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The largest index providers have a “stranglehold” on the market, which is keeping licensing costs higher for asset managers and limiting further passive fund fee cuts, according to experts.
Index providers’ influence in exchange traded funds’ fee levels came to the fore last week when Amundi launched its Prime Emerging Markets Ucits ETF with a market-leading price tag of 10 basis points.
Amundi selected smaller provider Solactive to calculate the fund’s index and keep costs down. By contrast, the French asset manager’s €5bn MSCI Emerging Markets Ucits ETF charges 20bp.
FTSE Russell, MSCI and S&P hold a dominant market position in Europe, with their indices accounting for more than 80 per cent of passive equity fund assets. MSCI alone has a 47 per cent share, according to Morningstar data.
“The big providers are not as cost effective . . . but still have a stranglehold on the main benchmarks,” said Hector McNeil, co-chief executive officer of white-label ETF provider HANetf.
Michael O’Riordan, founding partner at Blackwater Search & Advisory, agreed, saying the largest groups were a “money printing machine for licensing fees”.
O’Riordan said the largest providers could effectively “leverage” their brand, to which “a lot of clients” pay attention when considering an index.
When asked about the pros and cons of the largest firms’ dominance, Peter Sleep, a senior portfolio manager at multi-manager Seven Investment Management, said: “I am not sure there are any pros to this situation. The con of a branded index is the cost.”
Sleep said much of the reason for the biggest providers’ continued large market share was clients’ “muscle memory”, such as thinking of the S&P 500 index when thinking of the US equity market.
“There is the same muscle memory in fixed income too, mainly around the Bloomberg indices and the JPMorgan [emerging market] indices,” he added.
The European Fund and Asset Management Association has recently weighed in on this issue, writing a memo in June on benchmark costs.
“[The largest index providers] have significant market power and can unilaterally set virtually all contractual conditions since the customers on the asset management or banking side cannot undertake the activities that are essential to their business without the data provided by these firms,” Efama said.
“The use of financial benchmark data has therefore been subject to regular, sometimes massive, price increases, and the imposition of increasingly complex and arguably overpriced data licences,” the trade body added.
Index-licensing costs for the European fund industry are significant, Ignites Europe analysis suggests.
Annual costs are estimated to total more than €560m for index-tracking equity funds and ETFs, based on an estimated average fee of 3bp.
O’Riordan said index costs were not disclosed publicly but were typically 3bp of an equity fund’s assets, having been pushed down from 5bp over recent years.
Vinit Srivastava, chief executive of MerQube, an index and technology provider, said index providers started to charge their clients based on fund assets because there was a “trickle-down” effect following on from fund managers charging asset-based fees.
Index providers’ logic was that if they were giving a passive fund its “engine”, then they believed they should take a percentage of what the fund was charging, 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 business has a margin of 76 per cent, approximately twice as large as the average for asset managers.
MSCI declined to comment.
Meanwhile, smaller index providers are using different pricing models in an attempt to disrupt the market.
Timo Pfeiffer, chief markets officer at Solactive, said the largest index providers’ approach was “not a problem” as it created opportunities for smaller groups.
Pfeiffer said his company’s flat fee model was one means by which he was disrupting the market, as well as its speed to bring an index to market and the range of indices it offers.
Solactive could not justify an asset-based fee because the index was “not the main driver” of a fund’s asset gathering, he said.
Increasing price sensitivity and room 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 big index providers’ margins were unsustainable with data inputs getting more expensive at the same time as pressure continues to lower fund fees.
Merqube, which launched in 2019, did not have legacy business and so could be flexible on pricing, and effectively charge for its service as though licensing software, he added.
McNeil said the market was “changing, but not fast enough”.
There was more penetration for smaller providers, particularly with new fund launches, he said.
However, Europe’s asset management trade body wants regulators to intervene and rectify the situation.
Efama recommends that regulators “impose a cost-based licensing mechanism”, which would mean that any benchmark licence costs should “in principle be based only on the incremental [or] marginal cost of providing and distributing a given data service plus a reasonable profits margin”.
“Regulators should recognise that certain benchmark administrators hold disproportionate market power on financial benchmark data,” the trade body added.
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