ESG is at the very centre of every conversation with clients

Armelle Loeb, STOXX

I should not forget to mention climate strategies, where we see a lot of interesting developments every month. That includes Paris-aligned benchmarks, clean energy and even indices tracking energy transition metals. In most of those cases, investors can now make use of measurements to tackle their goals that weren’t available only a few years ago. It is indeed very interesting times for everyone.

Has the shift towards customisation opened the market to new players seeking to deliver tailored underlyings?

What we have seen is the arrival of specialised data companies that provide new and smart datasets. As index provider, we welcome that. A lot of the new investment themes are difficult to build using traditional revenue-based data or sector classifications.

For many of these emerging themes we need something else – for example, patents. With all these new datasets, you can detect trends more quickly with AI tools than you would be able to see via revenues. You can capture forward-looking growth.

At STOXX, we have a flexible open architecture approach that allows us to work with these data providers and be able to offer the right solutions in a more efficient and reactive way. They are bringing extreme innovation in data, so by partnering with them they can enhance the value of our methodologies.

As the number of custom strategies increases, so does the complexity of some of the underlyings. Are there any suitability concerns around some of the thematic indices we see in the market?

Complexity is a broad word. Some strategies are, by definition, complex, like a Paris-aligned benchmark that is required to comply with regulation. An optimization is also complex. We need to be clear on the definition of complex – and it is not an easy one. Innovation is at the core of the STOXX indexing business, and we specifically aim to bring ever-more sophisticated strategies to the market where we can combine our expertise with smart data or with tools such as Axioma’s portfolio construction capabilities. We have over two dozen thematic indices, for example, with customized versions derived from many of them. The selection process for many of them is no longer based on the more traditional metrics of industry or revenue, but on novel data such as patents, satellite images or companies’ annual reports.

Clients are now much more involved in the design of the indices than they were 20 years ago, and often it is them who lead in the adoption of innovative selection mechanisms. The level of sophistication that they have is very high.

That said, sophistication and customisation are welcome as long as they don’t undermine the transparency and rules-based objectivity of the strategy. Complexity should not and does not equate to higher risk. These days you can optimise your strategies and calibrate your desired risk level to the detail. Better technology empowers investors, and we should make the most of that.

We spend as much time ensuring our strategies are clear, accurate and replicable as we do look for the best methodology tools. Not all indices will be suitable for all clients, and it is the duty of intermediaries to make sure that investors are well aware of where they put their money. That basic premise of retail investing still stands: investors must understand what’s under the hood of the products they buy.

Where do you see the structured-products market in the next couple of years?

I definitely see more innovation coming ahead, whether in themes or in methodologies. We have been through some very challenging times with the pandemic, the global slowdown, rising interest rates and the war in Ukraine. Throughout this time, all these challenges have provided fertile ground for issuers to come up with imaginative strategies – to the benefit of end clients. It is true that difficult macro environments can benefit the industry, but I don’t see why, at the same time, that growth should not continue in more market-friendly times!”