Sector Primer Series: Industrials

IN THIS LIST

Practice Essentials - Understanding Commodities and the S&P GSCI^®

Sector Primer Series: Consumer Discretionary

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

TalkingPoints: The S&P Listed Private Equity Index

Education - Jul 18, 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 Industrials sector comprises companies primarily engaged in:

Producing capital goods, such as manufacturers of aerospace and defense products, building products, electrical equipment, and machinery, as well as diversified industrial conglomerates;
Providing commercial and professional services; and
Transportation such as railroads, air freight and logistics, airlines, and trucking.

COMPOSITION

The S&P 500 ^® Industrials comprises all companies in the S&P 500 included in the sector by GICS. 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 Industrials sector is the sixth most heavily weighted of the 11 sectors within the S&P 500. As of Dec. 31, 2018, the sector represented 9.20% 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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Education - Jul 08, 2019

Practice Essentials - Understanding Commodities and the S&P GSCI^®

Fiona Boal

Head of Commodities and Real Assets

Jim Wiederhold

Associate Director, Commodities and Real Assets

EXECUTIVE SUMMARY

S&P Dow Jones Indices has been providing index-based performance measures of real assets since 2007. Whether you prefer equity-based exposure to companies that produce commodities, or more direct exposure through futures contracts, S&P Dow Jones Indices offers tools for better understanding and accessing commodities market exposures. This paper focuses on understanding commodities as an asset class as well as the S&P GSCI, a preeminent measure of a basket of commonly traded commodities futures contracts.

WHAT ARE COMMODITIES?

Commodities such as gold and oil frequently capture media and investor attention. So what are commodities, and why are some financial advisors considering allocating portions of their clients’ portfolios to commodities and other real assets?

Commodities are:

Basic, standardized real assets that are in demand and can be supplied without substantial product differentiation across markets;
Fungible, or in other words, considered equivalent for trading purposes despite coming from different producers; and
In the case of physical goods traded as commodities, widely used as production inputs.

Because commodities are fungible and traded on exchanges globally, commodity prices are driven by global supply and demand. These performance characteristics set commodities apart from equity or fixed income investments, whose returns are linked to additional market fundamentals.

Some commodities, such as precious metals, are held for their store of value characteristics. However, since the storage costs of many commodities are prohibitive, some investors may use futures contracts to gain commodities exposure and avoid physical delivery or storage costs. Still, the question remains: is it better to physically hold a commodity like gold, or be diversified across a basket of commodities futures?

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Education - Jun 07, 2019

Sector Primer Series: Consumer Discretionary

Louis Bellucci

Senior Director, Index Governance

INTRODUCTION

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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