Indexology^® Blog

Revisions to the Global Industry Classification Standard (GICS^®) structure were implemented at the March S&P/ASX rebalance. The changes affect the GICS structure at all levels and involve a number of intra- and inter-sector changes for companies within the S&P/ASX 200 and S&P/ASX 300.

Inter-sector changes are the reclassification of constituents to a different sector under the new GICS structure, while intra-sector changes refer to firms being reclassified (i.e., sub-industry updates) within their current sector.

Inter-Sector Changes

All of the companies within the S&P/ASX 200 and S&P/ASX 300 that will change sector are part of the discontinued Data Processing & Outsourced Services sub-industry within the Information Technology sector. Companies within this sub-industry will either be reclassified to the new Transaction & Payment Processing Services sub-industry within the Financials sector or moved to the Industrials sector under the new Data Processing & Outsourced Services sub-industry.

This change has resulted in five companies within the S&P/ASX 300 changing sector, with three of those companies being constituents of the S&P/ASX 200. Collectively, these companies make up less than 0.90% of weight in each index.

Intra-Sector Changes

GICS changes that were implemented in the Consumer Discretionary sector redefined sub-industries based on the nature of goods sold. The discontinuation of the Internet & Direct Marketing Retail Subindustry, as well as the merger of General Merchandise Stores and Department Stores into a new sub-industry called Broadline Retail, account for several reclassifications.

The Real Estate sector was affected by an increased granularity of company classifications within real estate investment trusts (REITs). In particular, self-storage, data centers, telecom towers and timber REITs were given their own categories, while further granularity was also added to residential REITs.

Meanwhile in the Financials sector, the Thrifts & Mortgage Finance sub-industry (within the Banks industry group) has been discontinued. Mortgage finance companies mainly offer mortgage finance-related products & services and generates fee-based revenue, distinct from banks. These companies will move into the Financial Services industry group as a new sub-industry—Commercial & Residential Mortgage Finance.

Another change worth noting is that the Trucking sub-industry within Transportation was discontinued, with new sub-industries Ground Transportation and Passenger Ground Transportation being created.

In total, there are 13 companies within the S&P/ASX 300 and seven within the S&P/ASX 200 that were reclassified into a different sub-industry, amounting to a collective index weight of 3.22% and 3.16%, respectively.

How can indices help inform investors charting a course for net zero? Priscilla Luk of S&P DJI joins Dr. Qu Kang of Bank of China Hong Kong to discuss the potential role of index-based innovations in regional carbon reduction initiatives and what these developments could mean for the potential opportunity set.

The year 2022 was riddled with investment challenges worldwide, as fears of recession, rising inflation and geopolitical uncertainty ranked among a whirlwind of other market pressures. In South Africa, these risks manifested in two notably different halves of the year, with major equity and bond indices ending H1 in negative territory, but then rallying to recover in H2 (see Exhibit 1). The SPIVA^® South Africa Year-End 2022 Scorecard assesses the aftermath and reveals how many active managers successfully navigated the 12-month rollercoaster of risk.

Although many actively managed South Africa Equity funds started the year strong—with only 36% underperforming the S&P South Africa 50 Index at the end of H1—most lost their advantage by the end of 2022, as 61% of South Africa Equity funds finished 2022 as underperformers relative to the benchmark (see Exhibit 2).

Our South Africa Scorecard (unusually) offers two comparison benchmarks for the domestic equity category, reflecting the differing opportunity set for foreign-investment-constrained fund managers versus those managers with fewer constraints. Consistent readers of SPIVA South Africa might observe that 2022 was the fifth year in a row that less than half of South Africa Equity managers underperformed the S&P South Africa Domestic Shareholder Weighted (DSW) Capped Index, but the eighth consecutive year in which more than half underperformed the S&P South Africa 50 Index. These differences emphasize the importance of benchmark selection in evaluating active performance. It is perhaps worth highlighting that, nonetheless, most active funds underperformed either benchmark over a 10-year horizon (see Exhibit 2).

The changing rate of underperformance from H1 to H2 seems to have mirrored similar changes in the challenge of stock selection: although 51% of stocks in the S&P South Africa 50 Index outperformed the index itself through the end of H1, by the end of the year, only 43% of stocks had a higher return than the index (see Exhibit 3).

Among other notable highlights from this year’s reports, Short-Term Bond funds caught the eye with a commendably low 12.5% underperformance rate. This was the fifth year in a row that 20% or fewer of Short-Term Bond fund managers underperformed the STeFI Composite on an absolute return basis. However, the dramatic increase in the underperformance rate to 83% using risk-adjusted returns suggests managers may be generating their outperformance from higher-risk securities.

Adding risk brought added return for some managers in 2022. Only time will tell whether such approaches result in persistent success in 2023 and beyond.

What does it take to become an S&P Pan Asia Dividend Aristocrat? S&P DJI’s Rupert Watts and KraneShares’ Brendan Ahern explore how the index tracks quality dividend growers in Pan Asia and a range of potential applications for these defensive yield generators.

As persistently high inflation, high interest rates and geopolitical risks continue to dominate the macro environment, the S&P 500^® Revenue-Weighted Index, S&P MidCap 400^® Revenue-Weighted Index and S&P SmallCap^® 600 Revenue-Weighted Index have outperformed their corresponding float-adjusted market-capitalization (FMC) weighted indices by more than 5% during the past one-year period (see Exhibit 1). In this blog, we will analyze the revenue-weighted index methodology, the short- and long- term performance, style tilts and sector composition.

Methodology Overview

As alternatives to the FMC-weighted indices, the S&P 500, S&P MidCap 400 and S&P SmallCap 600 Revenue-Weighted Indices are weighted by constituents’ revenues from the past four quarters. In order to provide broader coverage and reduce concentration risk, individual constituents’ weights are capped at 5%. Lastly, these indices are rebalanced quarterly in March, June, September and December.

The revenue-based index may be a better reflection of the broader economy, as revenue is directly tied to economic activity. Moreover, revenue is a direct indicator of a company’s ability to generate income and is less susceptible to accounting manipulations.

Short- and Long-Term Outperformance

Historically, the revenue-weighted indices outperformed their corresponding FMC-weighted indices for all periods studied, in the short and long term, in terms of both total returns and risk-adjusted returns (see Exhibit 2).

Factor Exposure

In Exhibit 3, the revenue-weighted indices demonstrated a value tilt versus their respective benchmarks. In terms of Axioma Risk Model Factor Z-scores, the revenue-weighted indices had higher exposure to the book-to-price ratio, comparable exposure to earnings yield and lower exposure to growth factors. The value tilt has proved beneficial in the recent rising interest rate environment. Holding all else equal, value stocks offered relatively more protection in a rising interest rate environment compared with growth stocks, due to their lower durations.

Furthermore, all three revenue-weighted indices showed comparable or slightly higher profitability, lower momentum and smaller size tilt than their corresponding FMC-weighted indices.

Sector Composition

Exhibit 4 shows the historic sector exposure difference between the revenue-weighted indices versus their benchmarks. The revenue-weighted indices overweighted Consumer Discretionary, Consumer Staples and Industrials, while having an underweight in Financials, Information Technology and Health Care.

Conclusion

Weighted by constituents’ revenues over the previous four quarters, the S&P 500 Revenue-Weighted Index, S&P MidCap 400 Revenue-Weighted Index and S&P SmallCap 600 Revenue-Weighted Index have historically provided consistent total returns and risk-adjusted outperformance over both short- and long-term periods. The revenue-weighted indices also showed value tilt in comparison with their corresponding benchmarks.