Solactive is a Frankfurt-based index provider. The company recently rolled out an Australia index which has been taken up by BetaShares as underlying for the A200 ETF. We spoke to Timo Pfeiffer, head of research at Solactive, to get a better understanding of where Solactive sees the opportunity in Australia and how the index market is changing.
ETF Stream: You've just launched a plain vanilla Australia index - the Solactive Australia 200 Index. How is your index different from the famous ASX 200?
Timo Pfeiffer: Well, let's start with what they have in common: they're both made up of 200 stocks and specifically the 200 largest by free float market capitalisation. They both cover around 90% of the Australian equity market.
In terms of differences, we're operating with a buffer rule where we say stocks can only get kicked out at the quarterly rebalancing if they fall out of the top 225 largest companies. We've done this to reduce turnover. We also have an additional liquidity filter where we only accept stocks that have $100,000 average daily trading volume.
Besides differences in constructing the index, the ASX 200 is a big brand in Australia - we are not. We are on the slim and more efficient side. This is how we approach benchmarking.
When you devised the index were you surprised by the dominance of the biggest five banks in the Australian equity market?
It wasn't a surprise. Switzerland also has a high concentration in just a few names. It's not specific or unique to Australia.
We do have some versions of indexes for markets where we put caps for the biggest names. But that often has to do with regulatory requirements in different regions.
Let's talk about your business model, which may be unfamiliar to Australians. Solactive is different from the major index providers in that you charge a flat fee rather than a share of AUM, is that right?
There are a few differences and pricing is just one. The other index providers that you refer to are what we'll call big brand managers. There is big value in having a brand. We aren't building a big branded index and don't want to. We are a value and IT-driven business.
Yes, in standard market cap weighted indexes we often operate on a flat fee rather than a basis point share. That's not to say we don't like basis point shares - especially when we have IP involved. But ETF issuers like flat fees, especially for market cap weighted indexes where a lot of it is about the price game.
There is a lot of price pressure on core benchmark offerings. You feel this in the whole value chain. We are disrupting on the index side of things.
Are you calling bluff on major index providers franchise value? And are you driving commoditisation of the indexing business?
I wouldn't be that extreme; the indexing game has different parts. Plain vanilla market cap benchmarks are getting commoditised, yes. But I don't think there is any bluff to call. On the contrary, I do see a strong value in having a brand name. And let's face it: I would love to have one. But it takes a lot of money and time to run around the world and build the brand. It's just a different approach. But I would love a strong brand.
What do you make of self-indexing? Is there a danger of a conflict of interest for ETF issuers (i.e. putting securities into indexes that they no longer want to hold?)
Yes, by definition. If you're managing money and also managing an index there is a conflict of interest. The question is what you do about it. You're talking about an asset manager, but we could just as easily talk about banks.
There are regulatory initiatives currently underway in Europe to deal with this. Benchmark regulations will give a guideline for how to manage them. So yes, the conflict is there but it needs to be managed. Then there shouldn't be an issue.
Where do you see the opportunity in the Australian market?
In two places. The first is what we've already discussed and it is not specific to Australia. It is that in many markets globally there is a price game happening, especially in core offerings. We can and are contributing to that in Australia.
The second is that, given it's a young growing market there's room for innovative exposures. Some of those, like thematic exposures, are common across the globe. For instance, we're seeing indexes in cyber security and future cars in other parts of the world. There's opportunity in Australia for that. We are happy to play a role there too.
You guys also don't seem to do events and marketing like other index providers do. At any ETF event the index providers show up and hand out literature and give presentations.
You won't see us do that and we don't do it intentionally. It means cost for staffing and cost for brochures, etc. Our website needs work and we're working to improve it. And that's the bit of marketing we should invest in.
You guys seem to be growing quite quickly. Am I correct in inferring that?
Yes, we are growing very quickly. We have opened our first office overseas in Toronto, to complement the mothership in Frankfurt. This will be our base as we're active and pressing into North America. I've mentioned Australia, but there is also more to come in Asia. It's being driven by demand in the product space. Rapid growth comes with challenges, but we are fortunate to be growing.