Gareth Parker, senior director, index research, design & development at Russell Indexes, was one of the four people behind the launch of the FTSE100 20 years ago, and has gone full circle after working for S&P DJI and Russell. SRP spoke to Parker about the edge of the new firm and how index providers can add transparency to structured products.
What is the contribution of Russell to FTSE’s index business?
My last four years Russell have been very interesting. As a team we gave ourselves the challenge of increasing awareness around the Russell Indexes brand and developing a strong business in Europe. Given our smaller profile outside of North America, we realised that we could not compete with established European indexes such as the FTSE100, so developed our offering by approaching both the buy- and sell-sides to discover whether we could create a new approach.
The feedback we received was that the sell-side needed to be given more attention, as traditionally index providers had focused on the needs of asset owners and fund managers when creating products. This focus had design implications on the benchmarks, as it meant they needed to have a set of rules and liquidity considerations that could be easily replicable by the buy-side. However investment banks needed indexes where exposures to equity positions could be unwound in a few hours, or provided in the form of a swap, which requires hedging through borrowing the underlying index constituents. We felt that factors such as rapidly changing borrowing costs over the life of the product or if it is even possible to borrow the underlying constituents had often not been considered.
Trading desks usually require indexes that can hold a lot of money very quickly, so we started to focus on features such as the speed of trading each individual constituent, and created a methodology that ensured no individual constituent could dramatically increase the length of time taken to complete an index trade. Russell created indexes such as the Russell UK Mid 150 Index as a result of this new approach. The key feature was the speed to trade and the control of borrowing costs.
Is the cross-over between investment banks and index providers negative for the market?
The relationship between banks and index provider is often complementary. Index providers can deliver the data and set the requirements of an index, without the risk of a conflict of interests as we do not sell products that track the benchmark. While it may appear that we are in competition with the investment banks, most of the time we feed each other’s needs. Banks often construct technical and niche index strategies that would not be appropriate for an independent index provider such as FTSE Russell. We aim to construct broad-based indexes and benchmarks that are going to be used by a broad base of investors. Index providers often take the different approaches developed by an array of market participants (including investment banks), and make them into indexes that can be used to create investable assets. Smart beta and factor investing is a good example of this adaptable approach. Index providers add an extra layer of transparency and independence to the process. We offer a completely objectivity to index construction and provide solutions that investors can easily adopt. This provides certain reassurances for anyone investing in an ETF or a structured product linked to a FTSE Russell index.
FTSE and Russell are behind other index providers in terms of products linked to their indexes. Do you think this will change with the merger?
The merger will be of significant benefit to the business, and will allow us to generate greater global exposure. FTSE is a leading global brand while Russell has a strong market presence in the US. The Russell 2000 is the second largest index in the US with 80% of AUM in the domestic sphere. The combination of the two businesses is a win-win situation as we can combine the expertise and the resources of the two, providing better solutions for investors. The merger has added value on many different levels, for example the FTSE research team is well known for its idea generation, while Russell’s team has a real understanding of how the investment process works and the construction of portfolios.