In our last article, we explored the differing performance of MSCI High Dividend Yield Indices by region for the period December 2000 to December 2012. We found that high dividend equities outperformed the broad market index in each of Canada, the U.S. and EAFE (Europe, Asia and the Far East), however the outperformance varied by region.
In Canada, the outperformance was the most significant over the entire period but with fluctuating performance over bull and bear markets. Specifically, during the credit crisis, Canada high-yield equities underperformed the S&P / TSX index by 13% on an annualized basis. On the other hand, it outperformed the benchmark in the bear market of December 2000 to September 2002 by an annualized 16%, and during the bull markets of 2002 to 2007 and 2009 to 2012 by 9% and 16%, respectively.
EAFE high-dividend equities also outperformed the MSCI EAFE Index in every period by an annualized 8% to 9% with the exception of the credit crisis when high-dividend underperformed by approximately 9% per annum.
Excess Return of High Dividend Stocks versus Broad Index, by Region
Source: MSCI
If we look at the composition of the MSCI High-Yield Equities by region, we begin to understand why the U.S. did not perform as well as Canada or EAFE during the post-2002 period but outperformed during the credit crisis:
High Dividend Yield Sector Composition as at December 31, 2012 by Region (click image to enlarge)
Source: MSCI
The allocation to financials presented difficulties for both Canada and EAFE high-dividend index performance through the credit crisis but were the source of significant tail-winds preceding and following the October 2007 to March 2009 period.
We can attempt to approximate the contribution of the financial weights for both the credit crisis and its aftermath by normalizing to the U.S. high dividend financial sector exposure of 5% and using the regional financial sector performance versus the benchmark as a guide.
Attribution of Annualized Returns to Financial and Non-Financial Sources
Source: MSCI, Greystone
The analysis above is based on two major assumptions:
- The weight of financials remained at the December 31, 2012 weight throughout the periods.
- The returns of the regional financial sector subindex are identical to the returns of the constituent financials in the high yield index.
By decomposing the returns of higher yielding equities in Canada and EAFE, we find that approximately half of the underperformance during the crisis, and outperformance post-crisis, can be attributed to the financial sector for Canada, while far less so for EAFE.
As you can see, there are numerous factors to take into account when examining performance. Whenever significant outperformance occurs, it is important to consider the various attributes that may have had an impact.