WHAT'S DRIVING THE GROWTH OF PASSIVE IN ASIA?

WHAT'S DRIVING THE GROWTH OF PASSIVE IN ASIA?

Priscilla Luk, Managing Director & Head of Asia Pacific
Global Research & Design, S&P Dow Jones Indices

Transcript

  1. 1.

    WHAT'S DRIVING THE GROWTH OF PASSIVE IN ASIA? Copyright ©

    2019 by S&P Global. All rights reserved. Priscilla Luk Managing Director & Head of Asia Pacific Global Research & Design, S&P Dow Jones Indices 11th Annual Japan ETF Conference 2nd - 3rd April, 2019 / Tokyo
  2. 2.

    The Growth of Indexing Application 2 Market Indicator & Performance

    Benchmarking Exposure To Different Market Segments Exposure To Different Asset Classes Implementation Trading & Asset Allocation Strategies Implementation of Smart Beta, ESG, and Thematic Strategies Source: S&P Dow Jones Indices, LLC. It is not possible to invest directly in any index. Source: S&P Dow Jones Indices LLC. Table is provided for illustrative purposes.
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    Traditional Beta and Smart Beta ETFs Source: ETFGI data sourced

    from ETF/ETP sponsors, exchanges, regulatory filings, Thomos Reuters/Lipper, Bloomberg, publicly available sources and data generated in-house. Note: active equity ETFs/ETPs are excluded as they do not track a specific index. Data as of 31st January, 2019. Table is provided for illustrative purposes. At the end of Jan 2019, there were 1,322 Smart Beta ETFs/ETPs with assets of $680 Billion globally. 3 Market cap (Beta) Smart Beta Other Active Market cap (Beta) Smart Beta Other Active Assets (US& Mn) 3,095,227 679,865 155,149 27,310 5 Yr CAGR 20.9% 33.1% 31.9% 52.9% YTD Change 3.3% 12.1% 9.9% 20.0% # Products 3,033 1,322 171 312
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    Performance of Factor Strategies 4 0 5000 10000 15000 20000

    25000 30000 35000 40000 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/18 12/19 S&P 500 S&P 500 Buyback FCF Index S&P 500 Low Volatility High Dividend Index S&P 500 Pure Value S&P Momentum United States LargeMidCap Index Cumulative Returns (U$) Source: S&P Dow Jones Indices. Data based on USD total return index levels from 31st July, 1995 to 28th February, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
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    Cyclicality In Factor Performance 5 2004 2005 2006 2007 2008

    2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Value Mom LVHD Mom LVHD Value Value LVHD Value BB FCF BB FCF LVHD LVHD Mom Mom 26.1% 15.3% 26.4% 8.1% -24.1% 55.2% 23.1% 16.0% 25.6% 54.2% 22.5% 5.6% 22.7% 28.6% 1.1% LVHD Value BB FCF BB FCF BB FCF BB FCF BB FCF BB FCF BB FCF Value LVHD Mom Value BB FCF Mkt 19.9% 13.4% 25.6% 5.9% -27.4% 50.9% 22.0% 10.1% 18.2% 48.1% 20.2% 4.1% 19.6% 23.8% -4.4% BB FCF BB FCF Value Mkt Mkt LVHD Mom Mkt Mom Mkt Mkt Mkt BB FCF Mkt LVHD 18.8% 9.5% 20.0% 5.5% -37.0% 41.8% 21.4% 2.1% 18.1% 32.4% 13.7% 1.4% 13.7% 21.8% -5.9% Mom Mkt Mkt LVHD Mom Mkt LVHD Mom Mkt Mom Value BB FCF Mkt Value BB FCF 16.4% 4.9% 15.8% -2.2% -37.7% 26.5% 19.0% 0.4% 16.0% 32.0% 12.7% -4.5% 12.0% 17.7% -9.5% Mkt LVHD Mom Value Value Mom Mkt Value LVHD LVHD Mom Value Mom LVHD Value 10.9% 3.0% 9.8% -3.7% -47.9% 16.9% 15.1% -0.8% 6.7% 21.2% 11.6% -8.1% 5.3% 12.3% -12.0% Source: S&P Dow Jones Indices. Data based on USD total return index levels from 31st July, 1995 to 28th February, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
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    Factor Rotation Across Business Cycles The S&P Economic Cycle Factor

    Rotator Index aims to provide exposure to U.S. equities, with rotation among four select equity factors when they come into favor in current business cycles. The index is constructed in three steps: 6 Business Cycle Identification At the beginning of every month, using the 3-month average and change of the CFNAI Index to determine which business cycle we are in. Factor Rotation ONE equity factor is selected from a set of FOUR factor indices to represent the major factors linked to the business cycles. Target Volatility Apply a risk control overlay on top of the selected equity factor index to maintain a 6% volatility target on a daily basis. Source: S&P Dow Jones Indices LLC. Table is provided for illustrative purposes. ^ 1 2 3
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    Business Cycle Identification 8 Source: Federal Reserve Bank of Chicago.

    Chart is provided for illustrative purposes. Chicago Fed National Activity Index (CFNAI)  Weighted average of 85 indicators of U.S. economic activity  Live since 2001, first introduced in Evans, Liu, and Pham-Kanter (2001)  The 3-Month Moving Average of the CFNAI is often used as a recession predictor with high accuracy Employment Production / Income Consumption / Housing Sales / Inventories 85 Economic Indicators Chicago Fed National Activity Index (CFNAI)
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    Four-Phase Business Cycle CFNAI 3M Avg. > 0 Business Cycle

    Identification 9 CFNAI 3M Change > 0 CFNAI 3M Change < 0 CFNAI 3M Avg. < 0 Slowdown Expansion Contraction Recovery Source: S&P Dow Jones Indices LLC. Table is provided for illustrative purposes. ^
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    Four-Phase Business Cycle Factor Rotation Across Business Cycle 11 Quality

    Buy stocks with strong balance sheet High Dividend, Low Volatility Value Buy “cheap” stocks Momentum Buy “recent winners” Slowdown Expansion Contraction Recovery Source: S&P Dow Jones Indices LLC. Table is provided for illustrative purposes. ^
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    • On a monthly basis, ONE equity factor is selected

    from a set of FOUR factor indices to represent the major factors linked to the business cycles. 12 High Dividend, Low Vol. Value Momentum Quality S&P 500 Low Volatility High Dividend S&P 500 Pure Value S&P Momentum United States LargeMidCap S&P 500 Buyback FCF Contraction Recovery Expansion Slowdown Source: S&P Dow Jones Indices LLC. Table is provided for illustrative purposes. ^ Rotation Across Four Distinct Factor Strategies
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    S&P Economic Cycle Factor Rotator Index (Equity-Only) 13 0 10000

    20000 30000 40000 50000 60000 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/18 12/19 S&P 500 S&P Economic Cycle Factor Rotator (Equity Only) Index Equal-Weighted Index of Four Factors S&P 500 Buyback FCF Index S&P 500 Low Volatility High Dividend Index S&P 500 Pure Value S&P Momentum United States LargeMidCap Index Cumulative Returns (U$) S&P Econ. Cyc. Factor Rotator (Equity-Only) Equal-Weight Index Of Four Factors Source: S&P Dow Jones Indices. Data based on USD total return index levels from 31st July, 1995 to 28th February, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
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    S&P Economic Cycle Factor Rotator Index (Equity-Only) 14 116% 83%

    112% 108% 105% 124% 100% 80% 54% 103% 98% 84% 81% 100% 120% 90% 60% 30% 0% 30% 60% 90% 120% 150% S&P 500 Buyback FCF Index S&P 500 Low Volatility High Dividend Index S&P 500 Pure Value Index S&P Momentum U.S. LargeMidCap Index Equal-Weighted Index of Four Factors S&P Economic Rotator (Equity Only) Index S&P 500 Down Market Capture (Average Relative Loss vs. S&P 500 In Up Market) Up Market Capture (Average Relative Gain vs. S&P 500 In Up Market) Source: S&P Dow Jones Indices. Data based on USD total return index levels from 31st July, 1995 to 28th February, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
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    S&P Economic Cycle Factor Rotator Index (Equity-Only) 15 16.5% 12.3%

    11.0% 11.2% 13.1% 18.2% 9.1% 0.0% 5.0% 10.0% 15.0% 20.0% S&P 500 Buyback FCF Index (0.96) S&P 500 Low Volatility High Dividend Index (0.93) S&P 500 Pure Value (0.55) S&P Momentum U.S. LargeMidCap Index (0.64) Equal-Weighted Index of Four Factors (0.89) S&P Econ. Cyc. Factor Rotator (Eqty. Only) (0.92) S&P 500 (0.62) Annualized Return 17.2% 13.3% 19.8% 17.5% 14.8% 19.8% 14.8% 0.0% 10.0% 20.0% 30.0% Annualized Volatility Index (Risk-Adjusted Return) Source: S&P Dow Jones Indices. Data based on USD total return index levels from 31st July, 1995 to 28th February, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
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    Target Volatility - Risk Control Overlay 17 Source: S&P Dow

    Jones Indices LLC. Table is provided for illustrative purposes. ^On a daily basis, the Index identifies all possible portfolios of the bond and the equity constituents that have recently realized volatility equal to the target. If no portfolio is eligible, the Index will choose the portfolio with historical volatility closet to the target volatility and then deleverages the portfolio as necessary in order to achieve the target volatility. Selected Factor Index 5Yr Note Futures Index Variance Covariance Matrix Selected Factor Weight (W) 5Yr Note Futures Index Weight (1–W) Base Indices Weight Allocation • To maintain a 6% volatility target on a daily basis, a 6% risk control overlay is applied to the selected equity factor. • Based on historical realized volatilities and correlations between the asset components, weight allocations are adjusted between the equity factor portion and the 5-year Treasury Note Futures.
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    S&P Economic Cycle Factor Rotator Index 18 S&P Econ. Cyc.

    Factor Rotator Eq-Wtd Index of 4 Factors 500 1,500 2,500 3,500 4,500 5,500 8/95 8/96 8/97 8/98 8/99 8/00 8/01 8/02 8/03 8/04 8/05 8/06 8/07 8/08 8/09 8/10 8/11 8/12 8/13 8/14 8/15 8/16 8/17 8/18 Cumulative Return (U$) S&P 500 (Risk Control 7%) S&P 500 (Risk Control 5%) S&P Economic Cycle Factor Rotator Equal Weighted Index of Four Factors Buyback FCF (Risk Control 6%) Low Vol High Div (Risk Control 6%) Pure Value (Risk Control 6%) Momentum (Risk Control 6%) Source: S&P Dow Jones Indices. Data based on USD risk control excess return index levels from 31st July, 1995 to 28th February, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
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    S&P Economic Cycle Factor Rotator Index 19 Index (Risk-Adjusted Return)

    6.4% 5.6% 4.7% 4.9% 5.4% 7.0% 2.5% 3.3% 0.0% 2.0% 4.0% 6.0% 8.0% Buyback FCF, Risk Control 6% (1.13) Low Vol High Div, Risk Control 6% (0.97) Pure Value, Risk Control 6% (0.79) Momentum, Risk Control 6% (0.89) Equal Weighted Index of Four Factors (1.05) S&P Economic Cycle Factor Rotator (1.20) S&P 500, Risk Control 5% (0.56) S&P 500, Risk Control 7% (0.54) Annualized Return 5.7% 5.8% 6.0% 5.4% 5.2% 5.8% 4.4% 6.1% 0.0% 2.0% 4.0% 6.0% 8.0% Annualized Volatility Source: S&P Dow Jones Indices. Data based on USD risk control excess return index levels from 31st July, 1995 to 28th February, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
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    S&P Economic Cycle Factor Rotator Index 20 Allocation History vs.

    S&P 500 Performance 0 100 200 300 400 500 600 700 800 900 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 12/95 12/96 12/97 12/98 12/99 12/00 12/01 12/02 12/03 12/04 12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15 12/16 12/17 12/18 Allocation History Vs. S&P 500 Performance Momentum Value Buyback Low Vol High Div Bond S&P 500 (TR) Weight S&P 500 Source: S&P Dow Jones Indices. Data from 31st December, 1995 to 28th February, 2019. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance.
  18. 21.

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    Performance Disclosure The S&P Economic Cycle Factor Rotator Index was

    launched on August 16, 2016. All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The back-test calculations are based on the same methodology that was in effect on the index Launch Date. Complete index methodology details are available at www.spdji.com. S&P Dow Jones Indices defines various dates to assist our clients in providing transparency. The First Value Date is the first day for which there is a calculated value (either live or back- tested) for a given index. The Base Date is the date at which the Index is set at a fixed value for calculation purposes. The Launch Date designates the date upon which the values of an index are first considered live: index values provided for any date or time period prior to the index’s Launch Date are considered back-tested. S&P Dow Jones Indices defines the Launch Date as the date by which the values of an index are known to have been released to the public, for example via the company’s public website or its datafeed to external parties. For Dow Jones-branded indices introduced prior to May 31, 2013, the Launch Date (which prior to May 31, 2013, was termed “Date of introduction”) is set at a date upon which no further changes were permitted to be made to the index methodology, but that may have been prior to the Index’s public release date. Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for the Index, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. Another limitation of using back-tested information is that the back-tested calculation is generally prepared with the benefit of hindsight. Back-tested information reflects the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities, fixed income, or commodities markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance. The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US $10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on the investment plus accrued interest (or US $1,650), the net return would be 8.35% (or US $8,350) for the year. Over a three year period, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US $5,375, and a cumulative net return of 27.2% (or US $27,200).