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Never underestimate the power of financial institutions to come up with a new index from which they can generate sales.
S&P Dow Jones Indices has created the S&P Long-Term Value Creation Global Index. Is this new index worth tracking and should you align your investments towards it, absent a new ETF mirroring it (which will show up in due time, I’m sure)?
What exactly is this new stock index? The press release says, “The S&P LTVC Global Index is comprised of companies that have demonstrated the ability to manage both current and future economic and governance opportunities and risks by focusing on a long-term strategy. These companies must also have a sustained history of financial quality. Companies with these characteristics are more likely to maintain a competitive advantage and thereby sustain stakeholder value.”
This suggests that the companies, all 246 of them, were handpicked by the managers. So in certain respects, it’s a quasi-mutual fund or closed-end fund. One might also think of it as a “smart beta” fund.
The top 10 constituents of the index give me reason to think that its composition is aimed at the stated goals. If the idea is that these companies are long-term plays that have a good history of surviving all manner of economic cycles, have high return on equity and good corporate governance, it seems like a reasonable stance to take.
Lineup for the New Index
For example, I see Cigna Corp. (NYSE: CI). That’s a pretty solid, brand-name insurance company with a good balance sheet and fine history. I see O’Reilly Automotive (NASDAQ: ORLY). Reasonable minds can differ when it comes to auto parts companies, but I’ve compared members of this sector numerous times and O’Reilly never comes out on top. Altria Group (NYSE: MO) is a reasonable choice, as tobacco is an addictive product with a long-term history of generating outstanding cash flow, surviving economic busts as well as class-action lawsuits.
I certainly agree with the selection of Starbucks (NASDAQ: SBUX), for obvious reasons, as well as McDonald’s (NYSE: MCD) and Intel (NASDAQ: INTC). I also like the choice of the largest dollar store chain Dollar Tree (NASDAQ: DLTR), which always came out on top of my comparison games.
So does this index have merit for investors? It’s really a shoulder shrug as far as I’m concerned. Like any smart-beta, mutual or closed-end fund, the creators of the index set up criteria and pulled names that fit it.
A Word to the Wise
Well, that’s what you – as the ordinary investor – should be doing on your own. You want to build a diversified long-term portfolio, with stocks and companies that you are an expert in. You are making your own smart beta fund. Why rely on a manager to do it for you?
True, the whole idea is to beat certain benchmarks. Perhaps back-testing will reveal this is a good choice for that. There are also plenty of other choices out there that have a definitive track record of beating the market. Why throw money into a fund that hasn’t proven itself?
I wouldn’t invest in this index or its products. There are many other proven choices out there, and your own track record and experience is the best of all.
Worry-Free Riches
They’re owned by some of the wealthiest people on the planet. They share a few key similarities that distinguish them from 99% of equities. Even as the S&P keeps breaking record highs, they’re still crushing it. In fact, over the last ten years they’ve outpaced it by a colossal 390%.