Qontigo has already built more than ten thousand indices, commissioned by asset owners such as APG and Willis Towers Watson and asset managers such as BlackRock. Institutional investors increasingly want a customised index that is in line with their own investment objectives, according to Arun Singhal of Qontigo.
Investors have a greater need for insight, transparency and control, he explained. “That’s what “we” have in everyday life too. So why not about our investments?”
Singhal is head of product management at the company which has actually been in this capacity for only two years. Risk manager Axioma, German market index DAX and index builder STOXX came together in 2019. Qontigo was to be the answer to the increasingly intensive use of indices, helped by the growing market share of “passive investing” and the need of investors to be able to make active choices in the process, such as exclusion and positive selection.
Thanks to evolved techniques, this is now possible, explained Singhal. “Indices are no longer just parameters that can measure the market, they are now able to replicate various forms of factor strategies, ESG and sustainable market solutions.”
Through the addition of Axioma’s risk models and portfolio optimisation, Qontigo can then build indices that capture a specific investment objective, Singhal said. “Systematic, transparent, rules-based indices.”
Shaving
Roughly speaking, the construction of such an index starts broadly, like the STOXX Global 1800, after which companies are shaved off based on an investor’s investment objective.
“But that is a very general approach,” said Singhal. “We also use a lot of portfolio construction techniques. For example, if an investor wants a momentum strategy, we use the risk factor model that calibrates the exposure to that factor to a broad index. But also consider the tracking error. One client wants to minimise tracking error, so we force the index to do the same. Another client has different investment objectives.”
At the end of the day, the index is based specifically on the client, but Singhal emphasised that it is still a broad index that covers a large part of the market. “We also carry out a liquidity analysis, because we want to ensure that we meet the liquidity based on the investment objective”.
BlackRock and APG
One example of such a customised index is the series the German company has built for APG, in cooperation with BlackRock: the iSTOXX APG World Responsible Investment Indices. These five indices match the ESG profile drawn up by APG. BlackRock then implements, buys and sells the appropriate shares.
APG is not alone in its demand for a targeted sustainability index. ESG, climate, SDGs: three frequently mentioned topics that clients come to Qontigo with. In the meantime, the provider has built so many index families that existing indices already suffice for most questions, according to Singhal. “From market benchmarks to factor and ESG indices. Especially for the larger institutions, customisation or adaptation is sometimes necessary.”