S&P GIVI: Two good ideas in one index
Launched in March 2012, the S&P GIVI (Global Intrinsic Value Index) is a rules-based, global equity strategy index designed to capture two well-documented, persistent anomalies in the equity markets – namely, the low-volatility and value anomalies. The S&P GIVI tries to deliver – in a single index – both lower volatility and an alternative stock weighting scheme, whereby each stock is weighted by its intrinsic value, rather than its market capitalisation.
The index is constructed using two simple steps. First, to achieve its goal of lower volatility, the S&P GIVI excludes from the underlying S&P Global BMI universe 30% of market cap with the highest volatility in each country. It then weights each of the remaining stocks by its intrinsic value. The intrinsic value of each stock is calculated using the residual income model, where intrinsic value is equal to the sum of the value of assets in place and the value of growth opportunities. The value of assets in place is defined as the stock’s current book value while its growth opportunity is derived from the discounted value of projected earnings, as provided by analysts’ consensus earnings.
The S&P GIVI incorporates a unique alternative index strategy combining important features of fundamental-based and low-volatility strategies. Its intrinsic value weighting not only appears to capture the value premium, but also enables more exposure to growth opportunities than traditional fundamentally weighted indices. In addition, the index tends to retain the important characteristics of a fundamental-based index strategy, such as broad economic representation, high investment capacity and moderate implementation cost. These characteristics suggest that it may efficiently capture the equity risk premium, while simultaneously harvesting the value and low-volatility factor premia. Exhibit 1 illustrated main characteristics of the S&P GIVI.
By incorporating the present value of growth opportunities into the intrinsic value measure, intrinsic value indices use a more forward-looking measure of economic size. Exhibit 2 compares the sector allocation of the S&P GIVI US with that of a market cap-weighted index (S&P US BMI), and that of a book-value-weighted portfolio, as of March 2012. It shows that the S&P GIVI has broadly diversified sector exposures. One notable observation is that it over-weights the information technology sector relative to the market cap-weighted index, which stands in stark contrast with the book-value-weighted portfolio, which significantly under-weights the information technology sector. This finding indicates that the S&P GIVI may have more exposure to growth industries by virtue of incorporating growth opportunities into the intrinsic value measure. In comparison, fundamentally weighted indices have more exposure to traditional value by virtue of using fundamental accounting measures.
Another observation is that, as of March 2012, the S&P GIVI US significantly under-weights the financials sector compared to the market cap-weighted index. This finding stands in contrast with fundamentally weighted indices, which are significantly over-weight financials. The S&P GIVI’s current under-weighting of financials can be attributed to both its intrinsic value weighting scheme and low-volatility tilt.
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