Index Innovation of the year

Standard & Poor's

In addition to taking the Vix methodology to Hong Kong in partnership with Hang Seng Bank, Standard & Poor's (S&P) has overcome a stagnant new issuance market in Asia in the past year by focusing on three themes: providing investors with equity exposure to the region while controlling the level of risk; alternative diversification strategies with lower correlation to Asian equities; and enhanced accessibility of tradable index instruments in local markets.

"It's all about how you control risk," says an S&P  spokesperson in Sydney. "Given the continuing heightened levels of volatility, most investors were looking for ways to reduce risk and uncertainty in their portfolios."

The index provider has consequently been churning out thematic risk control indexes that "take advantage of the generally observed inverse relationship between volatility and asset returns," adds the spokesperson. Among the new risk control indexes to gain plaudits in Asia are the S&P South East Asia series, the S&P/ASX 200 Daily 12%, the S&P Asia 50 series, the S&P Asia Infrastructure Daily series, the S&P Emerging Markets and the S&P/Topix.

"The reputation that S&P has built in the Asian markets over the past couple of years is second to none," says one Hong Kong-based structurer. "That is why we don't really go beyond S&P. From a commercial standpoint they are the most innovative, and our relationship with them has been strong."

In June 2011, S&P launched a second series of its risk control indexes, this time using a bond component while targeting a specific level of volatility. The RC2 versions have already attracted interest from a number of investment banks, including UBS and JP Morgan.

Offering an innovative way for investors to manage exposure to Australia while potentially limiting their risk, S&P launched the S&P/ASX 200 Daily Risk Control 12% index, which was licensed to UBS for the creation of structured products.

"Standard & Poor's has support capabilities that are always useful," says a Sydney-based structurer. "We are reliant on S&P's data for our modelling and we feel it is able to turn things around quicker than its competitors."

The index provider has also developed the S&P Bric 40 RC2 index, which includes 40 leading companies from Brazil, Russia, India and China, as well as the S&P Asia 50 Risk Control 2 index, which includes 50 companies from Hong Kong, Singapore, South Korea and Taiwan. It has also has launched the S&P Civets 60, a tradable index based on second-generation emerging markets characterised by dynamic, rapidly developing economies and young, growing populations. Index constituents come from Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa.

Responding to the trend for portfolio diversification that is notable among investors, product issuers and financial planners, the S&P spokesperson highlights the launch of the World Commodity Index and International Corporate Bond index to meet the demand.

Meanwhile, investor appetite in Korea led to the launch there of exchange-traded funds (ETFs) based on S&P's GSCI commodity indexes, specifically Crude Oil Enhanced, Gold, North America Copper, Soybean, Precious Metals and Industrial Metals.

The index provider has also succeeded in improving access to tradable index instruments in local markets with the creation of two index series, one based on Japan corporates and the other on Korea corporate clusters, which provide liquid exposure to the component companies of corporate groups such as Mitsubishi and Samsung. The Japan Corporate Group Index-Mitsubishi Group Cluster was listed in 2010, with Mitsubishi UFJ Asset Management basing an ETF on it. By the end of that year, the ETF had become the largest domestic equity ETF in Japan (excluding those based on the Topix and Nikkei 225), with assets under management (AUM) of $1.19 billion as of September 2010. The ETF subsequently experienced huge redemptions from Japanese institutional investors, however, and AUM had fallen to $325 million by March 2011.

The Korea Corporate Cluster index series consists of Samsung Group companies and was licensed to Shinhan Bank in Korea to create structured products. Given the success of this structured product in Korea, S&P launched the Korea Corporate Group Index Series 2 Cluster, which was also licensed to Shinhan Bank for structured products.

"S&P has been extremely innovative in meeting investors' diversified goals," says one asset manager in Korea. "They are reputable, prompt and innovative, and those are the three factors that set them aside from competitors."

The launch of the S&P/StandChart Greater China, S&P/ASX Dividend Opportunities and S&P Pan Asia Dividend Opportunities indexes also illustrates how the firm has actively pursued several index concepts relating to dividend investing in greater China and regional Asia indexation.