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Indexing Strategies Asia
November 2007
Fran Thompson
Director, FTSE Asia Pacific
INDEXING IN ASIA
© FTSE LIMITED 2004. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
•Growth of institutional assets in Asia
•Investment Strategy indexing takes hold
•Unique asset classes - real estate and infrastructure
•Emerging markets
•Development of Asian exchange indices
•2008 outlook in Asian indexing
OVERVIEW
Fran Thompson November 2007Page 2 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Jason Hsu 28 November, 2007Page 2
Growth of Institutional Assets in Asia
Fran Thompson November 2007Page 3 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Asian Pension Assets Growing
Pension Assets as a Share of GDP
0%
20%
40%
60%
80%
100%
120%
2005 2010 2015
Australia Japan Asia
* CLSA, Dec. 2005
Pension Assets as a Share of GDP
0%
20%
40%
60%
80%
100%
2005 2010 2015
Korea Malaysia China
Taiwan Singapore Thailand
India Hong Kong Indonesia
Philippines
Fran Thompson November 2007Page 4 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Jason Hsu 28 November, 2007Page 4
Indexing: Investment Strategy Indices taking hold
Fran Thompson November 2007Page 5 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Cap-Weighted vs Wealth-Weighted
Cap-weighted
• Macro-consistent
• Recognise future earnings growth expectations
• Occupy prime place in the benchmark hierarchy
• Highly transparent and uniquely specified
Wealth-weighted• Consistent with long-
term investment principles
• Don’t recognise future earnings growth
• No current standing in the benchmark hierarchy
• Opaque and non-unique
Fran Thompson November 2007Page 6 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Cap-Weighted vs Wealth-Weighted
Cap-weighted
• Very limited rebalancing
• Subject to market bubbles
• No rebalancing effects
• Concentration in positions
• No diversity to strategies
Wealth-weighted• Rebalancing is part of
the alpha strategy • Value and anti-
momentum biases• Growth from
rebalancing• Less concentration in
positions• Diversity to strategies
Fran Thompson November 2007Page 7 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
FTSE/RAFI Country Weightings in Cap-Weighted World Index
Source: Research Affiliates, LLC.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
US Canada UK Germany France Italy Other Europe Asia Pacific ex Japan Japan
Japan
US
Fran Thompson November 2007Page 8 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
FTSE/RAFI Country Weightings in Fundamentally Weighted World Index
Source: Research Affiliates, LLC.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jan-88 Jan-90 Jan-92 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06
US Canada UK Germany France Italy Other Europe Asia Pacific ex Japan Japan
Japan
US
Fran Thompson November 2007Page 9 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
0
500
1000
1500
2000
2500
3000
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
Mkt Cap Earnings Cashflow Dividends Book
Prices Follow Wealth: Developed Markets
Fran Thompson November 2007Page 10 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Jason Hsu 28 November, 2007Page 10
Indexing: Unique Asset Classes
Fran Thompson November 2007Page 11 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Unique Asset Classes – Real Estate
FTSE EPRA/NAREIT Asia 33 Index vs. FTSE All-World Index
Price Performance in U.S. Dollars from 18 February 2005 to 14 September 2007
80
100
120
140
160
180
200
Feb-05 May-05 Aug-05 Nov-05 Feb-06 May-06 Aug-06 Nov-06 Feb-07 May-07 Aug-07
Rebase
d V
alu
e (18 F
ebru
ary
2005 =
100)
FTSE EPRA/NAREIT Asia 33 Index FTSE All-World Index
Fran Thompson November 2007Page 12 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Unique Asset Classes – Infrastructure
Fran Thompson November 2007Page 13 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Jason Hsu 28 November, 2007Page 13
Indexing: Emerging markets
Fran Thompson November 2007Page 14 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
China – FTSE Xinhua Index
Fran Thompson November 2007Page 15 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Vietnam
Source: The World Bank
80%2,254,4871,183,815China
68%51,55630,726Vietnam
Growth20052000
GNI (current US$) (millions)
Fran Thompson November 2007Page 16 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Jason Hsu 28 November, 2007Page 16
Indexing: Development of exchanges and their domestic benchmarks
Fran Thompson November 2007Page 17 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Classification of financial markets
FTSE Country Classification introduced in 2004 and reviews markets based on:
•Market & regulatory environment
•Custody and settlement
•Dealing landscape
•Derivatives market
Fran Thompson November 2007Page 18 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Development of Asian Exchanges
Philippines
Thailand
PakistanJapan
MalaysiaHong Kong
IndonesiaSingapore
IndiaTaiwanNew Zealand
China (A share only)
South KoreaAustralia
Secondary Emerging
Advanced Emerging
Developed
Fran Thompson November 2007Page 19 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Case Study 1: TSEC Taiwan
FTSE TSEC Index Series
TSEC Taiwan
50 Index
TSEC Taiwan
Mid-Cap 100 Index
TSEC Taiwan
Eight Industries Index
TSEC Taiwan
Dividend+ Index
TSEC Taiwan
Technology Index
(Small Cap)
Fran Thompson November 2007Page 20 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Case Study 2: Malaysia
Burs
a M
ala
ysia
Main
Board
Fledgling
EMAS
Large Cap Mid Cap Small Cap
EMAS Shariah
Hijrah Shariah
MESDAQ
Second BoardBurs
a
Mala
ysia
Second B
oard
& M
ESDAQ
Mark
et
Fran Thompson November 2007Page 21 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Case Study 3: Singapore
Straits Times Index
(30 Stocks)
FTSE ST Mid Cap Index
FTSE ST Small Cap Index
FTSE ST Fledgling Index
FTSE STAll-ShareIndex(98% of
SGX Main
Board)
13
FTSE ST
All-Share
Sector
Indices
New FTSE ST Index Family
Straits Times Index
(50 Stocks)
Current ST Index Family
FTSE STChinaIndex
7 All-Share Sector Indices
Fran Thompson November 2007Page 22 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Case Study 4: Thailand
The new series is likely to be similar to other exchange indices with:
•Large cap
•Mid Cap
•Small Cap
•Fledgling
Fran Thompson November 2007Page 23 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Jason Hsu 28 November, 2007Page 23
Indexing: 2008 Outlook in Asian Indexing
Fran Thompson November 2007Page 24 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Global Developments
New approaches to weighting:
• Capping
• Dividends
• Fundamental factors
• Wealth weights
Fran Thompson November 2007Page 25 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Asian Developments
• Emerging market institutions beginning international investment with various investment mandates. In Asia:
• China NSSF
• Taiwan Bureau of Labor Insurance
• Korea Investment Corporation
Fran Thompson November 2007Page 26 Indexing Strategies Asia 2007
© FTSE LIMITED 2007. ALL RIGHTS RESERVED. ANY INFORMATION PRODUCED MUST BE DONE WITH PRIOR AGREEMENT WITH FTSE.
Shariah Investment
(2 indices) (6 indices) (9 indices) (4 indices) (10 indices)(16 indices)
95 global indices in total: (36 x Global Developed); (31 x Global Emerging); (28 x Global Rest of World)
Fran Thompson
Director – Asia Pacific
FTSE Group
Tel No: (852) 2230 5800
Email: [email protected]
Index assistance: [email protected]
Contact Details