Despite being around for some time, index customisation is in its infancy when it comes to prototyping and back-testing index designs, according to Varun Pawar, vice president and global head of ICE Data Indices.
Recent progress is largely due to advances in technology, bringing more automation to index calculation and allowing clients to express their preferences using thousands of individual fields to help design indices tailored to their investment strategy.
With growth in increasingly specialised parts of the market – from ESG to thematic exposures – Pawar argued index customisation enables case-by-case implementation of client convictions and a way to disrupt the status quo.
He recently spoke with ETF Stream to offer insight into ICE’s plans in the sector.
What steps have been taken towards greater index customisation?
The trend towards customisation in indexing is only set to grow. Previously, designing an index, calculating it and publishing it on a daily basis was a monumental task. A broad municipal bond index for instance, has around 60,000 individual bonds in it. Having daily quality checks across thousands of bonds across hundreds of fields can be a big lift. This is why historically, there has not been much momentum in respect to customisation – things were done in a manner that does not scale.
At ICE, we have a very robust infrastructure with respect to the calculations of broad indices, which allows clients to pick and choose inputs and then change the rules to create a strategy that suits their needs. Our tool allows clients to bridge the gap from concept to prototype with very little effort and on a self-served basis. They can experiment with criteria across hundreds of fields and back-test their index versus the parent index based on returns, risk-based returns, duration and other analytics.
What are clients demanding in custom indices?
There is a spectrum of complexity. This starts with relatively simple custom indices, for instance taking one of our broad corporate bond indices and tilting it more heavily towards financial institutions. In this instance, a client could test this idea independently without talking to anybody on our team. Then there are more complex questions, including how clients want to reinvest cash – do they want to hold it until the end of the month and reweight all the cash into the bonds eligible for the index? While that’s the standard, sometimes clients want to rebalance cash daily.
Our team is available to help clients take those complexities into consideration.
Will fixed income remain ICE’s focus?
We are looking to expand the asset classes in which we operate. We are predominantly known for our fixed income indices after we acquired the Bank of America Merrill Lynch (BofAML) franchise.
We are the second-largest index provider in fixed income in terms of assets under management benchmarked to our indices.
We aim to grow the equity side of our index suite, with a focus on customisation. For instance, if clients have a group of separately managed accounts and require indices that are built on a per client basis, we can take care of that. Our vision is to expand the equity franchise – we’re two-thirds of the way there – with the goal of having custom indexing tools that can blend fixed income and equity indices.
We have built out the US family of indices and are rolling out the EU-UK family of indices. The aim after that will be to launch the Asia developed-market family of indices. These indices will all soon be available in the custom index tool.
What are some ESG solutions ICE is focused on?
From a Paris-Aligned Benchmark and Climate Transition Benchmark perspective, there has been solid appetite and strong ESG mandates coming out of Europe.
In terms of where we’re headed, data-focused acquisitions are providing sophisticated climate impact insights, for instance, ICE’s data on the wildfire, flooding, and hurricane risk across the US. This mapping can help clients identify areas of potential vulnerability for assets including municipal bonds or mortgage-backed securities.
How can ICE challenge other index providers?
Customisation is crucial. We have been doing this for several years already. It has always been front-and-centre for us, while others are still just getting started.
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To access the full magazine, click here.