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Not your father’s index provider

By: Caroline O'Shaughnessy, global head of sales & marketing, FTSE Russell

As the role and scope of passive investing continues to expand, the demands placed on global index providers have also grown apace. And, from the standpoint of a global index provider, one of the most fascinating and challenging aspects of this trend is the increasing demand for insights, tools and services that just a few years ago would not have been considered important by the providers of passive investment products. The game is changing, and this has required us to change – and raise – our game.

One reason for this change – at least for FTSE Russell – is the evolving expectations large institutions, asset owners and asset managers have of index providers. Innovations in indexing, as well as access to comprehensive data and powerful technology, have enabled market data and index providers to support the development of increasingly sophisticated investment solutions. Index providers are now providing more sophisticated and precise tools to a wider range of organizations that are seeking to meet specific philosophical objectives, achieve specific investment outcomes or open up access to new markets for investors. This trend is not limited to a single global region.

In the UK, Legal & General Investment Management (LGIM) Future World Fund, which HSBC Bank UK Pension Scheme has selected for the £1.85 billion equity default option in its DC scheme, is a prime example of this trend. HSBC sought to change its default equity pension fund with LGIM to a sustainable investment model with improved risk-adjusted returns for the pension members.

FTSE Russell took account of HSBC’s indexing requirements and created the award-winning[1] FTSE All-World Ex CW Climate Balanced Factor Index. The rules underlying this index are applied to capture and combine broad, comprehensive market exposure with factor-based smart beta while making adjustments for climate change such as reducing exposure to fossil fuels and greenhouse gases and increasing exposure to the new green economy. It is the first FTSE Russell index to combine a smart beta factor approach alongside climate change considerations. It also incorporates a range of factor and sustainability parameters in the index methodology design.

In the US, over the past several years, we’ve seen growing demand in the investment community for more sophisticated indexes whose methodology can be applied to capture market exposures efficiently and, in many cases, combine multiple factors to be used as the basis for investable products. For example, FTSE Russell recently developed the FTSE Low Beta Equal Weight Index Series in collaboration with Powershares. This index series has been used to form the basis of a new generation of smart beta ETFs. The index series is designed to reflect the performance of securities exhibiting relatively low beta, or market volatility, where all index constituents are weighted equally.

The FTSE Russell Low Beta Equal Weight Index Series methodology screens out unprofitable companies from its universe of constituents. It seeks higher quality large-cap stocks from the US and ex-US developed markets that exhibit relatively low volatility relative to their broad universe. Equal-weighted indexes that also screen for less volatile companies can be a useful tool for market participants who want to analyze and define their exposure to companies that have demonstrated less volatility than the broader market.

Moving east, Fullgoal Asset Management Limited of Hong Kong worked with FTSE Russell to develop the FTSE Russell designed FTSE China Onshore Sovereign and Policy Bank Bond 1-10 Year Index. This index methodology is designed to reflect the performance of bonds denominated in RMB (CNY), issued by Chinese Government and the three policy banks. Using this index, Fullgoal became the first Chinese asset manager to list an ETF on the London Stock Exchange, which offers investors a way to access China’s onshore bond market.

These examples show that as index providers change the way we engage with industry partners and become more collaborative, the community as a whole benefits. As the use of passive investment continues to rise and active managers use more passive tools in their investment approaches, investors large and small are seeking more sophisticated index approaches.

Whether they are used as a way to track new market exposures, monitor market volatility, or facilitate access to formerly inaccessible markets, indexes play a more powerful role today than simply measuring markets. Index providers are emerging as key players in this evolution. This has created an opportunity for market data and index providers to raise their profile and have a more active voice in market discussions. It has also raised the bar for all of us, inspiring us to become more vocal participants in the market and with our clients.

For more information about FTSE Russell’s services and index solutions please go here.


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[1] FTSE Russell were joint winners with LGIM in 2017 of the 18th annual Pension and Investment Provider Awards which recognises excellence among providers of products and services to UK workplace pension schemes. The three key criteria used to adjudicate the awards are performance, innovation and service standards

 

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