Potential for SA growth exists if country solves political woes – S&P Dow Jones Indices CEO
JOHANNESBURG — Alex Matturri, the CEO of S&P Dow Jones Indices, is in South Africa this week as part of a visit to the country. I managed to interview Matturri as well as Zack Bezuidenhout - who is the head of client coverage for S&P Dow Jones Indices SA - about how the organisation views the South African market amid recent political developments. Our discussion, which took place at the Johannesburg Stock Exchange, also extended to the debate raging over passive versus active, and how interest in emerging markets grew strongly in the latter half of 2017. - Gareth van Zyl I’m Alex Matturri and I’m the CEO of S&P Dow Jones Indices. I’m Zack Bezuidenhout and I’m the head of client coverage for S&P Dow Jones Indices, SA. Can you tell us more about your organisation's involvement in SA? I think from a parent-company standpoint we’ve actually just celebrated the 10th anniversary of having the ratings side of our business open up an office here. That led to our visiting as an index business starting around 2011, initially covering it out of Dubai. As we saw opportunities in the market we hired Zack, who joined us about 4.5 years ago now. Part of our philosophy when we open up a new office is to hire somebody local that knows the local market and Zack knew all the players. He was a customer at the time, so, it just brings a different understanding for us as we expand into the market here. How big is the office in South Africa Zack? The office generally runs where the calculations and the regulatory offices are so, the London and the New York office. We typically just function as satellite sales offices outside of those two big hubs. Obviously, we have big offices in China as well so, it’s still relatively small but the function is really just from a sales perspective. How important is the SA market to the S&P, just in terms of our relevance in the global market? We’ve had a strategy for quite a few years to be the local provider into the local market, unlike some of our competitors that look at selling the same set of indices globally, no matter where they are. We like to build from a local perspective. Here, clearly, we have competition with the JSE’s own indices but we saw the potential here of, number one, being a second player in the market, by bringing in some innovation and new ideas into the marketplace. So, to us, it’s as important as any other market that we’ve been expanding in. The potential for SA in terms of the growth [is there], but it clearly needs to get past the political issues that have been holding back some of the economic growth over the last few years. But we think the potential for the markets have become more sophisticated with the introduction of more, and more ETF and index-based strategies. We see a lot of opportunities that continue to grow for many years for us. There’s been a big debate around passive versus active. What are you seeing here? You’re at an event here today, what’s the feedback from the markets? Is passive growing in SA? Well, I think it’s still early days. I think the same data and the same characteristics of the market here we’ve seen in many other parts of the world. The passive/active discussion or debate – it’s not necessarily one or the other, firstly. We don’t say that there aren’t good active managers. There certainly are good ones out there, but for the average investor to find that manager and to find them on a consistent basis is very hard, and there’s a lot of reasons why managers tend to underperform against the appropriate benchmarks that are being measured. A lot of managers don’t measure themselves against the right benchmarks so that’s one step that by bringing in some transparency it helps people make informed decisions. So, the performance here has been no different than we’ve seen in other markets, where most managers over longer periods of time will underperform. I think in March we have the next version of SPIVA (S&P Indices Versus Active) coming out into the marketplace, which will give us a fresh set of data, but we’ve seen this pattern in all the various marketplaces so that’s one of the reasons why I think you’ve seen this growing trend of passive investing. It’s just that active managers have a hard time performing well, relative to their benchmarks. Again, this is a trend that’s kind of like a tsunami-type trend. Really, it’s global. It started in the US but it’s certainly nothing new. It’s actually been happening for quite a while. In the same pattern with that has come the growth of ETFs. Now, ETFs are just a delivery mechanism for passive products and, also, for active products. But with ETFs come transparency, lower cost products, which are good for investors. So, we see the same patterns here in South Africa that we think are just now starting to see the green shoots that will play out over many years. And in SA, we’ve got a lot of players like CoreShares, Sygnia, etc., who are focusing and honing in on ETFs and the likes of Smart Beta. So, you obviously have a growing base of clients here that you can service here? Yes, absolutely. In fact, you typically start out with plain vanilla index type products. We’ve expanded into fixed income, Smart Beta or factory-based indices, thematic ideas, multi asset class. It’s just a question of when the market is ready. These are ideas that we’ve used in other marketplaces and as we sense that the market is ready and talking to the product distributors about when we can bring more product into the marketplace. You don’t want to saturate it too early because then there’s too many products out there and people don’t understand it. So, it has to be done in a concerted effort where we can help educate the marketplace. Events like we had today are really geared for education. Getting the discussion among all the product issuers, among the public, to understand how indices can help them meet their goals. It’s over a million. About 50 here in SA. Yes, 50 and that’s ranging from fixed income, to equities, to Smart Beta so, you can really talk the multi-asset class solutions space. We basically have those covered on the ETFs on the JSE as well. Investors can actually build a full multi-asset class solution with ETFs linked to S&P Indices. In terms of the South African indices would you be looking at mid or mid-cap companies going forward, because we’re going through some big political changes at the moment, and there’s talk that some of these mid-cap companies might start to take off in years to come? Yes, so obviously, we have the top-50 covered, which looks at all those large-cap companies, and the nice thing about that is that it’s got that 10% capping in. But some of the Smart Beta indices that we run and the ETFs on the back of those definitely have more of a small-cap bias to them. So, if you’re interested in that mid-cap exposure, those Smart Beta indices or ETFs are probably going to give you that. In terms of where investors are going, are they heading more towards emerging markets this year or developed markets? What are you seeing? It’s still pretty early, and certainly, with the volatility in the marketplace, I don’t think the trends are really clear. I would say that if you look back last year there was a big movement into a lot of emerging markets. Probably more in the second-half of the year, and people were looking at the higher growth rates in emerging markets. In developed markets also, obviously, the big movement started in the US after the US elections. That continued throughout the year, and there’s still very strong markets there. We saw the developed markets pick up, and emerging markets pick up. It will be interesting to see how things play out now because of the volatility. But I think if this current bout of global volatility is due to, let’s call it supply, demand, and balances, or maybe markets overbought, and not for economic reasons. I think you’ll see good strength in emerging markets because the underlying pinning of the liquidity that’s come into a lot of these markets needs a place to go, and emerging markets is still going to be better growth rates overall. Do you think that SA could be included in that basket? I think it’s interesting, yes, I think especially with the political change. Often times in emerging markets, you need that spark to really draw. Especially when you get the international money to come in. The political issue here has been well known for a while so, it’s not like all of a sudden that one day, well, one day there’ll be a new president, clearly, but that’s the type of thing that global investors will look to feel. If they’re more comfortable there’s more stability in the marketplace, more trust that the economic policies are really there for good then I think you’ll see a lot more of the foreign monies start to flow in, into the SA marketplace. What do you make of some of the volatility in the Dow Jones earlier this year? It looks like there’s a correction that’s started to happen. There’s been a good run for a few years now but it’s starting to correct, it seems. Yes, again, we don’t forecast market movements. We certainly observe them mainly because we’re based in the US so, we see it on a daily basis. I think we look at it from a business standpoint. We look at a much more longer-term horizon. What happens over the short-term, and we can go back. I’ve been in this business for 30-years. The number of corrections and bear markets that happen before you know they’ve even happened they’re over in times, and that may be the case here. You can’t have markets go up forever. You’ve had some real changes in the economics. You’ve had a lot of liquidity coming into the marketplaces from the Central Banks. That’s changed. In the US now, you’ve got interest rates starting to move back up, but for a good reason – not for inflation, because the economy is actually becoming quite strong. Those are all good reasons why, over time, they should drive equity markets. Short-term – you can’t predict or make predictions like that. What do you make of these so-called robo-traders? There was talk here in SA when there was that correction on the Dow Jones the other day that we should ‘blame it on the robo-traders.’ Do you think that that’s a fair comment? Well, technology has been involved in investing for many years, in trading. They provide liquidity, there’s many different reasons. It’s a much more complex ecosystem than I think a lot of people realise. I think where things have changed, say from 10 or 15 years ago, was that there was much more human intervention. Now, it’s much more automated, but at the same time they’re all looking at taking advantage of different strategies. That’s no different than the individual investors who decide to say, ‘you know what, I think this stock is cheaper and that stock is rich.’ Now, technology does that instantly. They can capture news information so, I think what you’re seeing is that the sharp changes are because information is digested right away, and it’s reflected in stock prices very quickly. That’s why you get these huge swings but at the same time, if they’re being used to help provide liquidity that’s not necessarily bad. But some of them will be used to follow momentum strategies – if the markets going down they’re going to continue to sell. Other people may use the same technology to do a mean reversion strategy. They’ll be buying when the market is going down, to get back to some medium level. Again, the fact that it’s technology, in and of itself, it doesn’t bother me. That’s just a way of the growth of the markets. As a last question, what is your plan for the SA market? Are you going to be launching more indices in years to come? What is the general strategy here? Yes, I think we’ve got most of the asset classes covered, as well as most of the factors covered. I think some of the new things that we’re thinking of, and this is really going to be a demand from the big pension funds, is looking at ESG (Environmental, Social and Governance) indices. We’ve been working on some concepts regarding carbon efficient and fossil fuel free indices. But really positioning more indices for the institutional pension fund market because we feel that that’s probably the market that still needs to wake up to some of this innovation in the passive space, and maybe substituting some of that active exposure or overweight inactive exposure that they have with some of the new innovative factor and index solutions that we’ve got. So, would you look at possible renewable indices as well, because that’s another big field that I imagine would tie into what you’ve just mentioned? Yes so, within the global indices it’s definitely possible. Within a South African space, we’re a bit limited because of the size of the market but it’s definitely something that we have. We’ve acquired a company called True Cost, where it’s really focussed on the climate change and then climate data as well. So, again, a big focus on ESG going forward, as well, and blending ESG as a factor with some of the other factors like quality. An interesting index that we have is our Global Long-Term Value Creation Index, and that combines quality and governance as a concept for global investing. The whole idea of ESG is interesting. You’re living through a problem now in Cape Town that highlights the risks associated with climate change, whether it’s policies, whether it’s global warming – I’ll leave it for the experts to decide what’s causing the change. But there’s financial impacts of that. Companies that were maybe based in Cape Town, because they didn’t think water was a problem, but if you’re using a lot of water in your manufacturing facilities, for example, and all of a sudden water becomes a scarce commodity. That’s a huge risk to your profitability or your ability to grow. So, I think more and more people are looking at ESG from the risk side also, and trying to analyse – what are the implications of those two companies? One of the interesting statistics is that the cheapest water in the world is in a place that you would never think of, and that’s Saudi Arabia. The most expensive water in the world is in Denmark. Again, a place you wouldn’t think – it has plenty of water. But if you build a plant in one of these countries in Saudi Arabia, because water there is subsidised, and all of a sudden water costs go up. That has a financial impact and people haven’t in the past thought of ESG. It was always about the corporate governance – can you do well? But there’s also a lot of risk associated with this so, I think people and investors are now starting to think about how do you factor that into your investment decisions? So, when things happen you at least understand the implications. Great, thank you very much for chatting to me today. Pleasure.