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

New smart beta indexes and partnerships with exchanges a recipe for success

Sam Tsui, S&P Dow Jones Indices

Structured Products Asia Awards 2016

The 12 months to June have been a rotten time to be a shareholder in Asia-Pacific. The Shanghai Stock Exchange Composite Index has remained stagnant in 2016 after its crash in mid-2015; the Nikkei 225 has shed a quarter of its value in the same timeframe; and Australia's ASX 100, after much volatility, is down 8%.

This has not curbed S&P Dow Jones Indices' (SPDJI) enthusiasm for launching another batch of indexes in the region. It has developed nine new smart beta equity indexes, most of which have been licensed to exchange-traded fund (ETF) issuers. Five of these indexes are high-dividend, two are low-volatility and two are linked to high-quality companies.

SPDJI also partnered with the Japan Exchange Group (JPX) to launch a suite of indexes, including the S&P/JPX Vix index, which measures the implied volatility of Japanese government bonds (JGBs) using options on JGB futures listed on the Osaka Stock Exchange. This was the first public fixed-income volatility index available in Japan.

"Alternatives to traditional market-cap weighting are becoming increasingly important... SPDJI is responding to this," says Sam Tsui, SPDJI's Hong Kong-based director of market development for Asia-Pacific. He cites recently launched high-dividend ETFs, low-volatility products and value ETFs as examples of such non-traditional products.

In September 2015, the firm launched the S&P China 500 index, intended to be a better yardstick of the Chinese economy than rival products, which Tsui claims can be overweight in banks and insurers and may have no exposure to foreign-listed technology firms. The index covers the biggest Chinese stocks, including mainland A-shares and offshore listings such as Alibaba, Tencent, China Mobile and Baidu, and allocates the same weights to stock sectors as in the wider economy.

Local partnerships

A key plank of SPDJI's regional strategy is its close partnerships with local stock exchanges, says Tsui - something he argues rivals overlook. "In the Asia-Pacific region, we've been working very closely with local exchange partners, which have helped us extend our footprint in the region," he says.

Existing relationships include the Australian Stock Exchange and the Hong Kong Stock Exchange. Working with the JPX yielded a number of alternative equity indexes over the year, including the S&P/JPX Dividend Aristocrats Index and the S&P/JPX Capex and Human Capital Index. The former tracks companies with the highest dividend growth, and the latter tracks those with the fastest-growing expenditure in capital and training.

The company also formed a venture with New Zealand Exchange (NZX) and signed a partnership agreement with the Korea Exchange in 2015. It is also in discussions with the Taiwan Stock Exchange, Tsui says.

The impetus behind these partnerships is not only distribution, but data: "When we build the local indexes, we need to have those companies' information, pricing, and the like. The exchange will have all the data," he says.

What we've found is that investors are looking to have some downside protection when investing in the market
Sam Tsui, S&P Dow Jones Indices

SPDJI also benefited from a boom in ETFs in Asia-Pacific, particularly leveraged products centred on Japan. Total Japanese ETF assets have soared from $89 billion in 2014 to $144 billion in June 2016 as the number of ETFs has grown from 121 to 150, according to research firm ETFGI.

ETF assets have stagnated elsewhere. Outside Japan, total ETF assets in the region rose to $120 billion in June 2016 from $117 billion in 2014. The number of ETFs rose from 570 to 756 over the same period, according to ETFGI.

In Hong Kong, Tsui sees "more retail investors gradually picking up on the benefits of ETFs", where once the market was institutional only. Most South Korean ETF investors are retail, and appetite is growing in Taiwan, he says.

Nevertheless, SPDJI helped issuers launch 24 ETFs over a 12-month period. It worked with Yuanta Asset Management last year to launch the S&P GSCI Crude Oil Enhanced Return Index, Taiwan's first oil futures ETF, as well as the asset manager's first set of S&P 500 ETFs.

It also partnered with Smartshares, part of the NZX group, to expand its New Zealand-listed ETFs, including the newly launched S&P/NZX Real Estate Select Index and S&P/NZX 50 High Dividend Index.

Smart beta products are also being bought increasingly by Japanese investors, spurred by the low yields of traditional securities, as well as uptake by Japan's Government Pension Investment Fund (GPIF), says Tsui. The pension fund began a drastic trimming of its traditional active investments in 2014. Within one year, investments in the S&P Global Intrinsic Value Index ETF reached ‎¥‎1 trillion ($10 billion).

One trouble is that smart beta funds have a lower profile in the region, where investors have a patchy understanding of their benefits. SPDJI has tried to remedy this though conferences and seminars to educate investors and drum up trade for ETFs, particularly smart beta versions.

"What we've found is that investors are looking to have some downside protection when investing in the market. They ask ... 'do you have other solutions that maintain a lower volatility when you're buying into a certain market?'," Tsui says.

Smart beta funds - notably low-volatility and minimum variance funds, which seek to reduce drawdowns - have been investors' preferred solution. High-dividend smart beta products are also proving popular as long-term investors demand income protection rather than hunt for niche opportunities, he adds.

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