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Perspectives on S&P Europe 350® Stock
and Strategy Performance in 2014
Speed Read
CONTRIBUTOR
Tim Edwards, PhD
Senior Director
Index Investment Strategy
[email protected]
Despite a fair few bumps in the road and against a darkening economic climate, the
S&P Europe 350 finished 2014 with a modest gain. Returns were led by Swiss
companies and the healthcare sector, while energy trailed. British companies
contributed the most to positive returns, as a strengthening pound offset flat-to-negative
equity performances.
Companies from Germany, Spain, Denmark, the U.K. and Holland were promoted to join
the S&P Europe 350 during 2014. Two spaces were opened up via mergers and
acquisitions among existing members, and an additional two spots were created via
Greece’s demotion to emerging market status.
Alpha was available but only in small doses; active equity strategies and indices tracked
closer to each other than usual, as single stocks registered historic lows in dispersion.
Some strategies did well: Dividend-based and low-volatility versions of the S&P Europe
350 performed admirably, as did the recently launched S&P Quality Europe 350.
______________
Introduction
The S&P Europe 350, an index of pan-European, large-cap equities, rose by 4.7% in
2014, or 7.9% on a total return basis. After a strong 2013, the performance of European
equity markets this year was only just positive; as of Dec. 15, 2014, the index was
recording a loss for the year. But a strong finish saw the index recover more than 6% in
the last few weeks of the year, to close on a positive note. Exhibits 1 and 2 show the
price and total return of the S&P Europe 350 for 2014, in the context of the past decade,
as well as the monthly and cumulative total returns for the index during the past year.
The companies composing the European equity markets, and many of the participants
who trade them, are unlikely to remember 2014 with particular fondness. Investors
faced a more challenging economic, geopolitical and fiscal environment; volatility
increased from the previous year, and with it, political and fiscal uncertainty. The
economy stuttered across the continent and civil war broke out in Ukraine, quite
probably with Russian involvement. Later in the year, the U.K. flirted politically with
leaving the European Union just as (via the Scottish referendum) it closely avoided
dissolving its own union. From a macroeconomic perspective, the specter of deflation
has begun to haunt the continent; the 10-year German bund yield began the year at
close to 2%, and it has closed the year at 0.54%—an all-time low. Inflation expectations
remain resolutely below the European Central Bank’s 2% target and, as December
draws to a close, the potential of an early election in Greece has returned talk of a
“Grexit” to the financial pages.
INDEX INVESTMENT
STRATEGY
On the fiscal front, the U.S. Federal Reserve ended its program of bond purchases—it is
quite likely that some of the resultant capital flows (and suppression of the price of risk)
were supporting the prices of European equities. Meanwhile, the European Central
January 2015
Persectives on S&P Europe 350® Stock and Strategy Performance in 2014
January 2015
Bank (ECB) dithered publicly as to whether it can (or should) begin an analogous program of quantitative easing
in Europe.
The ECB has not entirely sat on its hands, but its series of more technical easing measures (“TLTRO”s and the
purchase of certain asset-backed bonds) has so far failed to increase the ECB’s balance sheet as much as
expected; according to recent surveys, the market expects more in the near future. Any failure by the ECB to
meet these expectations may be poorly received in the equity markets. Suffice it to say, that the year ends far
less optimistically than it began.
Exhibit 1: 10-Year Index Levels and Total Returns for the S&P Europe 350
250
S&P Europe 350
Total Return
200
150
100
50
December
2014
December
2013
December
2012
December
2011
December
2010
December
2009
December
2008
December
2007
December
2006
December
2005
December
2004
0
Source: S&P Dow Jones Indices LLC. Data from Dec. 31, 2004, to Dec. 31, 2014. Charts and tables are provided for illustrative purposes.
Past performance is no guarantee of future results. Values set to 100 on Dec. 31, 2004.
Despite all this seeming doom and gloom, as Exhibit 2 demonstrates, the S&P Europe 350 gamely struggled
through each of the year’s hurdles to post yearly highs in each of May, August, September and November; the
index has also posted a gain for the year and gained in 6 months out of 12. This positive performance was
particularly reliant on the returns provided by the healthcare sector and the euro-denominated performances of
Swiss and U.K. equity markets, as the following section shows.
Exhibit 2: 2014 S&P Europe 350 Total Returns
Total Return (%)
January
February
March
April
May
June
July
August
September
October
November
December
Month
-1.7
4.9
-0.7
2.0
2.7
-0.3
-1.5
2.0
0.6
-1.9
3.3
-1.5
Cumulative
-1.7
3.1
2.4
4.5
7.4
7.0
5.4
7.6
8.2
6.1
9.6
7.9
Source: S&P Dow Jones Indices LLC. Data from Dec. 31, 2004, to Dec. 31, 2014. Charts and tables are provided for illustrative purposes.
Past performance is no guarantee of future results.
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Persectives on S&P Europe 350® Stock and Strategy Performance in 2014
January 2015
Sector and Country Contributions
Contribution analysis uses both index weights and country or sector performance to show how much of the return
of an index has been contributed by each component. Exhibit 3 shows this breakdown for the 7.9% total return
posted by the S&P Europe 350 in 2014.
0.03%
Materials
-0.50%
0.17%
Industrials
0.58%
0.35%
0.79%
Utilities
Telecommunication Services
Energy
Financials
Information Technology
France
Switzerland
U.K.
-0.5%
-1.0%
Consumer Staples
-0.11%
Norway
0.0%
0.0%
Healthcare
-0.06%
-0.06%
-0.02%
Luxembourg
Portugal
0.00%
Greece
Austria
0.11%
0.33%
Germany
Ireland
0.36%
Sweden
0.14%
0.37%
Belgium
Italy
0.45%
Netherlands
0.17%
0.45%
Spain
0.5%
Finland
0.49%
1.0%
1.0%
Denmark
0.56%
1.5%
0.93%
2.0%
Consumer Discretionary
3.0%
2.0%
1.23%
4.0%
1.61%
5.0%
2.75%
2.5%
Sector Contributions
2.21%
3.0%
2.51%
Exhibit 3: S&P Europe 350 Sector and Country Contributions
Country Contributions
Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2014. Charts and tables are provided for illustrative purposes. Past performance
is no guarantee of future results.
The more defensive healthcare and consumer staples sectors performed particularly well. Energy was indeed a
drag on the performance of the index, but only to the extent of subtracting one-half of one percent from the overall
total return for the year.
While the returns are clearly highly dependent on the contributions of only two countries, the equity markets in
both the U.K. and Switzerland actually had largely indifferent years. The reason why they contributed so
materially is in part due to the particular stocks chosen to represent those markets, but more generally because of
the relative valuation of the respective currencies: The British pound sterling appreciated by close to 7% this year
against the euro, while the Swiss franc appreciated by around 2%.
Ins and Outs
Two spaces were opened up for new entrants to join the S&P Europe 350 via mergers and acquisitions among
existing members, and an additional two spots in the index were created via Greece’s demotion to emerging
market status (and the subsequent removal of Greek equities from the index). Seven other substitutions occurred
during the year, welcoming a net total of 10 new entrants to the S&P Europe 350 during 2014.



Invensys merged with Schneider Electric in January, creating room for British construction firm Travis
Perkins. In May, Scania was acquired by Volkswagen, making room for EasyJet to join.
The January demerger of Metso brought pulp, paper and power firm Valmet into the index for a brief period;
Telekom Austria was removed to make room. However, Valmet’s valuation has fallen and by June it was
removed from the index, replaced by the newly formed Caixa Bank. A second Spanish bank—Bankia—also
joined the index in June, replacing the troubled Banco Espirito. June’s rebalance also saw Danish logistics
firm DSV replaced by Austrian steel products manufacturer Salzgitter.
The National Bank of Greece and the Greek betting company OPAP were removed from the index in
September’s rebalance, which also saw the London-listed platinum producer Lonmin removed. The German
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Persectives on S&P Europe 350® Stock and Strategy Performance in 2014

January 2015
media conglomerate ProSiebenSat, Danish jeweler Pandora and German industrial firm Schindler (of the
elevators) joined the index in their place.
Finally, at December’s rebalance, U.K. equipment rental firm Ashtead replaced fellow British outsourcing firm
Serco, and the Dutch cable and broadband company Altice replaced dental equipment manufacturer Nobel
Biocare.
Volatility, Opportunity and Factor Performances
The story of volatility in European equities was, in 2014, almost indistinguishable from the story of correlations.
Both rose and fell rapidly, and largely at the same time and to the same degree. The occasional bouts of volatility
that flashed through equity markets during the year were largely externally driven, either by geopolitics or the
actions of central banks, and equity performances became highly correlated in each instance (see Exhibit 4).
Exhibit 4: 2014 Monthly Volatility and Correlation in the S&P Europe 350
0.7
Volatility
0.6
Correlation
0.5
20%
0.4
15%
0.3
10%
0.2
December
2014
November
2014
October
2014
September
2014
August
2014
July 2014
June 2014
May 2014
0
April 2014
0%
March 2014
0.1
February
2014
5%
January
2014
Annualized Volatility
25%
Stock-Stock Average Correlation
30%
Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2014. Volatility is the standard deviation of the S&P Europe 350 daily log returns in
each calendar month, annualized by a factor of the square root of 252 trading days. Correlation is the calendar month index-weighted
average pairwise correlation between every pair of stocks in the S&P Europe 350 at the time. Charts and tables are provided for illustrative
purposes. Past performance is no guarantee of future results.
Those blessed with the ability to “time the market” would have performed admirably this year; avoiding the
plunges of October and December would have added close to 20% in returns. On the other hand, stock-selection
skills were of relatively limited importance. Dispersion, which measures the degree of performance available from
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judicious stock-selection skills, remains low and was lower this year than in 2013 for the components of the S&P
Europe 350.
1
See Edwards and Lazzara, Dispersion: Measuring Market Opportunity (2013).
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Persectives on S&P Europe 350® Stock and Strategy Performance in 2014
January 2015
Exhibit 5: Average of Monthly Dispersion in the S&P Europe 350 by Year
18%
16%
15.3%
15.0%
14%
12%
9.7%
9.1%
8.7%
8%
6.9%
6.4%
4.5%
4.6%
2006
5.0%
5.5%
2005
6%
6.0%
5.8%
5.2%
4.9%
2014
8.7%
2013
10%
4%
2%
2012
2011
2010
2009
2008
2007
2004
2003
2002
2001
2000
1999
0%
Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2014. Charts and tables are provided for illustrative purposes. Past performance
is no guarantee of future results.
In terms of active management, an environment of such low dispersion and only temporary volatility can prove
challenging. This year, we began coverage of European active managers in the European S&P Index Versus
®
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Active (SPIVA ) Scorecard. This report has been published for the U.S. markets since 2002, and it has become
the de facto scorekeeper of the ongoing active versus passive debate; it also highlights market segments and
periods where active managers have (and more commonly have not) delivered benchmark-beating returns. The
most recent European report, which was published mid year and measures performance of active funds in the
year through June 2014, provided confirmation: More than three-quarters of European equity funds failed to
match the performance of the S&P Europe 350 over a trailing one-year period.
Active mangers faced other challenges. Not only was there little opportunity for stock selection ability to shine,
the market’s fluctuations proved difficult to navigate for trend-following strategies. Each spasm of volatility proved
temporary, which meant that those chasing momentum were frequently on the wrong side of the trade.
However, not all strategies (or funds) fared poorly. The dividend-based and low-volatility versions of the S&P
Europe 350 did particularly well this year; this is notable not the least because such themes have proved
resoundingly popular and, at the beginning of the year, concerns were raised that their very popularity might
challenge returns going forward. With the benefit of hindsight, it seems that such concerns were at best
premature; defensive strategies like high yield and low volatility often outperform in a year like 2014 (with
moderate but not strong equity appreciation, and a volatile pattern of month-to-month returns). Going forward, it
suffices to say that their popularity has not yet shown any signs of diminishing.
Finally, among investment styles, and of particular commendation in a year when there were lower-than-usual
performance differentials from one portfolio of large-cap European stocks to another, the quality strategy shone
through. Exhibit 6 summarizes the performances of factor indices based on the S&P Europe 350.
2
The latest report and its predecessors are available at the SPIVA Archive. It is not possible to invest directly in an index, and index returns do
not reflect expenses an investor would pay.
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Persectives on S&P Europe 350® Stock and Strategy Performance in 2014
January 2015
Exhibit 6: 2014 S&P Europe 350 Strategy Performance
2014 Full-Year Performance (Ranked by Risk/Return )
Total Return (%)
Risk (%)
Return/Risk
15.74
7.61
2.07
15.15
8.86
1.71
S&P Europe 350 Low Volatility High Dividend Index
12.12
7.3
1.64
S&P Europe 350 Low Volatility Index
12.28
7.63
1.61
S&P Europe 350 Equal Weight Index
8.24
7.94
1.04
S&P Europe 350
7.89
7.95
0.99
S&P Europe 350 Momentum Index
7.19
9.39
0.77
S&P Quality Europe 350
S&P Europe 350 Dividend Aristocrats
®
Source: S&P Dow Jones Indices LLC. Data as of Dec. 31, 2014. Charts and tables are provided for illustrative purposes. Past performance
is no guarantee of future results. These charts and tables may contain hypothetical historical performance. Please see the Performance
Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
Note: “Risk” is defined as the standard deviation of the 12 monthly returns, multiplied by the square root of 12.
The significant outperformance of popular dividend-based and quality indices, as well as the mild outperformance
by equal-weight indices, suggests that either a reliance on momentum failed active managers this year, or that, as
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a group, their performance was even worse than might be expected.
Heading into 2015, we note that dispersion has historically been persistent (that is to say, today’s dispersion has
proved to be a reasonable estimate for tomorrow’s level). So there is some credence to supposing that
dispersion will remain low. Yet in the longer term, if there is to be a big change in the level of dispersion, given
the currently depressed level, it would seem more likely to be an increase. As we indicated in a recent
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whitepaper, such an increase may benefit momentum and growth strategies in particular. More broadly, the
European equity markets enter 2015 in a higher state of volatility, with the geopolitical landscape in a greater
state of flux. With elections in the U.K. due in May 2015, and in Greece perhaps much earlier in January, one
senses that the stakes are raised for the ECB in managing the risks of deflation and in shepherding the economic
growth engine of Europe back on track.
3
See Lazzara, "Even Worse Than You Think" (2014).
See Edwards and Lazzara, The Landscape of Risk (2014).
4
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Persectives on S&P Europe 350® Stock and Strategy Performance in 2014
January 2015
PERFORMANCE DISCLOSURES
The S&P Quality Europe 350 (the “Index”) was launched on July 8, 2014. All information presented prior to the launch date is back-tested.
Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that
was in effect when the index was officially launched. Complete index methodology details are available at www.spdji.com. It is not possible to
invest directly in an index.
The S&P Europe 350 Momentum Index (the “Index”) was launched on Nov. 18, 2014. All information presented prior to the launch date is
back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same
methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.spdji.com. It
is not possible to invest directly in an index.
The S&P Europe 350 Low Volatility High Dividend Index (the “Index”) was launched on Jan. 22, 2014. All information presented prior to the
launch date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on
the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at
www.spdji.com. It is not possible to invest directly in an index.
S&P Dow Jones Indices defines various dates to assist our clients in providing transparency on their products. The First Value Date is the first
day for which there is a calculated value (either live or back-tested) for a given index. The Base Date is the date at which the Index is set at a
fixed value for calculation purposes. The Launch Date designates the date upon which the values of an index are first considered live: index
values provided for any date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the
Launch Date as the date by which the values of an index are known to have been released to the public, for example via the company’s public
website or its datafeed to external parties. For Dow Jones-branded indicates introduced prior to May 31, 2013, the Launch Date (which prior to
May 31, 2013, was termed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index
methodology, but that may have been prior to the Index’s public release date.
Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index
may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the
entire available history of the Index. Please refer to the methodology paper for the Index, available at www.spdji.com for more details about
the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all
index calculations.
Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Backtested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can
completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed
income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set
forth, all of which can affect actual performance.
The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains
the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not
reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are
intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of
the securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000
investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on the
investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an
annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US
$5,375, and a cumulative net return of 27.2% (or US $27,200).
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Persectives on S&P Europe 350® Stock and Strategy Performance in 2014
January 2015
GENERAL DISCLAIMER
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