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U.S. equities posted their

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worst first half performance since 1970

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as inflation concerns,

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Fed rate

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hikes and slowing

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economic growth weighed on markets.

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Hello, I'm

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Paul Murdock from S&P Dow Jones Indices.

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And joining me

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today are S&P DJI's

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Anu Ganti and Hamish Preston

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to discuss these trends

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and what they could mean

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for active management

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and asset allocation moving forward.

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Anu, Hamish,

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thanks for joining me today.

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Good to be here.

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Likewise. Thanks, Paul.

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So Anu,

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can you provide an overview of the key

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market

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trends from the first half of the year?

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So we've seen a lot of key macro factors

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at work

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during the first half of the year.

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Number one that comes to

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mind is inflation.

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We've seen rising inflation.

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We also saw the Fed

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hike rates by 75

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basis points,

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which was the most aggressive since '94.

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And most recently,

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we saw them hike again.

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And now you couple this with slowing

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economic growth,

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as well as geopolitical uncertainty,

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and you have an environment

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that's very reminiscent of the 1970s.

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Now, mega caps in particular

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were hit hard

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during the first half of the year.

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And on the sector side,

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we saw weakness

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among Technology,

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Consumer Discretionary,

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as well as Communication Services.

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And this mega-cap weakness

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was actually a boost, a

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tailwind for Equal-Weight

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because the strategy has a small-cap bias.

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Now, when we look

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at history, it's interesting

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to look at historical first half

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versus second half year performance.

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And we did this for the S&P 500

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and we see a lack of a correlation

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historically.

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So let's go back to 1970.

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First half of the year,

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we saw severe losses,

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but then we saw a strong turnaround

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in the second half of the year,

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which really proves that past performance

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is not indicative of future results.

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Now, let's come back

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to current circumstances in this year.

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So, so far in Q3,

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we've seen a reversal of these trends.

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Now, with mega caps

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returning to favor and growth

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outperforming value.

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So it'll be interesting

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to watch the rest of this year

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and see if we close out

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with another reversal.

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Thanks Anu. And Hamish,

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Can you discuss the key drivers

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of Equal Weight's outperformance this year? 

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What have been

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the performance implications

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for our Factor index family?

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Absolutely.

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So it's safe

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to say that the S&P 500 Equal Weight

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Index was caught up in

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some of the drawdowns

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that Anu

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mentioned as it fell more than 16%

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in the first half of 2022.

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But on a relative basis, it outperformed

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the S&P 500 by 3.3%.

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And this was actually the 15th time

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since 2003

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that the Equal Weight

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Index had outperformed

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its float

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market cap weighted counterpart

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in the first half of the year.

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And it was,

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going back to 1970, the 37th time.

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So fairly typical

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based on the history of the two indices

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What's perhaps less normal

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and quite interesting actually in 2022

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was the extent to which sector

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allocations were important

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in driving outcomes.

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And the real reason

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for that was the difference

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we saw in the performance

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of different sectors,

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the idea being that certain narratives

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have very different impacts

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on companies in different sectors.

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So for example, a whopping 65%

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separated the total returns

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of the best performing S&P 500 sector,

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which was Energy

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compared to the worst,

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which was Consumer Discretionary.

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And that 65% spread was the highest

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it's ever been at the halfway

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point of the year,

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when you look at S&P 500 sectors.

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Now against that backdrop,

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when you also

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consider that the

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S&P 500 Equal Weight Index has distinct

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sector exposures compared to the

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S&P 500, in part driven

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by the fact that equal weight's exposures

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are determined

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by the number of stocks

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or companies in each sector

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rather than the size

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relative to the rest of the index.

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And historically,

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that's meant

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that equates has had more exposure

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to Energy and Utilities

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and less exposure

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to Information Technology.

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And actually,

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if you look at

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the relative returns of Equal Weight

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compared to the S&P 500

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in the first six months of 2022,

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Equal Weight really benefited

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from having more exposure

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to Energy and Utilities,

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which outperformed

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and less exposure

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to information technology

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and communication services,

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which didn't actually underperform

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the S&P 500 itself.

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Now, in terms of the broad landscape

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of what

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these relative returns may mean for

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factor indices,

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I think what's helpful to remember

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is pretty much regardless of the fact

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you are looking at all

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the characteristics

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you're using to assess

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a particular factor,

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factor indices

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tilt away from the largest names

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and so,

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and also the constituents are weighted

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more equally.

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And so what that means,

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if you look historically,

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when Equal Weight

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has outperformed the S&P 500,

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typically a greater proportion

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of factor indices

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have outperformed the S&P 500.

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And that's exactly what we saw

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in the first half of 2022,

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although on an absolute basis, many,

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if not all S&P 500 based

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factor indices fell. On a relative basis,

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the majority of them

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outperformed the S&P 500.

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And so that speaks to

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a potential application

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of the Equal Weight

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Index and helping people to understand

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how conducive

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different market environments may well be

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for the outperformance of factor indices

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against the float-market capitalization

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weighted S&P 500.

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Thanks, Hamish.

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And the first half of 2022 also saw

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a large amount

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of outperformance of value versus growth.

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Can you walk us through

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what was driving that?

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Absolutely.

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So you're spot on to say that value

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really beat

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growth in the first half of 2022

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across the cap spectrum.

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And in fact,

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if you look at the 

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S&P 500 Value Index,

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it outperformed its growth counterpart

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by 16% in the first six months

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of the year,

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which was the highest such spread

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at the halfway mark of a year,

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right the way back to the mid 1990s.

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So definitely a strong trend.

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Now Anu's mentioned the rollover

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in some of those mega-cap names

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which are predominantly growth oriented

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and so that played a part

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in growth's underperformance

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compared to value.

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But I think a broader context here

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is the rising interest rates environment

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we've seen courtesy

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of the surging inflation.

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The idea here, of course, is that

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investors expect future cash

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flows from growth oriented companies

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to be further into the future.

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And so as interest rates rise,

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you would expect those longer duration

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cash flows to be more impacted

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as you discount them back to the present

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to arrive at a value

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for a company or price of its stock.

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And that seems to be what we've seen

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as the growth-oriented companies 

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have been more impacted

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compared to their 

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value-oriented counterparts, which

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whose cash flows are

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expected to be

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further to the to the present.

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Anu mentioned a bit of a reversal

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we've seen in the last few weeks

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in style.

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And that's

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definitely come across

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growth has outperformed value.

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But in terms of what the future holds,

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I think we will have to wait

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and see how this plays out.

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But what we can say

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based on the recent history

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is that the relative

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performance of growth compared to value

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may well tell us something

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about what investors expect

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as it pertains to the future

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path of interest rates.

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Thanks Hamish,

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It's certainly something

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to keep an eye on.

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And Anu, final question to you.

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How would you characterize

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the volatility environment this year

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and what does your research say

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about the potential implications

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for active managers?

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Well,

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if we look back

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at the first half of the year,

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the market environment

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was characterized

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by high volatility

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and in particular

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because of very high correlations,

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which is not surprising

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given all the macro headwinds

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that I outlined earlier.

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And most recently in Q3,

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we've seen those correlations come down.

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And another trend that we've seen

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that Hamish

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touched on is a wide disparity

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among sector performance,

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and that could have positive implications

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for skillful sector allocators.

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So the greater

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00:08:39,485 --> 00:08:41,220
that spread or dispersion,

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00:08:41,220 --> 00:08:41,821
the greater

295
00:08:41,821 --> 00:08:43,523
the opportunity to add value

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00:08:43,523 --> 00:08:44,857
if you have that skill

297
00:08:44,857 --> 00:08:47,193
to rotate among sectors.

298
00:08:47,193 --> 00:08:49,295
Now also, the comeback of smaller caps

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00:08:49,295 --> 00:08:50,062
and Equal Weight

300
00:08:50,062 --> 00:08:51,230
that we talked about in the first

301
00:08:51,230 --> 00:08:52,098
half of the year

302
00:08:52,098 --> 00:08:53,266
might have had positive

303
00:08:53,266 --> 00:08:54,767
implications for large-cap

304
00:08:54,767 --> 00:08:55,935
active managers

305
00:08:55,935 --> 00:08:58,004
as their portfolios tend to be closer

306
00:08:58,004 --> 00:08:59,672
to equal than cap weighted, 

307
00:08:59,672 --> 00:09:01,073
as it's tougher to overweight

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00:09:01,073 --> 00:09:02,642
those mega-cap names.

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00:09:02,642 --> 00:09:03,643
And historically,

310
00:09:03,643 --> 00:09:05,044
we see that of the three years

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00:09:05,044 --> 00:09:06,212
when most large-cap

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00:09:06,212 --> 00:09:08,014
active managers outperformed,

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00:09:08,014 --> 00:09:09,448
two of those years coincided

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00:09:09,448 --> 00:09:11,551
with equal weight outperformance.

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00:09:11,551 --> 00:09:13,219
But that brings me to a caveat,

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00:09:13,219 --> 00:09:14,220
which is the reversal

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00:09:14,220 --> 00:09:16,455
that we've talked about so far in Q3.

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00:09:16,455 --> 00:09:17,890
Now we've seen many caps

319
00:09:17,890 --> 00:09:19,358
coming back to favor.

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00:09:19,358 --> 00:09:21,661
So if this reversal trend continues,

321
00:09:21,861 --> 00:09:22,828
then that could be

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00:09:22,828 --> 00:09:24,463
a potential headwind now

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00:09:24,463 --> 00:09:26,232
for large-cap active managers.

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00:09:26,232 --> 00:09:27,533
So this will be an interesting one

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00:09:27,533 --> 00:09:29,135
to watch through the rest of the year.

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It will be interesting, indeed.

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00:09:32,071 --> 00:09:32,972
Anu, Hamish,

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thank you so much for your insights.

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Always a pleasure.

330
00:09:35,975 --> 00:09:37,143
Thank you.

331
00:09:37,376 --> 00:09:38,411
Thanks, Paul.

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00:09:39,912 --> 00:09:41,213
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00:09:41,213 --> 00:09:42,882
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00:09:42,882 --> 00:09:58,331
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