S&P deepens Asia index penetration, unveils Japan deal

Standard & Poor’s (S&P) is stepping up marketing activities in Asia to broaden perceptions about what it can offer and to increase the number of exchange-traded funds based on its growing range of indices.

The firm recently relocated Alaska-raised Reid Steadman from London to Hong Kong as its global head of ETF licensing. He is one of only two full-time staff focused on this area. The other is based in London.

S&P believes the time is right to increase collaboration with its Asian stock exchange partners and sees ETFs as a promising channel to diversify its revenues. It says it is increasingly engaging with potential ETF sponsors in the region to talk about tailoring indices in Asia and around the world to suit investor needs.

Only today, S&P will announce a landmark deal to licence the S&P 500 to Nikko Asset Management for the creation of an ETF based on the index. This deal will allow Japanese investors to track the returns of the US equity market directly using their local currency.

In fact, S&P just won AsianInvestor’s award for best local provider of indices onshore. Its contribution to the development of the ETF markets in Korea and Japan, amongst others, played a key part.

ETFs are a growing driver for S&P. At the end of 2005, ETFs based on the S&P 500 totalled $74.5 billion in assets under management (AUM), while ETFs based on other S&P indices totalled $60.6 billion. By the end of 2009, the latter had overtaken the former to stand at $125.5 billion, compared with $121.5 billion.

One of Steadman’s chief challenges is changing commonly held perceptions of S&P. “When people hear S&P with respect to indices they think of the S&P 500, and we’re fine with that,” he says. “But S&P offers many different types of benchmarks that range across regions, countries and also asset classes. We have been focused on expanding what the S&P index brand means to investors.”

S&P launched more than 90 indices last year alone, and its index products now cover a broad range of assets classes, from equities, fixed income and commodities to real estate and other strategies.

In Asia, Steadman lists S&P’s four best-known index brands as the S&P 500, the S&P GSCI commodities index, the S&P/ASX200 in Australia and the S&P CNX Nifty in India. But he notes that there is only one locally listed ETF based on those in Asia – State Street’s SPDR S&P/ASX 200.

This is something that Steadman, who first started with S&P in New York in 2003, has been brought across to Hong Kong, from London, to change.

The way it works is that S&P enters into a licensing agreement that entitles a client to use its and its exchange partner’s trademarks, as well as offering access to the recipe of its index. For this, as well as its marketing activities and continuing management of the index, it charges a royalty fee. The nature of its commercial relationships generally reflects the scale of the business.

“I would say our economic incentives are aligned with those of our partners, so the more successful our partners are at accumulating assets in their funds, the better we do,” says Steadman.

S&P’s initial priority is to help ETF sponsors build products based on its indices in a time-friendly zone, offering Asian investors diversified domestic exposure. Discussions are ongoing, says Steadman, and announcements can be expected soon.

But he also notes a developing trend of Asian investors seeking exposure to overseas listed ETFs based on a range of international indices. “The next wave, which I think will pick up momentum, is for international liquidity exposure,” he says. “There will be this continual looking outside of home markets for foreign investment opportunities. Within Asia, that is happening already.”

Prior to its Japan announcement today, S&P unveiled a similar agreement with Chinese asset manager Bosera this April to create an ETF based on the S&P 500. The fund has not been launched yet, but Steadman says he is seeing ETF sponsors aggressively marketing their products listed outside Asia to Asian investors.

He is also encouraging ETF sponsors to consider using its indices linked to assets classes other than equities, and sees an opportunity in bond products in particular.

ETFs based on S&P’s international bond indices are solely US-based, but Steadman says the firm is hoping to have ETFs based on its bond indices trading in Asia as well. S&P has a family of bond indices including international treasury and specialised products such as municipal bonds, but it is also striving to build out a set of international corporate bonds.

Furthermore, Steadman notes a strategic shift in the ETF industry. “It used to be that ETF sponsors would come to an index provider and say, ‘I see that index on your shelf, I want to use that to create an ETF’.

“But what is happening more and more when we meet an ETF sponsor, they map out the different areas of interest for them, the concepts and types of exposure they are looking to offer investors, and we collaboratively work on creating a new index.

“The bond space is more challenging and not as straightforward as equities, but the complication is beneficial in the sense that both parties arrive at an index that will be an achievable, fair benchmark that they can use to successfully manage an ETF.”