By: Jonathan Horton, global head of change management, FTSE Russell
The world is changing quickly. From accelerating cross-border capital flows to the rise of emerging markets, the world investors must grasp and understand today is radically different from that of 20, or even 10 years ago.
For this reason, it’s critically important for investors who use indexes to understand the process that index providers use to govern the creation and ongoing management of their indexes. As the influence of passive investing has grown, index providers are increasingly at the forefront of major market changes and are expected to make objective, well-reasoned, and thoughtful judgments on index methodology to ensure that the indexes they oversee accurately reflect evolving global markets.
For example, FTSE Russell has been on the leading edge of facilitating access to the growing China A-shares equity market to help institutional investors gradually build their position as foreign investor quotas increase. FTSE Russell created a separate family of China A-share inclusion indexes to help institutional investors build a gradual position in China A-shares in anticipation of the A-share market opening more widely in the future.
FTSE Russell also takes a highly active role in defining size (i.e., small, mid, large) and market classification (i.e., Frontier, Emerging, Developed) criteria for its global equity indexes to aid investors in portfolio construction. By clearly outlining asset allocation building blocks through index exposures, we enable investors to better balance market and size exposures and avoid gaps.
These are two examples where the index provider is making adjustments to its global indexes that may impact billions, even trillions, of investment dollars. We must be reasoned in our approach and follow a consistent governance process. For FTSE Russell, this means understanding key drivers in the market, seeking input from a wide range of market participants, and implementing index policy and developing index products that address investor needs in a responsible way.
I encourage all investors to fully understand the process governing the decisions their index providers are making and the index methodologies they are designing. Are they transparent? Do they seek input from all market participants? Do they clearly communicate their decisions? Are they governed by what is right for the end investor? At FTSE Russell, we consider all these things of paramount importance in helping our clients make better investment decisions.
Note: This blog was published on the Vanguard website on December 5, 2017. © 2017 The Vanguard Group, Inc.
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