MSCI has blurred the already fuzzy border between passive and active investing with the launch of a new DIY indexing option for the big end of town last week.
The new MSCI Institutional Client-Designed Indexes (iCDI) will enable large investors to adjust benchmarks on the go to bespoke metrics instead of conforming to standardised settings.
According to a MSCI statement: “Pension funds, sovereign wealth funds, endowments, and other institutional asset owners are increasingly evolving their investment strategies to account for impacts of a fast-changing market, with adjustments ranging from shifts in factor rotation to adoption of their own unique ESG and climate investing objectives.
“MSCI iCDIs are designed to allow asset owners to modify an index’s methodology as these changes arise instead of switching indexes completely when their investment strategies shift.”
The index market has seen hyperbolic growth in recent years with providers punching out benchmarks at rapid pace to meet demand for passive exposure to all manner of investment themes.
Global benchmarking industry body, the International Index Association (IIA), last reported its members administer more than 3 million indices.
“These indices cover a wide variety of asset classes, including equities, fixed income, commodities, and foreign exchange,” the IIA says.
But while index-based investing was originally conceived as a cheap and efficient way to gain exposure to broad-based market benchmarks, the explosion of niche benchmark-based strategies has pushed the once-passive practice into active management territory.
Professional investors increasingly rely on indexes to both benchmark performance and build products.
And the rise of ESG-based investing, in particular, has spurred the search for cost-effective matching indices. In September this year, for instance, the NZ Superannuation Fund revealed a change from a bespoke MSCI index to an off-the-shelf index aligned to the Paris Climate Accord – substantially cutting costs as well as the number of underlying shares in its portfolio.
MSCI says with its new flexible benchmarking option institutional investors can now create “an index for an indexed mandate managed by the asset owner internally or by a third-party asset manager”.
Sebastien Lieblich, MSCI head of indexed licensing, said the self-benchmarking approach represents a “sea change” for institutional investors.
“Asset owners’ investment mandates are moving beyond market-cap based strategies as factors like climate change, regulatory, and geopolitical developments rapidly reshape global markets and economies,” Lieblich said in a release.
“With record-high inflation driving volatility across a wide range of markets, investors have also been challenged to reassess their asset allocation strategies. In working with the largest institutional investors in the world, MSCI saw the need for an index solution that asset owners could evolve over time as they adjust their investment strategies in response to new developments and changes in their performance and risk outlook.”
MSCI is one of the three biggest firms in the lucrative benchmarking business along with FTSE Russell and S&P.