Structured Products Europe Awards 2016
With banks and asset managers trying to play traditional index houses at their own game, it can sometimes be hard for those putting money into investible indexes to differentiate between providers. But in a highly competitive market, one provider stood taller than the rest this year: MSCI.
The firm's global reach is impressive: over $10.5 trillion in assets under management are earmarked to MSCI indexes, and 97 of the top 100 investment managers are MSCI clients. More than 850 ETFs use MSCI indexes – more than any other provider.
Among this year's highlights, the UK's Wealth Management Association (WMA) announced a new deal with MSCI in September, whereby the latter will provide five private investor indexes – severing a 20-year partnership between the WMA and FTSE, a coup for MSCI.
The use of the new index series will begin in March 2017, with WMA chief executive Liz Field citing the "flexibility" offered by MSCI as a key factor in the switch.
MSCI calculates some 180,000 separate indexes daily, 10,000 of them in real-time. Twenty-four ETFs tracking MSCI indexes were launched in the first quarter of 2016 and another 14 in the second quarter. MSCI claims an accuracy rate – a paramount metric for index users – of 99.96%.
Ulrich Stoof, global head of index licensing for structured products at MSCI in London, says 2016 has seen a significant rise in demand for environmental, social and corporate governance (ESG)-focused indexes.
"There has been a major shift to ESG in the last year. The sell side has shown much more interest in both ESG and factor-based investing," he says.
As of June 2016, equity ETFs tracking ESG indexes provided by MSCI had grown by 60% from December 2014 to $2.3 trillion.
There are a number of reasons for this relatively sudden and dramatic explosion in the use of ESG indexes, says Stoof, but key is the action taken by governments and supranational bodies at the November 2015 UN Climate Change Conference in Paris, also known as COP21, which mandated that all asset managers must report their carbon footprint impact.
COP21 was a signal to the industry that it needed to get serious about ESG investment – and MSCI is in pole position to meet this surge of interest, argues Stoof.
"We are the leader in ESG development, in terms of research and the provision of indexes. We have 160 researchers in-house and 250 dedicated ESG business and sales staff. I think we are the only index provider with that sort of capability," he says.
It was this kind of breadth and reach that persuaded AP4, one of Sweden's largest pension funds with £35 billion ($44 billion) under management, to use MSCI indexes when it decided to allocate almost 22% of its global equity portfolio to low-carbon strategies in June 2016.
"We are delighted to work with MSCI, whose products we hope will take low carbon investing further into the mainstream," said AP4 chief executive Mats Anderson at the time. The pension fund intends to decarbonise its entire equity portfolio by 2020, likely spelling further business for ESG index providers.
MSCI continues to innovate in the field of factor-based investment strategies. The period of very low yields through which the global financial services industry has passed since the credit crisis and from which there is no sign of it emerging has added considerable fuel to factor investing.
The firm identifies six core areas around which to construct indexes: value, low size, low volatility, high yield, quality and momentum. As of March 2016, MSCI has $152 billion in assets linked to its factor indexes, and MSCI-linked ETFs account for over 50% of total global cash flows into all ETFs.
"These factors have to be robust over time and also clearly differentiated from each other," explains Stoof.
The decision by the UK electorate to leave the European Union on June 23 demonstrated the value of MSCI low-volatility indexes. In the three days following the largely unexpected verdict, the MSCI World Index dropped by 4.3%, while the company's Minimum Volatility Index dropped by only 0.7%.
Banks are unlikely to be a competitor to worry about when it comes to innovation, Stoof argues: "It is true banks are developing products and have systematic strategies, but their main focus is product development, rather than to be an index provider."
The week on Risk.net, August 4–10Receive this by email