusted returns; and
  • List different channels where Chinese investors may access global markets and review the Qualified Domestic Institutional Investor (QDII) program.

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Approaches to Benchmarking Listed Infrastructure

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Claire Yi

Analyst, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

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Tianyin Cheng

Senior Director, Strategy Indices

Investing in infrastructure has become popular among institutional and private investors in recent years. Investors could be attracted to the potentially long-term, low-risk, and inflation-linked profile that can come with infrastructure assets, and they may find that it is an alternative asset class that could provide new sources of return and diversification of risk.

WHY CONSIDER INVESTING IN INFRASTRUCTURE?

Infrastructure assets provide essential services that are necessary for populations and economies to function, prosper, and grow.  They include a variety of assets divided into five general sectors: transportation (e.g., toll roads, airports, seaports, and rail); energy (e.g., gas and electricity transmission, distribution, and generation); water (e.g., pipelines and treatment plants); communications (e.g., broadcast, satellite, and cable); and social (e.g., hospitals, schools, and prisons).  Infrastructure assets operate in an environment of limited competition as a result of natural monopolies, government regulations, or concessions.  The stylized economic characteristics of this asset class include the following.

  • Relatively steady cash flows with a strong yield component: Infrastructure assets are generally long lived. Most companies have long-term regulatory contracts or concessions to operate the assets, which can provide a predictable return over time.  As a result, infrastructure assets have the potential to generate consistent, stable cash flow streams, usually with lower volatility than other traditional asset classes.
  • High barriers to entry: Due to significant economies of scale, infrastructure assets are often regulated in such a way that discourages competition. The high barriers to entry often result in a monopoly for existing owners and operators.
  • Inflation protection: Revenues from infrastructure assets are typically linked to inflation and are often supported by regulation. In certain instances, revenue increases linked to inflation are embedded in concession agreements, licenses, and regulatory frameworks.  In other cases, owners of infrastructure assets are able to pass inflation on to consumers via price increases, due to the essential nature of the assets and their inelastic demand.

Consequently, the infrastructure asset class may provide investors with a degree of protection from the business and economic cycles, as well as attractive income yields and an inflation hedge.  It could be expected to offer long-term, low-risk, non-correlated, inflation-protected, and acyclical returns.

It is also generally believed that infrastructure is, as an asset class, poised for strong growth.  As the global population continues to expand and standards of living around the world become higher, there is a vast demand for improved infrastructure.  This demand includes the refurbishment and replacement of existing infrastructure worldwide and new infrastructure development in emerging markets.

Financing public infrastructure has traditionally been the responsibility of the state.  However, fiscally constrained governments are increasingly turning to the private sector to provide funding for new projects.  As a result, the investment opportunities in this sector continue to grow.

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