In this, our second issue of the Journal of Indexes Europe, we focus on the index investing industry specifically from a European perspective.
Gareth Parker, director of index research at Russell, examines the ongoing quest for a pan-European, tradeable equity benchmark. Existing candidates for the role are either tradeable but Eurozone-only, or comprehensive but less liquid than might be desired. To complicate things further, equity trading in Europe is getting increasingly fragmented. Parker attempts to define the challenge from first principles.
In our roundtable we ask five experts what defines indexing in Europe, how the local investor base approaches passive investing and how index investment products are used across the region. And how does Europe differ from the US, where indexing has been established for much longer? Deborah Fuhr of BlackRock, Hartmut Graf of STOXX, Nizam Hamid of Lyxor, Isabelle Bourcier of Lyxor and Felix Goltz of research institute EDHEC share their views on these questions.
Dimitris Melas, executive director of research at MSCI, contributes a fascinating article on the search for the value premium: how best to construct an index that offers exposure to the value factor, one that has traditionally offered superior long-term returns. Melas compares and contrasts different approaches to value-weighted indexing, using different fundamental variables. A thorough analysis follows, throwing light on the step-by-step process an index provider considers when constructing a benchmark for use as an investment tool.
The credit derivatives markets are still in the spotlight, perhaps even more so now than in 2008 at the worst (so far) of the financial crisis. Gavan Nolan and Tobias Sproehnle of Markit discuss index methodology for credit default swaps, and tell us that many credit truisms have been turned on their heads over the last few years. With many corporates now considered less risky than sovereigns, and emerging markets the new creditors to developed market debtors, CDS index charts have gone haywire.
Finally, Nicholas Brooks, head of research at ETF Securities, provides a thorough overview of a question that’s puzzled many investors, in Europe and elsewhere: what’s the right way to choose a commodity index? Though raw materials prices have been soaring again, if you chose the wrong index type you may have missed out—or even lost money. With index construction methods continuing to evolve at speed, you need to keep in touch.
A reminder to all readers: you can sign up on www.indexuniverse.eu if you’d like to receive JoI Europe for free in an electronic version. Print copies are also available for free to institutional investors, and to others for a modest annual fee to cover the costs of postage and packaging. See elsewhere in the magazine for details on how to sign up.how to sign up.