WBJ reached Alex Matturri, CEO of S&P Dow Jones Indices, to discuss the Warsaw Bourse and its growth opportunities
Interview by Wojciech Rylukowski
WBJ Observer: How can you, as an index provider, foster growth of the bourse?
Alex Matturri: We see indices as a way to help expand investors’ interest in the Polish market in general. There are many different ways that an index could be used to help develop the market, to bring more liquidity and more transparency. For us, it’s early in terms of exploring the potential here for growing our own business, which, by definition, will hopefully bring new products to the region, whether they will be ETFs or other index-based products. That’s our mission – to expand into this region, where we see a lot of opportunity.
What kind of opportunities do you see here?
Certainly, Eastern Europe is one of the bigger markets, and if you look at the region, you will see a lot of issues around Russia and Ukraine, so I think the Warsaw exchange is in a good position to become bigger. There is still a lot that needs to be done in the market, including improving education about the marketplace and bringing in new indices that would help foster growth. We are not product issuers, so our role is limited to providing independently governed indices that measure the markets and that can serve as the basis for product innovation.
What kind of indices is there a market for in Warsaw?
I think you already have some core indices in the local market. Where we can add value is by bringing greater transparency to these markets through our indices, and licensing them to product issuers for the creation of index-based investment products such as ETFs, for example.
Our research globally has shown that active fund managers do not perform as well as benchmarks. Expenses are a key reason for this. Eventually, investors begin to realize that they are paying high fees for certain investment products that don’t perform as advertised and are not as transparent in their holdings and processes as one would be led to believe. By doing the research and educating the marketplace on issues such as transparency and performance, we believe that investor interest in indices will grow and will lead to more efficient product offerings.
Over the last decade, the WSE has seen an outflow of individual investors. How would you attract more individual investors to the bourse?
Individual investors have to have confidence in the market and that comes with education, as well as with transparency. To draw more investors into the marketplace, you have to have products that are easy for them to understand and that perform within their expectations. Of course, we can’t make markets go up and down, but we can bring great confidence, transparency, and integrity to markets. Once, investors are confident and feel more educated, they will be more inclined to invest.
Investors should be looking more broadly to regional and global products, because of the need to diversify. If they invest strictly in one market, they run into a lot of diversification risk. As the example of China in the last couple of months has shown, if you don’t diversify, you can lose a lot of money.
Wouldn’t diversification cause an outflow of investors….
It doesn’t mean that the money has to flow out of Warsaw. There are ways of creating products that trade here, but also give access to foreign markets. It could be a structured product that is issued here, it could be an ETF that gives exposure to other regions, but is available locally. These are the type of things that index strategy could foster.
Looking historically, would you compare the Warsaw bourse to any other exchange market, and what are the lessons that can be learned from the experiences of others?
What’s happening here in Warsaw is not any different than what we’ve seen in Asia in its earlier growth phase – some booms, some successes, some fallback – a normal cycle. What we’ve seen happen many times, is that newer markets, like Warsaw, tend to learn faster from the mistakes of other marketplaces.
One of the ideas for the WSE expansion was to list Chinese companies. Is this a feasible development strategy?
One reason why international investors may want to do invest in the Polish marketplace is that companies are tied to the local economy. If they’re investing in an index based on stocks here, and there are Chinese stocks, it’s not representative of the local marketplace. The exchange, as a commercial venture, needs to attract listings, but at the same time, in order to spur economic growth, the Polish marketplace needs to develop local capital. To help people raise capital, Poland would need to attract new companies to list here, make sure that Polish companies are not listing in other marketplaces and bring more liquidity to the local market.
Should the bourse be privatized ?
We’ve seen the trend globally to privatize stock exchanges. If an exchange has a profit motive which happens when you’re privatized, then you have incentives in place to make sure that the exchange is more efficient. Indirectly, I think it benefits the marketplace.
In your opinion, is it necessary for the WSE to merge with another marketplace in order to grow?
This is a strategic question for the WSE, but we can look to global precedents. Cross-border mergers are very difficult to execute properly, mainly because there’s a lot of local political interests which can prevent the merger from being effective. It is very hard to merge cross-border since you need approval from regulators in both countries. There haven’t been many that have been successful – harmonizing clearing and regulation is difficult. Consolidation has certain benefits, if it can be accomplished.