Global index mega-provider, FTSE Russell, has showcased NZ as a responsible investment benchmark haven.
In a just-published paper, the London Stock Exchange-owned benchmarker says the rapid growth of negative-screening investment strategies in NZ has sparked demand for relevant indices to build products on.
“New Zealand reflects the global trend towards increased adoption of responsible investing,” the FTSE Russell report says. “… negative screening approaches have risen in use in New Zealand, with the assets devoted to this type of strategy increasing from NZ$86 bn in 2017 to NZ$88bn in 2018.”
FTSE Russell says a recent agreement with BNZ to supply a bespoke version of a benchmark from its Global Choice index family showed “how a financial institution can integrate responsible investing into its investment philosophy and products”.
BNZ selected FTSE Russell as background benchmarker in September after switching to a passive investment strategy for global assets in its KiwiSaver and managed fund products.
The off-the-shelf versions of the FTSE Russell Global Choice indexes feature negative screens across “three product categories and two conduct categories”, the paper says, covering:
- non-renewable energy (fossil fuels and nuclear power);
- vice products (adult entertainment, alcohol, gambling and tobacco);
- weapons (civilian firearms, controversial weapons and conventional military weapons);
- controversies (based on the UN Global Compact principles); and,
- diversity practices.
“The screening criteria are based on publicly available information and applied using definitions given in the published index methodologies,” FTSE Russell says.
However, investment firms can also tweak the Global Choice indices to bespoke settings under a “building blocks” method that “helps customise an index’s alignment with an individual client’s values and investment objectives”.
BNZ opted for a customised benchmark based on the FTSE All World Index, which covers between 90 to 95 per cent of “investable markets” globally including developed and emerging jurisdictions.
“As well as screening out equities that do not meet BNZ’s responsible investment policy, the index can be currency-hedged to the New Zealand dollar for up to 100 percent of the value of the underlying portfolio,” the paper says.
Based on back-testing, though, over the three years to the end of July this year, the bespoke BNZ benchmark would have slightly under-performed its broader reference index.
“Over the period under review, the custom ‘Choice’ Index which is currency hedged only partially, gave an annualised total return of 13.42 percent, compared with 13.97 percent for the FTSE All-World Index,” FTSE Russell says.
BNZ manages almost $6 billion across its range of KiwiSaver, retail funds and private wealth divisions. Following the move to passive investing for its global assets in May, the bank shifted about $1.2 billion from incumbent managers – JANA and Russell Investments for offshore equities and fixed income, respectively – to direct mandates with Vanguard.
The index transition also coincided with the appointment of BNP Paribas as custodian for the BNZ assets and a significant fee reduction across most of the bank’s fund range.
At the time, Peter Forster, BNZ wealth general manager, said other third-party managers – Mint and Nikko for equities, AMP Capital and Harbour for fixed income and Nikko again for cash – would follow Vanguard into mandate arrangements with the bank.