Largest index providers’ ‘stranglehold’ is limiting fee cuts

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According to experts, the largest index providers have “hangs” on the market, keeping asset managers’ licensing costs high and limiting further passive fund fee cuts.

Last week, when Amundi launched the market-leading 10-basis point prime emerging market Ucits ETF, the influence of index providers on exchange-traded fund fee levels was highlighted.

Amundi chose Solactive, a small provider, to calculate the index of the fund and keep costs down. In contrast, the French asset manager’s € 5 billion MSCI Emerging Markets Ucits ETF charges 20bp.

FTSE Russell, MSCI and S & P occupy the dominant market positions in Europe, with their indexes accounting for over 80% of passive equity fund assets. According to Morning Star data, MSCI alone has a 47% share.

“Major providers aren’t very cost-effective .. .. Hector McNeil, Co-Chief Executive Officer of HANetf, a white-label ETF provider, said:

Michael O’Riordan, founding partner of Blackwater Search & Advisory, said the largest group was “money printing presses for license fees.”

O’Riordan said the largest providers can effectively “utilize” their brand and “many clients” can be careful when considering the index.

When asked about the strengths and weaknesses of the biggest company’s advantages, Peter Sleep, Senior Portfolio Manager at Seven Investment Management, a multi-manager, said: The disadvantage of branded indexes is cost. “

According to Sleep, many of the reasons the largest providers continue to gain significant market share were client “muscle memory,” such as considering the S & P 500 index when considering the US stock market.

“Bonds have the same muscle memory, mainly around the Bloomberg Index and JP Morgan. [emerging market] “Index,” he added.

The European Fund Asset Management Association recently considered this issue and wrote a note on benchmark costs in June.

“”[The largest index providers] Asset management or banking clients cannot carry out business-critical activities without the data provided by these companies, thus gaining significant market power and unilaterally setting virtually all terms and conditions. “I will,” said Efama.

This article was previously published Ignite Europe, Titles owned by FTGroup.

“Therefore, the use of financial benchmark data has been affected by regular and sometimes large price increases, and has been subject to increasingly complex and arguably high data licenses,” added industry groups.

According to an analysis by Ignites Europe, index licensing costs in the European fund industry are considerable.

Based on an estimated average fee of 3bp, the total annual cost of index-tracking equity funds and ETFs is estimated to exceed € 560 million.

O’Riordan said index costs were not disclosed, but were usually 3bp of equity fund assets, down from 5bp in recent years.

Vinit Srivastava, CEO of index and technology provider MerQube, has had a “trickle down” effect following fund managers who charge asset-based fees, so index providers charge clients based on their fund assets. He said he started.

Index provider logic believed that if it provided its “engine” to a passive fund, it should take a certain percentage of the amount the fund is charging, Sri Vistava said.

According to the company’s public document, MSCI will charge an average of 2.58bp linked to the stock index based on assets at the end of June.

The company’s index business has a margin of 76%, which is about twice the average of asset managers.

MSCI declined to comment.

Small index providers, on the other hand, use different pricing models to disrupt the market.

Timo Pfeiffer, Solactive’s Chief Market Officer, said the largest index provider’s approach was “not a problem” as it created opportunities for smaller groups.

Pfeiffer said his company’s flat-rate model was one way he was disrupting the market: the speed at which he puts the index on the market and the range of indexes it offers.

He said Solactive could not justify asset-based fees because the index was “not a major driver” of the fund’s asset collection.

Increased price sensitivity and room for confusion meant that within three to five years the largest index providers would be less dominant than they were, Pfeiffer added.

Srivistava said the Big Mac Index provider’s margins are unsustainable and pressure continues to reduce fund fees as data entry becomes more expensive.

Launched in 2019, Merqube didn’t have a legacy business, so he added that it had flexibility in pricing and could effectively charge for services like licensing software.

The market is “changing, but not fast enough,” McNeill said.

In particular, the launch of a new fund has increased penetration into smaller providers, he said.

However, European asset management industry groups want regulators to intervene and remedy the situation.

Efama recommends that regulators “impose a cost-based licensing mechanism.” In other words, benchmark license costs should be “in principle only based on increments”. [or] Marginal cost and reasonable rate of return for providing and distributing specific data services. “

“Regulators need to be aware that certain benchmark managers have disproportionate market power over financial benchmark data,” industry groups added.

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Largest index providers’ ‘stranglehold’ is limiting fee cuts Source link Largest index providers’ ‘stranglehold’ is limiting fee cuts

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