Thomson Reuters issues challenge to index providers

Competition is heating up among index providers, particularly following a significant shift into more passive, benchmark-tracking investments, such as exchange-traded funds (ETFs), last year.

Thomson Reuters will make its latest move with today's launch of 7,500 equity sector-level indices, including a range referencing Asia-Pacific and emerging markets. The US information and technology group has thereby boosted its total number of indices to over 8,000 -- including 2,336 emerging-market indices -- in a clear challenge to established rivals such as Dow Jones, FTSE, MSCI and Standard & Poor's.

The firm has not yet signed any deals with Asia-Pacific fund managers or distributors, as its index business is just six months old, says Andrew Clark, chief index strategist at Thomson Reuters in Denver, Colorado.

However, several large asset-management firms and plan sponsors in the region are "test-driving" them, he tells AsianInvestor, adding that some of these firms are expected to sign up. The users are testing the indices both as benchmarks for active managers and as bases for investment products, and three major ETF providers in Europe and the US are also expressing interest.

All the indices are investible, and more so than those of the competition because of Thomson Reuters' liquidity filter, says Clark, who is visiting Asia this week.

As for how the firm plans to challenge other established index providers, he says: "We expect to beat them, at least at first based on the depth and breadth of our available data. We have no problem getting data in the 130 countries we do business in. Already we are comparable to MSCI in terms of number of countries and regions, and we have many more sector indices -- and at a greater depth -- than they do.

"We also have a superior liquidity filter, which makes our indices more investible than theirs -- ie, we have significantly fewer illiquid securities," says Clark. The filter selects stocks based on price, as opposed to volume, and only includes stocks that investors can access, says Thomson Reuters, thus providing a more accurate depiction of the investments available, particularly in emerging markets.

Another advantage of Thomson Reuters' indices is that they tend to include a far greater number of securities than those of its rivals, making its indices more representative and its sector indices deeper in terms of coverage, says Clark.

As for the challenge of obtaining sufficient data in Asian countries, he doesn't see any problems on that front, as Thomson Reuters covers 130 countries and has agreements with all the exchanges in those markets.

The new index range covers 44 countries and 18 regions, and includes Iberian and North American Free Trade Agreement (Nafta) sector indices, as well as indices for new sectors such as water, renewables and diversified media.

Sunand Menon, global managing director of indices at Thomson Reuters, says: "Investment managers, quantitative analysts and other financial professionals are continually looking for new ways to evaluate market movements at a deeper level by analysing the most relevant sectors, particularly in the more difficult-to-reach emerging markets."

Clark outlines how Thomson Reuters examines how the economy, the bond and stock markets, the media and commodity prices work together to give market insights, citing China as an example. He talks about the "rhythm and swing" of the market, and says there are three phases of stock-market activity that are closely associated with the business cycle.

Phase one is early on in the stock-market recovery -- which often leads the economic recovery by about six to nine months, says Clark. In this phase, consumer sectors and the financial sector often tend to lead the way, because in developed countries consumer spending is a significant part of GDP.

In China, the same is true, but industrials begin to play a role in this phase, he says, because the country's consumer sector is still in a nascent form, although it is bigger and more important than five years ago.

In phase two, as inventories start to be drawn down, industrials become more important as do basic materials, says Clark. Employment demands also tend to grow as manufacturers come to believe the economic recovery is for real.

"Both phase one attributes and phase two attributes are present in the Chinese stock market, which is very similar to where the US stock market is as well," he adds. "If the market is indeed moving out of phase one, one would expect basic materials and industrials to continue to do well, with energy and utilities coming into play as phase two comes to dominate."

Phase three is dominated by fixed investment, says Clark. At this point, the growth in demand has continued and now firms -- both service and industrial -- decide to make capital investments to expand their businesses. 

Sometimes this decision is well advised, he says, but often it is not. An important signal, the rise in industrial prices, occurs towards the end of phase two or maybe the start of phase three. This peak tends to coincide with the overall market's peak.

Hence, he says, many firms will continue to make fixed investments, even though leading indicators such as stock and bond markets are signalling caution.

Related to phase three is the ongoing rise in commodity prices and the probable over-production of consumer cyclicals such as autos.