Innovation by FTSE

  • "The industry has changed dramatically since FTSE first started and it will continue to change going forward.”

    Mark Makepeace, CEO, FTSE

 

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FTSE has been transformed in recent years, moving into new services and new products. Now it is expected to extend its offerings further, as Ian Wylie reports. 

When FTSE Group was launched in 1995, the series of indices it offered were so UK-centric that founder Mark Makepeace could meet most of his clients simply by taking a brisk walk from his office.

“The most exotic trip then was up to Edinburgh,” says Makepeace, now chief executive of FTSE and Director of Information Services at its owner, London Stock Exchange Group (LSEG). “These days we have clients in Beijing, Sydney, California – all over the world. Investment management is so much more international and is becoming increasingly sophisticated yet, at the same time, it is also becoming more reliant on benchmarks. The industry has changed dramatically since FTSE first started and it will continue to change going forward.”

Almost 20 years on, what began as a tiny startup with just nine staff is now a leading global index provider employing approximately 360 staff. With operations around the world, FTSE calculates thousands of indices that measure and benchmark financial markets and asset classes in more than 80 countries.

As a result, many of the world’s biggest pension funds, asset managers, exchange traded fund (ETF) providers and investment banks now work with FTSE to benchmark their own investment performance, using FTSE indices to create ETFs, index tracking funds, structured products and index derivatives. FTSE also provides trading venues around the world with their indices.

The difference between indexing providers can at first glance seem relatively small, but there are some key distinctions. FTSE was the first major index provider to move to a formal process for classifying countries, conducting an annual review of the market status of every country in their global benchmarks and assigning them to Developed, Advanced Emerging, Secondary Emerging or Frontier categories. In 2010, for example, the UAE was promoted to FTSE’s Emerging index, while South Korea was recently upgraded to the Developed market index.

Watching brief

FTSE also creates an annual Watch List of countries that may be subject to a change in their classification. These countries are reviewed by the FTSE Policy Group every September for possible classification changes. In the most recent annual review, two countries joined the FTSE watch list: Morocco which could be downgraded to Secondary Emerging because of poor market liquidity, and Qatar, which could be upgraded to Secondary Emerging, having ironed out some settlement issues.

Ukraine is no longer considered a possible Frontier entrant, following issues around regulatory oversight and capital controls. China by contrast, is on the Watch List for possible promotion to secondary emerging and is considered by FTSE’s Country Classification Committee to be making improvements on regulatory engagement, settlement and capital flows. Argentina, meanwhile, could face possible demotion from Frontier.

“The Watch List is important to clients in helping them plan for and manage future changes,” explains Makepeace. “South Korea is a major differentiating factor for FTSE. There is no doubt that the South Korean economy is developed but there is some arguments over whether the lack of liquidity outside of the Asian time zone and restrictions on currency trading cause unacceptable friction to international investors so as to prevent it being treated as a developed market.

Such shifts and reclassifications highlight FTSE’s ability to reflect the perceptions and real-world experience of clients, investors and market practitioners worldwide. The business also partners with certain clients and overseas trading venues to create new indices and products.

In North America, for example, FTSE works with California-based Research Affiliates on the innovative FTSE RAFI Index Series where index constituents are selected and weighted using four fundamental factors - total cash dividends, free cash flow, total sales and book value. In Hong Kong, FTSE and Bank of China launched a new index range tracking Renminbi offshore bonds and in 2013, FTSE added a minimum variance index to the Shariah compliant series it provides in partnership with research consultant Yassar.

The business helps clients to create customized indices too and it works with ETF issuers, ranging from Blackrock, the largest in the world, to smaller operators, such as Global X which wanted custom-built indices for the smaller emerging and frontier markets. .

“Liquidity can be a problem in certain markets, so we were able to introduce Global X to one of our institutional clients who was interested in investing in this area,” recalls Makepeace. “The three parties worked together to create a suitably liquid index that had exposure to the markets that both clients wanted.”

New products, new markets

Over the coming year, the business has four key priorities which have been developed in response to customer demand. The first is expansion of its offering in North America, home to almost half the world’s assets under management. The second is expansion in China.

“China is going to be the biggest index trade of the next decade. FTSE is well placed to offer customers access as a number of index funds linked to the China A Share market are linked to FTSE. We also run the Hong Kong MPF (mandatory provident fund) benchmarks, which are likely to be the first international benchmarks to include A Shares,” says Makepeace.

FTSE’s third priority centres on ETFs.

“In terms of equities, we are a leading player in the global ETF market. And we’re growing faster than anyone else and aiming to attract more customers around the world,” explains Makepeace.

FTSE’s final priority is to develop its fixed income presence, setting up bond indices around the world. The Group already runs a joint venture with Canadian exchange operator TMX, providing benchmarks for fixed income assets.

“We are rapidly expanding our coverage of fixed income indices provided by the FTSE/TMX joint venture, including fixed income country indices in Europe, Asia and in South America. We then plan to extend our coverage further by introducing regional and global fixed income indices,” he says.

“We are rapidly expanding our coverage of fixed income indices provided by the FTSE/TMX joint venture, including fixed income country indices in Europe, Asia and in South America. We then plan to extend our coverage further by introducing regional and global fixed income indices,” he says.

The index space is changing rapidly and over the next five to 10 years, the business of indexing is expected to extend beyond countries and equity exposure into a world of multi-assets and factor-based investing. However Makepeace believes the key to success will still be relationships with its customers.

“We adopt a relationship approach and building relationships takes time because they are built on trust,” explains Makepeace. “But that’s what people expect from FTSE - trust, transparency and authority. They want us to bring together information to create a consensus that 'becomes the authoritative source.”