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Impact Investing

IPE special report May 2018

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Schemes eye customised indices, providers say

GLOBAL – The demand for tailor-made indices is growing among pension funds keen to keep a close eye on asset managers and find new market opportunities, index providers have told IPE.

Customised indices represent an increasingly popular range of solutions for pension funds pursuing alpha through indices that closely meet their needs said firms such as FTSE Group, Standard & Poor’s and Dow Jones Stoxx.

They said the market has grown in the last few years and is set to grow in importance and size.

FTSE director Graham Colbourne explained that pension funds like the €19.2bn French reserve fund and the $182bn US scheme CalPERS opt for this solution to bring together asset classes which would not be normally associated, such as mid- and small-cap equities.

In the last five years FTSE has seen demand go from zero to 300 customisations currently, Colbourne said. And interest was still growing.

A key to customisation is to keep things simple, he said. FTSE recently provided a “high profile” UK pension scheme with total return index. The difference between net total returns and its gross total return counterpart could be as substantial as 0.1%, he said.

Another popular choice among pension schemes is to have the sponsoring company or its competitors excluded, while some pension funds prefer to distinguish between emerging markets or, especially in the UK, avoid them all together.

Indices to exclude products, market areas or entire markets have also been designed.

Politics and the protection of human rights also play a role, as taking an ethical stance is becoming a performance driver, said John Davies, S&P’s director of market development.

Davies said that together with offering a higher standard of service and flexibility, customised indices also represent a way to closely monitor asset managers. Up until a few years ago pension funds measured their results against peer groups.

Costs, according to the three providers, would not be an issue. FTSE’s Colbourne, who is responsible for client relationships with European pension funds, said the customisation process was reasonably straightforward and inexpensive.

According to Davies, S&P is committed to designing indices which are not limited to big pension funds and institutions.

Lars Hamich, managing director at Stoxx, said that with time clients will realise that outsourcing customisation is cheaper that having it made.

“If a pension fund wants a customised index, it has to pay experts. We have infrastructure, data, technology and manpower and all these resources are ready to be used,” he said.

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