In the second of a series of articles covering underlying strategies we look at the most recent developments in the environmental, social and governance (ESG) and smart beta space.
ESG has become a trending topic in the structured products market on the back of an increased number of transactions over the last couple of years. Since 2012, when MSCI and Barclays teamed up to launch a family of co-branded ESG fixed income indices for institutional investors to use in index-linked investment products, ESG has increased its profile in the global structured products market. This was followed by the launch of the first green bond linked to the Ethical Europe Equity Index in August 2014 by the World Bank, and a further six index-linked products within its Green Growth Bonds series - both institutional private placements and retail offerings, in Switzerland, Luxembourg and France, as well as in Asia (Hong Kong and Singapore) and the US.
Alongside ESG, the traction of smart beta strategies was also confirmed last week following the SIX Swiss Exchange's first foray into the smart beta segment with the launch of an index family for factor-based investments. The exchange's SPI Multi Premia comprises eight new indices aimed at allowing broader diversification and additional potential for returns. The individual indices are based on the largest and most liquid securities from the SPI (Swiss Performance Index) which are selected on statistical analysis of individual factors (value, size, momentum, residual momentum, reversal, low risk and quality.)
"The aim of this launch is to provide investors with a family of smart beta strategies that responds to their investments needs," says Werner Bürki (pictured), head business development & services at SIX Swiss Exchange. "This approach [smart beta] is being used in other European countries and is a reflection of the current interest rate environment which makes it difficult to generate yield."
Smart beta strategies, says Bürki, will appeal to investors hungry for performance because the model used to develop the indices includes statistical evidence that they have outperformed plain vanilla benchmark over the last 10 years.
According to Bürki, the new SPI Multi Premia Index will fit better on passive funds because investors can apply a medium-long term view as opposed to a shorter horizon which fits structured products better. "However, some of the single premium strategies can extract value of short term swings and therefore will lend better to structured products and derivatives," says Bürki.
In the UK, new research from Heartwood Investment Management has unveiled an increase in demand for more diversified, ethical investing. The research shows that less than half (43%) of independent financial advisers (IFAs) are satisfied with the range of ethical investment options currently available while a quarter of IFAs have seen an increase in demands from clients to offer a wider range of ethical investing opportunities.
Earlier this year, JP Morgan, rolled out its JP Morgan Ethos Investments, a new sustainable investments platform for institutions and distributors looking for fully-customisable ESG investments, and announced a collaboration with S&P Dow Jones Indexes to launch a new range of ESG indices, including the S&P Europe 350 Climate Change LVHD Index. The US bank had licensed the iStoxx Europe ESG Select 30 Index in 2015 to launch a product with the World Bank.
Finvex, the Belgian provider of sustainable indices, has also developed a number of indices that have been deployed as underlying for structured products and are issued in collaboration with Societe Generale. After its sale to Horus Wealth Management Partners in April 2016, the new owners launched the Ecofi SRI Europe PR index in collaboration with French investment boutique Ecofi Investissements. The index made its debut in Belgium earlier this month as underlying for a switch note distributed by VDK Spaarbank and issued via Codeis Securities, the SocGen special purpose vehicle.
Over the course of 2016, there have been an increasing number of ESG strategies being launched in combination with smart beta filters. Commerzbank licensed at the beginning of September the newly released Solactive Global Ethical Low Volatility AR EUR Index, to launch a wide range of products, from capital protected to more complex structures designed for their global retail and institutional client base. The new index tracks the performance of companies that display strong environmental, social and governance (ESG) standards and low volatility characteristics. Commerzbank is the latest of a number of structured products providers to unveil plans to build an ESG range aimed at retail investors in 2016.
Other investment banks moving to positon themselves in this segment include Deutsche Bank which partnered with Arabesque to rollout new ESG/smart beta investment products range; BNP Paribas to expand ESG range via FTSE low carbon series; UBS which licensed the QIX Deutschland smart beta index, as the basis for structured certificates in Germany; JP Morgan which rolled out an ESG-focused investments platform; and Natixis which licensed the Euro iStoxx 70 Equal Weight Decrement 5% Index to be used as the basis for structured products.
"This area has had a bigger focus in Europe but we see US index providers moving to develop indices with a green and sustainable approach, and a US angle," says Sebastien Lafosse, head of cross-asset structured products distribution Americas at Natixis. "We believe this will be an interesting segment in the future."
According to Lafosse, smart beta strategies can add value to investors and are a "very good complement" to traditional cap weighted indices. "These indices will not have the same reach as traditional US cap weighted indices but we think this area will drive sales as they fit well with the needs of investors in structured notes," says Lafosse.
Smart beta strategies have continued to propel sales in the ETF segment with a number of structured products also moving to cash in on the back of a turbulent equity environment. Smart beta exchange traded products and funds (ETFs/ETPs) listed in globally reached a new record high US$429bn at the end of June 2016, according to ETFGI, and at the end of August, Barclays reported US$400m invested in its Ossiam Shiller Barclays CAPE US Sector Value TR ETF. Meanwhile, in the structured products market, Stoxx reported that iStoxx-linked structured products assets had reached US$1bn in Q2 2016.
Stoxx has also beefed up its Stoxx Select and Stoxx Diversification Select index families that were introduced in October 2015 with a combination of investment themes such as low carbon and ESG with low volatility, high dividend and low correlation screens to create hybrid index concepts to set an attractive pricing framework "especially for structured products".
One of iStoxx ESG underlyings, the iStoxx Global ESG Select 100 has been deployed in four products distributed by Raifeisen Centrobank in Austria and Germany, two products from Crelan in Belgium, four products from Raiffeisenbank in the Czech Republic and one product from Raiffeisen Polbank in Poland.
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