My friends and colleagues in the index industry sometimes refer to me as the “been there, done that” of global indices. Perhaps it is a nod to my varied skill set and range of experience. Or perhaps it is just a nice way of saying I am very old!
Indeed, in my more than three decades in the industry I have worked for just about every type of index company, from the absolute startup to the ‘Big Three’ established players to the “up and comers” and in between.
So, although I am still thoroughly engaged in the day-to-day aspects of the industry in my role at global index provider Morningstar Indexes, my experience lends itself toward pondering the future of indexing. And lately, in fact, I think there is more uncertainty about the future of this industry than we generally think.
In a number of recent industry discussions, I have been asked who will win in this industry going forward. The choice appears to be between the small upstarts with innovative products and nimble operations but relatively little infrastructure or the established players with scale and an entrenched following. My answer? Neither.
It may seem self-serving for me to say that I increasingly believe the future of indexing will belong to the players currently in the middle, as I work for one of those middle players. But I do believe the signs point to that possibility.
Let me explain. On the one hand, if we buy into the argument that the investor and brand landscape is changing, the ‘Big Three’ index players will not continue to dominate forever. On the other hand, if we accept the economic and regulatory realities at work, the upstarts will not be eating the lunch of the industry leaders anytime soon.
With the rapid move toward customisation of indices, I believe the brand value attributed to major market indices and the providers that offer them has started to, and will continue to, erode. Alex Matturi, retired CEO of S&P Dow Jones Indices, recently pointed out very correctly that there is a credible argument that users are willing to pay higher prices for the liquidity that has built up around these indices and the products based on them, but I believe that price sensitivity is continuing to increase among the users of indices, particularly core beta indices, as investors realise that these products are increasingly becoming a commodity.
And therefore the “ecosystem” around successful indices probably just slows down the decline of their dominance. After all, there is a great example in the Russell 1000, which slowly but surely took more and more of the US benchmarking market from the S&P 500. And, as investor use of index-based products continues to grow, new areas of competition such as thematics and ESG are levelling the playing field and opening new areas to compete for up-and-comers.
Does this mean the biggest index providers will be going away anytime soon? No. There are plenty of macro trends at play which favour providers who have reached scale and make it much harder for emerging index players to compete. Just as the indexing industry is getting more competitive, the “moat” around indexing is widening, due in part to the regulation we all agree is increasing in all areas and the importance of owning one’s own data to compete.
As the rise in passive investment creates fee compression and drives greater focus on scale for commoditised indices, index providers will need to compete on scale while offering differentiated products and brand awareness that allow greater pricing power. There are very few players in the industry right now that can accomplish this, but it’s more than just the ‘Big Three’. And I am not sure the current M&A opportunities will allow any transformational deals for existing players. I believe this situation suggests that the indexing market will likely flatten and narrow, with smaller “big” providers and likely fewer index providers overall.
Gareth Parker is Chief Indexing Officer at Morningstar Indexes, recently named the fastest growing global index provider for the second year in a row by Burton-Taylor Consulting. Parker joined Morningstar two years ago with the acquisition of Moorgate Benchmarks, which he co-founded in 2018. In his 32-year career in indexing, Gareth was one of the original founders at FTSE Group, which later merged with Russell Indexes to become FTSE Russell. He has also spent time at S&P Dow Jones Indices.