London-based Stephan Flagel, Thomson Reuters’ head of indices, likes to compare the impact of data on the development of financial markets to that big data has had on the world of medicine.
“Today, the availability of data allows evidence-based decision-making,” he explains. “We see it in areas such as medicine, which increasingly employs data, analytics and statistics to prove which treatments work and to what degree. It is the same now in finance, where the availability to gather, store and analyse large amounts of data are making the source of returns ever more transparent.”
Now it’s possible to model investment strategies based on factors or indicators, and analyse how they behave and whether they do so in the way that the developers of those strategies say they will.
This also means the source of returns a manager obtains can be assigned either to the robustness of the investment strategy, if the model’s returns are as expected, and the manager’s execution capability, if the fund accurately replicates modelled returns.
While Thomson Reuters offers a range of market-beta indices for global equities, global commodities and some bond markets, it acknowledges these are not the definition of most of these markets in the way that some S&P, MSCI or Russell indices are. While Thomson Reuters makes these market indices available for benchmarking, for now it sees its strengths as a provider of index admin services, leveraging its deep content, technological ability and distribution network.
The firm focuses on smart-beta, which is identifying risk-return factors or other indicators and employing them in an index. Flagel uses the term “smart-beta” to describe any index that is not a market-cap weighted definition of a market. “We believe we have a large role to play in providing smart-beta indices for financial products, because we carry almost all the data that drives them,” Flagel notes.
Thomson Reuters seeks to use its index administration, calculation and distribution capabilities to build investment indices, mostly in partnership with partners such as fund managers, research firms or even other index providers. The firm’s index administration is aligned with the International Organisation of Securities Commissions (Iosco) principles, which underlines its independence.
It is Thomson Reuters’ focus on technological superiority, proprietary information and distribution capabilities that Flagel believes differentiates it from other smart-beta index providers. As an example, he cites a high-earners index for Asia Pacific (ex-Japan) that it is developing based on its Thomson Reuters StarMine Value-Momentum (ValMo) factor.
ValMo combines two valuation models with two momentum models, to make one strong stock-ranking factor. This index shows Thomson Reuters’ ability to combine index services, index values and proprietary content into a compelling proposition for issuers of financial products. “We are open to licensing that index, but most of all we are interested to work with investment managers, investors or other research houses to use our quant models to develop more of these types of indices,” Flagel says.
Over the past two years the majority of investments by the business have been geared towards upgrading index infrastructure, automating processes and becoming Iosco compliant.
For any investment index, Thomson Reuters aims to provide access to the indicators driving securities selection and weighting, the raw data the indicators are based on, and the models used to calculate the data. It’s available via its Eikon desktop.
“From an index perspective we are trying to work with fund creators and structured product desks, but because we can offer connected resources and data, we believe our product can add value to the financial community overall,” Flagel says.
Thomson Reuters has a dedicated index team located in Asia, Europe and North America. It also boasts a new multi-asset-class index calculation engine. The firm’s Global Head of Benchmarks, responsible for Indices and Reference Rates, sits in New York, while Flagel sits in London as Head of Indices. Its centres of excellence are based in St Louis, New York and Bangalore, providing global index administration and calculation services.
Flagel believes the migration of human intellectual capital on to machines will gather pace and become cheaper. He points to algorithmic trading and investors setting up their own investment strategies on portfolio portals. “We are going to be the one to provide the tools to facilitate that migration,” he says.
Head of Indices
Director, Indices Americas
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