The functioning of passive investment indices in times of crisis is already a sub-plot of the following viral drama histrionic on the oil market. It also presents itself as a flash point in actions, as supervisors struggle to press the eject button for injured businesses.
This is an urgent problem for those who manage benchmarks like the S&P 500, where dozens of companies are at risk of being wiped out, at least theoretically, after the stock market crash in March. While being guided by rules-based standards, index compilers must also face the same judgment as everyone else in assessing the market right now: how much of the Covid impact will prove to be permanent?
"The S&P committee is going to have to decide how long they want to wait before abandoning companies damaged by COVID," said Nicholas Colas of DataTrek Research, who sees more than 30 companies teetering on the brink of deletion. "The S&P 500 is perhaps the most followed passive index in the world, but COVID-19 and its consequences will force its manufacturers to make very active choices." Anyone who needs to recall the importance of building a passive index has only to look at the remarkable recovery of the S&P 500 since March, a rebound whose strength is largely due to its weighting in technology stocks and healthcare. health. Less appreciated is the impact of four dozen corporate ejections in the past three years, deletions that have focused on retail, industrial and energy companies, which have suffered the most during the virus.
A basket of equal weight made up of companies that have been started from the S&P 500 in the past three years (for reasons other than acquisitions) is down 47% this year, almost five times more than the decline in l benchmark in 2020, according to data compiled by Bloomberg. Only five of the ousted companies posted positive returns, while half plunged 40% or more. Oil and gas companies, including Chesapeake Energy Corp. and Transocean Ltd., are still down 80% or more. Bed Bath & Beyond Inc. and Macy’s Inc. lost about 70%. Of course, these companies were already in trouble before the coronavirus hit, hence their elimination. But the fact that they belong to industries directly in the collimator of fallout, where demand is decreasing, has been lucky for anyone with passive market exposure, for example, in an S&P 500 ETF.
"It was more fortuitous than expected that these companies would get worse," said Keith Gangl, portfolio manager for Gradient Investments. Still, "just by the nature of having less energy and fewer consumers, it certainly benefited the index."
Changes in the composition of the index are made as needed and “changes in response to corporate actions and market developments can be made at any time,” according to S&P Dow Jones Clues. Human judgment is also part of the process: the committee aims to minimize rotation and does not consider crossing the thresholds governing, for example, market capitalization, as a reason in itself to initiate a stock-out.
Lire la suite: Attendez-vous à une reconstitution «record» de Russell
“The criteria for addition are for adding to an index, not for continuous membership,” said the 41-page U.S. S&P. Clues Methodology rulebook. “As a result, an index constituent that appears to violate the criteria for adding to this index is not deleted unless the current conditions warrant a change of index. “
The elimination of 30 companies would exceed the annual average over the past three decades and rank among the busiest years. It’s a reminder that even passive structures have active elements, a fact posted last month when an exchange traded fundoverhauled the mix of his future over and over. In stock market indexes, companies are started when they fall below standards related to market capitalization or profitability. But deciding which companies to add requires a little more finesse.
Currently, a business must have a market capitalization of at least $ 8.2 billion for review S&P 500. The liquidity measures must also be sufficient and the sum of the total gains of the last four quarters must be positive, as well as the profits of the last quarter.
More recently, Capri Holdings Ltd. – the company behind retail brands such as Versace and Jimmy Choo – was removed from the S&P 500 on May 12 after losing approximately $ 5 billion in market value this year. As Capri was transferred to the S&P Small Cap 600 index, the medical device company DexCom Inc. and Domino’s Pizza Inc. were added to the large cap gauge. The two companies posted double-digit gains in 2020.
No longer meets the standard
Although market capitalization standards “are reviewed from time to time to ensure market conditionsAccording to the S&P methodology, consider what has happened to the little ones in the S&P 500 in the past 15 months. The market cap guidelines for the large cap gauge have been $ 8.2 billion on February 20, 2019. After the last stock market crash, about one-fifth of the companies in the index no longer meet this standard.
The types of businesses that can show consecutive profits in a post-Covid world are likely to be different from those that could have done so before, according to Colas of DataTrek. Travel and leisure businesses “are not very fortunate,” he wrote to customers, highlighting Uber Technologies Inc. and Lyft Inc. as examples of businesses that may not be profitable any longer.
In addition, the index committee is probably hesitant to add more tech companies to an already concentrated benchmark, he said. The S&P 500 Information Technology sector accounts for 26% of the index, the highest share since the dot-com burst.
Much of the rebound in equities that reached 30% from the March 23 trough can be attributed to such consolidation. Resilience in megacaps, technology and healthcare has been the salvation of bulls, but a growing schism ruled bythe automation between the “haves” and the “have-nots” of the stock markets has raised concerns about workers’ rights and wealth inequality.
La bonne performance des actions a également incité de nombreuses personnes à se demander comment le marché boursier pourrait devenir si détaché de l'économie réelle, où les mesures du chômage sont les pires en neuf décennies. Une partie au moins de la réponse réside dans la force des entreprises à mégacapacité, chaque membre du complexe Faang étant positif en 2020.
Going forward, market concentration is likely to increase only following the Covid crisis, according to Megan Greene, senior fellow at Harvard Kennedy School.
“This will create more distortion in many of these cluesSaid Greene over the phone. “As we see a much greater concentration of the market, it will be more difficult to read what is happening in the market. “
– With the help of Claire Ballentine