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TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

The Case for Information Technology Dividend Growers

Indexology Magazine: Winter 2020

The Development of the Global Sukuk Market from an Indexing Perspective

FA Talks: Managing Retirement Hazards with Managed Indexing

TalkingPoints: Benchmarking Quality Small-Cap Equities in Brazil

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Silvia Kitchener

Director, Global Equity Indices, Latin America

S&P Dow Jones Indices

When it comes to small-cap equities, profitability matters. Over the past 25 years, the S&P SmallCap 600® has outperformed the Russell 2000 by almost 1.7% on an annual basis. A key driver of this outperformance was the quality bias that comes from the profitability screen that is built into the S&P SmallCap 600. What  happens when that same methodology is applied to small caps  in other markets? 

1. What are the characteristics of small-cap stocks and how have market participants used them traditionally?

An important characteristic of small-cap stocks is that they are considered growth stocks, because they have a higher potential for growth. Historically,  small caps have outperformed large caps over the long term. Studies have  shown that stocks with attractive price valuation and good growth prospects tend to outperform. Small-cap stocks also tend to be focused more domestically, offering a purer local play on Brazil growth. Furthermore, in smaller markets  like those in the Latin American region, small-cap indices can actually help develop the overall market by drawing attention to the smaller stocks, which may help create more demand for direct or indirect investment, either through individual stocks or through index-based strategies tracking small-cap indices.

2. The S&P/B3 SmallCap Select Index is part of a broader index series, the S&P Global SmallCap Select. What type of small-cap stocks do these indices track?

Small cap can be defined based on either a fixed market size or on a relative  size range, the latter being what we use in Brazil. We start with a broad view of  the market, with our country index taking into account all Brazilian companies that trade on B3 and meet the minimum size and liquidity criteria. We segment those by total market cap and then take the cumulative weight of the floatadjusted market cap to categorize the different segments. We use 70%, 15%, and 15%. The top 70% represents the large caps, the next 15% the mid caps,  and the bottom 15% the small caps.

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The Case for Information Technology Dividend Growers

It was once thought that companies from the Information Technology sector do not pay dividends.  While this may have been the trend a long time ago, it certainly has not been for the last decade.  Over the past 10 years, within the Information Technology sector of the S&P 500®, 26 companies initiated dividend payments and 59 companies increased their dividends at various points throughout those years, for a total of 376 dividend increases in the sector.

During the same period, with an increasing number of Information Technology companies paying dividends, the contribution to S&P 500 total return by these companies rose from 9.07% in 2009 to 16.33% in 2019 (see Exhibit 1).

This change in the Information Technology sector creates a need to measure the performance of its dividend growers.  To do this, S&P Dow Jones Indices recently launched the S&P Technology Dividend Aristocrats® Index, which seeks to track the performance of Tech companies that have a history of consistently increasing dividends.  

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Indexology Magazine: Winter 2020

Is passive investing as passive as it sounds? How do three different index-based strategies seek to boost diversification?

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The Development of the Global Sukuk Market from an Indexing Perspective

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Jason Giordano

Director, Fixed Income

S&P Dow Jones Indices

The global sukuk market has enjoyed tremendous growth since 2013. As measured by the Dow Jones Sukuk Total Return Index and the S&P Global High Yield Sukuk Index, the U.S. dollar-denominated sukuk market experienced a compound annualized growth rate of nearly 18%, driven by increased issuance from sovereigns and supranationals, as well as strong investor demand for Shariah-compliant securities.  Historically, the majority of issuance has come from Saudi Arabia and Malaysia; however, the past three years have witnessed an increasing number of issuers from new markets, as well as a deeper and broader investor base.

The recent growth of the global sukuk market is likely to accelerate, as GCC issuers are poised to refinance in order to fund increasing deficits and as new entrants continue to come to market.  Most notably, several African sovereigns will likely enter the market in 2020, and Egypt has set up a Shariah supervisory committee to oversee sukuk issuance.  Furthermore, corporate issuers in both Indonesia and Malaysia have begun to shift funding sources away from traditional bonds in favor of sukuk. 

The relatively nascent green sukuk initiative could also stimulate issuance, as efforts to combat climate change gain traction, building on the inaugural green sukuk transactions in Malaysia and Indonesia.  The most recent green sukuk transaction was a USD 750 million issuance from the government of Indonesia earlier in 2019.  The Indonesian government also issued the world's first sovereign green sukuk, a USD 1.25 billion five-year instrument, to finance green projects.

From an investor perspective, sukuk garnered some of the best performance of all global fixed income asset classes over the past five years.  As of Oct. 31, 2019, the Dow Jones Sukuk Total Return Index had a YTD performance of 10.14%, while the S&P Global High Yield Sukuk Index returned 11.75%.  Compared to the S&P Global Developed Aggregate ExCollateralized Bond Index, the Dow Jones Sukuk Investment Grade Total Return Index outperformed by over 300 bps over the same period.  Taking volatility into account, the Dow Jones Sukuk Total Return Index had a fiveyear risk-adjusted return that was more than triple that of the S&P Global Developed Aggregate Ex-Collateralized Bond Index. 

The strong risk-adjusted performance could be attributed to a number of factors inherent to sukuk, including the quality of most sukuk issuers and the characteristics of the sukuk securitization process.  Many sukuk issuers are sovereign nations, supranationals, and other government-related entities.  The high-quality nature of issuers supports the strong credit fundamentals of the underlying sukuk structure.  Some market participants also point to the Shariah prohibition of riba (interest) and gharar (uncertainty).  In lieu of interest, the return to an investor must be linked to profits and derived from a shared risk assumed by both the issuer and investor, unlike traditional bonds, in which the degradation of an issuer’s credit fundamentals materially affects the probability of repayment of interest or principal.

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This article was first published in Islamic Finance news Investors Report 2020.

FA Talks: Managing Retirement Hazards with Managed Indexing

FA Talks is an interview series where industry thinkers share their thoughts and perspectives on a variety of market trends and themes impacting indexing

Accelerated Wealth (AW) is one of the fastest-growing wealth management firms in Colorado, with 9 offices around the U.S. AW, a hybrid planning firm specializing in both insurance and investment-based planning, just celebrated its first decade in business, and has won The Colorado Springs Gazette’s “Best of Colorado Springs” for financial planner 5 years in a row. As it is one of the few advisory firms we are seeing that are combining fixed indexed annuities and index-based investment management, S&P Dow Jones Indices (S&P DJI) recently interviewed senior leadership at AW to learn more about how indexing plays a role in how they plan and manage retirement risk.

S&P DJI: Tell us what holistic wealth management means for Accelerated Wealth?

AW: We created a process meant to bring as much peace to our clients’ lives as possible. Through our Keys to the City client service model, our process begins with holistic financial planning. This process includes a full evaluation across various financial strategies such as social security, income planning, required minimum distributions, investment portfolio analysis, life insurance and annuity inventory, health insurance, property and casualty insurance, identity and cyber security protection, estate planning, wealth transfer, and asset protection. We take great pride in our focus on building financial plans as opposed to running a business that is financial product centric.

The second step of the Keys to the City process is referred to as family legacy. In this process, we focus in on the family unit of our client. We want to do everything we can to ensure that the legacy that our clients are leaving are a blessing, and do not turn into a curse. We offer training on personality preference and emotional intelligence, and we help create an understanding for our clients as it relates to who they are as investors. We find that by providing this type of training, the family unit naturally begins to improve in their communication, conflict management, and decision-making.

If a wealth management firm is going to speak to holistic planning, we believe there is a mandate to provide offerings that do not just focus on the mechanics of the financial plan itself, but must also provide offerings that equip the client to execute the plan behaviorally.

As it relates to the financial plan itself, we want to ensure that we are not biased in the financial instruments we utilize by our licensing or past experiences. We want to know that our advisors have the ability to choose from the entire universe of asset classes when building their clients’ plans.

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