IN THIS LIST

Why Taking a Local Approach to Index Construction Matters in Canada

Indexing GARP Strategies: A Practitioner's Guide

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

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

TalkingPoints: The S&P Listed Private Equity Index

Why Taking a Local Approach to Index Construction Matters in Canada

Contributor Image
Michael Orzano

Head of Global Exchanges Product Management

S&P Dow Jones Indices

While nearly everyone in the Canadian investment community has heard of  the S&P/TSX Composite, few are aware of the key methodological Senior Director intricacies that distinguish it from other broad market Canadian equity benchmarks.

The most notable distinction is that the S&P/TSX Composite is designed specifically for Canadians (as are all S&P/TSX Indices), while many other Canadian equity indices, such as the FTSE Canada All Cap Index, are simply country slices of global benchmarks and, therefore, take the perspective of foreign investors.  Why might this matter?  Canada has foreign ownership limits that affect several industries, such as telecommunications, broadcasting, transportation, and real estate.  Therefore, whether or not these limits are accounted for in the index is significant.

As an example, Bell Canada (BCE)—the largest Canadian telecommunications company—was the 10th largest company in the S&P/TSX Composite, with a weight of 2.3%, as of June 28, 2019 (see Exhibit 1).  However, foreign investors are restricted from owning more than one-third of BCE under Canada’s Telecommunications Act.  As a result, BCE’s weight in the FTSE Canada All Cap Index is reduced by two-thirds from its natural market-cap weighting to roughly 0.75%.

pdf-icon PD F Download Full Article

Indexing GARP Strategies: A Practitioner's Guide

Contributor Image
Wenli Bill Hao

Director, Factors and Dividends Indices, Product Management and Development

S&P Dow Jones Indices

THE GARP STRATEGY

Growth at a Reasonable Price (GARP) is a well-known, much-practiced investment approach.  It is a fundamental-driven investment strategy that balances pure growth and pure valuation, as the former tends to invest in high-growth, yet expensive stocks, while the latter may take a long-term investment to pay off.  Primarily, the GARP strategy favors investing in companies with consistent earnings and sales growth, reasonable valuation, and solid financial strength, combined with strong profitability.  The underlying investment thesis of the S&P 500® GARP Index seeks to track the GARP strategy and earn higher risk-adjusted returns than its underlying universe over a long-term investment horizon.

In this paper, we introduce the S&P 500 GARP Index, its strategy, construction methodology, risk/return profile, factor exposures, and attribution analysis.

ESTABLISHING THE MULTI-FACTOR FRAMEWORK

We use a systematic bottom-up approach for stock selection and portfolio construction (see Exhibit 1), which we summarize as follows.

  1. Define the investment universe (the S&P 500).
  2. Identify factors with the potential to fulfill the GARP investment strategy.
  3. Select sensible factors for multi-factor metrics.
  4. Select constituents with well-defined rules.
  5. Construct a constituent portfolio with a predefined weighting methodology.

We use three-year EPS and SPS growth metrics to capture a firm’s growth.  In order to maintain sustainable growth, a firm needs to be highly profitable (high ROE) and not have excessive leverage (low financial leverage ratio).  We also use the earnings-to-price ratio to gauge a firm’s reasonable valuation.  These factors effectively enact the characteristics of the GARP strategy.

pdf-icon PD F Download Full Article

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

Contributor Image
Fiona Boal

Managing Director, Global Head of Equities

S&P Dow Jones Indices

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?

pdf-icon PD F Download Full Article

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

Contributor Image
Izzy Wang

Senior Analyst, Factors and Dividends

S&P Dow Jones 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.

  1. 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.

  1. 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.

pdf-icon PD F Download Full Article

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.

  1. 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]

  1. 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).

pdf-icon PD F Download Full Article
Processing ...