Indexology^® Blog

Global equities ended the first quarter of the year with a gain of 6.9%, as measured by the S&P Global BMI. Meanwhile, Shariah-compliant benchmarks, including the S&P Global BMI Shariah and Dow Jones Islamic Market (DJIM) World Index, also increased during the quarter and outperformed their conventional counterparts by 3.5% and 3.4%, respectively.

Overall, regional broad-based Shariah and conventional equity benchmarks had a positive quarter, despite recent volatility in the banking industry. However, the Pan Arab region declined marginally by 0.5% in Q1, while its Shariah benchmark finished the quarter with an increase of 2.5%.

Drivers of Shariah Index Performance in Q1 2023

Shariah benchmarks outperformed their conventional counterparts during Q1, in contrast to prior quarter returns. Sector composition can provide some explanation for this quarter’s results. Higher exposure to Information Technology stocks within Islamic indices and having no exposure to conventional financial services, including banks, were the main drivers of this outperformance. The Information Technology sector was up 22.6% and represents 29.3% of the index’s weight, driving the highest return contribution among all sectors.

Meanwhile, other sectors experienced double-digit gains, such as Communication Services and Consumer Discretionary, which rose 24.6% and 14%, respectively, in Q1, contributing significantly to the index’s outperformance, despite having a relatively smaller weight compared to other sectors.

Energy and Utilities were the only sectors that decreased substantially during Q1, but the impact was limited by their small weight.

MENA Equities Post Mixed Results in Q1 2023

MENA equities experienced mixed results in Q1, with the regional S&P Pan Arab Composite was down 0.5%. GCC country performance was also mixed, with positive returns for Oman (5.0%), Bahrain (4.9%) and Saudi Arabia (1.6%), and losses in the UAE (-5.2%), Kuwait (-3.5%) and Qatar (-1%).

For more information on how Shariah-compliant benchmarks performed in Q1 2023, read our latest Shariah Scorecard https://www.spglobal.com/spdji/en/documents/performance-reports/scorecard-sp-shariah-djim.pdf

This article was first published in IFN Volume 20 Issue 15 dated April 12, 2023.

After 83% of euro-denominated pan-regional equity funds failed to outperform the S&P Europe 350^® in the 10 years leading up to the start of 2022, last year brought an intriguing change in the market winds, including the end of near-zero interest rates and, along with it, higher hopes for stock-picking. There was higher dispersion and, with value stocks beating their peers, there were certainly opportunities for outperformance for those managers paying attention to fundamentals.

As it turns out, the year may well go down as one to forget for most active European equity managers, particularly in the pan-European equity category—in which 87% and 83% of funds underperformed in the euro-denominated and pound sterling-denominated categories, respectively.

While most major markets finished the year with declines, for managers with a “go anywhere, do anything” approach, there were also stark opportunities to generate relative value. Even in adjacent categories—large- and small-cap U.K. equities, for example—there were significant differences in performance. Exhibit 1, reproduced from the scorecard, summarizes full-year 2022 performance across a range of popular fund benchmarks.

Against this backdrop, Exhibit 2 summarizes the one-year underperformance rates across all the fund categories included in the year-end 2022 scorecard.

The scorecard also provides a raft of further data and analysis on the market conditions that accompanied such performance, as well as deeper statistics on the performance of actively managed funds. Readers can also dig deeper into the short- and long-term data on actively managed fixed income funds—included in our European scorecard for the first time this year—in a supporting blog by the report’s main author.

However, it is sometimes worth stepping back from the granular data to make a broader, simple observation, and there is a clear one hinted at by the SPIVA Europe Year-End 2022 Scorecard. In short: while volatile and falling markets might offer active managers greater opportunities to add value, there is no guarantee that they will be able to do so. As compared to European active managers in particular, the year-end 2022 scorecard adds to a growing library of evidence that, contrary to the common conception, an index-based approach to investing can be far better than “settling for average.”

For the first time, our SPIVA^® Europe Year-End 2022 Scorecard measures the performance of actively managed fixed income funds, covering 11 categories across currencies and credit quality. Fixed income funds had a better record than their equity brethren in 2022, with a majority of funds outperforming in five reported categories over a one-year horizon (compared to none of our 22 equity categories). At the front of the pack, just 23% of euro-denominated government bond funds underperformed the iBoxx Euro Sovereigns  in 2022. Admittedly, the results were less impressive as the time horizon extended: a cross-category average of 84% of active fixed income funds underperformed their assigned benchmark over the 10-year period, including 88% of euro-denominated government bond funds.

To say that 2022 was a challenging year for bonds globally is an understatement. Central banks around the world tightened interest rates to combat inflation, leading to double-digit losses for most European fixed income benchmarks, accompanied by particularly large declines in longer-dated bonds, which are more sensitive to changes in interest rates. Exhibit 1 shows the extent of 2022’s declines in our fixed income benchmarks in a decade-long historical context. At the back of the pack, the iBoxx Sterling Gilts recorded a maximum drawdown equal to a 31% decline from its 2020 high, finishing the year not far from its lows.

Despite the carnage, there were a few bright spots for actively managed funds, particularly in categories with benchmarks that were more sensitive to changes in the yield environment. Exhibit 2 plots the relationship between the one-year active underperformance rate in each fixed income category and rate sensitivity in that category’s benchmark, as measured by modified duration. The two series are negatively correlated, which suggests that some active managers may have generated their relative outperformance by holding bonds with shorter maturities, on average, than their category benchmark.

While conditions were particularly auspicious for fixed income managers with poorly performing benchmarks in 2022, such tailwinds may not persist over the long-term. Exhibit 3 shows that the relationship between benchmark returns and underperformance rates progressively weakens as the time horizon extends to 3, 5, and then 10 years. Just as Tim Edwards observes within European equities, the evidence suggests that is no easy task to identify active fixed income managers who can beat benchmarks over the long term.

The S&P China 500 gained 5.0% in Q1 2023, continuing to claw back some of the losses exhibited in 2022. Developed markets broadly had a strong quarter, with Chinese equities underperforming global equities while outperforming emerging markets. Communication Services led sector performance for the start of 2023, up over 20%. Energy and Information Technology also had a strong quarter, contributing to positive returns.

There was a large return dispersion among Asian markets in Q1. The S&P Korea BMI and S&P Taiwan BMI were the strongest markets, posting returns of 13.3% and 13.2%, respectively. The S&P China 500 outperformed the S&P Hong Kong BMI and S&P India BMI, which retracted 2.4% and 5.5%, respectively.

The S&P China 500 continued to maintain positive performance over the long term. With annualized gains of 5.9% in USD terms over the 10-year period ending in March 2023, the index has easily outperformed the S&P Emerging BMI, which gained only 2.9% per year over the same period.

Onshore Stocks Outperformed Offshore

The distinctive sector composition of offshore and domestic China listing types can sometimes result in performance variances. However, both delivered positive returns during the quarter, with China A-Shares outperforming China H-Shares. The S&P China 500 is diversified with both onshore and offshore listings and thus outperformed indices with higher weights in Hong Kong-listed Chinese companies.

Communication Services and Information Technology Led the Gains

Communication Services and Information Technology companies led performance in Q1 2023, gaining 20.6% and 17.0%, respectively. Energy also had a strong quarter, up 14.4%. Real Estate was the largest drag on the S&P China 500 performance, as it declined by 5.1%. All other sectors delivered a positive return during the quarter.

At the company level, the largest contributor to index return during the quarter was Tencent, which was up 20.9%, continuing the positive momentum from Q4 2022. Alibaba was also a notable contributor, up over 10%, and Kweichow Moutai had a solid quarter as well. In terms of standout performers, 360 Security Technology Inc, Zhongji Innolight and Zhejiang Dahua Technology each gained over 100% during the quarter. A number of technology stocks have outperformed amid investor enthusiasm over the commercialization potential of generative AI products.

Meituan (down 18.3%), JD.com Inc (down 21.8%) and PDD Holdings (down 6.9%) were among the few noteworthy relative detractors to index return during the quarter.

Valuation Metrics Remain Attractive

The S&P China 500 trailing P/E increased to 14.3x in Q1 2023 (14.1x in the prior quarter); however, it remained below the 3-, 5- and 10-year average. The rolling 1-, 3- and 5-year P/E ratios remained slightly above the longer-term average.

The trailing P/E for the S&P Emerging BMI also increased to 13.5x, as security price gains outweighed the losses across emerging markets. The S&P China 500 dividend yield, meanwhile, decreased from 2.44% to 2.34% on a quarterly basis.

What are the three main reasons it’s hard for most active managers to beat their benchmarks? Explore findings from the SPIVA and Persistence Scorecards with S&P DJI’s Craig Lazzara including an allegorical look at what might happen if Craig challenged Michael Jordan to a free-throw shooting contest.