Sector Primer Series: Consumer Discretionary

IN THIS LIST

TalkingPoints: The S&P/ASX 300 Shareholder Yield Index

TalkingPoints: The S&P Listed Private Equity Index

TalkingPoints: The S&P 500^® LinkUp Jobs Index

Volatility Test: Defensive Factor Indices versus Actively Managed Funds

Education - Jun 07, 2019

Louis Bellucci

Senior Director, Index Governance

INTRODUCTION

The Global Industry Classification Standard^® (GICS^®) assigns a company to a single business classification according to its principal business activity. This assignment uses quantitative and qualitative factors, including revenues, earnings, and market perception. The sector is the first level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries. GICS was developed in 1999 and is jointly managed by S&P Dow Jones Indices and MSCI.

The Consumer Discretionary sector comprises companies primarily engaged in:

Manufacturing consumer products including durables, leisure products, apparel, and luxury goods;
Retail, as distributors, internet and direct marketing retailers, specialty retailers, and multiline retailers such as department stores;
Providing consumer services such as restaurants, hotels, resorts, and casinos; and
Manufacturing automobiles and automobile components.

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Education - May 31, 2019

TalkingPoints: The S&P/ASX 300 Shareholder Yield Index

Izzy Wang

Analyst, Strategy Indices

The S&P/ASX 300 Shareholder Yield Index seeks to measure the performance of 40 stocks from the S&P/ASX 300 with the highest shareholder yield, which is a combination of common dividend and common share buybacks. From December 2014 to March 2019, the index had an average trailing 12-month gross dividend yield of 5.0% and an average annual excess return of 1.18% compared with the S&P/ASX 300.

What is the rationale behind the construction of the index?

Many income strategies targeting high-yield stocks struggle to address the sustainability of yield. Business risk rises as companies may fail to strike the right balance between distribution and reinvestment for future business. Moreover, the source of high shareholder distribution may come from increasing debt levels, especially in a low-interest environment.

The S&P/ASX 300 Shareholder Yield Index may provide an effective solution. It requires constituents to have free cash flow of no less than the sum of dividends and buybacks, aiming to improve payout sustainability and hence share price return.

The logic behind this is straightforward. Since dividends and buybacks are paid out of cash, a constituent company must be consistently generating more than enough free cash to pay the dividends and finance the buybacks.

Free cash flow appears to be a better indicator of cash generation than earnings (and therefore an earnings-based coverage ratio), without suffering from the pitfalls of accrualbased accounting. For instance, earnings may be boosted by accounts receivable, which is the money owed to the company but that has not been paid, and amortized capital expenditures. Dividends and buybacks cannot be paid out of either of the two.

How does the index work?

The S&P/ASX 300 Shareholder Yield Index selects 40 stocks from the S&P/ASX 300 with the highest shareholder yield, which is a combination of common dividends and common shares repurchased. In order to achieve sustainable performance, the eligible stocks are screened for liquidity, free cash flow, and dividend growth.

To balance between index yield and index capacity, the 40 selected names are weighted by the product of shareholder yield and float-adjusted market capitalization. The weight of each stock within the index is capped at 10% to achieve diversification. The index is rebalanced semiannually in April and October.

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Education - May 30, 2019

TalkingPoints: The S&P Listed Private Equity Index

The S&P Listed Private Equity Index follows the performance of the leading publicly listed private equity companies that meet specific size, liquidity, exposure, and activity requirements.

What is private equity, and what is driving interest in private equity?

Private equity investments are made in operating companies that are not publicly listed or traded on a stock exchange. Such firms are known for their extensive use of debt financing to purchase companies, which they restructure and attempt to resell for a higher value.

The primary reason for investor interest in private equity is its return enhancement potential. In the 1980s, 1990s, and 2000s, each U.S. dollar invested in the average private equity fund returned at least 20% more than a U.S. dollar invested in the S&P 500 ^®, with outperformance of at least 3% per year. ^{^[1]}

Currently an important asset class for institutions globally, private equity investment has grown significantly over the past two decades in response to low central bank rates, low discount rates and higher liabilities, and lower expected returns in public markets. ^[2]

What are the different approaches used to access private equity?

Commitments to closed-end limited partnership structures have been the most common route to access private equity investments for qualified institutions and high-net-worth individuals. New options are emerging, including direct investment, co-investment, separate accounts, and listed private equity (LPE).

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Education - May 29, 2019

TalkingPoints: The S&P 500^® LinkUp Jobs Index

Reid Steadman

Managing Director, Global Head of ESG & Innovation

The S&P 500^® LinkUp Jobs Index

To help investors better understand macroeconomic trends affecting U.S. and global markets, S&P Dow Jones Indices has partnered with LinkUp, a leading data-driven job search company, to create the S&P 500 LinkUp Jobs Index Series. The indices provides greater transparency into the hiring profiles of companies that are included in the S&P 500.

Headline

S&P 500 LinkUp Jobs Index

Sectors

S&P 500 LinkUp Jobs Energy Index
S&P 500 LinkUp Jobs Materials Index
S&P 500 LinkUp Jobs Industrials Index
S&P 500 LinkUp Jobs Consumer Discretionary Index
S&P 500 LinkUp Jobs Consumer Staples Index
S&P 500 LinkUp Jobs Health Care Index
S&P 500 LinkUp Jobs Financials Index
S&P 500 LinkUp Jobs Information Technology Index
S&P 500 LinkUp Jobs Communication Services Index
S&P 500 LinkUp Jobs Utilities Index
S&P 500 LinkUp Jobs Real Estate Index

Why do investors have an appetite for this type of index?

Reid: The S&P 500 LinkUp Jobs Index provides a unique view inside companies. The index helps investors understand whether companies are seeking to expand their labor forces and if so, at what rate. This type of data has always been of interest to investors: the U.S. Bureau of Labor Statistics’ (BLS) monthly report on payrolls is among the most-watched economic indicators by investors. As a jobs-focused measure, the S&P 500 Linkup Jobs Index fits in the same general category as the BLS report but is more forward looking, indicating what jobs will be filled as opposed to which jobs were filled. This new index is also timelier, updating weekly instead of monthly, and with just a single-week lag.

S&P DJI has long produced these types of measures, and they tend to be popular with investors. The best example is the S&P CoreLogic Case-Shiller Home Price Indices. This index series is second only to the S&P 500 in terms of the amount of traffic we receive on our website. The S&P 500 LinkUp Jobs Index will sit beside this renowned home price index series as an important economic indicator.

Toby: No other index provider measures jobs; thus, the S&P 500 LinkUp Jobs Index is the first and only to provide insights into the health of the global labor market. These indices deliver predictive signals around specific events such as layoffs, closures, product launches and discontinuations, divestitures, and store/facility openings, as well as other talent management indicators such as turnover.

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Education - May 28, 2019

Volatility Test: Defensive Factor Indices versus Actively Managed Funds

Aye Soe

Managing Director, Global Head of Core and Multi-Asset Product Management

Berlinda Liu

Director, Multi-Asset Indices

Indices based on factors such as low volatility and quality generally feature defensive characteristics. These strategies tend to outperform the broad benchmark in down markets, as previous studies have shown. However, some market participants also believe that active management fares somewhat better than the benchmark in periods of volatility and distress. In 2018, the S&P 500 ^® rallied 10.56% in the first three quarters and lost 13.52% in the fourth; this provides a good test to compare actively managed mutual funds against passive defensive factor strategies and see which rode the rollercoaster better. In our test, we also include the S&P 500 Equal Weight Index .

Different factors deliver different investment results, due to unique defensive mechanisms. In 2018, low volatility and dividends outperformed while quality lagged, compared with the median performance of all largecap mutual funds. Over the long term, when the cyclicality of the market had smoothed out, all these passive strategies tended to outperform the majority of actively managed mutual funds (see Exhibit 1).

In 2018, 64% of large-cap active funds underperformed the broad market, but even more managers underperformed the S&P 500 Low Volatility Index (88%) and the S&P 500 Dividend Aristocrats ^® (73%). Though quality has been considered a defensive factor, it did not perform as well as low volatility or dividends in 2018. Nearly 56% of active large-cap managers beat the S&P 500 Quality Index over the one-year period.

In the five-year period ending December 2018, the S&P 500 Low Volatility Index and S&P 500 Dividend Aristocrats outperformed over 85% of largecap active managers. In addition, over 66% of active large-cap funds had lower returns than the S&P 500 Equal Weight Index and the S&P 500 Quality Index.

Over the longer-term 15-year period, all four factor indices outperformed more than 98% of the large-cap mutual funds. This is not surprising; these defensive factor indices have tended to have higher hit rates and excess returns in down markets (see Exhibit 2).

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