Fixed-Income and Multi-Asset Indices Emerge

Terry Flanagan

Mark Makepeace, chief executive of FTSE Group, said he expects that  assets tied to fixed income indices to grow to rival equities and there is more also demand for multi-asset benchmarks.

This month FTSE TMX Global Debt Capital Markets, a joint venture between FTSE Group and Canada’s TMX Group, acquired the indices business of MTS, which tracks the performance of the largest and most widely traded European government bonds. Following the deal, existing MTS index products will change their name to the FTSE MTS brand.

Makepeace told Markets Media that commercial index operators have traditionally provided equity products but they are shifting into fixed income as global regulators have forced banks to diversify away from fixed income and there have been investigations into the rigging of benchmark interest rates such as Libor.

“Fixed income is a huge asset class and there is a growing adoption of indices by fund managers and ETF issuers,” he said. “MTS provides prices which have certainty and liquidity and are not from a single bank so will meet future regulatory requirements.”

The MTS acquisition expands FTSE Group’s European offering and allows the firm to move towards providing a global fixed income offering according to Makepeace. “We are looking at South America and Asia and you can expect announcements over the coming months,” he added.

Makepeace said the fixed income indices could potentially rival the equity business and that asset managers were also asking FTSE to provide more multi-asset benchmarks. There is also increased demand for customised indices and smart beta indices, which can be used to replicate active strategies at a much lower cost.

“We expect to grow both organically and through further acquisitions,” added Makepeace.

For example, banks are selling their index businesses as they focus on generating higher returns. Barclays reportedly plans to solicit offers for its index business this month while UBS has transferred control of its commodity index to Bloomberg.

FTSE could also grow organically by persuading asset managers and ETF issuers to switch to its benchmarks. Last June Vanguard completed the the move of six international funds with $209bn in assets under management to FTSE indices, which the asset manager said was one of the largest ever index benchmark switches.Vanguard also switched other funds to CRSP indices, provided by a research centre at the  University of Chicago Graduate School of Business, so the total transition involved more than $650bn in 22 funds.

Tim Buckley, Vanguard’s chief investment officer, said on the firm’s blog that it decided to switch because the cost of licensing benchmarks was increasing and becoming a disproportionately large part of an index fund’s expense ratio.

“These indexes incorporate full-float adjustment to reflect only those shares that are available and freely traded on the open market, providing a more accurate reflection of market movements,” Buckley said. “They buffer stock movement between market-capitalization segments, helping to reduce index turnover. They also incorporate multiple criteria to identify growth versus value. And they engage in gradual, orderly rebalancing to reflect market changes.”

Buckley also said on the blog that FTSE and CRSP offer comprehensive market coverage. “FTSE indexes comprise more than 7,400 securities in 47 different countries and capture 98% of the world’s investable market capitalization,” he added. “CRSP indexes include nearly 4,000 constituents across mega-, large-, mid-, small-, and micro-capitalizations, representing 100% of the US investable equity market.”

Related articles