Why indexing is big business

With over three million active benchmarks across the globe growing exponentially, the changing nature of index providers is becoming increasingly more relevant in the investment process.

The disproportionate ratio of stocks to indices shows no sign of abating as there are only 43,000 listed companies benchmarked against the Index Industry Association (IIA) estimate of 3.3 million indices - about 70 times more.

FTSE Russell managing director of global markets research Philip Lawlor says the role of the index provider is changing shape rapidly, particularly in the last decade.

It's evolved from a "number cruncher" function to becoming more involved in investment strategy and a partnership-based process with clients, he told Financial Standard.

Lawlor said index providers produce tiers of research and are privy to powerful, granular information.

They need to join the conversation about market dynamics among key decision makers and help with asset allocation - which includes the likes of investment committees and chief investment officers, he said.

FTSE Russell has about US$16.2 trillion of assets benchmarked against its indices - 81% is equity and the remainder in fixed income.

S&P Dow Jones, also a major player in equity indices, has about US$13.7 trillion benchmarked. MSCI, which purely operates in equity indexing, has about US$13.9 trillion benchmarked.

Conversely, Bloomberg benchmarks US$14.4 trillion of fixed income assets to its indices.

Across the board, the majority of strategies are active. IIA figures show equity indices overwhelmingly dominate over 95% of the benchmarks.

NYSE-listed MSCI earned more than half (56%) or US$719 million of its 2017 operating revenue from its index business, according to SEC filings.

For the majority of its indices, analytics and ESG products, MSCI licenses annual, recurring subscriptions in return for a fee. About a third (36%) or US$458.3 million of revenues came from analytics.

Clients typically use its indices across many areas of the investment process, including index-linked product creation and performance benchmarking, as well as portfolio construction and rebalancing, and asset allocation.

Index-linked investment products, such as ETFs and mutual funds, commonly pay MSCI a fee based on the value of the investment product's assets.

Asset-based fees make up a significant portion of its revenues, accounting for 21.7% for the fiscal year ended 31 December 2017.

BlackRock, MSCI said, accounted for 11.5% of total revenues making it the largest client based on this measure. Almost 95.3% of the revenue from BlackRock came from its MSCI-based indices.

Lawlor says indices will continue to evolve and become more important in the investment landscape.

A growing trend London-based Lawlor said he is seeing among European pension funds is the construction of sophisticated indices.

Many large pension funds are significantly capturing classic factors such as quality, value, volatility and so forth, in indices and blending it with ESG factors, he said.

For an in-depth discussion on index management strategies, read our recent feature article here.

Read more: MSCIBlackRockESGFTSE RussellBloombergFinancial StandardIndex Industry AssociationPhilip LawlorS&P Dow JonesSEC
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