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Blog Posts — July 7, 2023

Q&A with STOXX’s Loeb: Improved datasets are helping design new investment themes

STOXX is the main provider of thematic indices to the retail structured products market worldwide and is also the supplier of popular benchmark and sector underlyings.

The company is also a top three provider of decrement underlyings, according to SRP. Between 2019 and 2022, STOXX decrement underlyings were used across 19 national markets with sales exceeding USD 13 billion. In the last four years, STOXX’s thematic indices have been featured across 203 products, in total worth more than USD 3.3 billion. That gave the company a 36% market share in that segment.   

Armelle Loeb, Head of Index Sales for EMEA at STOXX, recently sat down with SRP for an interview in their Index Report 2023. The dialogue centered around indexing trends in the structured-products industry, and more. Below we republish the interview. 

What thematics are resonating with investors at the moment?

“Investors want to target the same themes and strategies that are capturing the imagination elsewhere, but to do so with the benefits of a structured note. That includes growth-oriented technological themes, as well as sustainability objectives. Both areas keep delivering exceptional innovation in terms of ideas and methodologies. Besides that, decrements also continue to see significant uptake as do volatility target indices. 

One example of those trends is the EURO iSTOXX® 50 Future Healthcare Tilted NR Decrement 5% index, which combines a strong technology-related theme with a decrement. In fact, the index was the most popular underlying for structured products in 2022 in terms of assets under management. The index tracks the benchmark EURO STOXX 50® plus the 10 largest securities from the STOXX® Global Breakthrough Healthcare index, while assuming a constant, annual 5% performance deduction.

Two other thematic indices with strong inflows last year were the EURO iSTOXX® 50 Artificial Intelligence Tilted NR Decrement 5% and the EURO iSTOXX® 50 Sharing Economy Tilted NR Decrement 5%.

This year, if anything, has seen even stronger interest in these themes, particularly as the market has embraced the economic potential of AI. I expect new technological themes, such as the Metaverse and future mobility, to gain traction.”

What role do ESG considerations play as investors embrace these new thematic strategies?

“ESG is at the very center of every conversation with clients. The Sustainable Finance Disclosure Regulation (SFDR) has been a major driving force, and I don’t expect any slowdown there. Quite the opposite, actually. In the post-pandemic world, all clients want an ESG, climate or – most lately – biodiversity angle for their strategies. Either as a pure play or main objective, or in the form of exclusions attached to a strategy, for example a thematic one.

Biodiversity is emerging like a new paradigm, with new metrics being developed that can help investors measure their impact on ecosystems. We recently launched the ISS STOXX® Biodiversity indices, which exclude companies involved in activities causing harm to biodiversity, select securities that have a positive impact on ecosystems and those enabling exposure to relevant UN Sustainable Development Goals (SDGs), and, finally reduce the portfolio’s carbon emissions. These steps can be used as a core strategy, but we are also discussing with some clients the integration of some of those filters as biodiversity exclusions within a broader strategy.

I should not forget to mention climate strategies, where we see a lot of interesting developments every month. That includes Paris-aligned benchmarks, clean energy and even indices tracking energy transition metals. In most of those cases, investors can now make use of measurements to tackle their goals that weren’t available only a few years ago. It is indeed very interesting times for everyone.”

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Has the shift towards customisation opened the market to new players seeking to deliver tailored underlyings?

“What we have seen is the arrival of specialised data companies that provide new and smart datasets. As index provider, we welcome that. A lot of the new investment themes are difficult to build using traditional revenue-based data or sector classifications. For many of these emerging themes we need something else – for example, patents. With all these new datasets, you can detect trends more quickly with AI tools than you would be able to see via revenues. You can capture forward-looking growth.

At STOXX, we have a flexible, open-architecture approach that allows us to work with these data providers and be able to offer the right solutions in a more efficient and reactive way. They are bringing extreme innovation in data, so by partnering with them they can enhance the value of our methodologies.”

As the number of custom strategies increases, so does the complexity of some of the underlyings. Are there any suitability concerns around some of the thematic indices we see in the market?

“Complexity is a broad word. Some strategies are, by definition, complex, like a Paris-aligned benchmark that is required to comply with regulation. An optimization is also complex. We need to be clear on the definition of complex – and it is not an easy one. Innovation is at the core of the STOXX indexing business, and we specifically aim to bring ever-more sophisticated strategies to the market where we can combine our expertise with smart data or with tools such as Axioma’s portfolio construction capabilities. We have over two dozen thematic indices, for example, with customized versions derived from many of them. The selection process for many of them is no longer based on the more traditional metrics of industry or revenue, but on novel data such as patents, satellite images or companies’ annual reports.

Clients are now much more involved in the design of the indices than they were 20 years ago, and often it is them who lead in the adoption of innovative selection mechanisms. The level of sophistication that they have is very high.

That said, sophistication and customisation are welcome as long as they don’t undermine the transparency and rules-based objectivity of the strategy. Complexity should not and does not equate to higher risk. These days you can optimise your strategies and calibrate your desired risk level to the detail. Better technology empowers investors, and we should make the most of that. We spend as much time ensuring our strategies are clear, accurate and replicable as we do look for the best methodology tools. Not all indices will be suitable for all clients, and it is the duty of intermediaries to make sure that investors are well aware of where they put their money. That basic premise of retail investing still stands: investors must understand what’s under the hood of the products they buy.”

Where do you see the structured-products market in the next couple of years?

“I definitely see more innovation coming ahead, whether in themes or in methodologies. We have been through some very challenging times with the pandemic, the global slowdown, rising interest rates and the war in Ukraine. Throughout this time, all these challenges have provided fertile ground for issuers to come up with imaginative strategies – to the benefit of end clients. It is true that difficult macro environments can benefit the industry, but I don’t see why, at the same time, that growth should not continue in more market-friendly times!”

Qontigo is a leading global provider of innovative index, analytics and risk solutions that optimize investment impact. As the shift toward sustainable investing accelerates, Qontigo enables its clients—financial-products issuers, asset owners and asset managers—to deliver sophisticated and targeted solutions at scale to meet the increasingly demanding and unique sustainability goals of investors worldwide.

Qontigo’s solutions are enhanced by both our collaborative, customer-centric culture, which allows us to create tailored solutions for our clients, and our open architecture and modern technology that efficiently integrate with our clients’ processes.

Part of the Deutsche Börse Group, Qontigo was created in 2019 through the combination of Axioma, DAX and STOXX. Headquartered in Eschborn, Germany, Qontigo’s global presence includes offices in New York, London, Zug and Hong Kong.