Economic Exposure Indices:

Transcription

1 Economic Exposure Indices: The Future of Country- Based Analysis Matt Hougan Executive Vice President, Global Head of Content IndexUniverse Raman Aylur Subramanian, CFA Executive Director, Index Applied Research

2 Importance of Economic Exposure 76 November 2012, Stock Fell 9.9% Yum Brands Economic Exposure: China Impact USA 26% CHINA 44% Others 30% Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13

3 Performance Implication of Economic Exposure 140 Relative Performance of World with EM and DM Expsoure Indices World with EM Exposure/ World EM/ World (RHS) World with DM Exposure/ World

4 Globalization and Economic Exposures of Companies High international exposure refers to exposures more than 30%. The figure on top of the first bar chart shows the number of companies with high international exposure

5 Economic Exposures of Companies A Shifting Landscape Source : Unilever and Samsung Annual Reports ; % Revenues from different regions

6 Economic Exposures of Global Mandates Economic Exposures of a Typical Global Mandate Data as of Dec The revenue exposure to emerging markets also includes the frontier markets. Europe ex UK and Pacific ex JP exposures are based on region definitions

7 Challenges in Estimating Economic Exposure Huge disparities in reported geographic segments across companies Economic Exposure provides a consistent approach to estimating revenue estimates a company s economic exposure based on the: 1. company s reported revenues by geographic segment and 2. GDP weights of the countries and regions in the specific reporting segment

8 Economic Exposure Indices: Balancing Portfolio Economic Exposure and Adequate Market Cap Coverage Applicable Universe All constituents of the ACWI or DM/EM Region/Country Indices Estimate Economic Score To the Target Region for the Index (e.g. EM Economic Exposure) Security Selection Select the top ranked companies with the highest target economic exposure Adequate Capacity: Exposure times market cap weighting Frequent Rebalancing: Semi-Annual Low Turnover: Use of Buffer Zones

9 Indices with EM Exposure 9

10 Performance Characteristics of the Back-calculated Indices with EM Exposure 10

11 Active Exposures of the Back-calculated World with EM Exposure Index Top 10 companies by weight in the World with EM Exposure Index Average exposures based on data from May Nov Top 10 companies by weight using data as of Dec

12 Contrasting the World with EM Exposure Index and the EM Indices 30 Sector Weights (%) World with EM Exposure Emerging Markets EM Small Cap Data as of March 31,

13 Economic Exposure Indices in the Investment Process The Indices with EM Exposure can be used by institutional investors with constraints on investments in emerging markets due to regulation, accessibility issues or potential concerns on governance ACWI World ACWI GDP Weighted World with EM World + World with EM Exp 75:25 50:50 25:75 Exp Direct Exposure to Emerging Markets ( EM Economic Expsoure (%) Annual Return (%) Annual Volatility (%) Return/ Risk EM Source:, World scope. Data from May 2002 March Direct exposure to emerging markets refers to the market cap weight of emerging market companies in the index. EM exposure of emerging market companies estimated using available World scope data as of Other exposure data are as of Dec Information ratio is the ratio of Active return / tracking error. 13

14 Economic Exposure Indices in the Investment Process The World with EM Exposure Index together with the EM Index provides a broader opportunity set for global institutional investors to access emerging markets growth ACWI World EM ACWI GDP Weighted World with EM Exp EM+ World with EM EM + World with EM Exp 75:25 50:50 25:75 Exp Market Cap Weight in ACWI(%)* EM Economic Expsoure (%) Annual Return (%) Annual Volatility (%) Return/ Risk Source:, World scope. Data from May March For ACWI GDP weighted Index, the EM weight in ACWI is shown. EM exposure of emerging market companies estimated using available World scope data as of Other exposure data are as of Dec Information ratio is the ratio of Active return / tracking error. 14

15 How European is Europe? Over the last five years, the percentage of European companies with high international exposure has risen from 45% in 2007 to 60% in 2012 Another striking fact is the high economic exposure of European companies to emerging markets that has risen from 14% in 2002 to nearly 29% in Proportion of Europe companies with High International exposure (%) % 60% 50% Revenue distributions of Europe companies 40 40% 30 30% 29% 20 20% 14% 17% 10 10% % North America Europe Pacific EMs 15

16 Performance Implications Performance of Europe Based Portfolios (%) May2002 to November 2012 UK with Intl Exp Europe ex UK with Intl Exp Europe with Intl Exp Europe ex UK Europe UK Europe ex UK with Dom Exp Europe with Dom Exp UK with Dom Exp

17 World with China Exposure SINGAPORE 3.7% JAPAN 5.6% SWITZERLAND 2.9% HONG KONG 10.8% UNITED KINGDOM 14.4% CANADA 1.3% USA 40.8% Country Weights Consumer Staples 3.3% Utilities 3.1% Financials 6.8% Consumer Discretionary 9.9% Industrials 2.9% Energy 2.9% Information Technology 37.4% Sector Weights AUSTRALIA 20.4% Materials 33.6%

18 Investing in China Through Developed Markets /1/2002 5/1/2003 5/1/2004 5/1/2005 5/1/2006 5/1/2007 5/1/2008 5/1/2009 5/1/2010 5/1/2011 5/1/ World with China Exposure (LHS) China A (RHS) China (RHS)

19 Summary With increasing globalization, many companies operate across different regions and countries and therefore it is difficult to disentangle these companies from their global footprint adopts a consistent approach to estimate the economic exposure of companies to different regions using the geographic distribution of their revenues The economic exposure of companies can serve as a complementary or alternative definition of the country factor and brings a new dimension to the construction and evaluation of global equity portfolios Emerging markets play an increasingly important role in the global economy and in the asset allocation of institutional investors The Economic Exposure Indices are complementary to traditional cap weighted EM benchmarks and provide an alternative approach to analyzing emerging markets and global growth 19

20 Thank You. Questions?