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Soothsayers of the investment industry first predicted a shift towards sector-based investment about three years ago. The increasing globalisation of markets meant the reasons for dividing investments up along country and regional lines were becoming less compelling, they said.
Particularly in Europe when the single currency was introduced, economic boundaries became far more flexible. European Benchmarks, the Antwerp-based European index provider, launched its first products to cater for the expected growth in demand for investment funds and financial products which were based on pan-European industrial sectors.
But despite a strong belief in their product, and some convincing arguments, the people behind European Benchmarks have been disappointed that their indices have not been more widely used.
“For some, we are not established enough,” says Koen de Leus, chief analyst at EuroBench. Recent talks with Belgian asset management house KBC on a possible product launch proved fruitless. On top of this setback, talks with Barclays Global Investors regarding Exchange-Traded Funds came to a close when the asset manager opted to use indices from a bigger US player.
It seems tough trying to persuade a major asset manager to use indices from a relative newcomer when they are already engaged with another index provider.
Creating a strong, recognisable brand is the perennial problem for those marketing any product. And the level of publicity required to push a product into the international spotlight does not come cheap. With a one-page advertisement in the Financial Times priced at around three million Belgian Francs, De Leus says EuroBench’s initial capital of Bf50m (exx) was soon finished.
But the company and its products are still relative newcomers to the financial world. EuroBench was set up in 1998, with its first indices launched in June of that year. It is determined to keep offering its core products which have qualities which set them apart from other sector indices.
EuroBench now has 11 members of its IN.SECTS family of pan-European sectoral indices, having started with just four. The indices reflect daily price movements.
The sectors they cover are autos, building materials, financials, media, non-durable goods, oils, pharma-chemicals, raw materials, technology, telecommunications and transport.
They include the top 500 European companies, which are mostly domiciled and quoted on exchanges within the European Union. But they also include stocks from Norway and Switzerland.
The indices, says EuroBench, are based on observations of real correlation between stock price movements, rather than traditional criteria which place companies in certain industrial sectors, and set their weightings. And the provider has a policy of only launching new sector indices if there is quantitative proof that they track sector behaviour in a meaningful way.
“If you want to follow the sector, you have to use our indices, because they are correlation-based,” says De Leus.
Certainly, for fund management groups aiming to launch European-wide sector funds, correlation-based indices seem the most efficient option. According to EU regulations, a fund created in one member state can be sold in other EU countries without additional controls as long as it complies with the rules set out in European Directive 85/611/EEC of 20 December 1985.
This directive aims to ensure a high level of diversification, and sets limits on the proportion of its assets a fund may invest in the securities of any one body.
Only with correlation-based weighting can fund managers meet this rule, argues De Leus. With correlation-based weighting, it is not the biggest stock by market capitalisation which receives the highest weighting, but the stock which best tracks the sector trend.
“One of the major advantages of our indices is that they have very good diversification in the stocks, and if you want to comply with this rule it’s important to have good diversification,” he says.
Perhaps a stumbling block in EuroBench’s road to swift success is that the arguments in favour of its products are too sophisticated. “I have the impression that it is not too important to the investor,” he says. “When it comes to technology, for instance, if the product says it’s technology, it must be technology, investors reason, so they just go ahead with it.”
“Maybe our biggest problem is that the story we have to tell is more complicated than the story others have to tell,” says De Leus.
But EuroBench has been careful not to keep all its eggs in one basket. In October last year, the company branched out by offering its first regional index – in direct response to a client.
The first index to come from the new family, called IN-Regions, is IN.flanders. IN.flanders covers the Flemish part of Belgium. EuroBench was asked by the Flemish Employers’ Association (VEV) to create the new benchmark. The association wanted to be able to give employees share options to enable them to participate financially in the fortunes of the companies they work for.
IN.flanders is made up of 100 shares, which are local as well as foreign. It is weighted according to the total number of employees. For non-Flemish companies which are included in the index, their weighting derives from the number of staff they have in Flanders, whereas Flemish companies draw their weighting from the consolidated employee level.
KBC Asset Management set up an investment instrument on the basis of the new index. It is an open-ended investment company with BEVEK status based on which KBC Derivatives has launched options.
EuroBench sees Belgian investors drawn to investments based on these local indices because they back the companies they work for, and therefore support job creation in their own area.
The index provider now intends to create benchmarks along similar lines for neighbour the Netherlands.
The Dutch employers’ federation has already said that the idea is a good one, says De Leus. “Now we are just waiting until the financial institutions are prepared to take a risk with us,” he says.

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