IN THIS LIST

Indexing Listed Property Stocks in New Zealand

TalkingPoints: Expanding the Equity Opportunity Set in New Zealand

Why Taking a Local Approach to Index Construction Matters in Canada

Indexing GARP Strategies: A Practitioner's Guide

Practice Essentials - Understanding Commodities and the S&P GSCI®

Indexing Listed Property Stocks in New Zealand

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

Publicly traded property stocks allow investors to gain exposure to real estate, an illiquid asset class, without sacrificing the liquidity benefits of listed equities.  Property stocks also typically offer higher yields than the broad equity market, may serve as an effective inflation hedge and may help diversify a portfolio due to their generally low correlations to stocks and bonds.

S&P Dow Jones Indices and NZX Limited jointly launched the S&P/NZX Real Estate Select in November 2015 to serve as an investable benchmark for real estate companies listed on the NZX.  The index includes the largest, most liquid property companies included in the S&P/NZX All Index.  To reduce single stock concentration, the index employs a stock cap of 17.5%, applied semiannually.

Total returns and volatility of New Zealand equities, as measured by the S&P/NZX 50 Index, and property stocks, as measured by the S&P/NZX Real Estate Select, were relatively similar over the longer term (see Exhibit 1).  This is somewhat surprising, given that global property stocks have historically had higher volatility than the broader global equity market.  As expected, investment grade bond returns were more modest, but much less volatile than equities and property stocks.

Indexing Listed Property Stocks in New Zealand: Exhibit 1

As shown in Exhibit 2, the S&P/NZX Real Estate Select historically had relatively low correlations to both the S&P/NZX 50 Index and the S&P/NZX Composite Investment Grade Bond Index.

Indexing Listed Property Stocks in New Zealand: Exhibit 2

Exhibits 3 and 4 illustrate the potential diversification benefits of adding a listed property allocation to a stylized equity or equity/bond portfolio.  For example, a hypothetical 80%/20% combination of the S&P/NZX 50 Index and S&P/NZX Real Estate Select resulted in a reduction in volatility of over 70 bps compared with a 100% position in the S&P/NZX 50 Index.  This reduction was driven by the relatively low correlation between the indices.

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TalkingPoints: Expanding the Equity Opportunity Set in New Zealand

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

The S&P/NZX Emerging Opportunities Index reaches beyond the S&P/NZX 50 Index to capture a unique mix of investable small- and mid-sized New Zealand companies.

  1. Why is this index being introduced now?

As the principal broad market equity benchmark in New Zealand, the 

S&P/NZX 50 Index defines the investable opportunity set for New Zealand fund managers. Our latest addition to the S&P/NZX Series, the S&P/NZX Emerging Opportunities Index takes an innovative approach to defining small- and mid-cap companies by including the smaller members of the S&P/NZX MidCap Index and the largest, most liquid members of the S&PNZX SmallCap Index. In doing so, it  reaches beyond the S&P/NZX 50 Index, expanding the opportunity set while still utilizing size and liquidity criteria to support investability.

  1. How does the index work?

The eligible universe is defined as constituents of the S&P/NZX All Index that are not members of the S&P/NZX 20 Index.  Minimum float market cap and median daily value traded thresholds of NZD 100 million and NZD 35,000, respectively, are required for inclusion. In addition, maximum total and float-adjusted market cap thresholds of NZD 1.5 billion and NZD 1 billion, respectively, are employed in order to ensure relatively large companies are excluded. The index is weighted by float-adjusted market cap and is rebalanced quarterly, in line with other S&P/NZX equity indices.

  1. How can the index be used?

The index is designed to be a complement to the S&P/NZX 20 Index, which comprises 20 of the largest, most liquid New Zealand companies. When used in tandem, the two indices essentially capture the entire investable market in New Zealand. The index is intended for use as a benchmark for small- and mid-cap investment strategies or as an underlying index for passive investment products.

  1. What are some unique characteristics of the index?

The S&P/NZX Emerging Opportunities Index has a meaningfully different size profile compared with the existing S&P/NZX size indices and the S&P/NZX 50 Index. As depicted in Exhibit 2, the weighted average total market cap of the index is less than one-third that of the S&P/NZX MidCap Index and more than double that of the S&P/NZX SmallCap Index. Unsurprisingly, it is far smaller than the S&P/NZX 50 Index or S&P/NZX 20 Index, which are heavily weighted to the largest New Zealand companies.

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Why Taking a Local Approach to Index Construction Matters in Canada

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Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

While nearly everyone in the Canadian investment community has heard of  the S&P/TSX Composite, few are aware of the key methodological Senior Director intricacies that distinguish it from other broad market Canadian equity benchmarks.

The most notable distinction is that the S&P/TSX Composite is designed specifically for Canadians (as are all S&P/TSX Indices), while many other Canadian equity indices, such as the FTSE Canada All Cap Index, are simply country slices of global benchmarks and, therefore, take the perspective of foreign investors.  Why might this matter?  Canada has foreign ownership limits that affect several industries, such as telecommunications, broadcasting, transportation, and real estate.  Therefore, whether or not these limits are accounted for in the index is significant.

As an example, Bell Canada (BCE)—the largest Canadian telecommunications company—was the 10th largest company in the S&P/TSX Composite, with a weight of 2.3%, as of June 28, 2019 (see Exhibit 1).  However, foreign investors are restricted from owning more than one-third of BCE under Canada’s Telecommunications Act.  As a result, BCE’s weight in the FTSE Canada All Cap Index is reduced by two-thirds from its natural market-cap weighting to roughly 0.75%.

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Indexing GARP Strategies: A Practitioner's Guide

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Wenli Bill Hao

Director, Factors and Dividends Indices, Product Management and Development

S&P Dow Jones Indices

THE GARP STRATEGY

Growth at a Reasonable Price (GARP) is a well-known, much-practiced investment approach.  It is a fundamental-driven investment strategy that balances pure growth and pure valuation, as the former tends to invest in high-growth, yet expensive stocks, while the latter may take a long-term investment to pay off.  Primarily, the GARP strategy favors investing in companies with consistent earnings and sales growth, reasonable valuation, and solid financial strength, combined with strong profitability.  The underlying investment thesis of the S&P 500® GARP Index seeks to track the GARP strategy and earn higher risk-adjusted returns than its underlying universe over a long-term investment horizon.

In this paper, we introduce the S&P 500 GARP Index, its strategy, construction methodology, risk/return profile, factor exposures, and attribution analysis.

ESTABLISHING THE MULTI-FACTOR FRAMEWORK

We use a systematic bottom-up approach for stock selection and portfolio construction (see Exhibit 1), which we summarize as follows.

  1. Define the investment universe (the S&P 500).
  2. Identify factors with the potential to fulfill the GARP investment strategy.
  3. Select sensible factors for multi-factor metrics.
  4. Select constituents with well-defined rules.
  5. Construct a constituent portfolio with a predefined weighting methodology.

We use three-year EPS and SPS growth metrics to capture a firm’s growth.  In order to maintain sustainable growth, a firm needs to be highly profitable (high ROE) and not have excessive leverage (low financial leverage ratio).  We also use the earnings-to-price ratio to gauge a firm’s reasonable valuation.  These factors effectively enact the characteristics of the GARP strategy.

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Practice Essentials - Understanding Commodities and the S&P GSCI®

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Fiona Boal

Managing Director, Global Head of Equities

S&P Dow Jones Indices

EXECUTIVE SUMMARY

S&P Dow Jones Indices has been providing index-based performance measures of real assets since 2007. Whether you prefer equity-based exposure to companies that produce commodities, or more direct exposure through futures contracts, S&P Dow Jones Indices offers tools for better understanding and accessing commodities market exposures. This paper focuses on understanding commodities as an asset class as well as the S&P GSCI, a preeminent measure of a basket of commonly traded commodities futures contracts.

WHAT ARE COMMODITIES?

Commodities such as gold and oil frequently capture media and investor attention.  So what are commodities, and why are some financial advisors considering allocating portions of their clients’ portfolios to commodities and other real assets?

Commodities are:

  • Basic, standardized real 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
  • In the case of physical goods traded as commodities, widely used as production inputs.

Because commodities are fungible and traded on exchanges globally, commodity prices are driven by global supply and demand. These performance characteristics set commodities apart from equity or fixed income investments, whose returns are linked to additional market fundamentals.

Some commodities, such as precious metals, are held for their store of value characteristics. However, since the storage costs of many commodities are prohibitive, some investors may use futures contracts to gain commodities exposure and avoid physical delivery or storage costs. Still, the question remains: is it better to physically hold a commodity like gold, or be diversified across a basket of commodities futures?

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