Blue-collar finance lies behind smart beta indexes
Richard Phillips (pictured) is Co-Founder, Senior Index Analyst, and Head of Index Operations at S-Network Global Indexes. He describes his firm as: “Blue collar finance, not white collar fancy suits and Maserati finance. We work in the mill and produce a good product.”
Phillips is responsible for all aspects of index development and production, overseeing the creation and distribution of more than 200 stock market indexes which serve as the basis for over USD 5 billion in financial products.
Phillips and his co-founder Joseph LaCorte founded the firm in 1997 as a consultancy having worked in the nascent ETF industry, for UBS and Deutsche Bank, and launched S-Network Global Indexes in 2005.
“We looked at the array of products on the market and found that there were a lot of small niche indexes being published that did not pass academic scrutiny – they were more like lists,” he says.
At the time, the big index players, like S&P and MSCI, weren’t interested in niche indexes, he says. One of S-Network’s first was an alternative energy index, that has since grown into the group of Ardour Global Alternative EnergyIndexes.
“At the time, we looked at the one available on the market and the largest holding in it was General Electric – it was just a hodge podge of stocks,” Phillips says. “We brought in pure play alternative energy companies based globally and the ArdourIndex has become the dominant or most prominent global alternative energy index.”
Phillips explains that their strategy is based on three pillars which are all connected and interactive. The first is development of indexes, primarily in the smart beta space as that is the biggest growth area in indexation, the second, is the promotion of benchmarks and the third is social responsibility.
Phillips sees increased demand from ETF providers for smart beta indexes, driven by fee compression in the US caused by regulatory change that requires financial advisers to act in a fiduciary role when looking after client money.
“The landscape and performance of actively managed mutual funds has been sub par,” Phillips says. “You can see the drag on a person’s portfolio over time and the amount of a person’s wealth that is going into inferior and expensive products over time and it’s damaging to retirement plans for many people.
“So our belief is that the ETF market is going to expand and a smart beta index based on one or more economic or financial factors published and managed for a modest amount of money is going to offer a solution to the issue of fee compression and poor performance.”
Last month saw S-Network launch a new suite of nearly 70 benchmark indexes, including equity benchmarks covering US, Europe, Pacific, Developed, and Emerging Market regions, complete with sector sub-indexes. The US series also groups by market capitalisation, and growth vs. value styles. The equity benchmarks include only operating companies; REITs and MLPs are represented in separate benchmarks under the Alternative Investment category.
At the time of the launch, Phillips’ co-founder, Joseph LaCorte said: “The indexes provide unprecedented levels of transparency and utility and may be used as the underlying universes for ‘smart beta’ indexes, performance benchmarking, and institutional investment.”
Phillips says that transparency is very important to the firm. “We work to nail down the details. Something that is important now is having good, clean, scrubbed data. If someone wants to do a dividend momentum index, we have data that will support the rapid and easy development of that.”
The socially responsible part of their work continues to be important. Since that first alternative energy index, the firm has developed other indexes reflecting impact investing and environmental, social and governance (ESG) issues. They have a joint venture with Thompson Reuters to support their Corporate Responsibility Indices – a comprehensive suite of US and international indexes that emphasise companies with exemplary composite ESG compliance.