IN THIS LIST

Introducing the S&P U.S. Preferred Stock Low Volatility High Dividend Index

Accounting for Carbon: Sovereign Bonds

TalkingPoints: The S&P/ASX Bank Bill Index – Measuring the Australian Bank Bill Market for Short-Term Cash Solutions

Practice Essentials - Low Volatility Indexing in Canada

Rethinking the U.S. Investment-Grade Corporate Bond Market

Introducing the S&P U.S. Preferred Stock Low Volatility High Dividend Index

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Phillip Brzenk

Managing Director, Global Head of Multi-Asset Indices

S&P Dow Jones Indices

INTRODUCTION TO PREFERRED STOCKS

What Are Preferred Stocks?

Preferred stocks are hybrid securities, blending characteristics of stocks and bonds.  They sit between common stocks and bonds in a company’s capital structure, thus having a higher claim on a company’s assets and earnings than common stocks, while having a lower claim than bonds (see Exhibit 1).

Like common stocks, preferred stocks represent ownership in a company and are listed as equity in a company’s balance sheet.  However, certain characteristics differentiate preferred stocks from common stocks.  First, preferred stocks provide income to investors in the form of dividend payments, typically providing higher yields than common stocks.  Second, preferred shareholders lack voting rights, resulting in less influence on corporate policy.  While common stock shares offer investors the potential for share price and dividend increases, investors generally look to preferred stocks for their high-yielding, stable dividend payments.

Preferred stocks are issued at a fixed par value, similar to bonds, with most paying a scheduled fixed dividend.  Preferred stocks are rated by independent credit rating agencies.  The rating is generally lower than bonds since preferred stocks offer fewer guarantees and have a lower claim on assets.  While a company risks defaulting if it misses a bondcoupon payment, it can withhold a preferred dividend payment without facing default risk.[1]

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Accounting for Carbon: Sovereign Bonds

INTRODUCTION

In 2015, the Paris Agreement was signed, committing 195 signatory nation-states to limiting greenhouse gas (GHG) emissions to well below 2 degrees  Celsius above pre-industrial levels.[1]  This recognized the clear role of governments around the globe in curtailing potentially catastrophic levels of global warming, which could have widespread and systemic impacts on the global economy, capital markets, and the quality of human life.  Sovereign bonds, the issuance of debt by a country to finance its activities, is one of the largest asset classes in the world, with over USD 20 trillion of central government debt securities outstanding in 2016[2] and general government debt exceeding USD 62 trillion in 2016.[3]  As such, it is a key mode of financing for governments, is one of the largest asset allocations by pension funds, and should be a focus of examination for climate risk analysis.

Portfolio carbon footprinting as a tool to support climate reporting and risk assessment has grown in popularity over recent years, so much so that it has become incorporated into best practice reporting guidelines for investors.  These include those outlined by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), which is backed by the central banks of the G20 countries and is legislated as part of France’s Article 173 regulation.  While it is now becoming common practice for asset owners and managers to report the footprint of their listed equity holdings and corporate fixed income portfolios, sovereign bonds have remained largely unexamined from a carbon risk and reporting perspective due to lack of appropriate metrics and actionable insight.  However, climate change affects all asset classes, so investors would need to measure, understand, and manage the climate change risks embedded in their sovereign bond portfolios as well.

In this paper, Trucost outlines a number of approaches to sovereign bond evaluation and the metrics available.  Scope and breadth of emissions are key considerations, as is the denominator chosen to normalize emissions to facilitate comparison between entities of different size.  The most appropriate metric may differ depending on the question(s) that investors intend to answer.

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TalkingPoints: The S&P/ASX Bank Bill Index – Measuring the Australian Bank Bill Market for Short-Term Cash Solutions

The S&P/ASX Bank Bill Index seeks to measure the performance of the Australian bank bill market, with maturities of up to 91 days. The series is designed for use by institutional investment managers, mutual fund managers, professional advisors, insurance companies, and custodians.

  1. How does the Australian bank bill market satisfy short-term cash balance investments?

Many financial institutions have cash balances that can be invested in short-term money market instruments.

Insurance companies have cash balances derived from:
- A general account to support future claims;
- An operating account used to receive premiums and pay claims; and
- A collateral or hedging account to manage funds.

Asset or fund managers and custodians need short-term investment solutions for omnibus accounts that represent cash-swept balances of client holdings. They can maximize their cash balances by investing in liquid products based on Australian bank bills. 

  1. How is the S&P/ASX Bank Bill Index constructed?

The index is based on the benchmark bank bill rates published by the ASX Benchmarks Pty Limited (ASXB). The S&P/ASX Bank Bill Index is rules based for transparency and follows a select set of eligibility criteria.

The index comprises four benchmarks and nine interpolated rates that are differentiated by the range of maturities of its constituents as follows.

The index is constructed synthetically through interpolated Bank Bill Swap (BBSW) rates, which are administered through procedures set forth by the ASXB. Detailed information on BBSW procedures can be

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Practice Essentials - Low Volatility Indexing in Canada

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Craig Lazzara

Managing Director, Index Investment Strategy

S&P Dow Jones Indices

THE LOW VOLATILITY ANOMALY

Although the low volatility anomaly was first documented more than 40 years ago,[1] the fearful and volatile market environment of the years following the 2008 financial crisis propelled the concept to the forefront of market participant interest.  In recent years, low volatility has been a hot topic in investment discourse, and this has resulted in innovative financial instruments that exploit the anomaly.  Importantly, the low volatility anomaly is not limited to one or two markets, but rather it seems to be universal.[2]

The S&P 500® Low Volatility Index is a passive vehicle that seeks to exploit this phenomenon systematically.[1]  Since 1991, the index has outperformed the S&P 500, and it has done so at a substantially lower level of volatility (see Exhibit 1).  In Canada, the performance differential between the country’s benchmark index and its low volatility counterpart is even more pronounced (see Exhibit 2).

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Rethinking the U.S. Investment-Grade Corporate Bond Market

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Jason Giordano

Director, Fixed Income

S&P Dow Jones Indices

Designed to track the largest and most frequently traded high-quality bonds issued by the well-known companies in the iconic S&P 500®, the S&P500/MarketAxess Investment Grade Corporate Bond Index provides a new way to look at the U.S. investment-grade corporate bond market.


EXECUTIVE SUMMARY
  • The S&P 500/MarketAxess Investment Grade Corporate Bond Index consists of high-quality issuers from the S&P 500; companies with global revenue streams, strong balance sheets, and a demonstrated capacity to service debt payments.
  • It seeks to track the largest-issued bonds by size—these issues tend to trade in larger volume and with higher frequency, hence offering greater depth of liquidity.
  • The index offers a more efficient way to view the broader U.S. investment-grade corporate bond market by tracking fewer bonds while achieving similar or better performance than the benchmark.

    EXPANSION OF U.S. CORPORATE CREDIT

    The accommodative conditions created by low interest rates and strong investor demand have resulted in an explosive expansion of corporate credit since the financial crisis. Over the 10-year period beginning Dec. 31,2007, the amount of U.S. corporate debt outstanding increased by over USD 4 trillion.[1]  U.S. companies have tapped the bond markets for a number of purposes: efficient capital management (e.g., refinancings, share buybacks, dividends, etc.), increased capital expenditure (R&D, fixed assets, etc.), and to fund merger and acquisition activity.  S&P 500 companies have been at the forefront of this expansion and were responsible for approximately 70% of the increase in outstanding corporate debt over the period studied (see Exhibit 3).

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