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Impact Investing

IPE special report May 2018

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DJ, FTSE, MSCI go for sectors

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Dow Jones has launched a new series of indices tracking global sectors – in direct competition with a new product from FTSE.
The new benchmarks – the Dow Jones Sector Titans Indices – are designed to let investors target only the largest and best-known companies in each of 18 global sectors, the provider says.
Explaining why the company created the new indices, David Moran, president of Dow Jones Indexes, says: “Global sector investing is getting more and more important as many investors now realise that the effects of industry and market sector events may often outweigh the effects of country-specific events.” In addition, increased market volatility has also led to a demand for consistency among investors, he said.
He says the stocks in the indices were among the most actively traded in the market, and their high liquidity allowed the indices to be replicated by investment managers efficiently and cost-effectively.
The Dow Jones Sector Titans Indexes consists of 18 indices representing the major companies of each of the following stock market sectors – basic resources, chemicals, automobiles, cyclical goods and services, media, retail, food and beverages, non-cyclical goods and services, energy, banks, financial services, insurance, healthcare, construction, industrial goods and services, technology, telecommunications and utilities.
Each index is made up of 30 stocks, selected according to free-float market capitalisation, sales, net income, book value and assets. Despite the limited number of stocks, each index covers at least half of the market capitalisation of its underlying sector, Dow Jones said. Weighting of each component is capped at 10% of the index’s total market capitalisation to stop any one company dominating the measure.
The sector indices are distributed in real time through major market vendors. Historical data are available on a daily basis back to December 31, 1991, and the indices are reviewed annually.
Among institutions formally expected to take up a licence to use the new sector indices are Dresdner, AXA, Société Générale and Hypo- Vereinsbank, Dow Jones says.

l FTSE International has also added global blue-chip sector to its product range. Called the FTSE Global Sector Index Series, the new range is a family of 11 indices. They have been created for use in sector-based trading supporting a wide range of OTC and listed products and exchange-traded funds and derivatives, the provider said.
FTSE says the global sector indices offered maximum tradability with minimum turnover.
As an example of the speed of transaction possible using the new measures, FTSE cited the FTSE Global Tech, which is the most liquid sector in the series. This index can allow a $1bn (e1.1bn) global trade to be completed in an average of less than one hour, it said. And even the most complex sector, FTSE Global Autos, takes only an average of eight hours to execute the same trade, the index provider said.
It says the new indices were a logical development given the trend towards sector-based investment. They will be used in conjunction with the provider’s broader-based FTSE All-World sector indices which fund managers use as a wide-ranging portfolio analysis tool
When the indices were launched in February, Merrill Lynch introduced a worldwide range of OTC and listed products including warrants, certificates, notes and funds on the indices. FTSE said it expects other securities houses to launch similar products soon. “We believe that institutional and retail investor demand for sector- based investing is rising rapidly,” says Isolde Regensburger at Merrill Lynch.
Exchange-traded funds and derivatives are expected to follow.
The indices will be calculated in real-time while major world markets are open.

l Aiming at a different market from Dow Jones and FTSE, MSCI has also launched a set of global sector indices. The new benchmarks are called the MSCI All Country SectorsSM.
The product, says MSCI, is a unique, all-inclusive and easy to use asset allocation, benchmarking and performance analysis tool for professional investors. “MSCI intends to lead the way in delivering products that enable investors to analyse the world’s equity markets from a sectoral point of view,” says Henry Fernandez, president of MSCI. “MSCI All Country Sectors is the ideal tool – enabling investors to select the exact industry and geographic combination they are interested in.”
The indices are built on the Global Industry Classification Standard (GICS), which MSCI claims is the most up to date and widely used classification system for equities.
Historical data for the indices is available back to January 1, 1995. The benchmarks offer immediate access to index levels, index returns, market capitalisation data, market weights and index valuation ratios. They are available on either a monthly or daily basis. Three modules are available – developed markets sectors, emerging markets sectors or Asia Pacific sectors, the index provider says.

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