The continued growth in exchange-traded funds (ETFs) and other passive-type investments was a defining feature of the year that ended.
Pulse online caught up with Rick Chau (RC) and Chris Costello (CC), respective heads of Index Sales for the Asia/Pacific and North America regions at Qontigo, to discuss how indexing and demand for index-based strategies are evolving in their markets.
Rick, Chris, what are some of the key index-based investing trends at the moment in your respective regions?
RC: “From an Asia perspective, we are seeing a move in the region’s developed markets towards more sophisticated indices due to the need to generate better returns. This includes specialized thematic indices as well as growing interest in ESG. Thematic indices are a key story as they resonate very well not only with younger retail investors but also with the wider retail market. They are seen as representing the future of investing, where anyone can get simple and direct exposure to a specific, targeted topic. We have also developed dedicated factor-based strategies for diverse markets such as Japan and Taiwan. More broadly, there is still a need for global benchmarks, particularly for the smaller emerging markets.”
CC: “If you look at the US market, a lot of the top indices in terms of attracting new assets belong to ESG, fixed income, thematic and multi-asset strategies. Investors continue to turn to passive vehicles because of their well-known advantages — low cost being a major one — but there is now an increasing focus on more complex portfolio-construction capabilities in the index space that is attracting sophisticated investors. With the combination of STOXX and Axioma into Qontigo, and the launch of our flagship Factor Index suite, we are actively capitalizing on this trend.”
Rick, are Asian-based portfolios becoming more internationalized in terms of regional allocation as managed assets grow?
RC: “The percentage allocated to ex-domestic is increasing due to the growing size of institutional capital and rising awareness within the retail market of the opportunities that can be tapped overseas. Of interest is the changing sentiment from institutional investors to allocate more assets back into Europe.”
And Chris, what is the situation in the US?
CC: “I agree that internationalization has always been important for diversification purposes. But the bulk of portfolios in the US market is still, of course, US-biased. What I believe we may see in coming quarters is a tactical reconsideration towards Europe after years of strong outperformance of US stocks and outflows out of Europe; and some of those outflows reverting and asset managers investing back in Europe. In fact, many clients are coming to us seeking plain European benchmark products that will provide diversification.”
Which investor segment is shifting capital to passive solutions?
RC: “Institutional investors have always had passive investments, but this share has been increasing over the years due to better overall net-of-fees returns. The wealth-management space — private banks — are now also offering passive products to their high-net-worth clients because of rising awareness of the products and higher demand.”
CC: “In the US, we are seeing growth from both the retail and institutional segments. In the former, there is a definite shift to passive strongly driven by younger investors. On the institutional side, there has always been an emphasis on passive investing and the growth trend continues. Institutions are not getting the alpha they expect from actively managed portfolios, so they are turning instead to beta-generating passive products at very low fees, with which at least they get the market’s return.”
Chris, the US is the pioneer and leader in passive investing – what are the new drivers and objectives?
CC: “ESG is an area where the US has lagged behind Europe, and I think it is where we’ll see growth pick up over the next five years. Our clients look to Europe for innovation and guidance in the ESG field and we’re beginning to see ESG gaining traction in the US. We’ve seen a lot of interest in the STOXX® USA 500 ESG-X Index, which is a fairly straightforward benchmark that excludes key sectors in which investors do not want to be involved anymore in the context of a sustainable portfolio. This includes tobacco, controversial weapons and thermal coal.1 As of February, the index underlies futures on the Eurex exchange, enabling investors to efficiently manage liquidity and lower trading costs in an ESG portfolio.
But as a holistic approach, STOXX’s ESG-X family is truly global. The indices are ESG-compliant iterations of established STOXX benchmarks that incorporate responsible exclusions. They aim to limit market and reputational risks while keeping a similar risk-return profile to the respective benchmark. Together with the rest of the suite of ESG, Low Carbon and Climate indices, and customized ESG solutions, we are creating key tools in the transition to responsible investing.
Lastly, for us at STOXX, it’s important to have capabilities that are differentiated and customizable, which is why we recently launched STOXX iSTUDIOTM. iSTUDIO is a self-indexing application that enables users to create and customize their own indices, integrating a wide option of datasets including ESG scores, RBICS and ICB sector classifications, and other capabilities.”
And, Rick, how is Asia catching up in the passive growth story?
RC: “In Asia, technology and education have provided the impetus for change. Any investor can now get access to more differentiated global products via ETFs, so the increasing trend is to have at least a portion of the portfolio in ETFs and the rest in direct investments. As the population ages, the requirement to generate income increases so this will fuel more demand for stable investments that provide returns at a low cost – which is largely passive products.”
STOXX is best known for European benchmarks such as the EURO STOXX 50® Index and the STOXX® Europe 600 Index. How is demand for these products evolving in your regions?
RC: “Europe is slowly becoming more interesting for the retail market. It comes down to education and access. The rise of ETFs has come a long way in helping bring Europe to the retail space, and many of those clients have chosen our indices.
Indices such as the EURO STOXX 50 and the STOXX Europe 600 are in demand because of their reputation and liquidity, but also because they allow Asian investors to diversify not only on a regional basis but also on the sector allocation relative to domestic portfolios.”
CC: “Demand for STOXX’s benchmarks remains strong. Investors know that our benchmarks are in favor in Europe, they offer liquidity and broad exposure, and underlie many derivatives and ETFs. People know STOXX because of the EURO STOXX 50 and STOXX Europe 600, and we are continuously building on that relationship and experience to promote the rest of our index suite, which is growing day after day. We also offer standard total-market, all-size and blue-chip US and global indices as well as focused strategies, such as ESG, thematic and factor. We are constantly working to cultivate brand awareness and trust, and we believe we have the right tools for it.”
What would you say is in the mind of Asian and North American investors when it comes to investing in Europe and accessing the best ways to gain that exposure?
RC: “Institutional investors are more about asset allocation so they will always have exposure to Europe. The wealth-management space previously saw Europe only as an opportunity to make quick returns. However, this is changing with increasing access to specialized products such as factor-based and thematic. Clients increasingly want more exposure to these strategies – no matter where they are in the world. More tactically, given the trade friction between the US and China, although for now seemingly toned down, we are seeing increasing client interest and demand for products with European underlyings.”
CC: “I agree. We’ve always seen Europe as an important part of institutional investors’ allocations. Whereas retail investors typically have an allocation to non-US regions, Europe has commonly been seen as a piece and not a core investment in their portfolios. However, we anticipate that changing with more eyes on Europe. Investors are watching the region more closely than ever and are utilizing passive investments based on our European indices for such exposure.”
In general terms, how do you see indexing and passive investing evolving in your markets in the next couple of years?
RC: “We see the indexing space pushing the innovation frontier further. Providers need to be more in tune with what investors need. This requires us to be nimble and deliver simple but powerful strategies that meet and exceed their requirements, and to address the very specific needs in each individual case.
CC: “We will continue to see a sophistication in the type of offerings, with smarter strategies being developed. Many institutional investors are allocating to active-replication approaches, and increasingly there are ETFs that serve this purpose. In addition, investors are becoming more demanding in terms of what kind of smart beta and specific exposures they want. There are more opportunities to be had and this is very exciting for everyone involved. I don’t see it slowing down any time soon.”
1 STOXX offers more than 40 ESG-X Indices that are ESG-compliant versions of global, regional and emerging markets benchmarks.