Indexology^® Blog

S&P DJI has just released the final regional edition of our S&P Index Versus Active (SPIVA^®) Mid-Year 2021 Scorecards. The semiannual reports cover the performance of actively managed funds in the U.S., Canada, Latin America, Europe, South Africa, India, Japan, Australia, and our newest regional addition, the Middle East and North Africa (MENA). SPIVA Scorecards offer a wealth of insights into the performance of active funds globally, including the percentage of all the available actively managed funds that underperformed an appropriate S&P DJI benchmark over various time horizons. Exhibit 1 summarizes the performance of domestically focused active funds across the various regions over the one-year period ending in June 2021.

In every region apart from Australia, most active funds underperformed. Intriguingly, although we often hear that index-based strategies “don’t work” as well in Emerging Markets, the rate of underperformance  was generally higher in those markets: 86% of Indian active managers failed to beat the S&P BSE 100, with similar underperformance among Mexican and Brazilian funds. This speaks to the shrinking alpha that is often seen as markets increasingly professionalize; put simply, it becomes harder and harder to remain “above average.”

Beyond the headline figures, the biannual reports dig into a wide range of specialized equity and fixed income fund categories and, as usual, the latest reports identify a few pockets where active managers had more reason to boast, and those markets where outperformance was hardest to find. Exhibit 2 shows the top underperforming and outperforming fund categories across all our regional reports. Canadian Dividend & Income Equity funds had the largest rate of underperformance, with more than 98% of funds underperforming the S&P/TSX Canadian Dividend Aristocrats^®. At the other end of the spectrum, U.S. bond fund managers, in particular, stood out for their benchmark-beating returns (although the excellent 12-month record in the Government Long, U.S. Government/Credit Long, and Emerging Markets Debt fund categories is qualified by close to 100% underperformance over a 10-year horizon). The most extreme case of outperformance was among South African Short-Term Bond funds, with only 8% of active managers underperforming the STeFI Composite.

Turning to cross-region comparisons (summarized in Exhibit 3), the best active U.S. equity managers over the one-year period ending in June 2021 were, perhaps surprisingly, more likely to sit on a different continent than the stocks they managed, with 51% of Japanese and European active U.S. equity managers underperforming the S&P 500, versus the U.S.’s 58%. However, over the long run, U.S. active managers did achieve a better outperformance rate than other regional managers, not only in U.S. equities, but also across Global and Emerging Market equity market categories, too.

Explore the latest SPIVA scorecards at https://www.spglobal.com/spdji/en/research-insights/spiva/.

The saying goes, “What does not kill you makes you stronger,” but could that strength translate into a greater chance of survival? Perhaps, especially if all future risks were equal or sufficiently similar to the one that was survived—assuming, of course, that one learned from that first experience.

The survival of mutual funds could follow the same premise. Unfortunately, every day is different; economic, political, and public health circumstances constantly change, making each market observation an independent event.

The S&P Indices Versus Active (SPIVA^®) Latin America Scorecard compares the performance of actively managed mutual funds in Brazil, Chile, and Mexico to their benchmarks over 1-, 3-, 5-, and 10-year periods.

In the mid-year 2021 scorecard, we observed fund survivorship from December 2014 to June 2021 (14 semiannual reports) under all categories and horizons covered by the report.[1] In the case of the 10-year period, data is only available from December 2018 to June 2021 (six semiannual reports).

In Exhibit 1, we can see that the highest survival rates in all categories were in the one-year period, while the lowest survival rates were in the 10-year period—the longer the observation window, the lower the probability of survival.

It can also be observed that both the 1- and 10-year periods presented lower dispersion compared with the 3- and 5-year periods. The category with the highest dispersion in all observation periods was Brazil Corporate Bond Funds and the category with the lowest dispersion in all observation periods was Mexico Equity Funds.

To see the latest active versus passive results including the fund survivorship report, please see the SPIVA Latin America Mid-Year 2021 Scorecard.

[1] The categories covered in the SPIVA Latin America Scorecard are: Brazil Equity Funds, Brazil Large-Cap Funds, Brazil Mid-/Small-Cap Funds, Brazil Corporate Bond Funds, Brazil Government Bond Funds, Chile Equity Funds, and Mexico Equity Funds.

Research has shown that equally weighted indices have historically posted long-term outperformance¹ over their benchmarks—largely driven by their exposures to small size and value along with associated risk premia, in addition to a healthy dose of concentration reduction.² However, in accessing compensated factors and reducing concentration, the S&P 500^® Equal Weight Index could elicit some undesirable ESG consequences.

With many investors looking to integrate ESG considerations into their portfolios, is it possible to gain the benefits of equal weighting while incorporating ESG criteria? This question raises three sub-questions.

• Can ESG benefits be gained relative to the S&P 500 Equal Weight Index?
• Can factor exposures associated with equal weighting be gained within an ESG framework?
• Can we reduce concentration in a few names, while excluding companies that are undesirable from an ESG standpoint?

To give the game away early (in case you want to stop reading here): yes, yes, and yes.

Before addressing these questions, it helps to understand how the index is constructed (see Exhibit 1).

Based on this index construction, how does the S&P 500 Equal Weight ESG Leaders Select Index perform? We can see an excess return over the S&P 500 Equal Weight Index (see Exhibit 2), with comparable volatility, realizing an improved risk-adjusted return over each period examined historically (see Exhibit 3).

Can ESG benefits be gained? There were large improvements in both the S&P DJI ESG Score and carbon intensity¹ at the index level, with the S&P 500 Equal Weight ESG Leaders Select Index relative to the S&P 500 Equal Weight Index achieving a stronger ESG profile and lower carbon footprint (see Exhibit 4).

Can factor exposures be maintained?  The only significantly difference in exposure we can see is small size, as the S&P 500 Equal Weight ESG Leaders Select Index is not quite as exposed. But it still has more exposure to small size compared to the market-cap-weighted S&P 500 or S&P 500 ESG Index.

Can we reduce concentration within an ESG Framework? While there is more weight in the largest stocks in the ESG equally weighted index than in the S&P 500 Equal Weight Index, there is still a large concentration reduction from cap weighting—relative to either the S&P 500 or S&P 500 ESG Index.

Ultimately, if the factor exposures and concentration reduction of equally weighted indices with an improved ESG footprint sounds good, the S&P 500 Equal Weight ESG Leaders Select Index may be a good fit.

¹ Historical long-term outperformance was over market-cap-weighted indices.

² Rashid (2021) shows equally weighted indices have performed well during economic recovery. Bellucci & Gunzberg (2018) and Edwards, Lazzara, Preston & Pestalozzi (2018) highlight increased exposure of equal weighted indices to small size and value, while Ganti (2021) observes value exposures by equally weighted indices. Edwards, Lazzara, Preston, & Pestalozzi (2018) and Preston (2021) discuss benefits of concentration reduction.

³ We define carbon intensity as Scope 1 + Scope 2 + Scope 3 emissions/enterprise value including cash (EVIC

Explore how the design of the S&P 500 Factor Rotator Daily RC2 7% Index is helping democratize access to factor investing, providing a simple, rules-based blueprint for building dynamic factor strategies.

With the passage of the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the “SECURE Act”, and subsequent Department of Labor rules on lifetime income disclosures, the shift towards income-focused outcomes for America’s plan participants is well underway. I was reminded of the importance of this topic after watching the recent video, Closing the Retirement Gap with Indices, where Nobel Laurate Robert C. Merton and Dan Draper, CEO of S&P Dow Jones Indices, discussed the challenges facing today’s retirement system and the need for independent, transparent indices that act as a benchmark that participants can use on their journey to (and through) track their retirement investment strategies.

As highlighted by Dr. Merton’s decades work in this space, the US defined contribution (DC) system requires participants to possess investment knowledge, the time necessary to manage their asset allocation, and the ability to harmonize those allocations across the household balance sheet. Not an easy task, even for the most savvy investor. However, these challenges pale in comparison to getting the first order challenge right: identifying the correct goal for retirement.

Unlike Social Security or defined benefit plans, the DC system is focused on wealth accumulation, and unfortunately, for most, this is the wrong goal. Why? Well, most Americans today rely on their DC plan as their primary retirement funding vehicle. We use our DC savings to fund our lifestyle in retirement, from basic subsistence and health care to recreation and bequests. So, recognizing that funding retirement consumption is the goal, we must manage the unique risks that affect retirement income. In addition to the risks associated with equity investing, we also face changing interest rates and inflation in retirement: lower interest rates can reduce the income that a given balance can support, while inflation reduces the purchasing power of savings.

Now here is where getting the goal wrong may negatively impact plan participants. Most comprehensive, “do it for me” products (think target date funds) are designed with a wealth accumulation goal in mind. To mitigate the risk of not attaining that wealth goal, the allocation invests in short-term, nominal fixed income as the participant approaches retirement. This choice may work when seeking to minimize the volatility of the account balance. However, it may not be inappropriate for retirement investing, since it leaves participants exposed to inflation risk and decreasing interest rates. A more appropriate strategy – one that invests in a moderate equity allocation and an inflation-protected bond portfolio utilizing liability-driven investing – can help protect participants against market, interest rate and inflation risk. To prove this rather contrarian approach to target date fund investing, look no further than a recent SSRN paper by Mathieu Pellerin, titled Investing for Retirement Income: A Comparison of Asset Allocations and Spending Strategies. I think you will find the results compelling to say the least.

A useful resource for participants in the DC ecosystem who seek investment strategies that move from a wealth-focused mindset to the more appropriate focus on retirement income, is the benchmark or index. As an independent, transparent measurement, indices like the S&P STRIDE Index aim to provide these participants with information to benchmark the performance of their retirement goals. I applaud the application of lifecycle finance in the methodology of these indices. Further, to paraphrase Dan Draper, the S&P STRIDE Indices aim to track strategies where retirement income is sought to be the outcome. To that I say, Amen!

Disclaimer:

Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission. Dimensional Fund Advisors: (i) has collaborated with S&P Dow Jones Indices to create the S&P STRIDE Index and receives license fees with respect thereto and (ii) licenses other S&P Dow Jones Indices data and trademarks in exchange for a fee payable to S&P Dow Jones Indices.

Robert Merton provides consulting services to Dimensional Fund Advisors LP.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

There is no guarantee investment strategies will be successful. Investing involves risks, including possible loss of principal. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.