Stock Market Returns of ‘AAA’-Rated Companies Lagging Behind S&P 500 Benchmark
Standard & Poor’s has updated its 2008 analysis of the correlation between credit ratings and price performance for S&P stocks, and finds that investment grade companies as a group continue to outperform speculative grade firms. But interestingly, the highest-rated companies underperformed the benchmark as a group in the last few years and have lagged ‘BBB’-rated firms.
The update takes into account the effects of the equity market’s crash and its subsequent rebound.
Key findings:
- Stocks of investment-grade rated companies (particularly ‘A+’ to ‘A-’ rated companies) in the S&P 500 outperformed the overall index.
- Stocks of speculative-grade rated companies in the S&P 500 underperformed the overall index.
- Stock performance of companies not rated by Standard & Poor’s Ratings Services fell in the middle of investment- and speculative-grade rated companies, underperforming the index.
This suggests that the creation of low-cost mutual funds or exchange-traded funds that track the performance of only the investment-grade companies or long/short versions that also short the speculative-grade companies would be attractive investments and thus worthwhile as new index-related products.
When looking at portfolios based on individual ratings, the investment-grade portfolios outperformed, with the exception of the ‘AAA’ to ‘AA-’ portfolio, which has fallen behind ‘BBB’-rated companies since 2007.
For details, see Market Intellect: How Equity Performance Tracks The Credit Quality Of S&P 500 Companies (Premium)
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