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MSCI executive director Steve Kowal, (pictured), has been working in the wealth sector for his entire career but has spent the last three years with MSCI, most of which has been taken up by overseeing the switch of the Wealth Management Association (WMA) Private Investor Index series from FTSE to MSCI.
FTSE had been managing the WMA’s five benchmark indices covering growth, balanced, conservative, income and global growth, for the last 17 years.
Kowal says: “MSCI hired me to build a strategy for how we deal with the private wealth market and I saw that as an opportunity to make ourselves more visible in the wealth community, which lead to our discussion with the WMA which coincided with a time when they were thinking of revamping their indices.”
The WMA indices are multi-asset benchmarks and MSCI doesn’t normally offer a fixed income index which was the first challenge, overcome by sourcing data from Markit iBoxx.
“Private wealth is managed in multiple asset classes,” Kowal says. “It is challenging to put together an index that reflects multi-asset because most index providers don’t have the full breadth of what you need to do that in this set of five ranging from conservative to growth across the risk spectrum. The unique feature is that even if I wanted to do this on my own and had all the component parts, somebody has to decide the weighting.”
The determiner of the exact weighting of equities, fixed income, real estate and so on within the benchmarks for the WMA is unique in that is it set by its 108 members who are polled on a quarterly basis as to how their portfolios are made up. The data is then tabulated and the averages go to the indices committee which ensures that the weightings are changed when they reflect current sentiment.
“It’s critical because as a benchmark if you are a wealth manager actively trying to beat or replicate an index, you want it to be reflective of current market sentiment as you are competing against your peers.
“As an index provider, we are not in the business about making macro-economic decisions so you need that special ingredient that comes from the practitioner community to make them balanced and relevant.”
Real estate is another sector that causes issues for indexers. “The typical wealth manager’s route to real estate is through direct property funds with one of the major houses,” Kowal says. “However, from an index perspective a typical index for real estate is based on publicly-traded REITS so there is data on how the price is moving every day which is what you need for a daily index.”
The difference between the two causes a mismatch between the index and the underlying asset. “So, we developed an innovative liquid real estate index which on a daily basis attempts to more closely capture the movement of commercial property in liquid form,” Kowal says.
The indices are also designed so that they should be replicable by purchasing the components – which wasn’t the case with the previous series with some of the sub-indices. “We have taken a different route to ensure every sub component is on its own an investable proposition,” Kowal says.
March 1st 2017 will see MSCI take over as sole recognised and authorised provider of indices for the WMA and the new products are available now as many managers need a long lead time to make the changes.
So far there has not been an ETF on the WMA indices but it would be possible to do so. Kowal comments: “We deal with the biggest investors in the world at MSCI, the largest pension and sovereign funds and one of the biggest changes over the past couple of years is that strategies that were only available to the largest institutions are now available to pretty much anyone as you can bring a variety of strategies, such as ESG or factor or smart beta, through ETFs. This could be just the starting point with the wealth community to find new innovations.”
Traditionally the WMA indices have been UK- centric but many UK managers manage money for global clients and Kowal says that there may be room now for a global range of similar indices going forward.
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