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Sector Primer Series: Health Care

Seeking Volatility Protection Using Indices

Blending Factors in Smart Beta Portfolios

Sector Primer Series: Information Technology

Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

Sector Primer Series: Health Care

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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 sub-industry is the most specific level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries, as of Dec. 31, 2018.

The Health Care sector comprises companies primarily engaged in Health Care Equipment & Services, Pharmaceuticals, Biotechnology, and Life Sciences. 

The sector includes, but is not limited to, companies that: 


  1. Manufacture healthcare equipment and devices including medical instruments, drug delivery systems, cardiovascular & orthopedic devices, and diagnostic equipment;
  2. Own and operate healthcare facilities, including hospitals, nursing homes, rehabilitation centers, and animal hospitals;
  3. Engage in the research, development, or production of pharmaceuticals;
  4. Engage in the research, development, manufacturing, or marketing of products based on genetic analysis and genetic engineering; or
  5. Enable the drug discovery, development, and production continuum by providing analytical tools, instruments, consumables and supplies, clinical trial services, and contract research services.

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Seeking Volatility Protection Using Indices

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Rupert Watts

Senior Director, Strategy Indices

  • Fluctuating periods of “risk-on” and “risk-off” mean that spikes in equity market volatility and large drawdowns are increasingly common in today’s economy.
  • Passive investment strategies could help position portfolios to withstand market volatility.
  • S&P Dow Jones Indices (S&P DJI) offers a variety of indices specifically designed to help smooth out equity market drawdowns and improve risk-adjusted returns.
  • These indices can be broadly placed into three categories: defensive equity, multi-asset, and volatility.

1. INTRODUCTION

With markets fluctuating between “risk-on” and “risk-off” environments, shifts in economic conditions can pose significant challenges for investors.  Exhibit 1 shows events throughout the current market cycle causing dramatic spikes in volatility and large drawdowns.  With more of these likely in the future, as our long bull market cycle ages, how do investors best position portfolios to respond?

Many investors are familiar with the indices that exist to gain broad market exposure in a low-cost, liquid, and transparent manner.  But which passive strategies can outperform during periods of negative equity performance and increased volatility?

S&P DJI offers many indices designed to help take the sting out of equity market drawdowns and improve risk-adjusted return.  In this paper, we examine such flagship indices and their performance during large equity market drawdowns, notably Q4 2018.

For the purposes of this paper, the indices have been divided into three broad categories (defensive equity, multi-asset, and volatility) to highlight shared characteristics, key features, and risk considerations.  For ease of comparison, Exhibits 2, 3, and 4 provide an overview of these categories and the corresponding indices.

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Blending Factors in Smart Beta Portfolios

In recent years, smart beta strategies have seen a significant increase in popularity.  These systematic strategies seek to measure factors in order to harvest the associated long-term risk premium.  Many empirical studies show that smart beta strategies have historically outperformed their capweighted benchmarks.  However, different single factors tend to outperform in different market environments.1  Therefore, holding a combination of factor strategies in a blended portfolio could provide a powerful source of diversification and more stable excess returns.

This paper briefly reviews the definition and performance characteristics of the S&P 500® Single-Factor Indices, demonstrates their historical cyclicality and correlation, and presents a few examples of how market participants could potentially use investment vehicles tracking these single-factor indices as part of their own factor allocation, either as strategic or tactical plays.  These examples expand the traditional asset allocation frameworks to factors, including optimal allocation frameworks, heuristic allocation frameworks, and a trend-based timing framework.

1. SINGLE FACTORS

The S&P Single-Factor Indices comprise four key factors: low volatility, momentum, value, and quality.  A rules-based selection and non-marketcap-weighting approach is used to construct the indices, and diversification and investability are taken into consideration.

The indices are constructed from the universe of S&P Dow Jones Indices’ (S&P DJI) headline global indices, including the S&P 500, S&P Europe 350®, S&P Global BMI, and regional and country benchmarks.  Approximately one-fifth of the universe is selected by applying liquidity criteria.  The constituents are then weighted two ways: by the inverse of volatility in the case of low volatility indices, and by the product of factor score and market cap for the momentum, value, and quality factors.  The indices are rebalanced semiannually except for the low volatility indices, some of which are rebalanced quarterly.  Exhibit 1a provides an overview of the S&P Single-Factor Indices.

In this paper, we will focus on the S&P 500 Single-Factor Indices.  Exhibit 1b provides the description of the four long-only, single-factor indices, together with a dividend index and an equal-weight index, built on the S&P 500 universe.

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Sector Primer Series: Information Technology

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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 sub-industry is the most specific level of the four-tiered, hierarchical industry classification system that includes 11 sectors, 24 industry groups, 69 industries, and 158 sub-industries, as of Dec. 31, 2018.

Companies primarily engaged in Software & Services, Technology Hardware & Equipment, and Semiconductors & Semiconductor Equipment are classified into industry groups that make up the Information Technology sector. It includes, but is not limited to, companies that develop and produce software, manufacture electronic equipment and instruments, provide commercial electronic data processing, and manufacture semiconductors and related products, as well as those that manufacture communication equipment and products including LANs, WANs, routers, telephones, switchboards, and exchanges.

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Considering the Risk From Future Carbon Prices: The S&P Carbon Price Risk Adjusted Index Series

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Andrew Innes

Head of EMEA, Global Research & Design

INTRODUCTION

Along with the advent of the 2015 Paris Climate Agreement has come a growing understanding of the structural changes required across the global economy to shift to low- (or zero-) carbon, sustainable business practices.

The increasing regulation of carbon emissions through taxes, emissions trading schemes, and fossil fuel extraction fees is expected to feature prominently in global efforts to address climate change.  Carbon prices are already implemented in 40 countries and 20 cities and regions.  Average carbon prices could increase more than sevenfold to USD 120 per metric ton by 2030, as regulations aim to limit the average global temperature increase to 2 degrees Celsius, in accordance with the Paris Agreement.[1]

S&P Dow Jones Indices launched the S&P Carbon Price Risk Adjusted Indices to embed future carbon price risk into today’s index constituents.

The key points included in the index concept are as follows: 

  • Carbon pricing risk from a growing array of new policies and taxes leading to potentially significant increased costs for companies.
  • Every company having a different carbon emissions profile—its total greenhouse gas (GHG) emissions footprint and where geographically these emissions occur.
  • Carbon pricing risk could vary substantially among companies operating in the same business sector.

This development is an example of the broader move toward incorporating environmental, social, and governance (ESG) considerations in asset management.

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