The “stranglehold” of the largest index providers limits fee reductions
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The biggest index providers have a “stranglehold” on the market, which keeps licensing costs higher for asset managers and limits further reductions in passive fund fees, experts say.
The influence of index providers on the fee levels of exchange-traded funds was evident last week when Amundi launched its Prime Emerging Markets Ucits ETF with a market-leading price of 10 basis points.
Amundi selected the smallest supplier Solactive to calculate the fund index and reduce costs. In contrast, the French asset manager’s EUR 5 billion MSCI Emerging Markets Ucits ETF charges 20bp.
FTSE Russell, MSCI and S&P occupy a dominant position in the European market, with their indices representing more than 80% of the assets of passive equity funds. MSCI alone owns 47% of the shares, according to Morningstar data.
âThe big suppliers are not as profitable. . . but still have a stranglehold on major benchmarks, âsaid Hector McNeil, co-managing director of white-label ETF provider HANetf.
Michael O’Riordan, founding partner of Blackwater Search & Advisory, agrees, saying the larger groups were a “money-printing machine for license fees.”
O’Riordan said larger vendors could effectively “leverage” their brand, which “a lot of customers” pay attention to when considering an index.
Asked about the pros and cons of dominating larger companies, Peter Sleep, senior portfolio manager at Seven Investment Management, said, âI’m not sure there are any benefits to this situation. The downside to a branded index is the cost.
Sleep said that a big part of the big vendors’ significant market share is the âmuscle memoryâ of customers, such as thinking of the S&P 500 when they think of the US stock market.
âThere is also the same muscle memory in fixed income securities, mainly around the Bloomberg indices and the JPMorgan. [emerging market] clues, âhe added.
The European Fund and Asset Management Association recently took up this issue, writing a note in June on benchmark costs.
“[The largest index providers] have significant market power and can unilaterally define virtually all contractual conditions, as clients on the asset management or banking side cannot undertake activities essential to their business without the data provided by these businesses â, Efama said.
This article was previously published by Ignites Europe, a title belonging to the FT group.
“The use of financial benchmarks has therefore been subject to regular, sometimes massive price increases, and the imposition of increasingly complex and arguably overpriced data licenses,” added the trade body. .
According to Ignites Europe’s analysis, the index licensing costs for the European fund industry are significant.
Annual costs are estimated at over â¬ 560 million for index equity funds and ETFs, based on an estimated average commission of 3bp.
O’Riordan said the index’s costs were not publicly disclosed, but generally represented 3bp of an equity fund’s assets, having been reduced by 5bp in recent years.
Vinit Srivastava, managing director of MerQube, an index and technology provider, said index providers have started billing their clients based on the fund’s assets because there was a ‘trickle down’ effect following the fees imposed by fund managers.
The logic of the index providers was that if they gave a passive fund its âengine,â they thought they should take a percentage of what the fund charged, Srivistava said.
MSCI charges an average of 2.58bp linked to its equity indices, based on its assets at the end of June, according to the company’s public documents.
The company’s index activity has a 76 percent margin, about twice as large as the average asset manager.
MSCI declined to comment.
Meanwhile, smaller index providers are using different pricing models in an attempt to disrupt the market.
Timo Pfeiffer, director of markets at Solactive, said the approach of the larger index providers was “not a problem” as it created opportunities for small groups.
Pfeiffer said his firm’s fixed fee model is one of the ways he disrupts the market, along with his speed of bringing an index to market and the range of indexes he offers.
Solactive could not justify an asset-based commission because the index was “not the primary driver” of fundraising for a fund, he said.
The increased price sensitivity and margin for disruption meant that within three to five years, the largest index providers would not be as dominant as they were, Pfeiffer added.
Srivistava agreed, saying the margins of major index providers were unsustainable, with data entry becoming more expensive as pressure continues to reduce fund fees.
Merqube, which launched in 2019, had no legacy business and therefore could be flexible on pricing and effectively bill its service as if it were licensing software, he added. .
McNeil said the market “is changing, but not fast enough”.
There was more penetration for smaller providers, especially with the launch of new funds, he said.
However, the European asset management body wants regulators to step in and rectify the situation.
Efama recommends that regulators “impose a cost-based licensing mechanism”, which would mean that any benchmark license costs should “in principle be based only on the [or] marginal cost of providing and distributing a given data service plus a reasonable profit margin â.
“Regulators should recognize that some benchmark administrators have disproportionate market power over financial benchmarks,” the professional body added.
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