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

The Benchmark that Changed the World: Celebrating 20 Years of the Dow Jones Sustainability Indices

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

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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Education - Sep 23, 2019

The Benchmark that Changed the World: Celebrating 20 Years of the Dow Jones Sustainability Indices

Mona Naqvi

Global Head of ESG Capital Markets Strategy

S&P Global Sustainable1

INTRODUCTION

The year 1999 gave the world the euro, The Matrix, and the world’s first ever global sustainability benchmark—the Dow Jones Sustainability Index (DJSI). The product of a landmark collaboration between S&P Dow Jones Indices and SAM¹ (now RobecoSAM), the DJSI pioneered sustainable indexing and has shaped corporate sustainability practices ever since.² To commemorate the 20^th anniversary of the DJSI in 2019, we reflect on its origins, its impact on the market, and the possible future of the sustainable investing landscape. Inclusion in the DJSI is seen as a badge of honor by sustainability champions around the world. Perhaps no other benchmark has had as profound an impact on the behavior of companies, as they seek to secure a coveted spot in the world-renowned DJSI World each year. Today, there are over 37,000 sustainable indices available worldwide,³ and with a 60% increase in the number between 2017 and 2018 alone, the industry is rapidly transforming.⁴ Amid this proliferation of environmental, social, and governance (ESG) benchmarking tools, the DJSI continues to make waves as the evolving global standard for benchmarking corporate sustainability performance, even two decades later.

1700s-1970s: THE ORIGINS OF RESPONSIBLE INVESTING

The notion of responsible investing is practically as old as investing itself. Records date back to the 18^th century, when faith-based groups such as the Quakers and the Methodists provided guidance on “sinful” investments to avoid. To this day, faith-based strategies like Shariah-compliant investing are offered within the broader sustainable investment framework. However, the modern socially responsible investing (SRI) movement, as we know it, took off in the 1960s and 1970s, for example, with the boycott, divestment, and sanctions against South African companies during the era of apartheid.

Similar measures were adopted during the Vietnam War, culminating in the establishment of the first ethical investment vehicle, the Pax World Balanced Fund, in 1971.^[1] The mutual fund, which avoided investments in the supply chains of the controversial tactical herbicide Agent Orange, offered a channel for values-driven investors seeking to redirect their investments on the basis of pacifist moral principles. Together, these movements paved the way for a generation of socially conscious investors seeking to affect social and political change, underscoring the ambition of “putting one’s money where one’s mouth is.”

By the 1980s, SRI had become fairly standardized in removing “sin stocks,” such as alcohol, tobacco, weapons, and nuclear energy, from investment portfolios. Fundamentally about values, SRI is driven by the desire to align one’s investments with one’s beliefs. But as modern portfolio theory suggests, excluding stocks from the opportunity set reduces potential returns. While popular with values-driven investors, SRI thus did not gain widespread traction among mainstream investors and was left relegated to those willing to put their beliefs before their returns. However, the idea that responsible companies are not only morally superior, but are also superior in terms of financial performance was slowly starting to surface. In the early 1970s, the New York-based journalist Milton Moskowitz published lists of “responsible” and “irresponsible” companies, tracking their performance against the stock market. In 1973, he wrote in the New York Times, “I do harbor the suspicion that socially insensitive management will eventually make enough mistakes to play havoc with the bottom line.”⁶ While his thinking underpinned many of the ideas behind corporate social responsibility (CSR), it would remain largely disconnected from the typical investment process until ESG investing later became widespread—in part, due to the launch of the DJSI.

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Education - Sep 10, 2019

Indexing Listed Property Stocks in New Zealand

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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Education - Aug 30, 2019

TalkingPoints: Expanding the Equity Opportunity Set in New Zealand

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.

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&P NZX 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.

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.

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.

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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Education - Jul 29, 2019

Why Taking a Local Approach to Index Construction Matters in Canada

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 10^th 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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