SGX targets Asian quality stocks with first smart beta index

SGX Index Edge's first smart beta benchmark, the Developed Asia ex Japan Quality Index, reflects the performance of stocks in three developed Asian economies - Hong Kong, South Korea and Singapore, which have a high exposure to the quality risk factor. "We've been finding increasingly and more recently that a lot of our clients and prospective issuers are not so willing to take a directional view on any particular risk factor other than quality," said Simon Karaban (pictured), head of index services at Singapore Exchange (SGX).

Only primary listings on the SGX, South Korea and Hong Kong Stock exchanges are eligible for inclusion, with a minimum market cap of US$500m for new constituents and additional free float screening. Furthermore, only profitable companies are included in the index. "We started with a pool of 67 different underlying metrics that could be feasibly defined as quality, and condensed those down to four that we consider efficient, appropriate and most representative for the Asian market," said Karaban. "The index has a modular nature, where each of the three countries in the index has a standalone component of quality companies."

The four quality factors sourced from S&P Global Market Intelligence's Alpha Factor Library include return on invested capital, adjusted accruals, normalised ROE and financial leverage. "The underlying factors selected are different to those in most products by our competitors, and our results are not like those of our competitors either," said Karaban. "The market is becoming crowded with respect to vendors that offer factor strategy solutions, and it's increasingly difficult to differentiate."

The new index's regional breakdown, as at March 31, 2017, consisted of a 34.2% weight for Hong Kong, 33.35% for Korea and 32.45% for Singapore. In terms of sectors, consumer discretionary is the heaviest sector with a 20.69% weight, followed by IT with 19.05% and industrials at 18.54%.

Investors are "increasingly looking at smart beta and factor investing ... and there is a clear and present opportunity there," said Karaban. "The new index is the first of many, and we'll increasingly look at multi-factor strategies and thematics that employ a component of smart beta."

Besides quality being the top item in reverse enquiries from clients and prospective issuers, it also offers a strong basis for multi-factor strategies, such as quality plus yield, Karaban noted. "We don't have product issuance on the index that we would consider imminent, but certainly we are hoping a product will be issued towards the later part of this year," said Karaban. "ETF issuers are the source of the majority of enquiries about the index, but also a handful of Asia-based structured products issuers, [which will most likely be marketed via private banking channels]."

SGX Index Edge secured access to SPGMI's Alpha Factor Library in September with the specific goal of reinforcing its research and design capabilities with regard to quant index models and smart beta indexes. The new index comes after SGX developed a high dividend strategy for a real estate investment trust ETF that listed in Singapore in October. Since the launch of the fund, a number of structured products issuers have expressed interest in the index, Karaban told SRP in November.

SGX to introduce leverage and inverse trackers in Q2

Singapore's MAS explores OTC derivatives trading mandate

Smart beta will grow in potency as technology evolves, SGX