In This List

S&P 500® 2018: Global Sales

Building Better International Small-Cap Benchmarks

The S&P MidCap 400®: Outperformance and Potential Application

ETFs in Insurance General Accounts 2019

Capturing the Complete China Story: The S&P China 500

S&P 500® 2018: Global Sales

Contributor Image
Howard Silverblatt

Senior Index Analyst, Product Management

YEAR IN REVIEW

  • In 2018, the percentage of S&P 500 sales from foreign countries decreased, after slightly increasing last year, and declining the prior two years. The overall rate for 2018 was 42.90%, down from 2017’s 43.62% and 2016’s 43.16%. The recent high mark was 2014’s 47.82%, and the recent low mark was 2003’s 41.84%. S&P 500 foreign sales represent products and services produced and sold outside of the U.S.
  • Sales in Asia slightly declined, while technically remaining the highest of any region, with the use of six-digit precision. Asia accounted for 8.24% of all S&P 500 sales, down from 8.26% in 2017 and 8.46% in 2016, but up from 2015’s 6.77% and 2014’s 7.80%.
  • European sales posted their fifth consecutive year of gains, at just a tick lower than Asia. For 2018, European sales increased to 8.24% of all sales, up from 2017’s 8.14%, 2016’s 8.13%, 2015’s 7.79%, and 7.46% in 2014. The UK (which is part of European sales) increased to 1.49% in 2018 from 2017’s 1.12% and 2016’s 1.10%.
  • Japanese sales again decreased in 2018, to 1.14% from 2017’s 1.51% and 2016’s 1.52%. African sales inched down as well, to 3.82% from 2017’s 3.90% and 2016’s 3.97%. Sales in Canada declined to 1.98% from 2017’s 2.16% and 2016’s 2.67%.
  • Information Technology continued to have the most foreign exposure of any sector, increasing to 58.19% in 2018 from 56.85% in 2017 and 57.15% in 2016. Energy, which was the sector leader in 2016, with 58.88%, declined to 51.28% in 2018 from 54.06% in 2017.
  • Pro forma tabulations for Communication Services (formerly Telecommunication Services) showed that 44.74% of sales were foreign.
  • Given the ongoing debate and legislative actions on sales, tariffs, and jobs, the level of specific data disclosed by companies continues to be disappointing.


OVERVIEW

In 2002, we removed foreign issues from the S&P 500. However, being an American company (or defined as an American company) doesn’t mean you’re not global. While globalization is apparent in almost all company reports, exact sales and export levels remain difficult to obtain. Many companies tend to categorize sales by regions or markets, while others segregate government sales. Additionally, intracompany sales—and hence, profits—are sometimes structured to take advantage of trade, tariffs, taxes, and regulatory policies. Changes in domicile, inspired by tax savings and nationalistic policies, have also changed the technical classification of what is considered foreign. Therefore, the resulting reported data available to shareholders is significantly less substantial and less revealing than the data that would be necessary to complete a truly comprehensive analysis. However, using the data that is publicly available, we do offer an annual report on foreign sales, which is designed to be a starting point that provides a unique glimpse into global sales composition, but it should not be considered a statement of exact values.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Building Better International Small-Cap Benchmarks

Contributor Image
Phillip Brzenk

Senior Director, Strategy Indices

INTRODUCTION

Since the documentation of the size premium, a market participants have increasingly seen small-cap stocks as a distinct asset class and have started to maintain a dedicated, separate allocation apart from large caps. In recent years, research has shown that quality is the prominent driver of returns in the small-cap space.b Asness et al. found that the variability of the size effect mainly stemmed from the volatile performance of low-quality, or junk, small-cap firms. When junk or low quality is controlled for, the size premium becomes more robust in nature and is found across industries, time periods, and 23 different markets.

Based on evidence found in “A Tale of Two Benchmarks: Five Years Later” and effectiveness across regions in Asness et al., we investigated whether quality has earned a similar premium in international small-cap benchmarks. We tested a number of profitability metrics and found that for international small-cap universes, companies with positive earnings, or higher profitability ratios, incorporated as an inclusion requirement outperformed portfolios without such a requirement. The results were consistent regardless of the profitability metric used and region tested.

In order to capture the positive earnings return premia seen in the profitability metrics testing results, the S&P Global SmallCap Select Index Series was launched in late 2018. The series is designed to measure the performance of small-cap companies with positive earnings, with most based on the S&P Global BMI universe. The series includes indices representing multiple regions, such as global, global ex-U.S., developed exU.S., and emerging markets. It provides several key benefits over traditional small-cap benchmarks, including improved risk-adjusted returns (see Exhibit 2), low tracking error, and enhanced liquidity. We additionally found that the series raises the bar for active manager performance measurement relative to the traditional small-cap benchmarks (see Exhibit 19).

EARNINGS RETURN PREDICTABILITY

A profitability requirement—even something as simple as screening out unprofitable companies using earnings per share (EPS)—could have a positive return impact for an international small-cap benchmark.

To determine if profitability is a driver of performance in the international small-cap space, we explored six common measures of profitability. These are EPS,1 asset turnover, gross profit margin, gross profitability, return on assets (ROA), and return on equity (ROE).2 We compared the six-month forward returns of companies with positive (or higher) profits to ones with negative (or lower) profits. To check if geographical differences played a role, we tested the metrics across four universes, including global, global ex-U.S., developed ex-U.S., and emerging markets.

Monthly, we ranked companies in each universe and grouped them into quintiles, with the most profitable (highest) companies placed into the Quintile 1 and least profitable (lowest) companies placed into Quintile 5. For EPS, we placed companies in two groups, companies with positive earnings and companies with negative earnings. We equally weighted companies within each group to avoid size bias and calculated returns in local currency to avoid currency effect. Exhibit 3 shows the average of the forward six-month returns for each metric from November 1999 to April 2018.

pdf-icon PD F DOWNLOAD FULL ARTICLE

The S&P MidCap 400®: Outperformance and Potential Application

Contributor Image
Hamish Preston

Associate Director, U.S. Equity Indices

Contributor Image
Louis Bellucci

Senior Director, Index Governance

Contributor Image
Aye Soe

Managing Director, Global Head of Product Management

EXECUTIVE SUMMARY

Mid-cap stocks have often been overlooked in favor of other size ranges in investment practice and in academic literature. Yet mid-caps have outperformed large- and small-caps, historically: the S&P MidCap 400 has beaten the S&P 500® and the S&P SmallCap 600® by an annualized rate of 2.03% and 0.92%, respectively, since December 1994. To better understand the historical outperformance by mid-caps, as well as their potential use within an investment portfolio, this paper:

  • Provides an overview of S&P Dow Jones Indices’ methodology for defining the U.S. mid-cap equity universe;
  • Outlines the so-called “mid-cap premium,” analyzing it from factor and sector perspectives;
  • Shows that active managers have underperformed the S&P MidCap 400, historically;
  • Highlights how mid-caps can be incorporated within a portfolio.

INTRODUCTION

U.S. equity indices have a long history of measuring the performance of market segments. The Dow Jones Transportation Average™, the first index and a precursor to the Dow Jones Industrial Average®, was created in 1884. The inaugural capitalization-weighted U.S. equity index was first published in 1923 and evolved into today’s widely followed 500-company U.S. equity benchmark—the S&P 500.

More recently, after academic literature demonstrated the existence of a size factor, index providers developed benchmarks to track the performance of smaller companies. Among them were the S&P MidCap 400 and the S&P SmallCap 600, launched in June 1991 and October 1994, respectively.

Despite the historical outperformance of mid-cap stocks, they appear to be under-allocated compared to small-caps. Exhibit 2 shows the proportion of assets invested in core U.S. equities, across the large-, mid-, and small-cap size ranges, by U.S.-domiciled retail and institutional funds at the end of 2018. Based on overall market capitalization, we might expect funds to allocate twice as much to mid-caps compared to smallcaps. Instead, the aggregate core allocation to small- and mid-caps is approximately the same: investors appear to have a preference for smallcaps over mid-caps in their core holdings. The data shows this preference is especially true for active funds.

pdf-icon PD F DOWNLOAD FULL ARTICLE

ETFs in Insurance General Accounts 2019

Contributor Image
Raghu Ramachandran

Head of Insurance Asset Channel

INTRODUCTION

In our last report, we showed that in 2017, insurance companies increased their use of exchange-traded funds (ETFs) by a significant amount (37% year-over-year). In 2018, insurance companies continued to increase their use of ETFs and, in spite of a market correction in the Q4 2018, held ETF assets in line with long-term growth trends. Furthermore, in 2018, the industry also displayed a divergence in their investment patterns—with companies that had previously been slow to adopt ETFs increasing their usage, and other companies, which in the past had grown ETF usage rapidly, retrenching. A divestment from Smart Beta ETFs, in particular, caused a drag on the overall share ownership and AUM of insurance companies invested in ETFs. In our fourth annual analysis of ETF usage in insurance general accounts, we explore the changing dynamics and current usage of over 1900 companies in this market.

OVERVIEW

As of year-end 2018, U.S. insurance companies had USD 26.2 billion invested in ETFs. This represents a tiny fraction of the USD 3.4 trillion of ETF assets under management (AUM) and an even smaller portion of the USD 6.3 trillion in admitted assets of U.S. insurance companies. While ETF AUM steadily increased over the prior six years, in 2018, the AUM of ETFs in the industry declined for the first time since 2011. In 2018, U.S. insurance company ETF AUM decreased by 3% from the prior year. However, usage still showed a double-digit compound annual growth rate (CAGR) over the 3-, 5-, and 10-year periods.

The last quarter of 2018 had marked downturn in the equity and fixed income markets. The S&P 500 dropped 14% in the 4th quarter; a week before year-end the S&P 500 was off 20%. On December 19th, 2018 the Federal Reserve increased the Fed Funds rate for a fourth and last time in 2018. And even though 10-year Treasury and corporate yields fell during the quarter, corporate spread increased by a larger amount in the Q4 2018. To test if market volatility in Q4 2018 depressed the year-end AUM numbers, we also looked at the number of shares held by insurance companies. Unlike AUM, the number of shares of ETFs used by insurance companies continued to increase in 2018.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Capturing the Complete China Story: The S&P China 500

Contributor Image
Priscilla Luk

Managing Director, Global Research & Design, APAC

Contributor Image
Liyu Zeng

Director, Global Research & Design

The S&P China 500 captures a more complete picture of the Chinese economy than other segmented China equity indices. This paper discusses the demand for and objective of the index and reviews its construction, characteristics, and historical performance in comparison with other onshore and offshore China equity indices.

EXECUTIVE SUMMARY

  • China is one of the world’s largest economies and is experiencing rapid capital market growth. Chinese equities will likely remain an essential part of long-term investments globally.
  • Offshore-listed shares have represented as much as 34% of the total Chinese equity market, and they have gained increasing traction among global investors who seek exposure to the Chinese economy but are restricted from onshore market investment.
  • There is an increasing demand for benchmarks that integrate Chinese onshore and offshore listings. The introduction of various domestic and foreign investment schemes, as well as stock connect programs, have broadened capital flows between domestic and international markets.
  • The S&P China 500 is designed to measure the performance of the top 500 companies in China. The index includes companies regardless of their place of listing, thereby reflecting a more complete China story than other segmented China equity indices.
  • As the majority of leading Communication Services companies are only listed offshore, and the S&P China 500 is designed to approximate the sector weights of the broad market, the S&P China 500 is less concentrated in the Financials sector and more tilted to the Communication Services sector than the onshore China indices.
  • Benefiting from more diversified sector, exchange, and currency exposures, performance of the S&P China 500 was less volatile than the onshore China indices, while recording slightly higher riskadjusted return over the long term.

THE RISE OF CHINA AND THE NEW G2

There is little room for doubt regarding the growing importance of China in the global economy. China’s nominal GDP reached USD 13.4 trillion in 2018, representing 15.8% of the world economy. It is second only to the U.S., which had a GDP of USD 20.5 trillion in the same year, representing 24.2% of the world economy. China leaped into the new G2 and replaced Japan as the world’s second-largest economy in 2009. Its 2018 GDP was more than double that of Japan, which is in third place, with a 2018 GDP of USD 5.0 trillion.

From 2014 to 2018, China’s real GDP grew at an average rate of 6.9% year-over-year, and the IMF expects this to continue growing at an average annual rate of 5.9% from 2019 to 2023, which would still be much higher than the growth rates of developed countries.

Judging from the purchasing power parity GDP, China represented 18.7% of the world economy in 2018 according to IMF estimates, surpassing the U.S., which represented 15.2% of the world economy in the same year.

pdf-icon PD F DOWNLOAD FULL ARTICLE

Processing ...