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Index Innovation for Multi-Asset Solutions Gains Pace

Rising demand for ESG-themed funds has led to the development of indices with sustainability components.
Index Innovation for Multi-Asset Solutions Gains Pace

As the global pandemic has strengthened the conviction toward well-diversified portfolios and environment, social, and governance (ESG) criteria, the index industry has evolved to cater to the increasing demand for multi-asset solutions and the benchmarking of such investments.

“In the past five years, a low-interest-rate environment, combined with market uncertainty and depressed returns from single-asset-class investments, has led to rising enthusiasm for multi-asset portfolios,” says Tianyin Cheng, Senior Director of Strategy Indices at S&P Dow Jones Indices, a unit of S&P Global. Among other factors in the current market environment, the pandemic has heightened demand for diversification through multi-asset strategies, prompting S&P DJI to expand its offering of indices in three core areas: risk parity, risk premia, and multi-asset indices with volatility limits.

Risk Parity Strategies

Cheng explains that S&P Risk Parity Indices have volatility targets ranging from 8% to 15%, and they are designed to measure the performance of multi-asset strategies in which allocations are made based on risk. “The index targets equal measures of risk among equity, fixed income, and commodities futures contracts,” Cheng says. “For many years, risk parity funds lacked a proper benchmark and were measured against the 60/40 equity/bond portfolio or some similar peer group funds.” S&P DJI launched its risk parity index series with different volatility targets in July 2018 and was the first index provider to do so.

The purpose of the S&P Risk Parity Indices is not only to provide benchmarks for risk parity strategies but also to provide an alternative to investors who are looking for a lower-cost passive solution, according to Cheng.

Risk Premia Strategies

S&P DJI already had a series of live risk premia indices, and the plan is to expand the suite to meet rising demand. Cheng explains that risk premia strategies aim to outperform the market mainly through long-short positions across asset classes and various factors, such as value, low volatility, and momentum. “We are in the process of building up a suite of risk premia indices across equities, fixed income, currencies, and commodities,” she says.

As asset managers and owners face increasing pressure to generate returns, these indices should provide the “building blocks to build tailored multi-asset solutions,” says Cheng. “S&P DJI has also won some sizable mandates, as investors’ demand is now increasingly focused on low-cost, liquid, and transparent strategies.”

Managed Volatility Multi-Asset Strategies

The third area of innovation for S&P DJI in recent years has been multi-asset indices with risk control overlays. “The reason why a strategy that combines risk control and multi-assets has become so popular is that it results in a lower option price,” said Cheng, adding, “It allows the bank to construct a strategy that might be more attractive to investors.”

The S&P Balanced Global Bond and Equity Futures (S&P BEF) Index, for instance, is a multi-asset strategy designed to limit volatility while delivering consistent returns through various market cycles and economic conditions. The index exploits the complementarity and negative correlations between equities and bonds to offer a multi-asset pathway to participation and protection, especially during periods of crisis. The underlying equity components of the index are the S&P 500®, the EURO STOXX 50 Index, and the Nikkei 225 Rolling Futures. The bond basket comprises U.S. Treasuries, JGB Notes, and Euro-Bund Rolling Futures. The volatility of the index is capped at 4%.

ESG-Themed Multi-Asset Strategies

Amid the rising popularity of ESG investments, S&P DJI has also developed a multi-asset index series with ESG elements. For instance, the S&P ESG Global Macro Index seeks to measure the performance of a multi-asset-class strategy with ESG-themed equity components and a risk control overlay. The index uses the OECD Leading Indicator to dynamically allocate to equities and fixed income across three regions based on economic and market trend signals. The index’s risk control overlay adjusts exposure to allocations actively to maintain a 5% target risk level. By switching between these two types of assets, the index adapts to changing market conditions to generate excess return while mitigating risk. The S&P ESG Global Macro (with Commodity) Index additionally includes commodities exposure to seek to provide inflation protection. The equity component of these indices comprises the top 75% of stocks with the highest ESG performance, Cheng explains.

Overall, S&P DJI has seen the highest demand for its index products from insurance channels and private banks, with requests picking up momentum since July 2020.



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