For an index provider such as S&P Dow Jones Indices (S&P DJI), the rise in passive investment has been great news for business. Asia leads the world in allocations to passive investments, according to Moody’s, which as of the end of 2016, found 44% of assets managed passively in the region, compared with 42% in the United States and 25% in Europe.
“Overall, in Asia, the market has been growing quite significantly from the passive investment side, whether exchange-traded funds [ETFs], exchange-traded notes or other types of index-linked products,” says Sam Tsui, Hong Kong-based senior director for market development in the Asia-Pacific at S&P DJI. “That’s both in terms of assets under management and in terms of the diversification of the products used.”
In response, S&P DJI launched more than 300 Asia-Pacific and emerging markets indexes between July 2016 and June 2017, winning plaudits from an executive at one buy-side firm, who praised the “breadth and depth” of its product offering and the innovation it displayed, especially in its thematic offerings around environmental, social and governance (ESG) investing.
“Clients in the region are becoming more sophisticated, and also more cost-conscious,” Tsui says.
That sophistication is evident in the growing attention they are paying to the influence of ESG factors on financial performance, a trend which S&P DJI is responding to. Last October, the company acquired carbon and environmental data and risk analysis firm Trucost to expand its capabilities in this area.
“The traditional assumption was that investing in ESG involved giving up some financial performance,” says Tsui. “That’s not the case – on the contrary, sustainable investments often exhibit favourable risk/return characteristics compared with their traditional peers, based on our research. New forms of sustainable and responsible investment – including impact investment, green bonds and social impact bonds – have seen strong growth.”
The results are somewhat intuitive: companies that have high levels of corporate governance, or that use energy or other natural resources efficiently, are likely to be attentively run and will thus tend to outperform the market. There are also longer-term risks and opportunities, such as around climate change, which could profoundly impact company performance in the future.
To date, Asian investors have lagged behind those in Europe and the US regarding ESG investing, but that is starting to change, says Tsui. “We’re seeing institutional interest and enquiries from the private wealth management sector, where ESG issues are a priority for millennials, the next generation of wealthy individuals.”
Within the region, Japan is a leading market for ESG products, with large pension funds, in particular, increasing their focus on the theme. S&P DJI teamed up with the Japan Exchange Group to launch the JPX/S&P Capex & Human Capital Index, which consists of firms that making above-average capital expenditures and dedicating resources towards training their staff. Blackrock, Asset Management One DIAM and Nikko Asset Management have all listed ETFs on the index, which have attracted nearly $700 million of assets.
Globally, S&P DJI is using ESG as a smart beta factor, such as with the S&P ESG Index series, which the company says is the first index family that treats ESG performance as a potential source of beta. “In the same way that a smart beta index might weight towards value, volatility, momentum or dividends, for example, we can use a company’s ESG score as standalone performance factor,” says Tsui.
S&P DJI has also registered success licensing more conventional smart beta products with institutions in the region. For example, Japan’s giant Government Pension Investment Fund has allocated some ¥1.8 trillion ($10.6 billion) to the S&P Global Intrinsic Value Index, a global equity index tilted towards value stocks exhibiting low levels of volatility.
The company has launched a number of other smart beta indexes in partnerships with the Japan Exchange Group, including the S&P/JPX Dividend Aristocrats Index, which is weighted towards companies that are paying out rising dividends, and the S&P/JPX Risk Control Index family. These latter indexes are dynamically adjusted each day to target a specified level of volatility. Two exchange-traded products, with almost $100 million in assets, have been listed tracking the Dividend Aristocrats Index, while two ETFs, with just $6 million in assets, have been listed against the Risk Control indexes.
Other highlights in the region include the S&P New China Sectors Index, which was launched to provide investors with exposure to the country’s growing consumer-led economy. The index has spawned ETFs from CSOP Asset Management and structured products from BNP Paribas.
“In the expansion of its index family, S&P DJI is demonstrating innovation and adaptation to local market needs, as it has shown with its S&P New China Sectors Index,” says one buy-side executive. “It’s very timely.”
Part of the reason for the index provider’s success in the region, says Tsui, is the close relationship it has with investors and issuers in terms of product development. “When I joined the company in 2011, clients tended to come to us to license off-the-shelf products. Now, we work with clients to develop products to meet specific investment objectives.”
S&P DJI is also investing heavily in investor education in the region, spending some 20% of its global education and thought leadership budget in the Asia-Pacific. “We have a responsibility to educate investors so they understand how passive investment vehicles work and how they can best utilise them,” says Tsui