There is a clarification at the end of the article.
FTSE, one of the world’s largest equity index providers, is swiftly spreading its wings in India. Globally, the business of creating indices for both passive and active investments generates a revenue of over $1 billion annually and the trend of investing though the use of such measures is catching up in India, too. While FTSE has tied up with the MCX Stock Exchange, it is also in talks with the Bombay Stock Exchange for joint strategies. Donald Keith, deputy chief executive officer of FTSE Group, shares his views in an interview with Palak Shah. Edited excerpts:
Your deal with MCX-SX to jointly develop products is in limbo. What are your other India plans?
It is frustrating that MCX-SX has not got the necessary approvals but partnering with exchanges is just a part of our business strategy. In India, our thrust will be on bringing products to suit retail investors. So, we would license mutual funds, exchange-traded funds or index fund managers for using FTSE indices. Another key area would be pension funds, in their nascent stage in India. There is already demand from Indian fund managers for customised indices which suit their asset allocation and investment strategy.
On exchange tie-ups, there is no possibility of any association with NSE (National Stock Exchange), as they have a joint venture with S&P (Standard and Poor’s, a rival). It is well known that our talks with with BSE (Bombay Stock Exchange) have been on for a long time now.
Stock picking has always been a preferred tactic of fund managers. Has the financial crisis changed that?
The financial crisis has accelerated the shift of both institutional and retail fund managers from active to passive investing. There is greater demand for transparency and simplicity, so dependence on an index to invest is increasing, as one can get more clarity. FTSE indices have a transparent structure in terms of governance and a rule-based approached, which is available to the common public. While investing through the index, one can get a higher level of precision for pure performance, analysis, risk attribution or anything else. We are getting more requests for customisation, so that fund managers can go straight from stock picking to sectors.
In case of large investors, the trend is that they don't want to invest in a particular sector but maintain a list of stocks for whatever reason they don’t want to invest in. Or, they want it to be according to a particular currency or to hedge. In some cases, fund managers also want the index to factor in some form of tax treatment. Volatility and risk declines when you use an index to invest, even if it may not be very exciting. In stock picking, particularly retail investors burn as markets turn during major events.
Global indices will be traded in India. Are investors mature enough?
It is a natural progression and a close parallel is China. There are nearly 10 applications currently in China to launch ETFs on overseas markets where only domestic ETFs were allowed. There is already an ETF on the Hong Kong markets in India and, bit by bit, Indian investors are starting to look outside the country, as some domestic companies have become global giants.
People may be interested in their local markets only till there is a product which can capture their imagination. Back in 2000, it was difficult to invest in China and nobody wanted to. We licensed a China index for listing in the US with low expectations, which we thought may gather just a few million dollars, as China was still seen as a niche area. Surprisingly, the index got about $8 billion. At its peak, the investment in the indices were about $13 bn.
You think the two key indices, Sensex (of BSE) and Nifty (of NSE) have been able to exploit their brand potential? How is the competition among global index providers shaping?
I don’t think they have been. Both Sensex and Nifty might be well recognised in India but internationally they are not very strong. One reason is both have not been trading outside India for long. Globally, the competition is mainly between three index providers — MSCI, FTSE and S&P. To some extent, Dow Jones is also part of the competition and then there are other players focused on particular regions. If you take active passive investors, it is difficult to get a precise figure, but we reckon that over $3.5-trillion is either linked to benchmarks or using FTSE indices for investment globally.
Clarification
Reacting to this interview, the National Stock Exchange and the FTSE Group have termed inaccurate the statement attributed to Mr Keith -- "On exchange tie-ups, there is no possibility of any association with NSE (National Stock Exchange), as they have a joint venture with S&P." NSE and FTSE are in advanced talks with respect to the licensing of FTSE 100 to NSE for facilitating launch of derivative contracts trading on FTSE 100 in NSE, a joint release issued on Wednesday said. The statement in this report was based on a recorded interview with Mr Keith and was made in the context of NSE and FTSE coming together to develop new indices for Indian markets.
