Indexers’ focus is on ESG and fixed income
The Index Industry Association (IIA)’s fourth Annual Benchmark Survey has revealed a 40 per cent growth in the number of indices measuring ESG criteria in the past year, with the association’s CEO, Rick Redding, saying that the industry has never seen anything like it.
Founded in 2012, the IIA is a trade organisation created for the independent index industry, Redding says. “What we mean by that is that these are index providers who neither trade the underlying component securities or create products for investors. If you picture the ecosystem in the index world, we are in the middle, only doing index provision and administration which is important because it reduces the potential conflicts of interest.”
Membership of the IIA is global, with thirds split across Asia, Europe and the Americas.
“All of our members have to uphold intellectual property rights and the basic tenets of what we do as an organisation is two-fold. We have to do education on the index level not the product level, as the product providers do a great job there and secondly, we do advocacy works which involve lots of regulatory and legislative issues across the globe.”
Redding points to the fact that the organisation has grown rapidly as a sign that is front and central in the index business. “There is no shortage of issues to tackle these days with so much going on in the index space,” he says. “It’s a perfect time to be in the industry.”
The driver behind this growth is the uptake of index-based products across the globe. “They have been coming at us and as the assets under management grow, you can see a sea change of activity of how investors think about their investment portfolios,” he says.
The growth is driven by performance and cost. In 2019, The Committee for Economic Development of The Conference Board (CED) did a study of financial indices and estimated that index-based products have saved investors USD12-15 billion dollars annually in fee reductions and when you consider other factors such as transaction costs, and bringing down fees of all types of investments, investors save an estimated USD40-50 billion annually.
“I think what you have seen in the index industry is that is extremely scaleable, unlike other areas of the ecosystem,” Redding says. “Index providers can scale quickly because they are transparent and publicly displayed. You can disclose what you are trying to do and a lot of disclosures means that the index industry has become even more transparent over the last 10 years or so.”
The IIA members administer three million indices and with roughly 8,500 ETFs globally there are a lot of indices that are not meant for investable products but for benchmarking and measurement purposes, Redding says.
“With the growth in index-based funds, people have forgotten what the primary driver for this is. The IIA’s fourth annual survey revealed three million indexes a year, which was the big headline when we started doing it, but now what’s been interesting is that it has been able to pick up on trends and you can see where the index providers are spending on research and development,” he says.
The survey revealed that the fastest growing are ESG and fixed income and while the ESG phenomenon is the largest, Redding points out that fixed income has actually grown 15 per cent over the last two years.
“During the March to April period this year, when the VIX went up to 83, what people were looking for when there was so much volatility in the markets was data on indexes to anchor themselves.
“That’s when the measurement piece of an index is so important as people can’t see where the individual securities are and in those periods, people really think about index products because there is typically more liquidity in an indexed product that in individual securities.”
Redding was previously at the CME where he saw that people would invest in the indices rather than individual securities at a time of high volatility.
Putting together the two big growers over 2020, Redding is excited by the huge increase in indices in fixed income ESG.
“Talking to investors, you hear of ESG in the equity space, but if people have convictions and want to put money into investments that reflect their mores, it would be strange to only use equities not fixed income,” he says. “Look out in the coming years because you will be able see where the next frontier may be. When people in the index provider space invest in research and development, there is a lag until the funds come out, so look out for where the index providers are increasing their numbers dramatically as that is where the new funds may come.”
Fund providers can test the market before launching, Redding says. “It’s almost like research and development in a pharmaceutical company where the basic research work is being done and then the product side says: ‘This may have commercial appeal’.”
Every underlying category in the fixed income space increased over 2020, Redding observes. “This tells me that things in the fixed income space are really starting to heat up and you will continue to see continued investment into different ways to capture the market in the fixed income space – alternative ways of measuring bond activity, for instance.”
Another observation that Redding draws from the survey is that with increase competition, some of the providers that would normally work in equity indices are now doing fixed income and the opposite is also true.
“This tells me that the industry is becoming even more competitive,” Redding says, also pointing to the growth of multi-asset type indices. “These will be a bigger and bigger part of the market a few years out,” he says.
CEO, Index Industry Association
Rick Redding CFA is CEO at the Index Industry Association, the first global industry group for independent index providers. In his role with IIA, Rick leads the association’s efforts in educating the public, bringing visibility to indexes’ role in the markets, as well as advocating for IIA members and their interests around the world. Before joining IIA, Rick spent most of his career in senior leadership roles with The CME Group (“CME”), a leading provider of benchmark futures and options products and an innovator in futures trading. Rick held the post of Managing Director, Products and Services at CME. In this role he led global sales, product development, and strategic global growth initiatives. He played an integral part in the transition of CME’s ownership stake in Dow Jones Indexes to the S&P Dow Jones Indices joint venture. He also held senior positions in CME’s index products division.