While 30 years is a lifetime in commodities investing, what more can we expect in the next three decades?
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Commodities Index Innovation: The Next 30 Years
Simplicity Is Also Beautiful in Brazil: The S&P/B3 Low Volatility High Dividend Index
Style Bias and Active Performance
Exploring Techniques in Multi-Factor Index Construction
The S&P Catholic Values Indices: A Multi-Asset Solution for Faith-Based Investing
Commodities Index Innovation: The Next 30 Years
Simplicity Is Also Beautiful in Brazil: The S&P/B3 Low Volatility High Dividend Index
María Sánchez
Director, Sustainability Index Product Management, U.S. Equity Indices
S&P Dow Jones Indices
EXECUTIVE SUMMARY
For investors who seek higher dividend yield and lower volatility for better risk-adjusted returns, S&P Dow Jones Indices has proposed a two-step constituent screening method. In this paper, we discuss how this analysis can be applied to Brazilian equity markets using the S&P/B3 Low Volatility High Dividend Index.
- The low volatility screen acts as a quality measure to avoid high-yield stocks with sharp price drops and seeks to capture the low volatility factor for the S&P/B3 Low Volatility High Dividend Index.
- The S&P/B3 Low Volatility High Dividend Index delivered a higher absolute and risk-adjusted return than the benchmark, the S&P Brazil BMI, from May 31, 2007, to March 31, 2020 (see Exhibit 1).
- The index outperformed the S&P Brazil BMI 83% of the time in down markets and underperformed 68% of the time in up markets. However, the outperformance in down markets was more pronounced than the underperformance in up markets.
- Compared with its benchmark, the S&P/B3 Low Volatility High Dividend Index historically delivered higher dividend yield.
1. INTRODUCTION
Almost one year after launching the S&P/B3 Low Volatility High Dividend Index, we examine the potential advantage of incorporating a low volatility screen into a high-dividend-yield portfolio. We also compare the S&P/B3 Low Volatility High Dividend Index to other S&P Dividend Indices in the Brazilian equity market across various aspects such as sector composition, dividend yield, and historical return, among others.
Historically, the percentage of dividend payers in Brazil has ranged between 71% and 92%, making it a favorable environment for implementing dividend-focused strategies. In Brazil, S&P Dow Jones Indices has three different dividend-focused strategies, using different constructions and targeting different objectives:
- The S&P Dividend Aristocrats® Brasil Index is designed to measure the performance of 30 stocks in the S&P Brazil BMI that maintain increasing or stable dividends.
- The S&P Brazil Dividend Opportunities is designed to measure the performance of 40 of the highest-yielding stocks in the S&P Brazil BMI that demonstrate profitability.
- The S&P/B3 Low Volatility High Dividend Index is designed to measure the performance of the least-volatile stocks among a specified group of high-dividend-yielding constituents of the S&P Brazil BMI that trade on the B3.
The highest-yielding stocks in high-yield strategies often come with greater portfolio volatility, and Brazil is no exception. Therefore, an income strategy may require some form of volatility management for portfolio construction.
Style Bias and Active Performance
EXECUTIVE SUMMARY
- Style bias plays a major role in explaining active manager outperformance across the capitalization spectrum.
- Active managers of large-capitalization portfolios tend to tilt down the cap scale, while mid- and small-cap managers tend to tilt up. Consequently, large-cap managers are most challenged when large-cap stocks beat mid- and small-caps. Mid- and small-cap managers have the opposite tendency.
- As Exhibit 1 illustrates, the likelihood that a majority of managers in a given capitalization tranche will outperform is importantly dependent on style favorability.
- Similar results apply for fixed income managers.
A SIMPLE QUESTION
The evidence that most active portfolio managers typically underperform passive benchmarks appropriate to their investment style is extensive—both historically and geographically. Exhibit 2, for example, summarizes data from our firm’s SPIVA® Scorecards, which have documented the performance of U.S. managers since 2001 (with shorter histories for other markets). Of the 19 full calendar years for which we have U.S. SPIVA results, the majority of large-cap active managers outperformed the S&P 500® in only three.
This paper asks a simple question: what (if anything) distinguishes the three years when most active managers outperformed from the 16 years when the majority failed?
Exploring Techniques in Multi-Factor Index Construction
In multi-factor equity index construction, the decision-making and practical implementation can be complex and challenging. This paper examines the range of portfolio construction choices available to those seeking rank-based, multi-factor approaches, and the relative advantages of each.
Through back-testing hypothetical portfolios based on the S&P 500®, this paper evaluates the following construction choices: top-down versus bottom-up; sector-neutral versus sector-agnostic; portfolio concentration; weighting scheme; and rebalancing frequency. To measure the effectiveness of each portfolio, a factor efficiency ratio (FER) is proposed, which allows investors to gauge their factor purity without having to invoke the complexity of a risk model.
Our paper concludes with key findings, including the following.
- Sector-neutral portfolios may be more efficient than sector-agnostic.
- Top-down approaches may dilute exposures but are still efficient.
- Factor score-based weighting schemes may improve efficiency.
INTRODUCTION
The benefits of diversifying across a multitude of smart beta equity factors have been supported and explained in a host of research and literature. Single-factor indices (quality, value, momentum, low volatility, and small size) may reward market participants over the long term, but can be notoriously difficult to time over the shorter term. Multi-factor indices, on the other hand, generally forgo the need to time each factor and instead, through deliberate diversification, may provide more stable excess return outcomes.
Multi-factor equity investing may be well justified in theory; however, there are numerous practical portfolio construction choices to consider, each with its own advantages and implications. Without a consensus on the most effective multi-factor technique, indices offered in the market have fractured into a variety of vastly different methodologies. Some employ optimization and risk models to determine the most effective portfolio based on the strategy’s objectives. Others dismiss the complexity and lack of transparency of optimized solutions, instead favoring the relative simplicity of rank-based selection rules. Yet even within this latter realm, the choices may appear countless and overwhelming.
In this paper, we attempt to demystify the range of choices available to market participants seeking rank-based, multi-factor approaches. In doing so, we compare the relative advantages of each approach and discover the trade-offs between each decision. Critically, the approaches should be measured both on their effectiveness and efficiency in terms of risk.
Importantly, we do not advise investors which strategic factor allocation decisions are the more successful. Also, testing the robustness of multifactor performance across markets and time periods was outside the scope of this paper.
Instead, by testing only one multi-factor combination on the S&P 500, the paper’s purpose is only to demonstrate relationships among portfolio construction choices. Our goal is to arm market participants with the necessary knowledge to help determine which multi-factor portfolio construction techniques are most appropriate for their own investment objectives.
The S&P Catholic Values Indices: A Multi-Asset Solution for Faith-Based Investing
EXECUTIVE SUMMARY
- Faith-based investing has been practiced in the U.S. for more than 150 years by believers from diverse religions.
- The S&P 500® Catholic Values Index and the S&P U.S. Catholic Values Aggregate Bond Index exclude activities by certain companies or governments that are not aligned with the Socially Responsible Investment Guidelines of the U.S. Conference of Catholic Bishops (USCCB).
- The S&P Catholic Values Indices Methodology, combined with the USCCB Guidelines, captures broad market performance with the added benefit of faith-based investing within a multi-asset-class index offering.
MEASURING THE MARKET THROUGH A CATHOLIC LENS
Sustainable investing has in one form or another been present throughout time. The notion of responsible investing is practically as old as investing itself. Records date back to the 18th century, when faith-based groups such as the Quakers and the Methodists provided guidance on “sinful” investments to avoid. To this day, faith-based strategies like Shariah-compliant investing are offered within the broader sustainable investment framework. Faith-based or faith-consistent investing begins with alignment with the formal religious teachings and beliefs of a tradition, and it includes promoting all the values, priorities, and practices judged to be consistent with those teachings.
Examples of aligning financial outcomes with one’s values range from faith-based investing, socially responsible investing, sustainable investing, or environmental, social, and governance (ESG) investing. The belief used to guide faith-based investing can be grounded in formal religious dogma or simply generational thinking, with an emphasis on seeking to leave the world a better place for the future.
