Stock market indices such as the CAC 40 or the S&P 500 are emblematic of the financial markets. A few large providers like FTSE Russell and MSCI dominate the industry and have some of the best performance in the financial world. New entrants want to shake up the status quo.
Their names have become synonymous with the financial markets: the CAC 40, the S&P 500, the FTSE… The companies which produce these stock market indices are however much less known, while their weight continues to grow. A handful of big players dominate this continuously growing market and have some of the best stock market performances of the past year. FTSE Russell, the world’s leading index provider, is a subsidiary of the London Stock Exchange Group, the London Stock Exchange. In 2019, the LSEG saw its title jump 90%. MSCI, leader in equity indices, gained nearly 75%, while S&P Global, which completes the trio of major index providers, took 60%.
Performances that have something to make envious of banks, insurers and large managers of listed assets. BlackRock, the world’s largest manager with nearly $ 7.5 trillion in assets, gained just under 28% last year on the stock market, slightly underperforming the S&P 500. The rise of passive management and listed index funds (ETFs), driven in particular by BlackRock, is one of the main reasons for the excellent performance of index providers.
Growth driven by ETFs
In fact, between 2014 and 2018, while the assets invested in ETFs increased from 2,800 billion to nearly 6,200 billion dollars, the market for the production of indices grew from 2.3 billion to more than 3, $ 5 billion. In particular on equities which took the turn to ETFs earlier than other asset classes. Three of the four largest ETFs in the world thus replicate the S&P 500 index of S&P Global.
The market is very concentrated. MSCI, FTSE Russell and S&P Global control more than 80% of the equity index income market, which itself represents 70% of the index market, according to consultancy firm Burton-Taylor, a subsidiary of TP-Icap. On the bond indices, it is FTSE Russell, again, Bloomberg and IHS Markit who share more than 70% of the income. This concentration can be explained by their ability to take advantage of their market power. These index providers are remunerated in several ways: a share of recurring subscriptions, but also fees proportional to the assets that follow their indices, as well as royalties on each futures contract referencing them. Most of them also offer data management and analysis services.
The domination of the big players in the index sector has been built in part by external growth in recent years: FTSE has bought Russell and the Citi indices business while Bloomberg has bought the bond indices from UBS and then by Barclays. And the same trend is now at work on green themes: FTSE Russell bought Beyond Ratings last year while S&P Global acquired the ESG rating activity of RobecoSAM. A consolidation that goes badly with some: “prices have multiplied by 4 and responsiveness has disappeared,” laments an ETF manager about ESG analysis companies bought by large groups.
However, this position of strength is partly self-sustaining. The more well-known indices attract more capital, which improves the liquidity of the products linked to their indices and attracts even more capital. “The Euro Stoxx 50 is not the most representative index in Europe, for example, but it is one of the most liquid thanks to listed options and futures,” notes a professional in the sector. And this is reflected in profitability: MSCI thus posted an operating margin of almost 48% in 2018.
But things are starting to change. “At the start of the ETF wave, it was very important to have a recognized brand, but it is probably less important today, especially for individual customers,” explains Matthieu Guignard, ETF development manager at Amundi. Especially since the high prices of certain index providers weigh more and more on the managers, who are also facing the reduction of management fees. Moorgate Benchmarks, which recently embarked on providing indices, lashed out in a column published last year: “These giants impose fees on their clients that exceed the value of the services they provide them, simply because they can ”.
As long as the markets are doing well, the turnover of index providers should, however, continue to grow rapidly, said David Tabaka, specialist in the sector at Burton-Taylor, who mentions a rate of more than 10% per year. Sufficient to allow all players, historical as well as new entrants, to continue to post solid growth rates.