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| 1) What is SGI ? |
Société Générale Index (SGI) is the brand name for financial indices created by the Equity Derivatives platform of Société Générale, in partnership with index providers. As of today, SGI includes a dozen of indices. |
| 2) How is SGI offer organised ? |
There are two broad families within SGI offer. Beta Research Indices reflect a market universe in a specific industry or asset class. While renewable or "new" energy indices are a dominant feature, as illustrated by ERIX, Solex, Waex and Biox, environment in general has been a central theme: in addition to energy-related indices, SGI has launched water (Wowax) and waste management indices. Other indices include alternative assets (private equity, timber) and swap bonds (SGI 5y AAA Synthetic Bond Index). Alpha Research Indices are "strategy indices" aiming at outperforming a reference index or benefiting from specific market conditions. Alpha Research may also consist in a dynamic baskest of stocks. |
| 3) What are the broad principles governing SGI ? |
All SGI indices have been defined under according to four principles (1) transparency. Société Générale has partnered with independant index providers, that are Société Générale calculation agents. That means that Société Générale is the Index Sponsor: i.e. it is defining the index specifications at inception and supplies rebalancing instructions to the Calculation Agent. Index methodology has been set not to be not subject to frequent changes (2) systematic approach: each index is built according to a systematic methodology. Rebalancing between components can either be determined according to a closed-formula or based upon a more sophisticated selection screening. Each Index price will be determined according to explicit input parameters, which can either be "endogenous" (prices, volatility, etc.), or "exogenous", either “bottom-up” (such as PER, cash flow, etc.) or top down (macro, consensus). However, on specific equity basket indices (beta), the index sponsor may have a part of discretion on components' selection and allocation between sub-sectors (3) No maturity. Each Index will not have any starting and termination points (4) Innovative. SGI seeks exposure to unexplored themes by index providers. Strategy indices are based on original indexations. |
| 4) How would you position SGI versus mainstream indices ? |
The index business is dominated by three type of actors: stocks exchanges, index providers, and investment banks. Depending on the actor, the economic model can be either selling licence (Dow Jones/ Stoxx, S&P, Lehman Bond Indices), selling data (MSCI, FTSE, Lehma Bond Indices) or selling calculations (S&P, Dow Jones/Stoxx). SGI takes a different approach as it aims at providing an original and dynamic underlying in a structured product. Such an approach means that (1) Each index is tradable: SGI naturally benefits from its proximity with the trading desks. (2) Index rules take a pragmatic approach, for instance, they may take or not take into account replication costs or fees, depending on structure of the product. (3) Finally SGI Index definition complies with UCITS III diversification ratios, in order to allow the replication of the index in mutual funds / tracker funds. |
| 5) How would you position an SGI index versus a fund ? |
An SGI index may represent an alternative to a fund on several grounds, notably from a liquidity, fees, transparency and ownership. In some countries, an index underlying may be more tax-efficient that a fund. |
| 6) How many indices does SGI currently include ? |
SGI includes 12 indices of which 3 in the alpha range and 9 in the beta ranges. This number does not include the different currency or price return versions that have beeen created. Another series of four indices is currently under construction. SGI goals is to double the number of launched indices by year-end. |
| 7) Among the alpha index range, can you give more details on the SGI Fed Model US ? |
The SGI Fed Model US is a strategy index based on a tactical asset model, which assumes two competing assets: US equity and US bonds -the optimal allocation between equity and bonds which may vary from 0% to 100%. The Fed Model postulates that in an efficient market, the forecasted earnings-to-price ratio US shares and the interest rate yield of the 10-year Treasury bond should equal one another. Such an identity can be interpreted as a simplified version of the dividend discount model. The SGI Fed Model US, based on the Fed Model, has been launched in Feb-2007 and the index back tested since Feb-1990. Based on historical simulations, the SGI Fed Model US has delivered convincing outperformance versus a 50% equity/ 50% bond benchmark as (i) it gave sell signals on equity ahead of bear markets (ii) It has been fully invested in equities over the last four years. The index is currently invested in equities as price-earnings ratio have decreased (profits have risen more than share prices) and Treasury yields have remain unusally low. |
| 8) Can you elaborate on other alpha indices ? |
There has been two others alpha indices launched by SGI. The SGI enhanced buy-write index US has been designed to deliver performance in time of less mildly bullish or flat equity market. The index includes two engines of performance (1) It is long the S&P 500 and sell call on the index to cash in premium and limit the downside in case of market decline (2) It sells call on the index at two different strikes (95% and 105%) depending on a proprietary trend indicator. The second alpha index is the SGI Vol Target S&P BRIC 40. Its investment objective is to provide exposure to the BRIC index while keeping the volatility at a stable (and lower than that of the S&P BRIC) level. As a result of volatility monitoring, the SGI Vol Target BRIC 40 eliminates the extreme return points observed on the S&P BRIC 40. |
| 9) What is your relationship with the Equity Research Department ? |
SGI favours increased initiatives with the Equity Research Department. In particular, SGI will calculate alpha indices consisting in a dynamic allocation of stocks. The first CAR-ideas-generated indices, which consist in a quantitative selection of European stocks based on momentum and valuation criteria. A long and a long-short versions will be released shortly. |
| 10) How do you work with index providers ? |
Developing a partnership with index providers has been a central element in SGI development. In addition to its long la sting relationship with Dow Jones/Stoxx that has been initiated by Société Générale Derivatives Flow desk more than two years ago, SGI has created a partnership with S&P at the start of the year. Scope of services include daily computations, rebalancing and corporate events management according to the pre-defined Index Methodology, prices dissemination through data vendors (Bloomberg, Reuters) and communication to the current index allocation. Such services bring independance to calculation and allow SGI to benefit from leading Houses expertise in indexi engineering. |
| 11) What are the dissemination channels ? |
SGI indices are disseminated through three main external channels. The sgindex.com recently launched website gives clients an access to the whole SGI offer, it displays index factsheets, brochures, components, prices, financial ratios and any other relevant news. The SGIX <Go> Bloomberg page monitors SGI indices, it includes historical prices and in most cases back testing simulations. For S&P-calculated indices, the S&P internet website-http://customindices.standardandpoors.com- has added an SGI page, in which any relevant information may be added. In general readers will be able to read index simplified rules. |
| 12) Can I brand differently SGI indices ? |
Yes. That is perfectly possible to promote a SGI-index-linked product under a S&P Custom/ brand name instead of using the SGI name. In that case, the Société Générale financial engineering team can create a S&P-calculated clone of the index. |
| 13) Can I licence SGI indices ? |
Yes. While the underlying business model is to promote investment products based on SGI indices, SGI keeps open the possibility to licence or, in some specific case, sub-licence its indices. |
| 14) What are the investment products indexed on SGI offering ? |
All SGI indices are investable and many can be delta-one-invested through Euronext or Frankfurt-listed certificates. Structured notes have been issued, which range from open-end leveraged funds to capital proctected products. Two examples: a volatility target fund indexed on the Wowax (a Dow Jones calculated index investing in water treatment and infrastructure) has been issued for HK retail investors; in the US, a large network is currently distributing a note structured as a 5-year IRR call indexed on the SGI Fed Model US. |
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