SEI's Barbaneagra: Index Providers Are Not Incentivised To Do The Right Thing

Speaking to Investment Week, Barbaneagra said index providers, such as FTSE Russell and MSCI, were running a "duopoly" in Europe meaning they could charge "extortionate" fees to investors.

"If you think about the FTSE 100 or the MSCI World, it is a very simple process which can be done in two seconds, but the price investors pay for benchmarking has gone from virtually zero 20 years ago to double digit basis points.

"There is no competition," he continued. "Effectively it is a duopoly between MSCI and FTSE and I wish index providers did less instead of more."

One solution to this issue, the portfolio manager said, was for regulators or associations to instead provide an open-sourced suite of benchmarks that investors could use.

This would save asset managers from wasting fees on "something trivial" and enable them to instead spend more time researching companies in order to make better investment decisions.

"[The index providers] have a monopoly yet it is not something regulators are interested in," he said.

"If you are a large pension fund, you could be paying a bigger fee to an index provider than an asset manager, which is insane."

Furthermore, Barbaneagra said index providers were "not incentivised to do the right thing" because often the factors most suitable to launch are those that have lost money over the past ten years.

The portfolio manager added European value was one factor he was overweight because it was currently very cheap and had performed "horrifically" since the Global Financial Crisis.

"It is hard for generic investors to buy something that would have lost money over the past ten years, yet often that is the right thing

to do."

Managers reconsider use of index providers amid 'eye-watering' costs

Barbaneagra, who invests across the investment spectrum in passive, smart-beta and active managers, also highlighted MSCI's new factor classification programme that launched in January in order to bring a standard framework to the market, which he criticised as just a rebranding attempt from the index provider.

The portfolio manager warned investors could be "bullied" into adopting this new standard, which would become another source of revenue for MSCI and "wasted" cost for the investor.

"Just because you can measure [your portfolio] correctly against MSCI does not give you any better returns, but you pay for it," he said. "There is no innovation whatsoever, it is a rebranding exercise."

MSCI said in response: "As factor investing continues to grow, and we see a tremendous amount of products being brought to market, the industry is demanding more education and clarity to properly evaluate and implement factor-based products.

"There was a significant gap in the market with respect to the standardisation of factor definitions and measurement before the launch of the MSCI FaCS and MSCI Factor Box.

"While factor investing is not new, MSCI FaCS and Factor Box provide innovative tools and education that investors need to evaluate factors as a component of their investments.

"Similar to global, country and sector classifications, our factor classification will allow a wider array of investors to evaluate and take advantage of factor-based strategies."