ESG Index Considerations for Brazilian Pension Funds

TalkingPoints: Introducing the S&P/TSX SmallCap Select Index

The Dow Jones U.S. Select Short-Term REIT Index

S&P High Yield Dividend Aristocrats: A Practitioner's Guide

Making the Case for the S&P Biotechnology Select Industry Index

Education - Dec 18, 2019

ESG Index Considerations for Brazilian Pension Funds

INTRODUCTION

What is ESG? How can ESG be integrated into an index, especially in smaller markets? How can the divestment versus engagement arguments affect indices? How do ESG indices perform?

ESG risks have been poking their head above the water in Brazil over recent years, from issues surrounding the Amazon rainforest fires to corruption at Petrobras (BBC, 2018) and JBS (Schipani, 2018). At S&P Dow Jones Indices (S&P DJI), we have increasingly seen demand for ESG indices in Brazil and throughout Latin America in response to specific incidents and global shifts toward more responsible investment practices.

WHAT IS ESG?

ESG stands for environmental, social, and governance. Environmental factors look at issues connected to global warming, energy usage, pollution, etc. Social factors encompass issues such as a company’s management of health and safety, human capital practices, etc. Governance factors primarily address how a company is run, with metrics used including board structure and independence, executive compensation, and many more.

There are so many different terms floating around, including responsible investment, sustainable investment, and impact investing. These are all methods of incorporating ESG, with differing objectives. Exhibit 1 shows The Spectrum of Capital, which does a good job of defining the difference between different types of integration of ESG and how they differ from investments looking for purely financial returns.

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Education - Dec 05, 2019

TalkingPoints: Introducing the S&P/TSX SmallCap Select Index

Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Why is the S&P/TSX SmallCap Select being introduced now?

Prior research has demonstrated that profitability matters for small-cap companies in the U.S.^{^[1]} For example, the S&P SmallCap 600 ^®—which includes earnings eligibility criteria—has outperformed the broader Russell 2000 Index (with lower volatility) throughout its 25-year live track record. Our new S&P/TSX SmallCap Select Index extends this phenomenon to Canadian equity markets, where we have found that a similar effect exists. Simply put, small-cap companies without a track record of generating earnings have performed poorly relative to their profitable peers and have thus been a drag on broad small-cap indices.

How does the S&P/TSX SmallCap Select Index work?

The index is a part of the S&P Global SmallCap Select Index Series. In order to be eligible for index inclusion, companies must post two consecutive years of positive earnings per share. As a buffer, companies are dropped from the index after posting two consecutive years of negative earnings. In order to improve replicability of the index, we also eliminate the 20% smallest and 20% least liquid companies. The index is weighted by float market cap and is rebalanced semiannually in June and December.

What additional indices are offered within the S&P Global SmallCap Select Index Series?

The S&P/TSX SmallCap Select Index follows the same index methodology framework utilized in our S&P Global SmallCap Select Index Series. We currently offer several regional and country indices within the S&P Global SmallCap Select Series, including those in Exhibit 1.

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Education - Dec 02, 2019

The Dow Jones U.S. Select Short-Term REIT Index

Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Dow Jones Indices

Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

The Dow Jones U.S. Select Short-Term REIT Index seeks to track REITs in sectors that typically have short-term lease durations, with the goal of creating a REIT index that is less sensitive to interest rate changes.

OVERVIEW: THE ROLE OF INTEREST RATES ON REIT INDICES

REITs are a popular and efficient way for market participants to access the real estate asset class. The potential for strong long-term total returns combined with other key investment characteristics, such as a tendency for high dividend yields, inflation-hedging properties, and a relatively low correlation with other asset classes, have contributed to the appeal of REITs. However, because they are widely considered to be rate-sensitive assets, there is substantial interest among market participants to see how REITs have performed when interest rates increased during periods of high fluctuation. Although there is evidence that REITs have typically fared well over full cycles of rising rates, U.S. REITs have often experienced sharp sell-offs in short-term periods in which interest rates have increased significantly. Given this context, there is considerable interest in a U.S. REIT index that may be less sensitive to interest rate movements.

HOW DOES THE INDEX WORK?

The Dow Jones U.S. Select Short-Term REIT Index is a subset of the Dow Jones U.S. Select REIT Index that only includes REITs in property sectors that typically have relatively short-term lease durations. These sectors are apartments, hotels/resorts, manufactured homes, and self-storage. Theoretically, REITs with shorter lease durations should be less sensitive to interest rates, given that they can more quickly reprice their rental agreements. For example, a hotel effectively has overnight leases and can rapidly respond to market changes. Similarly, apartment owners typically engage in one-year leases with tenants, making the average lease duration of apartment REITs under one year. On the other hand, office, health care, and other major REIT sectors generally have much longer-term lease durations—giving them more bond-like cash flow characteristics. Exhibit 1 shows the different Dow Jones U.S. Select REIT Term Indices with their sub-sectors and the typical average lease duration. The indices also employ a 5% cap on stock weights to reduce single-stock concentration.

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Education - Nov 25, 2019

S&P High Yield Dividend Aristocrats: A Practitioner's Guide

Qing Li

Director, Global Research & Design

S&P Dow Jones Indices

Wenli Bill Hao

Director, Factors and Dividends Indices, Product Management and Development

S&P Dow Jones Indices

INTRODUCTION

In a market environment with low yields and potential interest rate cuts, as seen in the U.S. in 2019, yield-seeking investors may become more interested in equity dividend yield strategies. Dividend strategies could satisfy investors’ needs in several ways, including higher dividend income, favorable risk-adjusted returns, lower volatility, and more downside protection in bearish market environments. In this paper, we look at the S&P High Yield Dividend Aristocrats and its characteristics, risk/return profile, and performance attribution.

Two common strategies for dividend investing are high dividend yield and dividend growth. To capture the premium of a dividend growth strategy, S&P Dow Jones Indices launched the S&P High Yield Dividend Aristocrats in November 2005. The index is designed to track a basket of stocks from the S&P Composite 1500 ^® that consistently increased their total dividends per share every year for at least 20 consecutive years.^[1] The index universe covers large-, mid-, and small-cap stocks in the U.S. equities market.

The outperformance of the S&P High Yield Dividend Aristocrats has historically been attributed to stock selection rather than sector allocation. Moreover, the index constituents tend to have the high-quality characteristics of higher operating profitability and more conservative investment growth than the overall market. From business operations and financial perspectives, high-quality fundamentals form the foundation for sustainable dividend increases.

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Education - Nov 14, 2019

Making the Case for the S&P Biotechnology Select Industry Index

Biotechnology has famously improved our quality of life for decades. It addresses many global health problems, such as infectious and age-related diseases. Investors can see the potential for significant gains in this sector, due to its potential for new sources of return and diversification of risk. However, this also comes with the possibility of losses. The S&P Biotechnology Select Industry Index ’s “basket” approach to allocation may provide a solution for those concerned with risk. It aims to provide diverse exposure to listed biotechnology (biotech) companies across large-, mid-, small-, and micro-cap companies in the U.S.

WHY INVEST IN BIOTECHNOLOGY?

Based in genetic analysis and engineering, biotech firms primarily engage in the research, development, manufacturing, and, to a lesser extent, marketing of healthcare products based on genetic analysis and engineering. Biotech has a few important industry-specific characteristics.

High Investment and Long Waiting Period: It can take as much as a decade to get a new drug from the test tube to the pharmacy shelf. During this lead time, biotech companies may not generate revenue, and hence are highly dependent on venture capital funds and trading publicly on stock exchanges to fund research and development.
High Risk: The discovery of new drugs is an expensive, slow, and risky business. Investors need to be aware that the risk of failure of new drugs to reach approval is exceptionally high. Typically, 85%95% of all new drugs fail to reach approval.^{^[1]} Historically, many biotech companies have experienced serious losses after failing critical research or drug trials.
High Yield: During the research phase, biotech companies tend to be unprofitable. However, once a new breakthrough drug is discovered that proves to be successful in treating diseases, it has the potential to be highly (or exponentially) profitable. Then, the high yield is protected by adequate IP or copyright to ensure that the company can appropriate its research and design results and reduce the likelihood of imitation by competitors.The rewards and risks of investing in biotech stocks can be significant. Key factors to consider include the research pipeline, stage of research and clinical trials, secure sources of future financing, regulatory changes, and mergers & acquisitions.

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