IN THIS LIST

Fleeting Alpha Scorecard: The Challenge of Consistent Outperformance Year-End 2019

The VIX Index and Volatility-Based Global Indexes and Trading Instruments

How Smart Beta Strategies Work in the Australian Market

The S&P Composite 1500®: An Efficient Measure of the U.S. Equity Market

A Survey of Mexican Insurance Investment Officers

Fleeting Alpha Scorecard: The Challenge of Consistent Outperformance Year-End 2019

SUMMARY

The Fleeting Alpha Scorecard is a semiannual report showing how well outperforming mutual funds from one three-year period continue to outperform thereafter. It combines two other S&P Dow Jones Indices reports, the SPIVA® U.S. Scorecard and the the Persistence Scorecard. The former measures the percentage of active managers that beat their benchmarks across various equity and fixed income categories. The latter shows the likelihood that strong performers in early periods maintain their status relative to other funds in subsequent periods.

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.

Report 1 shows the performance persistence of managers investing in various domestic and international equity categories, based on trailing three-year returns. Of the 18 categories in domestic equity, eight did not show funds with alpha persistence after three years. For example, as of Dec. 31, 2016, roughly 10% of 313 large-cap value funds had outperformed the S&P 500® Value in the previous three years. By the end of 2019, none of these 31 winners had maintained that status for three consecutive years. Of the winners at the end of 2016, just 12.9% of all domestic equity funds beat the S&P Composite 1500® in each of the three following one-year periods.

The vast majority of domestic equity funds showed little outperformance persistence, with notable exceptions in the small- and mid-cap spaces. Improvement in persistence mainly came from the mid-cap growth funds and the small-cap growth funds, in which 67% and 50%, respectively, of the past winners were able to generate positive alpha in the three subsequent one-year periods (in a small sample size).

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The VIX Index and Volatility-Based Global Indexes and Trading Instruments

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Matt Moran

Vice President of Business Development, Chicago Board Options Exchange (Cboe)

The Cboe Volatility Index® (VIX® Index) measures the market’s expectation of future volatility conveyed by S&P 500 Index option prices. The VIX is recognized as a premier gauge of expected US equity market volatility. The 2000–09 decade experienced two deep bear markets for equities that saw numerous short-term periods of high levels of investor uncertainty. Most investors recall how during the financial crisis of 2008–2009, the correlations between equities rose globally and traditional diversification goals became difficult to achieve. Exchange-listed VIX futures were launched in 2004, and VIX options were launched in 2006. During the 2008–09 financial crisis, VIX futures and VIX options experienced tremendous growth, as interest in and use of such index-based products as exchange-traded notes and exchange-traded funds grew. These products have become widely used in investors’ strategies ranging from trading tactical views on volatility to incorporating volatility trades and hedges in risk management and multiasset strategies.

This study addresses several questions investors have asked related to the VIX Index, volatility-based trading products, and the use of VIX futures in portfolio construction. These questions include the following:

  1. What does the VIX Index measure, and what does a VIX level signify?
  2. What are some indexes that measure expected volatility of European or Asian stock indexes?
  3. How do features such as convexity and negative correlation make the VIX an intriguing investment gauge?
  4. Is the VIX Index tradable, and if not, why?
  5. What tradable volatility-based futures and options products are available?
  6. How do contango and backwardation affect the returns of VIX futures-based strategies?
  7. What volatility benchmark indexes are available, and what is their impact when added to S&P 500 portfolios?

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How Smart Beta Strategies Work in the Australian Market

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Priscilla Luk

Managing Director, Global Research & Design, APAC

S&P Dow Jones Indices

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Liyu Zeng

Director, Global Research & Design

S&P Dow Jones Indices

EXECUTIVE SUMMARY

With increasing interest in smart beta strategies in the Australian equity market, we examined the effectiveness of six well-known risk factors, size, value, low volatility, momentum, quality, and dividends, in the Australian equity market from Dec. 31, 2004, to May 29, 2020.

  • Quintile analysis showed that low volatility, high momentum, and high quality delivered the most persistent absolute and risk-adjusted return spreads, but small cap and value did not generate incremental return in the Australian market.
  • Among the Australian factor indices offered by S&P Dow Jones Indices (S&P DJI), the quality and momentum indices delivered the highest excess returns, while the low volatility and dividend indices had lower volatility than the S&P/ASX 200.
  • Our macro regime analysis showed that most factor portfolios in Australia were sensitive to local market cycles and investor sentiment regimes.
  • The distinct cyclicality of factor performance in Australia indicated its potential for implementation of active views on the local equity market.

How Smart Beta Strategies Work in the Australian Market: Exhibit 1

FACTOR-BASED INVESTING IN THE AUSTRALIAN EQUITY MARKET

Smart beta strategies have gained significant attention in the asset management industry, and the exchange-traded products (ETPs) tracking factor indices have experienced significant asset growth since the end of 2008. Factor-based strategies are a category of smart beta strategies that target specific risk factors.  They share some common characteristics with passive investing, such as rules-based construction, transparency, and cost-efficiency, and they also share features of active investing in that they aim to enhance return and reduce risk compared to market-cap-weighted indices.

Single-factor indices are constructed explicitly to capture a specific risk factor and exhibit distinct cyclicality in response to a changing market environment, which also makes them ideal tools for implementation of active views. 

In Australia, although the adoption of factor-based investing by local market participants is behind the U.S. and some Asian markets (like Japan), the growth of factor-based ETPs has accelerated in recent years, achieving 46% growth in net assets in the past 18 months in local currency terms as of Dec. 31, 2018, and accounting for 10.5% of the Australian ETF market. Dividend products still dominate the Australian factor-based ETP market, but we observed the proliferation in categories and the increasing demand for factor-based index-linked products within the Australian equity market.

Based on the performance contribution analysis for the S&P/ASX 200 portfolio, the Financials and Materials sectors contributed about 63.6% of the total performance of the portfolio for more than 15 years.  At a stock level, the top five large-cap contributors (BHP Group Ltd, Commonwealth Bank of Australia, Westpac Banking Corporation, CSL Limited, and Australia and New Zealand Banking Group Limited) together contributed approximately 49% of the total portfolio performance over the same period.  This suggests that sector or size bias might have  a significant impact on the excess return of factor portfolios in the Australian market.

In this paper, we examined the effectiveness of six well-known risk factors (size, value, low volatility, momentum, quality, and dividend) in the Australian equity market and the behavior of these factors under different market regimes.

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The S&P Composite 1500®: An Efficient Measure of the U.S. Equity Market

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Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

S&P Dow Jones Indices

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Hamish Preston

Head of U.S. Equities

S&P Dow Jones Indices

EXECUTIVE SUMMARY

Launched in 1995, the S&P Composite 1500 (hereafter the "S&P 1500") serves as a benchmark indicator for U.S. equity market performance, aggregating price movements of S&P 500®, S&P MidCap 400®, and S&P SmallCap 600.

The S&P 1500 also increasingly serves as a basis for constructing portfolios designed to deliver a "market" return at lower cost than those active managers who offer to beat it. We shall examine the S&P 1500 from both perspectives, as well as examining its merits in comparison to popular alternatives. In particular, we observe that:

  • The sizeable representation of U.S. companies means tracking U.S. equity market performance may be relevant to investors, globally;
  • The S&P 1500 has outperformed the S&P 500, historically;
  • Incorporating smaller companies in a U.S. market benchmark provides a more holistic view of the U.S. economy (see Exhibit 7); and
  • Compared with other U.S. equity market indices, the S&P 1500 avoids relatively illiquid, lower priced, and lower quality stocks (see Exhibit 1).

MEASURING THE U.S. EQUITY MARKET

U.S. companies represented an average of 49.47% of the S&P Global BMI’s capitalization at each year-end between 1995 and 2019, more than five times the average weight of second-place Japan (9.39%). Given that U.S. companies also accounted for over 50% of the market capitalization in most global industries at the end of 2019, many investors may need to turn to the U.S. in order to obtain certain exposures.

The S&P 1500 is designed for investors seeking to replicate the performance of the U.S. equity market, or benchmark against a representative universe of tradable stocks. The S&P 1500 combines three widely followed indices—the S&P 500, S&P MidCap 400, and S&P SmallCap 600—in proportion to their free-float market capitalizations. Hence, the S&P 1500 uses the same inclusion criteria as its three component indices.

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A Survey of Mexican Insurance Investment Officers

In February 2020, S&P Dow Jones Indices and the Association of Mexican Insurance Companies (AMIS) conducted our second annual survey of insurance investment officers in Mexico about the state of the local insurance industry.

The objective of the annual survey is to better understand how Mexican insurers invest and allocate their excess capital and how they view issues such as regulation, passive strategies, and the implementation of environmental, social, and governance (ESG) investment criteria. With each annual survey, it is our aim to reflect the current state of the insurance investment landscape from the perspective of the investment decisionmakers.

We administered the survey between Feb. 4 and Feb. 28, 2020, prior to the aggressive spread of COVID-19 in North America and the declaration of the virus as a global pandemic by the World Health Organization. As such, the coronavirus and its potential implications for the financial markets may not have been as top of mind for respondents as they likely would be today. Answers to questions regarding expected returns, adjustments in allocations, concerns, and economic projections represent the respondents' perspectives pre-crisis, under comparatively "normal" market conditions. This report summarizes respondents' perspectives on the following themes:

  • Investments and asset allocation, with a focus on excess capital;
  • Sensitivity to and potential impacts of regulation;
  • The implementation of ESG criteria within the investment process;
  • Indexing and the use of passive strategies and instruments; and
  • 2020 economic indicators.

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