DC poser for index providers
The need for index providers to have contact directly with pensions finds and other institutional investors is an avenue that MSCI has been quietly pursuing. According to MSCI principal Jane Staunton, the group’s traditional client has been the asset managers and more recently the brokerage houses. “About two years ago we started to focus on pensions plans and their consultants, who are also instrumental in the benchmarking decisions. In Europe, we realised that we needed to have this dialogue with the asset owners, where the concept of benchmarking was just coming to the fore.”
In fact, it was very much this upsurge in interest in indexing matters that sparked this move: “It was something of an awareness and educational issue, as people need help with regard to making choices,” she said. This is now being followed up with the establishment of local presences in Frankfurt, Milan and Paris, instead of servicing clients just from London. “This will enable us to get closer to clients and to better understand their needs.”
In Europe, MSCI is still the dominant force, though its market share is less. “Our overall market share is about 85% globally, while in Europe, judging by the Merrill Lynch Gallup survey of the investment industry in Europe, we have 64% of this.” Around 600 of MSCI’s 1,500 clients worldwide are in Europe and some $1.5 trn in assets are estimated as being MSCI benchmarked, with about 10% of that indexed to MSCI. The direct contact with the asset owners is not just being expanded in Europe, it is now being rolled out elsewhere. “We felt this had worked well for us there and decided that we needed to do it on a global basis as the pensions arena was in the throes of change in other places.”
But Staunton who has recently relocated back to New York from London is actively talking to US pension funds, particularly about the shift to defined contribution. “DC redefines the game for index providers. Traditionally, ours has been an institutional market. We have a new clientele – one who is certainly not as sophisticated as the institutional investor.” But on the logic of the decision to service the asset owners, the individual in a DC plan is regarded as being in charge of the assets.
She thinks the index provider has a role to play, particularly on the educational side: “How is the individual member going to make decisions on asset allocation and benchmarking?” She suggests that perhaps some kind of system would be needed, capable of providing on-line analytics which could allow the member to enter in his risk profile, his age, investment objectives and so on. “We should be able to respond to what an appropriate allocation for a person with that risk profile ought to be and what your individual benchmark should be, so that he can measure how well the investment manager is performing.”
Much will depend on the distribution channels involved, she acknowledges. “We are on the cusp of change here,” says Staunton.