Equity index providers, riding high on investor moves into passive and global investments, are also getting more active.
Each of the four largest index providers — FTSE International Ltd., MSCI Inc., Russell Investments and S&P Dow Jones Indices LLC — has created new rules-based ways to select stocks that aim to outperform traditional market-cap-weighted indexes, thereby pitting them against active money managers.
The evolution is changing the companies' primary function as providers of performance measurement tools to providers of investment insight and strategies for investing, often via third-party products such as exchange-traded funds.
Not that traditional business is bad. FTSE's compound annual growth rate in revenue was 21% for the five years ended Dec. 31, while annual income grew an average 24% in the period. MSCI's operating revenue doubled in the two years ended Dec. 31, while net income more than doubled. Sales at S&P Indices rose 18% in 2011, and Standard & Poor's traces a 29% compound annual growth rate of its index business back to 1994. A joint venture forged in July saw the combination of S&P's index unit with Dow Jones Indexes to create the world's largest index business.
But index providers are gearing up, acquiring companies (or being acquired) to take advantage of cross-selling opportunities. In addition to the S&P/Dow Jones deal, the London Stock Exchange Group PLC last December acquired the half it didn't already own of FTSE from Pearson PLC, and MSCI acquired RiskMetrics Group and Measurisk in 2010.
The index provider industry faces pressure from providers of ETFs, which pay licensing fees to index companies. The rise of cost-cruncher Vanguard Group Inc. in ETFs has put pressure on such funds that track traditional indexes, while BlackRock is threatening to create its own indexes for its iShares ETFs.