EDHEC-Risk Asian Index Survey 2011

his is the first comprehensive survey of Asian investment professionals that identifies the criteria investors use to assess and select stock and bond indices, measures satisfaction of Asian investors with existing indices, and documents their segmentation practices. It includes comparisons with results from sister surveys of European and North-American investors.

The 127 Asian investment professionals, representing asset managers, institutional investors, investment consultants, and private wealth managers, who responded to the survey are principally from the three asset management hubs in the Asia Pacific region (Australia, Singapore and Hong Kong), but a wide range of other countries are represented, including India, China, Japan and New Zealand.

This new survey-based evidence will be useful to Asian investors who wish to benchmark their indexation practices to research advances as well as to the practices of their peers in the region and globally. It will also provide much-needed information to providers of investment solutions who want to better address the needs of Asian investors.

Among the key results of the survey:

  • Even though 88% of respondents consider that transparency is a key factor (liquidity, objectivity and transparency are the three most important criteria for investors in selecting or assessing an index), numerous index providers do not provide free and easy access to the composition of their indices.
  • 59.8% of respondents see significant problems with standard cap-weighted equity indices, while only 17.6% see no issues with such indices (the remaining respondents do not offer an opinion).
  • The results show that while indices are relatively widely used in all asset classes, satisfaction rates are moderate to low, especially for fixed-income indices, where fewer than 50% of respondents are satisfied with the indices they are using.
  • While 65% of respondents judge equity sector indices to be important, only 47% see equity style indices as important for their investment process (despite academic evidence that style factors such as value and size have strong explanatory power for expected returns). Within the Asian investment universe, country indices also tend to carry more weight than sector indices – again surprising in the light of evidence on the diminishing potential for diversification across countries.
  • More than 77% of respondents consider that corporate bond indices lack reliability in terms of interest rate and credit risk.
  • Unlike investors in Europe and North America, Asian investors consider the risk-return properties of an index to be important when making the decision to adopt an index.
  • Sub-segment indices are more important for bond indices than for equity indices. A clear majority of respondents who invest in government bonds consider credit-segment indices to be of high or very high importance. Likewise, a clear majority of corporate bond respondents see maturity-segment and credit-rating segment indices as critical.
  • The survey shows that a generic index construction approach is not necessarily consistent with investor’s varying investment objectives, which can differ across asset classes or even across investors who invest in the same asset class. The challenge for indices in the future may be to find a better match between the requirements and objectives of investors and the properties of the indices and benchmarks they have at their disposal.