INNOVATIONS IN INDEXING – APPLICATION TO ASIA Asia Roadshow November/December 2011
1
Agenda 1. STOXX Ltd. – Introduction
Page 03
2. Evolution of indexing - Asia
Page 08
3. The next level – enhanced indexing
Page 21
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1. STOXX LTD INTRODUCTION
3
STOXX at a glance
Shareholder structure
Global presence
Unified sales platform
Focus on innovation and clients
History of STOXX » STOXX was founded in 1998 and the first to launch the European family of indices - STOXX® indices, including the EURO STOXX 50® Index, which marked the beginning of a unique success story » Deutsche Börse and SIX Group are the shareholders of STOXX STOXX aims Global » STOXX has over 60 employees worldwide » STOXX is headquartered in Zurich, Switzerland and has satellite offices in Frankfurt, Hong Kong, London, Madrid, New York, Paris, Singapore, Stockholm, and Tokyo STOXX is marketing agent for DAX, SMI indices and iNAV ® » Unified sales platform not only for STOXX indices but also for leading national indices » Provides real time indicative net asset value (iNAV® ) calculation service STOXX is dedicated to deliver innovation in indices » The indices are licensed to more than 400 companies among the world’s largest financial products issuers, capital owners, and asset managers » Proven track record for innovation to be continued
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STOXX – the proven innovator in the last decade and the future Innovations Innovation in indexing » First index provider using free-float market cap weighting throughout its index family » First index provider offering an optimized investability (by considering borrowing availability) for both sector & country indices » Offering access to direct dividend investments ("dividend point indices") » Leading provider of European volatility concepts
Innovative financial products » First pan-European equity, size, and sector ETFs, and futures and options » First buy-write ETFs globally, first dividend point, and volatility strategy ETFs 5
STOXX is a leading global index provider Market position A
B
ETF market Index provider
31 Dec 2010
AuM1)
C
Derivatives market
Struct. prod. market
30 Jun 2011
# ETFs
AuM1)
# ETFs
Index
Traded futures & options3)
Delta2)
# issues in 2010
AUM/# 3613
Kospi MSCI
337.8
389
366.9
453
9/16
S&P
301.1
315
325.6
355
8/13
BarCap
111.2
126.4
100
14/19
STOXX (incl. DAX and SIX)
89.7
84 283
105.3
290
17/2
Russell
80.5
70
84.5
91
5/30
FTSE
54.9
60.6
175
10/9
Dow Jones
46.7
161 138
54.5
159
17/15
Taiex
Markit
45.1
112
48.3
125
7/12
Nasdaq
Nasdaq
31.7
61
33.6
62
6/2
NYSE
16.6
41
17.3
46
4/12
DAX RTS
Number 4 globally in the ETF market
1716 2049
Nikkei
DAX
1368
S&P STOXX
# issues in Q1Q3/2011
357 335 191 65 53 225 114 270 169 82 83 96 48 66 80 42 36
2010
H1/2010
139`526
234'871
168%
44`363
52'719
119%
S&P
8`669
8'272
95%
Dow Jones
5`950
5'766
97%
Hang Seng
1`942
5'772
297%
Euronext
4`561
4'154
91%
FTSE
1`586
1'045
66%
MSCI
1`672
2'044
122%
STOXX
688 727 657
Delta Q1Q3/2011 vs. 2010
H1/2011
Number 3 out of the top 7 derivatives globally
1) bn USD; Source: BlackRock 2) figures in % 3) In million contracts Source: BlackRock, Homepagestatistics, FIA, Structured Retail Products
Largest provider of SP underlyings globally 6
STOXX operates a unique global index family with innovative focus Global index universe … available worldwide
Comprehensive set of indices Total Market Index (“TMI”) Standard indices (“STOXX“)
Broad indices
Advanced Leverage indices and Short (“STOXX+“) indices
Bluechip indices
Sector indices
Style indices
(Sub-) Regions
» » » »
Global Americas Asia Pacific
» All Europe » Latin America » BRIC
Countries
» » » »
Argentina Australia Austria …
» » » »
Size indices
Risk Optimal Control indices Leverage indices
… Ukraine United Kingdom USA
Total 53 countries covered 7
2. EVOLUTION OF INDEXING ASIA
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The next session will be using theoretical example indices created from STOXX„ Index Factory tool Index Factory STOXX Index Factory Tool
Usage in this presentation
» Index generation tool to construct indices based on multiple methodologies and selection mechanisms
» Using index factory a set of example indices have been created for the purpose of supporting this presentation
» Global coverage of over 10,000 securities
» The theoretical indices do not officially exist currently but may be created and launched upon specific client demand at any time
» Free construction of indices for various markets or their combinations » Instant backtesting results available
» All calculation parameters may be adopted according to client or market needs
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Evolution of indexing for a region will be looked at in three major steps Overview 1 Individual countries » Compilation of broad market benchmarks (TMI indices) » Construction of representative, liquid and tradeable blue chip indices
2 Regional indices » Developed market core index » Stepwise addition of emerging markets according to investors preferences
3 Enhanced indices » Application of enhanced index strategies to previously built indices
In the next step examples for constructing these steps for the Asian region will be discussed
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First step is creation of a broad market index for the individual country as market measurement Step 1a - country TMI indices STOXX Japan TMI
STOXX Singapore TMI
STOXX Hong Kong TMI
2,500
3,500
3,500
3,000
3,000
2,000
2,500
2,500
1,500
2,000
2,000
1,000
1,500
1,500
1,000
1,000
500
500
500 0
0
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10
0
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Return1)
0.39%
Return1)
9.46%
Return1)
7.71%
Volatility1)
25.28%
Volatility1)
20.77%
Volatility1)
24.43%
Ø ADTV2)
6.68
Ø ADTV2)
0.22
Ø ADTV2)
1.18
Ø MCap2)
1,484.11
Ø MCap2)
66.52
Ø MCap2)
249.30
1) Annualized 27/12/01 – 14/11/11 2) in mn USD for current composition
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Blue chip indices significantly enhance size and liquidity while maintaining return characteristics Step 1b – blue chip indices STOXX Japan 50 TMI index
2,500
STOXX Singapore 20 Blue-chip index
2,000
TMI index
STOXX Hong Kong 50 TMI index
Blue-chip index
3,500
3,500
3,000
3,000
2,500
2,500
1,500
2,000
2,000
1,000
1,500
1,500
1,000
1,000
500
500
500 0
0
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10
Return1)
3.25%
TMI
0.39%
Volatility1)
23.73%
TMI
25.28%
Ø ADTV2)
142.49
TMI
0.22
Ø MCap2)
23,746
TMI
2,579
Blue-chip index
0
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10
+2.9%
Return1)
10.22%
TMI
9.46%
-1.6%
Volatility1)
21.45%
TMI
20.77%
+ 135
Ø ADTV2)
38.96
TMI
6.68
+ 21k
Ø MCap2)
8,353
TMI
1,721
1) Annualized 27/12/01 – 14/11/11 2) in mn USD for current composition
'01 '02 '03 '04 '05 '06 '07 '08 '09 '10
+0.76%
Return1)
8.30%
TMI
7.71%
+0.68%
Volatility1)
24.38%
TMI
24.43%
+ 38
Ø ADTV2)
80.36
TMI
1.18
+ 7k
Ø MCap2)
8,562
TMI
1,444
+0.59% -0.05% + 79 + 7k
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Regional index covers entire region with high liquidity and market cap – significant underrun vs. global equity Step 2a – regional indices Developed market Asia index (DMAI) » Developed Asia Index with significantly different performance to global index » Underperformance over last 10 years overall though compared to global developed markets
2500
2000
1500
1000
500
0 2002
DMAI
2003
2004
2005
2006
2007
2008
2009
Return1)
4.9%
STOXX Gl. 1800
7.1%
Volatility1)
23.5%
STOXX Gl. 1800
17.8%
-2.2% +5.7%
2010
STOXX Global 1800
Source: STOXX calculations
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Results of index calculations in the presentation will be compared on risk / return matrix Overview risk / return profile Risk / Return matrix 12%
Indices » » » »
STOXX Singapore 20
10%
8%
STOXX Japan 50 STOXX Singapore 20 STOXX Hong Kong 50 DMAI
STOXX Hong Kong 50
6%
4%
No huge diversification effect on portfolio – strong dominance of Japan
DMAI
STOXX Japan 50
2%
0% 18%
19%
20%
21%
1) Footnote,
10 pt
22%
23%
24%
25%
26%
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Small portion of South Korean stocks to the developed market basket leads to improved risk return profile Step 2b – regional indices with further markets (1/4) DMAI + South Korea (DMAI+SK) » South Korean Index with extreme outperformance » Addition of only 20 stocks adds over 3% performance p.a. and reduces risk
10000 9000 8000 7000 6000 5000 4000 3000 2000
Return1)
8.1%
DMAI
4.9%
Volatility1)
22.4%
DMAI
23.5%
+3.2% -1.1%
1000 0 2002
DMAI+SK
2003
2004
2005
2006
DMAI
Source: STOXX calculations
2007
2008
2009
2010
South Korea Index
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Addition of further markets lead to smaller change in risk return profile – lower risk observed Step 2b – regional indices with further markets (2/4) DMAI+SK + Malaysia (DMAI+SK+MA) » Addition of Malaysia (20 stocks) adds further performance and risk reduction » Smaller additional effect though
3000 2500 2000 1500 1000 500 0 2002
2003
DMAI+SK+MA
2004
2005
2006
DMAI
Source: STOXX calculations
2007
2008
2009
Return1)
8.4%
DMAI
4.9%
Volatility1)
22.1%
DMAI
23.5%
+3.5% -1.4%
2010
Malaysia Index
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Adding markets with smaller companies such as Phillipines with limited impact on portfolio Step 2b – regional indices with further markets (3/4) DMAI+SK+MA + Phillipines (DMAI+SK+MA+PH) » Addition adds only 1/10 % to performance » This is due to relatively small market cap of Philippine stocks added
6000 5000 4000 3000 2000 1000 0 2002
2003
DMAI+SK+MA+PH
2004
2005
2006
DMAI
Source: STOXX calculations
2007
2008
2009
Return1)
8.5%
DMAI
4.9%
Volatility1)
22.1%
DMAI
23.5%
+3.6% -1.4%
2010
Philippine Index
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Addition of major market such as China leads to further risk reduction – negative impact on performance though Step 2b – regional indices with further markets (4/4) DMAI+SK+MA+PH + China (DMAI+SK+MA+PH+CN) » 30 Chinese stocks offer additional diversification potential and reduce risk by further 0.5% » Performance impact is negative due to relative underperformance of China
4500 4000 3500 3000 2500 2000
Return1)
8.3%
1500
DMAI
4.9%
1000
Volatility1)
21.6%
DMAI
23.5%
+3.4% -1.9%
500 0 2002
2003
2004
DMAI+SK+MA+PH+CN
2005
2006
DMAI
Source: STOXX calculations
2007
2008
2009
2010
China Index
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Results of index calculations in the presentation will be compared on risk / return matrix Overview risk / return profile Risk / Return matrix 12%
Indices » » » » » » » »
STOXX Singapore 20
10%
8%
STOXX Hong Kong 50
DMAI + EM
STOXX Japan 50 STOXX Singapore 20 STOXX Hong Kong 50 DMAI DMAI+SK DMAI+SK+MA DMAI+SK+MA+CN DMAI+SK+MA+CN+PH
6%
4%
Addition of EM with significant improvement of risk/return profile
DMAI
STOXX Japan 50
2%
0% 18%
19%
20%
21%
22%
Source: STOXX calculations
23%
24%
25%
26%
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Index calculation framework allows fast analysis and implementation of asset allocation strategies for Asia Intermediary summary Observations » Index performance for developed Asia has not been overly exciting over 10 year time span compared to global developed markets » Addition of small portions of more emerging markets can significantly shift risk return profile into the right direction » Not all markets are equally tradeable for all market participants
Conclusions » Overall asset allocation to different markets drives portfolio performance » Standardized frameworks for constructing indiviudal indices to fit investor needs forms as a basis to startegically steer investments » The road does not end here – enhanced indexing as next step of development on top of the standard market indices! More in the next chapter!
» Countries with larger companies add more value to this approach than smaller ones
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3. THE NEXT LEVEL – ENHANCED INDEXING
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Enhanced indexing adds further dimension to the investment objective Enhanced indexing applications to Asia STOXX Asia 100 Risk Control
» Enables investors to indivually choose their desired risk level, while maintaining exposure to the desired underlying market » ALREADY LAUNCHED
STOXX Asia 100 Optimal Leverage
» Strategy aimed at optimizing the level of exposure to the target market depending on current market conditions » ALREADY LAUNCHED
Asia Equal Weight
» Using already developed index and applying equal weighting strategy to the portfolio to conquer the shortcomings of market cap weighted portfolios » CONCEPT ONLY
STOXX Asia ESG Leaders Index
» Application of STOXX‘ groundbreaking ESG rating model to the developed Asia markets » Enables investors to comply with sustainability restrictions » CONCEPT ONLY 22
Risk control indices allow investors to choose their risk level while investing in specific markets Concept Overview STOXX Asia 100 Risk Control » The risk control strategy is available at multiple risk levels ranging from 5% to 20% but could also accommodate custom levels » The strategy leverages or de-leverages an investment in an underlying index according to the current market volatility » If market volatility is below the desired risk level, the investment is leveraged up to achieve the higher risk level » If market volatility is higher than the desired risk level the investment is de-leveraged by means of cash investment to achieve the lower risk level
Performance Chart STOXX Asia 100 Risk Control 20% 3500
STOXX Asia 100
3000 2500 2000 1500 1000 500
0 2002
2004
Name
1)
Annualized June 2002-2011
2006
2008
Performance1)
2010
Volatility1)
STOXX Asia 100 Risk Control 20%
9.27%
18.96%
STOXX Asia 100
5.10%
25.63%
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Optimal leverage uses a leverage factor between 0.5 and 4 to optimized returns from an underlying index Concept Overview STOXX Asia 100 Optimal Leverage » The optimal leverage strategy ensures high leverage in bull markets, by increasing the leverage factor due to increasing index returns » Reduces leverage in turbulent market by reducing the leverage factor due to increasing volatility » Uses volatility as risk measure to ensure a timely response to market turbulences » The index portfolio consists of » Leveraged STOXX blue-chip index » A loan in the overnight money-market to finance the leverage » The optimal leverage factor is determined monthly based on the risk / return profile of the underlying blue-chip index
1)
Annualized June 2002-2011
Performance Chart 3000
STOXX Asia 100 Optimal Leverage
STOXX Asia 100
2500 2000 1500 1000
500 0 2002
2004
2006
Name
2008
Performance1)
2010
Volatility1)
STOXX Asia 100 Optimal Leverage
2.03%
20.03%
STOXX Asia 100
5.10%
25.63%
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CONCEPT
Equal weighting of each constituent brings small or large cap effects to the fore Concept Overview Asia Index Equal Weight » Equal weighting uses an existing index and modifies the weighting to level all components weights on a quarterly basis
Performance Chart DMAI Equal Weight
1300
DMAI
1100
» This enhances the weight of small and mid caps in the indices – the performance does thus change accordingly » Mismatch of majority of allocated capital to highly valued companies is broken up leading to positive performance effect historically
900 700 500 300 2006
2007
Name
» Phases of strong outperformance but also underperformance observed historically
1)
Annualized 2006-2011
2008
2009 Performance1)
2010
2011
Volatility1)
DMAI Equal Weight
-3.26%
25.3%
DMAI
-4.54%
25.7%
25
Results of index calculations in the presentation will be compared on risk / return matrix Overview risk / return profile Risk / Return matrix 12%
Indices STOXX Singapore 20
10%
8%
STOXX Asia 100 Risk Control 20%
STOXX Hong Kong 50
DMAI + EM 6%
4%
Overlay of strategies can shift risk levels massively: varying effects on returns
DMAI
STOXX Asia 100
» » » » » » » » » » »
STOXX Japan 50 STOXX Signapore 20 STOXX Hong Kong 50 DMAI DMAI+SK DMAI+SK+MA DMAI+SK+MA+CN DMAI+SK+MA+CN+PH STOXX Asia 100 STOXX Asia 100 Risk Control STOXX Asia 100 Optimal Lev.
STOXX Japan 50
2% STOXX Asia 100 Optimal Leverage 0% 18%
19%
20%
21%
22%
Source: STOXX Calculations
23%
24%
25%
26%
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CONCEPT
STOXX ESG Indices are based on a transparent rating model – coverage includes STOXX Asia 600 Index Overview index concept
Broad Index
E, S and G Specialized Indices
Base Indicators mapped to DVFA/EFFAS KPI 3.0 Standard
» STOXX Global ESG Leaders Index » Index made up of the sum of the three specialized indices » Contains global leaders in Environmental, Social and Governance fields based on STOXX Global 1800 Index universe » STOXX Global ESG Environmental Leaders, Social Leaders and Governance Leaders Indices » Selection of top 25% companies in each area Relative company E, S and G ratings ranging from 0 to 100 indicating relative position to remaining basket as basis for selection » Total of 128 Key Performance Indicators (KPI) relevant to sustainability criteria are used as basis for the rating model » KPIs are approved by DVFA / EFFAS and are based on the KPI for ESG 3.0 Standard » Data is provided by index partner Sustainalytics
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Customization and enhancing of index concepts allows individual steering of risk return profile Summary Three things to take home today » If you look at an index product for the Asian region, make sure to consider the country composition and its fit to your investment objectives » Indices for all requirements of country allocation and strategy overlay can be constructed easily at your demand based on a fully standardized set of index and strategy rules » Your index provider should be able to help you implement the ideal underlying for your investment product – from simple to highly complex – just give us a call!
Contact Details: Konrad Sippel Global Head of Product Development STOXX Ltd.
[email protected] +49 69 211 17369
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Disclaimer The indices in the presentation and the trademarks used in the index names are the intellectual property of STOXX Ltd, or SIX Swiss Exchange AG, or Deutsche Börse AG. The use of the STOXX®, DAX®, and SMI indices® and of the respective index data for financial products or for other purposes requires a license from STOXX, Deutsche Börse AG, or SIX Swiss Exchange AG. STOXX and its owners do not make any warranties or representations, express or implied, with respect to the timeliness, sequence, accuracy, completeness, currentness, merchant- ability, quality, or fitness for any particular purpose of its index data. STOXX and its owners are not providing investment advice through the publication of indices or in connection therewith. In particular, the inclusion of a company in an index, its weighting, or the exclusion of a company from an index, does not in any way reflect an opinion of STOXX or its owners on the merits of that company. Financial instruments based on the STOXX®, DAX®, or SMI indices® are in no way sponsored, endorsed, sold, or promoted by STOXX or its owners .
About STOXX STOXX Ltd. is an established and leading index specialist of European origins. The launch of the first STOXX® indices in 1998, including the EURO STOXX 50® Index, marked the beginning of a unique success story, based on the company’s neutrality and independence. Since then, STOXX has been at the forefront of market developments, continuously expanding its portfolio of innovative indices – and now operating on a global level, across all asset classes. The indices are licensed to more than 400 companies among the world’s largest financial products issuers, capital owners, and asset managers. They are used not only as underlyings for financial products such as ETFs, futures and options, and structured products, but also for risk and performance measurement. In addition, STOXX Ltd. is the marketing agent for the indices of Deutsche Börse AG and SIX Swiss Exchange Indices, among them the DAX® and the SMI® indices.
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