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Sector Primer Series: Financials

Indexology Magazine: Spring 2019

TalkingPoints: The Fourth Industrial Revolution - Are We Ready?

FAQ: S&P/Drucker Institute Corporate Effectiveness Index

Real Estate from an Index Perspective: Discovering Your Real Estate Benchmark

Sector Primer Series: Financials

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Louis Bellucci

Senior Director, Index Governance

INTRODUCTION

Developed in 1999 and jointly managed by S&P Dow Jones Indices and MSCI, the Global Industry Classification Standard® (GICS®) assigns companies to a single classification at the sub-industry level according to their principal business activity using 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 subindustries, as of Dec. 31, 2018.

The Financials sector comprises companies primarily engaged in Banking, Diversified Financials, and Insurance. The sector includes, but is not limited to: 

  • Companies that have conventional banking operations;
  • Financial institutions primarily engaged in investment banking and brokerage services;
  • Insurance and reinsurance brokerage firms;
  • Financial exchanges and providers of financial decision-making support tools and products, including ratings agencies; and
  • Companies with significantly diversified holdings across three or more sectors, none of which contribute a majority of profit and/or sales.

 

COMPOSITION

Created in 1957, the S&P 500® was the first broad U.S. market-cap-weighted stock market index. 

Today, it is the basis of many listed and over-the-counter investment instruments.  The S&P 500 Financials Index comprises all companies included in the S&P 500 that are classified as members of the GICS Financials sector.

The Financials sector is the third most heavily weighted of the 11 sectors within the S&P 500.  As of Dec. 31, 2018, the Financials sector represented 13.31% of the S&P 500 (see Exhibit 2).  Since the index is market capitalization weighted, this sector has an above-average influence on the overall index performance.

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Indexology Magazine: Spring 2019

The Fourth Industrial Revolution: Are We Ready?

Thirty-eight percent of American workers may need to change occupations by 2030, according to PwC.1 That means about 45 million people already in the workforce might need to be retrained over the next 11 years. In the same vein, McKinsey Global Institute has estimated that approximately 50% of the activities people are paid to do, representing USD 16 trillion in costs to the global economy, can be automated using currently available technology.2

Rapid developments in artificial intelligence (AI) and robotics— coupled with ubiquitous connectivity and vast, easily accessible processing power—are laying the groundwork for fundamental structural changes in the global economy. These mutually reinforcing catalysts are driving exponential innovation across a wide swathe of the economy, reshaping entire industries and creating new ones.

Interestingly, these catalysts are not new in and of themselves. For instance, the early work in modernday artificial intelligence began in the 1950s, even though progress was limited given the lack of necessary processing power; and, of course, robots have been commonplace in manufacturing for well over 30 years. What’s prompting this new era is the compounding effect of developments in each of these areas. For instance, massively powerful and easily accessible computing power has greatly accelerated developments across AI, robotics, and the internet of things. Similarly, rapid developments in AI have greatly enhanced the capabilities of robotics, complex network management, and our ability to make sense of the vast amount of data captured by an increasingly connected world.

It is not purely technical advancements that are facilitating this revolution: a cultural shift towards a more open, sharing economy has also lowered the barriers to entry for many innovative startups. The open source community has evolved to include valuable intellectual property and sophisticated foundational components made freely available by large companies, such as Amazon, Google, and Facebook, for use by third parties. Couple that with ondemand services, such as effectively limitless computing power, and it’s easy to see how many traditional barriers to entry have been lowered across many industries.

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TalkingPoints: The Fourth Industrial Revolution - Are We Ready?

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John van Moyland

Managing Director, Global Head of S&P Kensho Indices

Thirty-eight percent of American workers may need to change occupations by 2030, according to PwC. That means about 45 million people already in the workforce might need to be retrained over the next 11 years. In the same vein, McKinsey Global Institute has estimated that approximately 50% of the activities people are paid to do, representing USD 16 trillion in costs to the global economy, can be automated using currently available technology.

Rapid developments in artificial intelligence (AI) and robotics—coupled with ubiquitous connectivity and vast, easily accessible processing power—are laying the groundwork for fundamental structural changes in the global economy. These mutually reinforcing catalysts are driving exponential innovation across a wide swathe of the economy, reshaping entire industries and creating new ones.

Interestingly, these catalysts are not new in and of themselves. For instance, the early work in modern-day artificial intelligence began in the 1950s, even though progress was limited given the lack of necessary processing power; and, of course, robots have been commonplace in manufacturing for well over 30 years. What’s prompting this new era is the compounding effect of developments in each of these areas. For instance, massively powerful and easily accessible computing power has greatly accelerated developments across AI, robotics, and the internet of things. Similarly, rapid developments in AI have greatly enhanced the capabilities of robotics, complex network management, and our ability to make sense of the vast amount of data captured by an increasingly connected world.

It is not purely technical advancements that are facilitating this revolution: a cultural shift towards a more open, sharing economy has also lowered the barriers to entry for many innovative startups. The open source community has evolved to include valuable intellectual property and sophisticated foundational components made freely available by large companies, such as Amazon, Google, and Facebook, for use by third parties. Couple that with on-demand services, such as effectively limitless computing power, and it’s easy to see how many traditional barriers to entry have been lowered across many industries.

We now stand on the cusp of this new era, the so-called Fourth Industrial Revolution. A term coined by Klaus Schwab of the World Economic Forum (WEF), it refers to this period of pervasive change in which the characteristics of man and machine begin to merge, whereby human capabilities are enhanced by genetic engineering and wearable and implantable technology, and machines acquire human characteristics, including cognitive capabilities. The WEF uses the term cyber-physical systems to describe the symbiosis of man and machine.

Some have argued that the innovation and change underway today is simply an extension of the Third Industrial Revolution, which heralded the introduction of computers and the digital era in the late 1960s/early 1970s.3 However, the Fourth Industrial Revolution represents a step change both in terms of the rate of change and the nature of it. The digital era is transitioning from one largely involving the automation of rote tasks to one that now includes the advanced cognitive capabilities typically associated with humans. The rate and breadth of change anticipated over the next decade is also unprecedented, resulting in what is likely to be a very different-looking world.

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FAQ: S&P/Drucker Institute Corporate Effectiveness Index

INDEX DESIGN

  1. What is the S&P/Drucker Institute Corporate Effectiveness Index? The S&P/Drucker Institute Corporate Effectiveness Index is designed to track stocks in the S&P 500® that consistently rank highly on proprietary management criteria. The best of these companies are published annually in a special section from the Wall Street Journal as the “Management Top 250.” These are companies that create value through excellence in employee engagement and development, customer satisfaction, social responsibility, innovation, and high-quality financial metrics, all of which may be leading indicators of both short- and long-term financial performance. Furthermore, companies that pursue success in one or two of these factors at the expense of the others may be taking on risk currently undervalued by the market. The S&P/Drucker Institute Corporate Effectiveness Index was thus constructed to identify companies that exhibit excellence and consistency in how they create and sustain value.

2. Why was the S&P/Drucker Institute Corporate Effectiveness Index created? While some investors obsess over short-term financial performance, they typically look right past crucial long-term factors that are difficult to measure—the reason these factors are often called “intangibles.” Yet a growing body of research shows that as much as 80% of a typical company’s value is driven by intangibles such as the strength of customer relationships, the engagement of the workforce, the ability to innovate, integrity in finances, and contributions to society. In collaboration with the Drucker Institute, S&P Dow Jones Indices created this index to give investors the whole picture: companies that effectively manage their intangibles with a holistic consistency that suggests they will continue to do so in the future.

3. What makes the S&P/Drucker Institute Corporate Effectiveness Index unique? The index combines two innovative measures—the Drucker Institute corporate effectiveness score and the S&P DJI quality score—into a single method that seeks to measure a company’s capacity for creating value while managing risk. The index uses an innovative construction that considers both financial and intangible management performance, and recognizes companies that stand out on the combined measure without resorting to a more risky unbalanced approach.

The objective of the S&P/Drucker Institute Corporate Effectiveness Index is to track firms that are managed effectively. This begins with the Drucker Institute’s rigorous and quantitative assessment of the managerial functions at the core of every enterprise: customer satisfaction, employee engagement and development, innovation, and social responsibility. Added to this is S&P DJI’s quality score as a recognized measure of financial strength. Together, these measures assess a firm’s ability to create, deliver, and sustain value for shareholders and stakeholders alike. Finally, in identifying companies that are not only effective on average but also well balanced, the index seeks a blend of short-term performance and long-term potential.

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Real Estate from an Index Perspective: Discovering Your Real Estate Benchmark

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John Welling

Director, Global Equity Indices

INTRODUCTION

Indices have long played an important part in measuring the real estate market and the array of offerings illustrates the varied needs of market participants.  This paper highlights the role of various real estate indices offered by S&P DJI, how they differ from each other, and how they cater to the diverse needs of real estate investors.

S&P DJI REAL ESTATE INDICES

Our diverse offerings allow investors to measure the performance of listed real estate companies in a variety of ways.

Dow Jones Select Real Estate Securities

The Dow Jones Select Real Estate Securities Indices (RESI) are cut from the S&P Global BMI and are designed to serve as a proxy for direct real estate investment.  These indices measure approximately USD 24.3 billion[1] in passive AUM and exclude companies whose performance may be driven by factors other than the value of real estate.  

  • Key Attributes: 75% of revenue must be derived from the ownership and operation of real estate; there is a minimum float-adjusted market cap of USD 200 million; mortgage companies and a majority of specialized real estate companies are excluded.

  • Key Indices:

           o Dow Jones Global Select RESI

           o Dow Jones Global ex-U.S. Select RESI

           o Dow Jones U.S. Select RESI

           o Dow Jones U.S. Select REIT Index

Dow Jones Real Estate

The Dow Jones Real Estate Index seeks to track the performance of real estate investment trusts (REITs) and other companies that invest directly or indirectly in real estate through development, management, or ownership, including property agencies, capturing approximately USD 5.0 billion[1] in passive AUM.

Dow Jones Green Real Estate

The Dow Jones Green Real Estate Indices include the same constituents as the corresponding Dow Jones Select RESI, however, company weights are modified to tilt each index toward stronger performers according to GRESB’s real estate ESG assessment.  

  • Key Attributes: The same constituents as the Dow Jones RESI, but weights are tilted to reward higher-performing ESG constituents.

  • Key Indices:

            o Dow Jones Global Green RESI

            o Dow Jones Global Ex-U.S. Green RESI

            o Dow Jones U.S. Green REIT Index

            o Dow Jones Japan Green RESI

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