Last Updated: 22 November 2023
The index business has historically been a silent backwater of the finance industry. But growing interest in passive, benchmark-based investing and regulatory scrutiny following last year’s LIBOR scandal have thrown indexing into an unfamiliar spotlight.
“We’re experiencing our fifteen minutes of fame,” the head of one benchmark provider told IndexUniverse.eu recently.
Indexing may stay in the headlines for longer than that. A battle for commercial influence is intensifying in an industry that, despite its association with transparent, index-tracking funds, has traditionally been coy about the precise nature of its sources of income.
But by suggesting a steady erosion of incumbents’ pricing power, recent announcements trumpeting new, low-cost entrants to the index market may not give the full picture.
More Transparency, Lower Costs
One symptom of the rising competitive tensions in indexing is the appearance of a raft of new providers. These interlopers promise to undercut traditional benchmark providers on cost, while also offering greater transparency.
Last year Structured Solutions, an index provider based in Germany, told IndexUniverse.eu that it offers clients a slimmed-down index service, focussing on benchmark and calculation only, and does so for a flat fee, rather than charging a basis point share of assets under management in funds linked to the index, the traditional revenue model in this area of the market.
In March this year Edhec-Risk, the financial research institute of France-based Edhec business school, announced that it would shortly offer the general public free access to a wide range of data covering so-called “smart beta” equity indices, reportedly the types of benchmark offering index firms the highest profit margins.
And a new competitor, the Freedom Index Company, says it plans to offer substantially the same levels of transparency for traditional, capitalisation-weighted indices, citing the high cost of index-related information as a key concern.
“Our mission is to provide free, open and independent indices for use by asset managers,” Freedom Index’s founder, Carl Bacon, told IndexUniverse.eu.
“We see ourselves as the Wikipedia of indexing and aim to offer basic, barometer-type information that should be available to the market for free or nearly free.”
“Smaller asset managers are just not able to perform the type of index analysis they want to do. They are priced out of the market and can’t get access to the price information they need,” Bacon said.
The Freedom Index, which is non-profit-making, has been guaranteed five years’ worth of funding by asset management firms, Bacon told IndexUniverse.eu.