Governance ‘not enough’ for index providers to manage conflicts – EDHEC
Institutional investors have voiced concerns over opacity among index providers in a survey conducted by EDHEC-Risk Institute, which found the majority of respondents were dissatisfied with provider transparency.
The report surveyed investors on their views of index providers, governance and transparency.
Called ‘Index Transparency – A Survey of European Investors’ Perceptions, Needs and Expectations’, the report showed that a significant majority (82%) of investors believed transparency was the best method for index providers to manage conflicts of interest.
Only 12% suggested good governance was enough for this to take place.
EDHEC’s report said a governance-based approach would not only be ineffective in dealing with conflict-of-interest risks but also counterproductive.
It said: “It would also strengthen the existing oligopoly in the index provision industry with adverse consequences for competition and innovation. Such an approach is recognised as ineffective by investors and as costly by asset managers.”
The research highlighted that only a 4.6% were ‘very satisfied’ with the current level of transparency from index providers, with two-thirds of respondents suggesting the level was inadequate.
The institute said this finding fell in line with its own observations, as all but one index provider fails to provide historical constituents of indices.
The survey found that four-fifths of investors believed an adequate level of transparency would require historical or live replication.
Further to this, an overwhelming 81% said the credibility of reported track records, especially newer forms of index, was undermined by providers’ opacity.
Noël Amenc, director at the institute, said improving transparency was key in light of moves by the asset management industry to develop more sophisticated indices.
He added the report published by the institute gave a voice to end investors of transparency, as index providers “too often express themselves on behalf of the investors”.
“There can be no serious reason for authorising an index provider to publish the performances of an index,” he said, “without the market being able to guarantee their veracity, credibility and robustness due to a lack of sufficient information.”
He added: “It is difficult to accept index providers conducting most of their marketing without giving markets the means to check and question the representativity or the outperformance.”
The research found that investors agreed with EDHEC’s stance, with 77% suggesting the rise of newer index strategies made transparency more of an issue.
Investors also threw their weight behind proposals from the European Securities and Markets Authority (ESMA) for more transparency for non-UCITS funds.
Some 71% of the 109 investors surveyed said this step was necessity among index providers.