The S&P 500 is one of the most widely used benchmark indexes for creating structured products. However, index provider Standard & Poor's has not won this award for its flagship offering. Rather, Structured Products is recognising Standard and Poor's for its custom index range.
A custom index is basically a 'build your own' index, says John Davies, London-based senior director Index Services, Europe at S&P. Investment banks approach index providers with an investment strategy or underlying on which the index provider then builds an investable index for the creation of structured products. And S&P is undoubtedly at the forefront of this emerging trend in the European market.
So far this year, S&P has created more than 80 custom indexes for investment banks in Europe, all drawn from its index universe, which covers 10,000 companies worldwide. S&P has partnered with investment banks ABN Amro, Credit Suisse, UBS and Bear Stearns in developing new indexes to act as the underlyings for structured products distributed in Europe.
"The number of customised equity strategies and structured products being offered to the European market continues to grow at a rapid pace," says Tim Eisenhauer, New York-based head of S&P's Custom Index Group. "As a result, structured product desks are increasingly looking to S&P for the analytical expertise, independence and experience needed to construct and calculate indexes based upon these customised strategies."
The custom indexes have created several new underlyings and investment strategies for structured products. Working with ABN Amro, S&P has created no less than 40 of them, including innovative underlyings such as water, metals and mining, clean renewable energy, super yield and alpha strategies.
Paul Thind, executive director, new product development at ABN Amro in London, says the relationship with S&P has been "tremendously successful". S&P's custom indexes enable ABN to replicate institutional investment strategies, allowing structured products to be made available and easy to understand for the retail investor, he adds.
For Credit Suisse, S&P has assisted with the Holt Index series. These indexes offer retail customers access to the Holt underlying, which was previously the preserve of the bank's private bank clients. Index participants are chosen via quant analysis of valuation and operational performances using the Holt Model. "The flexible approach of the S&P custom indexes has been instrumental in helping us launch these new indexes," says Jessica Houtepen, Credit Suisse's London-based managing director responsible for equity derivatives structuring. Credit Suisse looked at a number of potential partners but chose S&P for its flexibility, retail brand appeal and efficiency, she says.
In conjunction with UBS, meanwhile, S&P has created a new infrastructure index series. The UBS Global Index and Utilities Index provides price and accumulation data for listed infrastructure and utilities companies around the world. The index is now widely regarded as the most liquid and investable index in the infrastructure and utilities sector.
S&P has not neglected its core business of benchmark indexes, however. Far from it. S&P has released several new innovative benchmark indexes. In July, for example, it joined with Citigroup to release the Global Stars Index. The index consists of 25 stocks from across Europe, the US and Asia, selected according to a methodology established by S&P to pick stocks with the highest performance potential on a relative and an absolute basis. The 25 stocks are selected from a universe of 1,850 global stocks by using rules-based qualitative analysis. S&P was also first to market with an initial public offerings (IPO) index released in February this year, tracking the performance of IPO stocks.
WHY STANDARD & POOR'S WON
Standard & Poor's constantly develops its exhaustive index range to accommodate the needs of structured products issuers. Its custom index range has added a new dimension to the European structured products market, while its brand appeal, flexibility and index universe is unrivalled in Europe.