Tag Archives | index funds

CII: Index Providers Speak

Index Providers Speak: Policy Process and Voting Rights

Index providers spoke at  about how they develop their policies. Specifically, they discussed recent developments around voting rights.

Index Providers Represented

  • Annalisa Barrett, Clinical Professor of Finance at the University of San Diego (Moderator)
  • David Blitzer, Managing Director & Chairman of the Index Committee, S&P Dow Jones
  • Pavlo Taranenko, Executive Director, Index Research, MSCI (standing in photo)

Index Providers: What I Heard

As with all my other posts on , I mostly refrain from quotes, since my typing speed is abysmal. I try to be accurate but don’t always hit the mark. You may also find some difficulty determining if what write is my opinion or that of a speaker. Be forewarned.

Annalisa Barrett started off with a little background of the importance of indices. For example, index funds will hold more than half the assets in the investment-management business by sometime between 2021 and 2024, according to Moody’s Investors Service Inc. By definition, actively managed investments, in aggregate, cannot deliver above average performance

Some index-tracking exchange-traded funds charge as little as $3 annually for every $10,000 invested. The average charged by U.S. stock mutual fund managers is $131. (Index funds to surpass active fund assets in U.S. by 2024)

David Blitzer then opened his remarks by discussing the work of S&P Global. They are not just index providers. They also do credit rating and provide financial information.

With regard to indices, they have a plethora or products from equities, to commodities and housing. Committees have ultimate responsibility on index policies and governance. Voting policy determines which and how firms go in an out of the indices. They start with the International Organization of Securities Commissions (IOSCO) guide.

S&P Global index methodologies are published. Material changes require review and consultation. S&P Global publishes questions before making changes on their website to published policies. Consultations, if public, take a minimum of 30 days. The Index Committee reviews all comments. All revisions to policy are done on noncommercial side of the company.

The most discussed decision in their history came with the Snap controversy . 75-80 responses on consultation. Two public comment periods. No changes in the broadest indexes. However, for the largest indexes, 1500 (large, mid, small) accounting for 50%+ stock in market, the big change left companies like Snap off. Now companies can have only one class of stock unless they were in the index before.

Index providers do not see themselves as a regulators. Committee members are all on the noncommercial side, experienced, with appropriate degrees, etc. Sometimes they have partners but they insist those representatives on the Committee are noncommercial as well. Yes, they heard from the major ETF providers, CII, etc. but did not hear from corporate managers — although they did hear from some attorneys who represent them.

Companies can increasingly get a huge amount of capital without going public. There is less anti-trust action.  Majority vote standard? That could be petitioned. (unlikely) Stock market should be a market for corporate control.

Pavlo Taranenko noted that MSCI was founded in 1969 and is based in Geneva. Then it connected to Morgan Stanley but is no longer affiliated. They acquired Risk Metrics. He briefly touched on portfolio analytics and other products. MSCI can create leveraged indexes.

Market-cap weighted, ESG indexes, Islamic, etc. Generally, policies are consistent globally. Equity index committee discusses changes in methodologies. Committee members are senior researchers (noncommercial). Sounded much the same process as S&P Global, although I do not recall anything about a public comment period. Majority vote standard? Some ESG indexes address.

Both looked at the issue because there was a consensus in investment community. Index providers can act faster than regulatory agencies.

Personally, I am interested in MSCI’s approach to optimizing factor and ESG exposure, which places a higher weighting on stocks with alpha potential, based on less risk/controversy, higher ESG.

Index Providers: What Others Write

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Jack Bogle on Diversified Portfolios vs Speculation

Jack Bogle

Jack Bogle

Buying and holding stocks and bonds for the long term and maintaining a diversified portfolio are still the smartest strategies for the average investor, says Vanguard founder Jack Bogle in answer to Mark Cuban and other critics of these traditional approaches. In the Big Interview with Journal columnist Jason Zweig, Bogle takes aim at the culture of market speculation. Betting on long odds, he says, “doesn’t pay off very often.” Continue Reading →

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Corporate Governance: Stepping Back in Time From October 2013

MrPeabodysWayBackMachinePublisher’s Note: Yes, you’ll find many broken links in the material referenced below. After 5, 10 and 15 years, the internet moves on. Many of the organization’s linked have since gone under. We’re just glad to still be here, offering our readers a sense of the history we have shared. More about the WABAC machine.

Five Years Ago in Corporate Governance

  • The Treasury is injecting $125 billion into nine big banks and making a like amount available for other banks that apply. Those financial giants owed their executives more than $40 billion for past years’ pay and pensions as of the end of 2007, a Wall Street Journal analysis shows. (Banks Owe Billions to Executives, 10/31/08) How much of our $250 billion bailout will go to pay for special executive pensions and deferred compensation, including bonuses? Will our disgust with those who brought us the financial melt-down lead to an upsurge in mutual banks and credit unions?
  • Jackie Cook, the founder of Fund Votes, told SocialFunds.com, “Executive compensation is at the heart of a growing problem Continue Reading →
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ETF's: Danger or Positive

The factors that brought about the tech bubble, the collateralized debt obligations crash and the rest are being replicated with ETFs: floods of cash and tidal surges of ingenuity in the markets advancing faster than the regulators’ event horizon.

via Fair exchanges?, Inside Investor Relations, 6/29/2011

‘ETFs, indexes and ‘closet indexers’ among mutual funds already make up about 40 percent of the market, I’m told that if you get up to about 60 percent, there really is no market anymore,’ Bob Monks points out. Others disagree. Additionally, Jon Lukomnik says ‘indexes provide active ownership discipline: where you can’t use exit, you use voice.’

See the FSB five page advisory report entitled Potential financial stability issues arising from recent trends in Exchange-Traded Funds (ETFs) found through Why ETFs give an uneasy sense of déjà vu, ft.com, 5/5/2011.

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Video Friday: John Bogle on Index Funds & Corporate Governance

Bogle sees Index Funds, which hold 25% of all stock, as the best hope for governance. However, he acknowledges free rider problem, potential conflict of interests for offending clients. Hopes we will gradually break down the barriers. These are the funds that have held for three years or more, so these are the funds that will have proxy access.

Bogle would like funds to introduce resolutions requiring 75% of shareowner vote in order to make political contributions. They should vote in the interest of their shareowners, not their managers. Corporations shouldn’t be controlled by their agents.

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