‘Revolutionary’ changes in the index business

It’s very exciting to see how far the index provider has come in the last two decades, growing in scope and mirroring the evolution of the financial markets.

I was delighted to lead the business back in 1995, after the Financial Times and London Stock Exchange decided to build on the success of its partnership producing the FTSE 100, 250 and All-Share, by creating an incorporated company to develop further benchmarks.

While we have looked at the construction of indexes in previous months, I feel it is important to provide some context around the history of the industry.

The first stock market indexes were developed as information tools and served as a guide to economic and financial market sentiment.

Many indexes were calculated and disseminated by newspapers, including our own, and some historic indexes retain their link with journalism.

However, these are, by and large, the exception rather than the rule. Although public awareness of indexes is at an all-time high, partly thanks to the role of the media, the compilation and ongoing management of indexes is now largely in the hands of specialists.

In the mid-1990s, index businesses tended to be departments of larger entities, where as now they are major companies in their own right. FTSE changed dramatically during this period, going from a handful of staff working on a predominantly UK-focused series of indexes, to an operation employing hundreds of people around the world, tracking all the major asset classes.

In 2014, we concluded a deal to acquire US firm Russell’s index business, increasing our scale and geographical reach still further. Now some US $10 trillion in global assets are benchmarked to FTSE Russell indexes.

Some changes in the index business have been revolutionary. It has become increasingly clear that indexing has helped push down the overall costs of money management for investors, including the rapidly growing market for exchange-traded funds (ETFs).

This trend, which has seen passive investment in equities rise by almost 400 per cent in the last twenty years, has hugely benefited investors both large and small, and I think it has a lot further to go.

Today, we operate, quite rightly, in a more regulated environment and index providers adhere to strict regulation. Global principles for financial benchmarks require that firms set in place appropriate governance arrangements to protect the integrity of their indexes and to address potential conflicts of interest.

In FTSE Russell’s case, this emphasis is not new. Making sure that indexes serve their users – that they are constructed with transparency, objectivity and integrity – is crucial.

We have always upheld good governance not just because supervisors require it, but because the investment industry needs index providers to operate to the highest standards.

Our Governance Board is charged with maintaining the integrity of all FTSE Russell products by ensuring that indexes meet the appropriate technical standards and we have independent audits across the business on an annual basis.

Looking to the future, I expect the volume of money following so-called ‘Smart Beta’ or factor indexes to become as large as the traditional market-cap weighted segment.

These indexes encompass a variety of strategies and are designed to replicate the performance of a particular equity market factor or factors.

There’s a rising investor interest in indexes that screen constituents for their compliance with environmental, social and governance (ESG) standards.

The FTSE4Good index series, launched in 2001, is designed to incorporate responsible investment standards among its members and we continue to enhance this offering on a global scale.

I hope you will join with me in congratulating FTSE on its first 20 years; here’s to another 20 as FTSE Russell.