We define rules to help determine strategy: Alka Banerjee

NS Vageesh Mumbai | Updated on January 15, 2018

ALKA BANERJEE, MD — Product Management, S&P Dow Jones Indices

Alka Banerjee is the Managing Director — Product Management, S&P Dow Jones Indices, and also heads the company’s joint venture in India with the BSE. This is the company that calculates the indices that tell you the mood of the stock market at any time.

“We calculate more than a million indices every day — globally. We cover 83 countries,” she says. In a brief chat with BusinessLine on a recent visit to India, she explained the work of her company and the role played by indices in fostering the growth of passive fund management as opposed to active fund management. Excerpts:

On the core business of S&P indices ...

We create, calculate and maintain stock, commodity, fixed income indices which measure market movements such as the the S&P 500, which is a well known index for the US stock markets and the Dow Jones Industrial Average.

We don’t profit from market movements. We provide the intellectual property that provides tools, instruments and knowledge for investors to say where the market is moving, and characteristics of the movement. We give, through a single number, how the market has moved over a time series.

Our customers are asset managers who create mutual funds, exchanges who do derivatives trading, banks who trade in OTC products, asset managers who create exchange-traded funds.

On usage of indices in passive management...

The way people use these indices, is that you can create an MF against it. You can be either active or passive. What you can do is replicate the market in exactly the same way as it is in the index and track it. That is going to give you the performance of the market. A lot of research shows that this is possibly the best way to invest. Most active managers cannot consistently outperform over time. You can outperform for a short period of time but not in the long term.

As market gets more efficient that knowledge becomes available to everyone. The research costs in active management becomes expensive, the trading costs become expensive. So, this (passive management) is cost-effective.

On the outperformance of passive funds...

We regularly measure the performances of the indices against active funds in the same space. In our latest report published recently, we found that 92 per cent of the active funds in the US had underperformed the indices. In India where we publish the S&P BSE 30, almost 66 per cent of the active funds have underperformed when benchmarked against that index.

On the need for multiple indices ...

We started in 2014 with the BSE, took the indices they were already calculating and subsequently launched about 40 indices. Why do we need so many?

Because one index captures one section of the market — large-cap, all-cap index — covers 70 to 90 per cent of the market. Investors may want sector strategies or size or geographic diversification. For years we were the beta shop. In the last 10 years, investors felt that they cannot get sufficient diversification even with all this. In 2008, everything crashed.

On smart beta indices ...

The latest approach is smart beta indices or factor indices — where we pick characteristics of a stock other than price indices — is this stock the least volatile, the one with maximum momentum, etc. You devise rules, and using standards, pick stocks and create an index. This has been used by active managers. Anything that they do, we can put it in a rules-based format and create an index. It gives exactly what we need.

We don’t say it outperforms or bet on performance. We define rules to help determine strategy — and this is creating waves globally.

On the global experience with exchange-traded funds ...

The first ETF was launched in the 1990s. This is like an MF except that it is traded real-time on the exchange. And what has happened with ETFs in every country is that global asset managers now look at them and say this will give me the return I need from that country, instead of picking individual stocks from that country. Retail also likes it because it is liquid. ETFs are growing at the fastest rate — the asset size is over $3 trillion.

On the lukewarm market for ETFs in India ...

The cost factor, efficiencies, transparency, all play a part. In any emerging market, active management has an important role because there are inefficiencies in the market. You have gaps in knowledge and active management flourishes. This market (India) is a classic emerging market — even the US was like that some years ago. The active management industry is over 100 years old whereas the passive fund management industry is only about 25 years old. But changes are happening here rapidly. We have come a long way.

The big change that has happened is the government has decided that they should invest in equities for their pension/provident funds. And also using ETFs for the disinvestment route. This is the beginning and there is a long way to go.

Published on April 26, 2017

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