Index provider of the year: S&P Dow Jones Indices

Index provider capitalises on smart beta trend

Bernd Henseler, S&P Dow Jones Indices

Structured Products Americas Awards 2016

The wave of popularity for smart beta indexes shows no sign of abating, particularly when a low-volatility equity index can help investors generate returns of more than 8%. In the past 12 months, the low-volatility S&P 500 index dwarfed the S&P 500, yielding 8.38% compared with 0.99%, and year to date the smart beta index is ahead already by 3.84%.

"The main themes in 2015 were, and continue to be, smart beta and factor indexes," says Bernd Henseler, head of structured products and channel management for S&P Dow Jones Indices in Toronto – winner of the Structured Products award for index provider of the year.

In contrast to a perceived overcrowding of the low-volatility index market, S&P Dow Jones Indices has proven itself adept at creating healthy returns in smart beta indexes.

Henseler puts this down to the changing cycles of investment – while a particular factor can become overcrowded at certain times, people often move from factor to factor, so it will not always be that way. This means risk premiums are not necessarily diminished, it just depends on the business cycle.

"As more money comes in, investors may follow a particular factor based on its popularity with the market. There may be a herd mentality with factor-based indexes, however the performance of individual factors moves in cycles. As a result investors jumping onto the latest 'factor bandwagon' does not diminish risk premiums," says Henseler.

While the low-volatility S&P 500 index was a standout success in 2015, other smart beta products also emerged in 2015 at S&P. One success saw the creation of a long-term value-creation index, which comprises companies that are long-term focused and have sound financial history. The index raked in $2 billion worth of investment in 2015 from the Canadian Pension Plan Investment Board – which helped develop the index - and Singapore-based investment firm GIC, among others.

We've expanded to LatAm because, as an economic region, we see promise from the offshore market and an increased adoption of passive and ETF investment there
Bernd Henseler, S&P Dow Jones Indices

It also created what it claims is the first index tracking the debt of S&P 500 companies – the S&P 500 bond index. An exchange-traded fund (ETF) provider is set to launch a fund based on the index. This index adds to the firm's suite of fixed-income indexes, which have $30 billion worth of ETF assets linked to them.

One client – Elkhorn Securities – was founded in 2013 by former employees of ETF investment boutique Powershares. They had an existing relationship with S&P that expanded significantly in 2015 to take advantage of the index provider's depth of coverage.

"They touch on lots of different areas, particularly when it comes to custom indexes, which they can create and calculate for us in any asset class – not every index provider can do that," says Graham Day, head of product development at Elkhorn Investments in Chicago.

The index provider is also looking to branch southwards – S&P's Henseler confirms the company will become benchmark administrator and calculation agent for the co-branded local benchmarks on the main exchanges in Brazil, Chile and Mexico.

"We've expanded to LatAm because, as an economic region, we see promise from the offshore market and an increased adoption of passive and ETF investment there. The US and Europe and already huge markets, while Asia has become big from a low base, and now we see LatAm as the next big boom," he says.

To lead the charge, the company hired Manuel Gonzalez from PiP LatAm as a director, based in Mexico, covering northern South America and Latin America. It also hired Paulo Eduardo Sampaio from Cetip to be a senior director, covering southern Latin America, based in Brazil.

"A lot of investment is done offshore still, but we're seeing in Mexico long-dated structured products that are equity-linked up to three years, and they are expanding ETF offerings too," says Henseler.

"In Brazil, legislation passed on equity-related notes and we've seen an uptick in investment. Only in the hundreds of millions of dollars, which is a small start in comparison to other countries, but it took five years to pass the legislation. Banks are interested and we see rising demand for local indexes and global."

While S&P has an extremely strong competitive position in the market, the firm's clients praise its efforts to be mindful of the more cost-conscious times that banks live in today.

"S&P has been extremely understanding and respectful of what the bank can do from a derivatives risk management perspective and the cost for the bank," says one structurer at a European bank in New York.

"They've been accommodative under challenging circumstances for us," according to one business manager at a global bank in New York.

"They could have bullied us, considering their market share, but they have been willing to work through the constraints on our side, and we managed to renegotiate an existing agreement to the benefit of both parties."