STOXX CEO Matteo Andreetto made the move from the world of investment banking to index investing at an interesting time. As the percentage of institutional investors switching to passive strategies has increased in recent years, so too has the number of index products built with their specific requirements in mind. Frustration with the high fees and lackluster performance of active strategies pushed more than $400 billion into passive funds in 2015. At Zurich-based STOXX, a wholly owned subsidiary of Germany’s Deutsche Börse, the trend has led to the creation of a family of new products, some built with direct involvement from pension funds that say they need indexes that better suit their risk management and exposure needs.
Andreetto, 41, spent almost 15 years at Goldman Sachs, Merrill Lynch and UniCredit before heading up marketing and business development for London-based asset manager Method Investments & Advisory. He joined Deutsche Börse two years ago as global head of sales and senior managing director at its STOXX unit, attracted to the neutrality that he believes indexing provides. The London-based executive was appointed CEO in March.
Andreetto, who grew up near Venice, Italy, and holds a BA in economics and finance from Bocconi University in Milan, uses an American football analogy to explain how he perceives STOXX’s place in the markets. “We have this neutral role that we try to play in the overall investment solutions ecosystem; we are the quarterback,” he says. “We receive the ball and pass it, for implementation, to whoever is better suited according to the asset owners’ requirements.”
Associate Editor Kaitlin Ugolik recently spoke with Andreetto about his views on indexing and some of the new products STOXX has launched in recent months.
Institutional Investor: What’s one significant change that you have made at STOXX?
Andreetto: When I joined, I set up an asset owner consulting unit. On a daily basis we engage either directly with asset owners or with consultants — the Mercers and Towers Watsons. At the end of the day, the consultants are the ones with the relationships with a lot of asset owners, and talking to them helps us find solutions around some investor problems they have identified. It helps us to leverage our reach.
Based on those discussions, and discussions with investors, what do you think is behind the shift from active to passive investing?
There is demand in the marketplace for both passive and active investment strategies. At STOXX, our focus is on the passive side. We develop indexes that are rules-based, transparent and liquid and that allow investors to gain exposure to their desired strategies. We’ve seen increased movement toward passive investment, which we can attribute to a number of factors, including enhanced risk-reward, lower costs and reduced operational risk. Passive strategies have historically outperformed active strategies. We also are seeing shifts in the regulatory landscape that make passive management more appealing to both retail and institutional investors, as well as increased interest among institutional investors for passive strategies for asset allocation.
All of our indexes can be used in multiple ways, and already are. What was very interesting with the True Exposure family of indexes, which is 100 percent exposure to companies doing business in the U.S., was that I thought the first usage of the technology would be for risk management purposes. It ended up winning the award from ETF.com as the best index provider for ETFs in Europe in 2015. It’s interesting because there are no ETFs on TRU yet. That validates my point: That every time we design, if we design by focusing on an investor’s problem, we are basically addressing multiple usages of the product. It’s not innovation for the sake of innovation, but really always thinking about the client’s needs and designing investment solutions around those needs.
What specific need do the True Exposure indexes address?
It became very evident that there was a problem during the southern European crisis in 2012, when Italy, Greece and Spain potentially could have left the EU. We found that a significant number of companies were actually exposed to southern Europe, despite the fact that they were listed in quite safe countries. Something similar happened at the beginning of this year with China. Because nearly 40 percent of the revenue of the S&P 500 is exposed to non-U.S. revenue, the S&P 500 basically had a significant correction during a two-week period, compared to what would have been the performance of a 100 percent U.S.-exposed index.
We looked at the investor need, the problem, and structured a solution around it. Our competitors allocate using global GDP if exposure isn’t properly classified. We argue: That’s not the best way, because your revenues will come from different countries, so it’s not necessarily purely based on GDP but also on which sector you are in and the trade dynamics between the country you are and the country you try to estimate. The auto sector is a perfect example: On one side BMW gives 100 percent granularity of its revenue, with percentages. Daimler, however, gives macro regions. But apply global GDP to the European exposure of Daimler, and it’s not necessarily the best way of estimating country exposure. Taking into consideration those dimensions, we created a more precise type of exposure estimation compared to what GDP will give you.
STOXX also recently launched its first fixed-income product. Why now?
We always had the capability of doing fixed-income indexes, because we are a real-time calculator for all market indexes, but we decided not to enter fixed income because we thought it would be very difficult to add value. But while looking at fixed-income data in general, we discovered a negative correlation between fixed income and the Euro STOXX 50 equity index. We thought it was worth exploring that correlation to increase return for the unit of risk investors are taking. We decided to leverage our existing infrastructure and data sets of credit securities to launch the Euro STOXX 50 corporate bond index. Rather than coming up with another exposure index, we took a household name that many already have in their portfolios, the Euro STOXX 50, and took it into another asset class: corporate bonds. The way the index is constructed, it is basically the same issuers that you find in the equity index as constituents.
An extension of this idea came at the end of May, when we launched the Euro STOXX 50 multiasset family. We are trying to extrapolate the value of the negative correlation found between asset classes.
Are ESG needs another growing concern? How is STOXX addressing the area of responsible investing?
Investors increasingly are using environmental, social and governance criteria to ensure that they are investing ethically. For example, there has been increased demand in the marketplace for investing strategies that exclude companies that produce significant carbon emissions. STOXX recently launched a family of low-carbon indexes, designed to act as underlyings for exchange-traded funds and other investable products, such as structured products and derivatives, and as benchmarks for passive and active investment strategies. We use data on the reported and estimated emissions of companies around the world to measure existing emissions and note the steps that companies are taking to proactively reduce emissions in the future. We have spent a lot of time with investors, and incorporated their feedback.