How can an index help market participants benchmark the developed world? Take a deep dive into the S&P World Index as we explore its coverage and usage, its performance history and why it continues to be a tough index for actively managed funds to beat with S&P DJI’s John Welling and Anu Ganti.
[TRANSCRIPT]
Interviewer:
Hi everyone, welcome to Asset TV. I'm Michelle Yu.
How can an index help market participants benchmark the developed world? Well, we happen to have a great panel to help answer that very question. Joining me today are John Welling, Head of Global Equity and Thematic Indices at S&P Dow Jones Indices, and Anu Ganti, S&P DJI's Head of U.S. Index Investment Strategy.
And today we're discussing the S&P World Index, its coverage and usage, its history, and why it continues to be a tough index for actively managed funds to beat. And I'm going to start with a very basic question and ask why the S&P World Index is often referred to as an "everything-in-one" index. John and Anu, welcome. John, I would love to start with you.
John Welling:
Thanks, Michelle. So the S&P World Index was launched in 2009, and since then, it has provided investors with a robust tool for comprehensive market analysis and informed decision-making. The index captures constituents from 24 developed markets across the world, and within those 24 developed markets, it captures about 85% of float market cap in each of those. So think it covers large caps and mid caps, so quite comprehensive and accessible exposure.
It's designed to represent the market performance of those economies in aggregate and gives insights into country- and sector-specific trends. So many would kind of think of the first-case usage as kind of moving away from home bias. So if you think of yourself as a U.S.-based investor, you might think of the S&P 500 while moving away from sort of the home bias and expanding and extending your exposure reach to beyond your home exposure area, the S&P World would help you achieve that.
Interviewer:
So you mentioned decision-making here. I mean, the question here is how could the S&P World help investors make more informed decisions? Anu, what are your thoughts on that?
Anu Ganti:
So, as John mentioned, the index has so many different uses, right. For example, you can use the S&P World to assess performance of global equity portfolios. Also, fund managers can use it as a benchmark to understand their relative performance versus the index. Also, the index can be used for the development of financial products, like ETFs and mutual funds, for example. And finally, it's so timely to think about risk management when thinking about sector trends and trends in these developed markets. So the index can be used for risk mitigation strategies as well. So there's so many different uses for this index in this climate.
Interviewer:
So, I think something our audience wants to know is how does the S&P World Index really help market participants navigate today's large, complex and rapidly changing investment universe? John, what are your thoughts on that?
John Welling:
Yes, Michelle. So, just for a little bit more context, I mentioned the launch of the S&P World Index since 2009. This benchmark also builds on the legacy of an even longer legacy of the S&P Global BMI, the S&P Global Broad Market Index, which was launched in 1989 and has about 15,000 companies with about USD 1.2 trillion in AUM in related benchmark assets. So as Anu was talking about, these assets, there's quite a bit of tracking of this index, so I would just say in terms of the rapidly changing environment, that question is on our minds. Markets evolve, but the index tends to evolve with it and provide the exposure needed.
So the S&P World Index takes into account maybe not all 15,000 of those, it's closer to about 1,500 companies within 24 developed markets, but you can then take a look at sector exposures, and there's an important aspect of using the GICS structure, the Global Industry Classification System, which is flexible and evolves with the types of companies and exposures in the index. So the S&P World Index covers over 300 GICS sub-industries, so you can really go and see what your performance is doing in relation to each of those sectors and kind of the more rapidly moving investment areas.
Interviewer:
And also one of those objectives we've heard a lot about in recent years is sustainability, and it's important to ask the question though, how exactly does sustainability manifest in the S&P World Index and what can we learn about the potential path of this trend from the index, John?
John Welling:
Yes, so it's true that sustainability-related investment risks and opportunities continue to mount. Climate change, artificial intelligence, the impact of political shifts in the U.S. and beyond, the energy transition, are just a few considerations as we head into the middle of 2025.
I should say, however, that we view sustainability as more than just a trend. At S&P Dow Jones Indices, we've been pioneers in sustainability indexing for more than 20 years, starting with the 1999 launch of the Dow Jones Best-in-Class World Index, formerly known as the Dow Jones Sustainability World Index. That index is effectively a sustainability-focused version of the S&P World Index. It leverages our world-class sustainability data sets to enable market participants to integrate climate and other sustainability-related considerations into their investment processes. This benchmark, along with many others, allows a variety of perspectives on sustainability and the various transitions that we're going through.
Interviewer:
Now similarly, there is increasing attention given to index governance, and the question here is how is the S&P World Index part of S&P DJI's commitment to following these types of best practices, John?
John Welling:
So actually a heightened focus on governance is a good thing for investors everywhere, especially in volatile and changing markets, like today's. As markets evolve, we are seeing stricter regulations and more demanding disclosure requirements, thus companies and indices alike must adhere to higher standards of governance. Because we prioritize transparency, independence and integrity, the S&P World Index remains steadfast as a reliable and accurate benchmark.
Its methodology is reviewed regularly. It's transparent. It's rules-based. We have independent oversight committees and various review processes, and as a co-founder of the Index Industry Association, we at S&P DJI adhere to industry best practices and changing regional regulatory standards. So stricter regulations and focus on governance is just business as usual for us.
Interviewer:
I want us to pivot now and talk a little bit about performance at a high level and how does S&P DJI assess performance of actively managed funds relative to the S&P World Index? And what insights can you share based on this analysis?
Anu Ganti:
Absolutely. So since 2002, we've been producing the SPIVA Scorecards, which stand for S&P Indices versus Active. We've been producing this in the U.S. for more than 20 years. We've expanded all around the world. And in our Mid-Year Scorecard, we actually showed one consolidated global update, and now we use the S&P World as our benchmark for the global equity category. So it's very interesting to see these cross-regional comparisons.
And what we found is that a majority of global equity funds underperformed across regions. If you think about Japan, Australia, Canada, the U.S., for example. And 2024 was no exception. We saw that 84% of U.S.-domiciled funds underperformed, and if you look at Europe, 91% of them underperformed. It was the highest ever, which was pretty interesting.
Interviewer:
The SPIVA data Anu shows it has been hard for active managers to beat the S&P World Index, but why do you think that is and what is the role of the current market concentration? What do you think about that?
Anu Ganti:
Yes, it's so timely, and one of the concerns right now is market concentration concerns with the outperformance of large caps. If you think about technology, if you think about the Magnificent 7, it can be tougher for active managers to overweight those large-cap names. In the U.S., we see that 89.5% of large-cap funds underperformed the S&P 500 over a 15-year period.
Now let's look globally. We see very similar concentration trends globally as well, with 92.5% of global funds underperforming the S&P World. Now it's important to step back and see that concentration trends can manifest at a country level as well. So if we look at the U.S., the U.S. has outperformed for more than a decade now, and if you look at the underperformance rates of these global equity managers, perhaps a headwind may have been that they were underweight the U.S. and more focused on their local opportunity set, particularly for the non-U.S.-domiciled ones. So it's important to keep those home biases in mind that John was alluding to earlier.
Interviewer:
Anu, you're always a financial encyclopedia. Thank you so much for being here as always. John, great to see you as well. Thank you so much both of you for your great insight.
And to learn more about the S&P World Index and why it is so relevant in today's concentrated markets, please visit us at the link below.
spglobal.com/spdji/sp-world-index
And that'll do it for us right now on Asset TV. I'm Michelle Yu. See you next time.
