Global equity index users face a world of choices

Global equity indexes are undergoing their greatest transformation ever, giving investors more choices in broader universes and from more providers.

Dow Jones Indexes and Wilshire Associates Inc. and Russell Investment Group have entered as powerful new global index competitors, while FTSE Group and Standard & Poor's already have established global indexes.

An overhaul of global index methodology by MSCI Barra, for years the industry leader, has sparked hope among rival index providers that they can capture new business. The MSCI change will force most index fund users to switch to a new MSCI global index methodology or consider spending the transition cost on moving to a competitor's index.

"Investors will soon be inundated with international equity benchmark choices, and maintaining the status quo will not be an option." said Steven A. Schoenfeld. chief investment strategist-global quantitative management at Northern Trust Global Investments in New York.

"The next 18 months will be extremely dynamic and complex, with unprecedented competition between global benchmark providers amid a background of asset owners' increasing allocations to international equities, both developed and emerging" markets, Mr. Schoenfeld said.

Among the changes, Dow Jones Indexes, New York, and Wilshire Associates, Santa Monica, Calif., introduced Oct. 16 the Dow Jones Wilshire Global Total Market Index, the biggest stock index in the world. It consists of more than 12,000 stocks in 56 countries with a market capitalization, based on float-adjusted or shares available for public trading, of nearly $34 trillion, said John A. Prestbo, editor and executive director, Dow Jones Indexes.

In June, Tacoma, Wash.-based Russell announced plans to introduce before the end of this year a global stock index, based on the methodology of its U.S. Russell 3000 index series. Russell isn't ready to release details, but David T. Grieger, managing director of marketing, said: "We've been looking at this for some time. We see there are gaps in existing products used for international benchmarks. They aren't complete and don't seamlessly connect with standards in the U.S.

"We are looking to cover the world like we have in the U.S. (indexes)," Mr. Grieger said. "We will give people a complete view of the markets. The world has gotten smaller,"

And all of this comes as MSCI Barra, New York, announced on Oct. 18 it plans to undertake a major expansion of its MSCI All-Country World index. MSCI will include all investible large-cap and midcap stocks worldwide in the ACWI next year. It also will offer for the first time large-cap and midcap style subindexes for the ACWI.

Also, MSCI will expand its global small-cap index, which is a separate index series, to include all investible stocks below the midcap segment and add all such investible stocks in all emerging markets. The existing small-cap index now covers only developed markets. Also as part of the expansion, MSCI Barra plans to offer growth and value style subindexes for the first time in both ACWI and the small-cap indexes.

MSCI Barra will also offer a new "combined investible market index," combining the expanded ACWI and expanded small-cap index. "We don't have a name for that yet," said Arun Kumar, executive director.

ACWI now covers 85% of the market cap of both all developed and emerging markets and has 2,771 large-cap and midcap stocks whose combined market cap is $27.5 trillion, he added.

Mr. Kumar couldn't say how many stocks would be added to the indexes. He said the expansion plan is the result of discussions that began last March with investors worldwide about MSCI Barra's international equity indexes.

MSCI Barra plans to make public details of the expansion by Nov. 17 and begin consulting with market participants on developing a transition process to the expanded methodology from the existing indexes.

All these changes are good for investors, competitors said, although some observers urged caution.

Jerry Moskowitz, managing director of FTSE Americas, New York, said, "The landscape is going to change. When it's all done, MSCI might still be the dominant player," but its market share could be reduced.

"We're looking at this (market disruption) to take market share from MSCI," Mr. Moskowitz said. "People don't like to change indexes because of the expense … Now MSCI is throwing the opportunity up to everybody. Whether you want to stay with MSCI or go with (another provider), it will cost you."

Corin Frost, investment strategist, equity index portfolio management, Barclays Global Investors, San Francisco, said, "MSCI would have been at risk of being less representative" without its planned overhaul. "As global markets become more accessible, indexes have to reflect those markets."

For users, Mr. Frost said, "now is a very opportune time" to reconsider their international benchmark.

"The differences between these global indexes are becoming smaller," said Bill Muysken, global head of research at Mercer Investment Consulting in London. "There used to quite considerable differences between them.

"That's good for the investors because whatever index they pick, they will be better ones than were available five years ago," Mr. Muysken said.

But he added: "We would advocate caution before making a change. Given the convergence of indexes, the differences aren't that great. So you have to ask yourself: Is there going to be a significant enough difference to make a change?

"Investors also should consider the availability of suitable passive funds," Mr. Muysken said. "That won't change overnight. The new indexes will become more attractive once you can find managers using the indexes as a basis for passive funds."

Russell's Mr. Grieger said transition could be costly, even if an investor does "nothing" but migrate to new methodology.

Ronnee Ades, senior director-institutional markets at Dow Jones Indexes, said, "We are building global indexes to fit together seamlessly."

"There is a demand by institutional investors for more diverse and broader indexes," she added. "Users will have to take a look at what (the MSCI restructuring) means. It is a great time to look at other indexes."

"MSCI is fairly dominant and FTSE is a respectable competitor," Ms. Ades said. "But now with all new stuff, it will increase competition."

"We believe our (global total market) index is the broadest representation" of the world's stock markets," Ms. Ades said. "Our objective was to provide total market coverage in each country."

The S&P/Citigroup Broad Market index, created in 1989 on a free-float basis, or shares available for public trading, included all investible stocks, both attributes other global indexes subsequently adopted or have plans to adopt, said Alka Banerjee, S&P vice president-global index management. S&P acquired the indexes from Citigroup in 2003. The S&P/Citigroup Broad Market Index has 11,045 stocks from 53 markets and a total market value of $43 trillion.

"We were the original proponents that global benchmarks must be more comprehensive, more transparent," Ms. Banerjee said.

Indexes are supposed to mirror global market performance," Ms. Banerjee said. "The best way to do that is to have the broadest index possible. … It's a good time to be in the business and a good time for investors to make up their minds about what kind of index to use."

But at FTSE's Mr. Moskowitz dismissed the idea of comprehensive indexes that cover all investible stocks. "You're picking up 2% of the market by adding 4,000 to 5,000 more stocks," he said. "But the companies you pick up have marginal liquidity at best. I question the cost of being so comprehensive. I wonder if it is a value to investors. It's a nice concept to say you have everything" in an index. "But I don't know if it is a value to investors."

The FTSE All World index has about 7,500 stocks, including emerging and developed markets.