Article
In the latest of our series of short interviews, Valerio Schmitz-Esser, Head of Index Solutions, discusses how index solutions have fared during this period of exceptional turbulence, and identifies some noteworthy trends.
June 29, 2020
Quite the opposite: the long-term shift from actively managed strategies toward index-tracking products has continued unabated, with the latter commanding a continually increasing market share. According to a report by Morningstar, we witnessed very significant mutual funds outflows in Europe of EUR 246 bn in March, but only EUR 24 bn of these outflows stemmed from index funds and exchange-traded funds (ETFs). In previous bear markets, investors have tended to put their faith in active managers to provide some downside insulation, but during the COVID-19-induced turmoil, the guarantee of no significant market underperformance that index-tracking solutions provide clearly proved appealing.
We actually witnessed a complete bifurcation in flows across the different classes of index solutions. On the one hand, ETFs and various categories of index solutions falling into a niche category suffered the biggest outflows. Meanwhile, the providers of products offering institutional investors long-term building blocks for strategic asset allocation fared much better. At Credit Suisse Asset Management, we benefited from net inflows of EUR 800 mn in March, placing us among the top four index solution businesses in Europe in terms of asset gathering.
"With 95 index funds and CHF 100 bn in assets, we have become the fourth-largest provider of index mutual funds and ETFs in Europe."
For us and for our competitors, one of the biggest hurdles was to quickly and efficiently transition from a centralized office environment to working from home. This is especially challenging for index solution teams because there is no margin for error in indexing, where a missed deadline in terms of changing portfolio constituents and/or index rebalancing will result in an unacceptable degree of tracking error. At Credit Suisse Asset Management, we have the largest index solution team in Switzerland. We have successfully managed to maintain a smooth operation with 80% of our professionals working from home, including employees from all front- and back-office functions. This demonstrates the importance of the investment we made in our customized Aladdin® system, which we rolled out in January 2019. Aladdin is a fully integrated platform that covers every function from trade execution to risk management. We also faced the additional challenge of launching three new ETFs and converting three index funds into these ETFs in the middle of the market turmoil in mid-March. In such exceptional circumstances, postponement was an obvious consideration, but the decision to continue with the schedule as planned proved the right one. The launches were highly successful, reaching more than USD 2 bn in assets at the end of May. These new products collectively form a compelling and integral component of our overall index fund offering. With 95 index funds and CHF 100 bn in assets, we have become the fourth-largest provider of index mutual funds and ETFs in Europe.
The appetite for ESG-compliant solutions is a very strong trend across the asset management industry and one that is set to endure. Across Europe, the US, Japan, Pacific (ex Japan) and the emerging-market complex, ESG benchmarks outperformed broader market indices over the first quarter of 2020. One reason for this is that the application of ESG criteria tends to reduce exposure to companies operating with riskier business models or weaker risk management systems that make for high vulnerability to external shocks. In order to meet this strong demand, we have established a full range of ESG index solutions comprising 14 tracking funds and ETFs.
"Across Europe, the US, Japan, Pacific (ex Japan) and the emerging-market complex, ESG benchmarks outperformed broader market indices over the first quarter of 2020."
Index solutions have three compelling attributes to offer to investors. Firstly, they provide very wide diversification, with most major indices incorporating hundreds if not thousands of individual securities. As such, index solutions virtually eliminate idiosyncratic risk altogether. Secondly, investors are guaranteed that there will not be a nasty shock provided by a manager who substantially underperforms the benchmark. Index solutions typically deliver above-median performance on a consistent basis because they offer full exposure to the asset class, rather than a chosen sample. This attribute is greatly appreciated particularly by institutional investors, who do not typically wish to carry much active risk in the core components of their portfolio (many favor a core/satellite approach in which only the satellites carry active risk). Lastly, index funds provide a low-cost solution by virtue of their highly competitive total expense ratios (TERs) and low turnover. TERs reflect lower implementation costs as neither broker research nor remuneration for active managers is required. In respect of low turnover, the MSCI World Index provides a prime example with a turnover of just 2.5% per annum. Low turnover means less trading, which supports the competitive TER.
Head of Index Solutions
Valerio Schmitz-Esser, Managing Director, has more than 23 years of professional and executive experience in quantitative finance, index research, and portfolio management. Valerio was appointed Head of Index Solutions at Credit Suisse Asset Management in March 2010. Valerio joined Credit Suisse in 2000 as an index portfolio manager. From 2002 to 2010, he held several team lead positions in quantitative portfolio management at Credit Suisse Asset Management. From 1996 to 2000, Valerio was a research assistant at the Chair of Corporate Finance and Governance at the University of Fribourg. Valerio holds a PhD from the University of Fribourg in Switzerland and is a CFA charterholder.