In This List

Strengthening Your Core with Indices in South Africa

Conceptualizing a Paris-Aligned Climate Index for the Eurozone

S&P 500® Low Volatility Index: Five Decades of History

Rethinking Commodities

China's New Economy Sectors: How Are They Doing?

Strengthening Your Core with Indices in South Africa

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Chris Bennett

Director, Index Investment Strategy

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Tim Edwards

Managing Director, Index Investment Strategy

Since the introduction of index-based investing in the 1970s, passively managed assets have grown substantially, with AUM in products tracking the S&P 500® reaching nearly USD 3 trillion.

South Africa has participated in the global trend; a wide range of indices has been developed for the region, meeting a growing demand for passive solutions that span asset classes and investment styles.  This paper highlights the range of passive exposures and indices available in South Africa and uses S&P Dow Jones Indices’ (S&P DJI) array of domestic and international indices to illustrate the variety of outcomes that could have been achieved with index-tracking portfolios, maintaining the perspective of a local investor.

Summarizing one of the key conclusions of this paper, Exhibit 1 shows the potential differences in risk and return profiles that a South African investor might have obtained over a 10-year period by making different possible choices among indices.  An allocation to international equities would have proved beneficial in most cases, but the choice of domestic equity index— the “core” exposure—proves to be an important decision point.

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Conceptualizing a Paris-Aligned Climate Index for the Eurozone

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Ben Leale-Green

Analyst, Research & Design ESG Indices

On the brink of irreversible climate change, a combination of ground-breaking datasets and index innovation is emerging, through which investors will have the choice to align their investments to a future climate scenario compatible with mitigating catastrophic global warming to the planet. This new breed of sustainable climate indices will not only offer solutions that intend to be impactful, but equally aim to provide investors with reduced risks from transitioning to a low-carbon economy and the consequences of physical, environmental events while capturing financial opportunities that arise.

Based on scientific evidence around the need for a 1.5°C1 global warming scenario to be hit (Masson-Delmotte, et al., 2018), the EU Technical Expert Group (TEG) has released its final report (The EU Technical Expert Group on Sustainable Finance, 2019), outlining two new climate benchmarks. This paper describes an S&P Dow Jones Indices (S&P DJI) concept for the eurozone region, which is aligned with the more stringent of these two new climate benchmarks: the Paris-Aligned Benchmark.

The index concept uses pioneering, forward-looking Trucost datasets to meet multiple climate objectives, aligned with a 1.5°C scenario and the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, while incorporating the Science Based Targets Initiatives-endorsed climate transition approaches and state-of-the-art Trucost physical risk data.

Exhibit 1: Data Inputs into the PAC Concept

Exhibit 1 outlines the inputs into the S&P Eurozone Paris-Aligned Climate Index Concept (PAC Concept), which enable the climate objectives achievement. This paper outlines how climate-related objectives can be met, due to the use of optimization, while maintaining similar performance to the underlying index, with low tracking error. This results in a broad, diversified index that should perform similarly to the underlying index. Factor analysis shows there to be unexplained alpha that may be driven by the climate strategy of the PAC Concept.

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1 Global warming should not exceed 1.5°C above pre-industrial levels. 2 A part of S&P Global.


S&P 500® Low Volatility Index: Five Decades of History

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Smita Chirputkar

Director, Global Research & Design

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Tianyin Cheng

Senior Director, Strategy Indices

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Izzy Wang

Analyst, Strategy Indices

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Hamish Preston

Associate Director, U.S. Equity Indices

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Phillip Brzenk

Senior Director, Strategy Indices

S&P Dow Jones Indices (S&P DJI) publishes a series of low volatility indices, offering market participants a perspective on the returns of lower volatility equities and forming the basis for index-linked products globally.1 Low volatility indices have typically outperformed their underlying broad market benchmarks on both an absolute and a risk-adjusted basis.2 S&P DJI recently extended the returns history for one of the widely followed low volatility benchmarks—the S&P 500 Low Volatility Index—back to February 1972.3 Using the additional two decades of return information, this paper:

• Offers a longer-term perspective on the ability of low volatility indices to combine downside protection and upside participation;

• Assesses the relative importance of equity market movements and interest rates in explaining the low volatility index’s performance; and

• Demonstrates the potential applications of low volatility indices.

Exhibit 1 shows the risk-adjusted returns for the S&P 500 Low Volatility Index and the S&P 500 in each decade since 1972.

Source: S&P Dow Jones Indices LLC. Chart based on daily data between Feb. 18, 1972, and Dec. 31, 2019. Risk-adjusted returns based on the ratio of annualized returns to annualized volatility. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

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1 Please see Appendix A for an overview of the low volatility indices offered by S&P Dow Jones Indices. 2 Chan, Fei Mei and Craig J. Lazzara, “Is the Low Volatility Anomaly Universal?,” S&P Dow Jones Indices, April 2019. 3 Previously, the returns data began in November 1990.


Rethinking Commodities

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Jim Wiederhold

Associate Director, Commodities and Real Assets

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Fiona Boal

Head of Commodities and Real Assets

INTRODUCTION

Commodities have long been viewed as the poor cousin in the investment universe, and often for good reason.  Unlike equities, commodities do not offer a so-called market beta that drifts higher over time in line with economic activity.  In contrast, they present a collection of unique price returns that reflect the underlying supply and demand dynamics of physical assets that serve as the building blocks of the global economy. 

In this paper, we take a new look at commodities as an asset class and at its uses in a portfolio, which historically have been diversification and inflation protection.  We also analyze different commodity beta allocations.  Finally, we identify alternative investment uses of commodities, including as building blocks to express particular investment themes, as tactical trading tools, and as a component of a multi-asset risk premia allocation.

COMMODITIES AS AN ASSET CLASS

What does it mean to say commodities are an asset class?  What are they, and how have they performed as an investment instrument?  What are the common criticisms and misunderstandings when it comes to these distinctive assets?

Commodities have unique characteristics; they are:

  • Basic, standardized physical assets that are in demand and can be supplied without substantial product differentiation across markets;
  • Fungible, or in other words, considered equivalent for trading purposes despite coming from different producers; and
  • Widely used production inputs in the economy.

Even though individual commodities share these important characteristics, commodities are not homogeneous.  The concept of a broad commodity market beta is tenuous, likely a construct of those who championed the financialization of commodity markets more than 30 years ago.  Low intracommodity correlation is one of the few common threads between individual commodity markets, though there are important exceptions among commodities that form part of the same production process or may be substitutes.  There is little market “beta” when it comes to corn, copper, crude oil, and coffee.

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China's New Economy Sectors: How Are They Doing?

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Priscilla Luk

Managing Director, Global Research & Design, APAC

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Liyu Zeng

Director, Global Research & Design

China’s economy is shifting from being primarily focused on investment and manufacturing to a consumption- and services-driven market.  In this paper, we use the S&P New China Sectors Index to analyze China’s growing economic sectors and examine their equity, fundamental, and price performance characteristics.

EXECUTIVE SUMMARY

  • The main sectors and industries benefiting from China’s economic Global Research & Design transformation are Consumer Discretionary, Consumer Staples,Communication Services, Health Care, Insurance, and Independent Power and Renewable Electricity Producers.
     
  • As China’s structural economic reforms deepen, the demand for benchmarks tracking sector drivers is increasing.The S&P New China Sectors Index is designed to provide equity insight into China’s new economy sectors.
  • The S&P New China Sectors Index has its largest overweights in Consumer Discretionary, Communication Services, and Consumer Staples, and its largest underweights are in Industrials, Materials, and Financials, compared with the broad Chinese equities market.
  • The S&P New China Sectors Index recorded an annualized return of 8.5% between Dec. 31, 2010, and Sept. 30, 2019, outperforming the S&P China 500 by 4.3%, indicating that the new economy sectors performed better than the broad equity market.
  • The outperformance of the S&P New China Sectors Index was dominated by sector-allocation effects.
  • New economy companies featured higher revenue growth, higher profitability, and lower leverage than the broader equities market, and they tended to be priced with higher valuation and lower dividend yield.

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