Qontigo flourishes after turning point year
2019 was a turning point year for the newly named Qontigo group, the year when its index provider, STOXX, merged with US-analytic firm Axioma. The resulting company is majority owned by Deutsche Boerse and has the index capabilities of STOXX and DAX, as well as the analytical skills of Axioma.
Stephan Flaegel, Chief Product Officer for Index, joined the firm two months after the merger in December 2019, and, of course, with the benefit of hindsight, just two to three months before the world, as it was known then, changed forever, due to the pandemic.
Flaegel says: “The first year went very differently from what we expected as when I joined, we had a clear road map for 2020, that included refocusing on new client segments and adding in more focus on ESG and sustainability.
“Our plan also was to build a new technology infrastructure and, in the end, we accomplished a lot of those things,” he says, although the volatility of last March somewhat delayed the whole process. “We went through a detailed analysis of the markets, the liquidity and depth of our indices and unlike some of our competitors went ahead with the March 2020 review which turned out to be the right decision.”
The second half of the year was overtaken by a major project on the DAX index, which had sailed into troubled waters over the Wirecard insolvency. “We decided to review the German DAX, which is now in its thirties, to make it fit for the next 30 years,” Flaegel says. “The Wirecard issue saw a DAX company become insolvent in one or two days so we thought it would be good to look at the DAX overall and make sure the rules still applied and were the right rules.”
There was a catalogue of things that Qontigo wanted to examine so put the issue out to a public consultation which received 630 responses. “As a result, we introduced measures to increase the quality of the DAX, including the new rule that new members had to have two years positive EBITDA and requiring that DAX members satisfied certain sections of the German governance code, specifically in terms of audit committee requirements. The rules were also simplified with criteria for ranking reduced from liquidity and market capitalisation to market capitalisation only. Finally, the companies within the index went from 30 names to 40.
“The number one topic for us at Qontigo is Sustainability ,” Flaegel says. “The merger with Axioma gives the index business, the STOXX brand, unique opportunities and most importantly part of that is that we are focusing on some specialised indices.”
The next part of the action plan for Qontigo was addressing ETF issuers even more than they had previously. “We have been the number one provider to the structured product market and that continues to be a core segment for us. In addition, ETF issuers deserve more focus from STOXX as growth continues to accelerate and assets are shifting into sustainable products. For the next phase of our growth, we need to look at markets that enable growth.”
The ESG and Sustainability initiatives are roughly divided across three buckets and themes: ESG baseline, climate change and thematic or impact investing.
Last July saw Qontigo issue their STOXX Paris-Aligned Benchmark Indices, based on liquid securities from a selection of STOXX Benchmark Indices. The indices follow the EU Paris-aligned Benchmark (EU PAB) requirements outlined by the Technical Expert Group (TEG) on climate benchmarks and have been licensed by Amundi and Franklin Templeton. More variations on these indices are due this summer.
The firm has also introduced indices based on ‘exclude’ and ‘enhanced’ elements of ESG. “ESG is a play to mitigate risk or to express a value so we have to come up with a spectrum of ESG indices depending on our clients’ appetite for sustainability exposure.”
The exclusion indices exclude companies on the basis of their ESG scores or product involvement, while the enhanced indices leverage the Axioma optimiser, taking a parent index and optimising it to achieve a specific result for an investment objective, such as a tracking error of less than 1 per cent, combined with a targeted ESG score. This approach has been licensed for the DAX ESG Index by BlackRock.
In terms of impact investing, Qontigo is actively researching and designing indices that enhance the progress towards sustainable development goals.
“We are the link between the real economy and the finance economy,” Flaegel says. “We have a certain responsibility to come up with indices that further the transition to sustainable development goals and Qontigo has a unique skill set in our capabilities with optimisation, sustainability and thematics which enable us to develop tailor-made solutions to our clients.”