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Cutting indexing costs through vertical integration

Entering the index business after years of working in it behind the scenes, Thomson Reuters argues having its own data gives it a cost and speed advantage over its rivals.

Cutting indexing costs through vertical integration
Anthony Yeung of Thomson Reuters

The indexing business is undergoing change amid moves by institutional investors to diversify portfolios, including to boost emerging-markets exposure and to consider using methods other than market-capitalisation weighting. Anthony Yeung, Asia head of business development at Thomson Reuters Indices, outlines how the firm is building in the region against this backdrop.

AsianInvestor: How does Thomson Reuters plan to challenge the established providers in Asia?
Anthony Yeung: Asian clients are very cost-conscious and – according to a survey by Aite group on major market data users (asset managers with more than $50 billion in AUM) – half of them spend over $5 million on market data every year. Of that, $1 million goes on benchmark index data. Because we are vertically integrated – offering not only the indexes but the underlying data as well – we feel we can provide better service in this area across all the major asset classes.

Surely other providers can get the data they want if they pay for it?
Yes, they can get stock prices very easily, and most providers source them from Thomson Reuters. However, if they are looking for evaluated data – such as ESG [environmental, social and governance], bond information, news sentiments or investment analytics (eg IBES estimates) – that’s not necessarily readily or immediately available to everyone.

Do you have easy access to data on less liquid markets?
This is one of our advantages and one reason we got into the index business – our ability to create and calculate indices using multiple asset classes. We have prices contributed by many sources, as well as having our own FX (Dealing) and fixed income (Tradeweb) communities. This gives us the most realistic prices and ability to calculate the most accurate indices cheaply because all the source data is in-house. Another example is our fundamentals database, which covers less liquid markets. In fact, our global sector schema we use for our sector indices, TRBC, covers 130 countries. No other schema can match our global footprint.

How much can you save a client compared to another provider?
Areas where clients typically save with us include index distribution and procuring source data, because they are all done in-house. We also have index licences with most exchanges globally, meaning clients don’t have to approach the exchange directly to build an index using their pricing data. For a COO looking at the heavy expenses associated with indices holistically, we’re confident we’d provide a compelling cost saving.

When and why did Thomson Reuters enter the market as an index-provider?
Thomson Reuters has calculated indices for 32 years, including some of the world’s most well-known benchmarks linked to over $200 billion in ETF AUM. If you take into account indices linked to mutual funds, the AUM is significantly higher. We not only calculate and white-label indices for others, we’re also the underlying supplier of data to many index providers for both equity and fixed income. We have brands like the CRB Commodity Index, launched in 1957. Since we have the expertise, data and resources, we decided it was time to calculate our own indices, and we formed the index group in 2009. In fact, many clients viewed the space as an unhealthy oligopoly and encouraged our entry. We spent one-and-a-half years building the infrastructure and logistics, and in 2010 we started talking to clients about the products.

What kind of clients are you seeing most demand from in Asia, and for which offerings?
We’re mostly targeting asset managers or product issuers right now, and the brokerage community – we already have a good distribution network there. The next step will be to target institutional funds. What they want is flexibility in pricing, data delivery and dissemination, and index products not just based on equities but across multiple asset classes. Hedge funds, for example, may have portfolios that straddle multiple asset classes, so will want to be able to benchmark across the whole portfolio. We have built some sophisticated multi-asset-class, alpha-generating indices for such clients this year. Quality of service and turnaround times are also critical. Clients tell us stories about well-known investment products linked to indices backed up on PCs. As mentioned, we calculate some of the world’s most investable indices, meaning our service has to be robust. In addition, we have round-the-clock development and operational support.

What do you offer in terms of alternatively weighted indices and what demand are you seeing?
Everyone is looking for alpha, but they’re not going to switch to alternative weightings overnight. All the main indices such as the S&P 500, Topix or Hang Seng are market cap-weighted, so they will remain the main benchmarks for now. Given time people may switch, but not in the short term. We’re happy to work with customers looking for a traditional cap-weighted approach for a new fund, or for firms looking for something more exotic. We haven’t announced anything, but are working on some innovative products in this area.

Do you plan to capitalise on the trend for institutional investors to diversify from their home markets and increase exposure to emerging markets?
We have an array of pre-built indices for customers looking to create products capitalising on this trend. In the EM and frontier equities space, we have over 2,000 existing index products, and are already working with firms to produce bespoke solutions for their clients’ needs. Another area of innovation is our July release of the first Islamic equity index based on AAOIFI [Accounting and Auditing Organisation for Islamic Financial Institutions] standards. These research-based indices are accepted by many Islamic communities worldwide, and are the closest there is yet to a global sharia financial standard. We’re really trying to ensure this space sees constant innovation and we’re building products that help address the challenges the investment management community is facing, in terms of both alpha and beta.

In which parts of the index business do you see most potential growth, particularly in Asia?
There’s not one single product or area that has the biggest potential for us. There’s no such thing as a ‘killer index’, like a ‘killer app’ in mobile technology. It’s more of the range of services we offer that sets us apart. One important aspect of indexing is our sector-classification scheme, TRBC. Our business-sector classification is one very important aspect of the business. We have a team of 40 analysts who speak over 30 languages and go through local filings and reports to make industry assignments. This means we have much better coverage and more reliable industry assignments than competitors in many Asian countries. The fact that we classify stocks before IPOs, and have access to our own news, deals and corporate actions services means our emerging-markets information is completely up-to-date and accurate.

Can you give any examples?
In Vietnam we cover all 800 listings, which no other schema does. Similarly, in India we cover 4,000 stocks, over 1,000 in Malaysia and over 23,000 across the Asia-Pacific region. We also feel the schema is more up to date. For example, we have renewable energy and exchanges industries, but we don’t have a specific internet industry, because in today’s world everyone operates via the internet.

How does Thomson Reuters combine its index with its overall platform – in terms of data, communications, software, analytics etc?
We offer all our proprietary indices (over 10,000) to our global network – including over 600,000 global real-time users – and they’re available via Eikon, our primary desktop, as well as Thomson Reuters Datastream. Custom index clients can also benefit from this reach, and from other distribution solutions we have, such as FTP and API. We also have different analytics available to create alpha for clients. For example, the Asset4 service evaluates and ranks companies worldwide on ESG factors. Based on this data, you can generate alpha indices by country, region or sector. And there is Starmine, which aggregates equities and credit data and is already heavily used for buy-side stock selection and for the sell-side to evaluate in-house analyst performance. Both can be used to create alpha-generating indexes by country, region or sector. Our intention is to take our world-class content sets, and continue to provide value-added analysis on top of them.

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September 2016 Magazine
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