Syntax Creates New ESG Index that Aims to Improve Portfolio Outcomes.
Just like everyone knows that we need to wear masks to stay safe, everyone knows that diversification and valuation are important considerations when constructing investment portfolios. But a “safety in numbers”, herd mentality has driven everyone into the same securities and investors are currently buying Amazon stock with the same intensity that they bought Clorox wipes from the Amazon website in April.
Unprecedented stimulus helps boost asset prices in Q2, but Coronavirus concerns linger
- Broad-based recovery in all equity benchmarks following sell-off in Q1 sees diversified indices outperform cap weight in Q2
- Stratified SmallCap (+30.3%) and MidCap (+27.9%) have strongest quarter on record
- Resurgence in COVID-19 cases stalls industry reversals, but value opportunities remain
- Economic Breadth Indicator suggests demand for equities is robust
The risk reduction benefits of diversification are well understood by investors and form the cornerstone of risk management. This paper shows that diversification can also improve upside capture and lead to higher portfolio returns.
As the market leadership shifts from mega-cap technology stocks to a more value oriented focus, we wanted to highlight the attractiveness of our Stratified Weight Indices. So far this quarter, our flagship indices have significantly outperformed their benchmarks in all categories (US Large Caps, Mid Caps, Small Caps and International).
- Market decline in Q1 2020 sees higher volatility than during the financial crisis
- Alternative Weight indices struggle to keep up with cap weight during flight to safety
- Market concentration is at the highest levels since 1978
- Previous recoveries have seen headwinds for momentum strategies, causing cap weight to underperform alternative weight products
In 2019, there were a total of 129 Initial Public Offerings (IPOs) in the United States. By number of IPOs, the Healthcare sector dominated, representing 48.8% of the 2019 IPOs. The next largest sector by number of IPOs, Financials, represented only 15.5%. The concentrations of IPOs in the Healthcare and Financials sectors represent a heavy weighting in certain business risks of new stock into the economy, however it does not tell the full story. While the Healthcare sector accounted for a significant plurality of IPOs in 2019, the Information sector took in a much greater share of the total market capitalization, with just over $104.9B. That is, 48.8% of the value of newly listed public companies came from the Information sector. This massive amount of funding is made all the more interesting due to the fact that there were only fifteen Information sector IPOs.
The root cause of the current market crisis is markedly different from anything we’ve seen before. However, the broad risk aversion, chaotic markets and divergence of sector performance has many of the hallmarks of the 2008 Global Financial Crisis. In this report, we examine the trajectory of the 2008 sell-off and subsequent recovery using our unique business risk lens and give actionable insights. If the 2008/9 hindsight is indeed 20:20, there are two ways to add value to our core portfolios: (i) rebalancing after the broad-based sell-off and (ii) reducing business risk concentrations during periods of high uncertainty. We will explore these two strategies in more detail and take stock of the market today.
Since the first cases of Coronavirus were publicly identified in Wuhan at the end of 2019, the market has experienced significant decline as investors face uncertainty about the outbreak’s effects on corporate earnings. Using Syntax’s Functional Information System (FIS®) to evaluate shared business risks, we can granularly understand how the virus has specifically impacted the Tourism industry and the broader market.
Markets climb the wall of worry without a harness
- 30 for 30: S&P 500 up over 30% - 4th best annual return in 30 years
- Active Business Risk: most concentrated market since June 1999
- Alternative Weight indices struggle to keep up with Cap Weight
- Small Cap resurgence in Q4
- Brexit and trade war news eases uncertainty internationally
- Sectors: Healthcare and Financials outperform in Q4 after lagging
When investors think about diversification, they are usually looking to reduce downside volatility. However, a more diversified approach can be just as helpful in enhancing returns during a market recovery. The S&P 500 Financials Sector has given investors a turbulent ride over the last decade. Since that index peaked on February 20, 2007, it has had an incredibly sluggish recovery. Just yesterday, almost thirteen years after the last peak, the index achieved a new all-time high. The Stratified LargeCap Financials Index, on the other hand, recovered from the financial crisis five years ago.
Building on the concept of active share, Syntax has developed a new measure of portfolio risk called Active Business Risk. This white paper introduces Active Business Risk as the excess level of sector or industry exposure in a portfolio or index and shows that Active Business Risk is an important driver of portfolio return. It concludes that Active Business Risk is a quantifiable risk that is not adequately diversified by cap weighted indices.
- US Large Cap has strongest YTD since 1997
- VIX and S&P 500 both rise in Q2 and Q3 - suggests more volatility to come
- Tech sector sees a renewed focus on valuation
- Active Business Risk: Core products are heavily biased
- Markets rise, but volatility reemerges as macro business risks linger
- Cap-weighted indices under pressure as DoJ investigates Big Tech
- Healthcare in the cross hairs of political posturing
- International markets vulnerable as global economic uncertainty rises
- Smaller companies lag
- Best Q1 for S&P 500 since 1998, SYLC outperforms
- Stratified MidCap beats S&P 400 in 2018
- Cap-weighted indices' uncontrolled sector biases
- International markets rebound in Q1
- Broad market recovery, but financials lag
- Market performance in December worst since Great Depression
- The downturn in Q4 was market-wide. We expect Stratified Weight to outperform as Business Risk trends emerge in recovery
- FAANGs lose their bite
- SEADM outperforms EAFE by 2.6% in 2018
- Stratified LargeCap outperforms Equal Weight by 1.2% in 2018
- Stratified MidCap outperformed the S&P MidCap 400 by 3.6% in 2018
- Strongest quarter for S&P 500 since 2013 Q4; strong performance by SYLC
- Rising macro risks highlight that diversification matters
- IT and Information business risks start to diverge
- Interest rates and tax changes create headwinds for home builders
- Energy leads SEADM on the back of Brent price recovery and merger activity
On September 28, 2018, S&P Dow Jones Indices and MSCI Inc. implemented the largest structural change to the Global Industry Classification Standard to date, significantly broadening the GICS Telecommunication Services sector to include a host of new companies and renaming it the Communication Services Sector. In this report, we discuss the new GICS changes through the lens of the Syntax Business Risk Taxonomy.
This report analyzes business risk exposures present in the S&P 500 over the previous 25 years using Syntax’s Functional Information System (FIS). Unlike traditional industry classification systems, which offer a one-dimensional, static, taxonomical approach to classification, FIS utilizes a multi-dimensional attribute classification system to better understand underlying risk exposures in investment portfolios.