Mark Sladkus runs a fee-only advisory firm, Red Lighthouse Investment Management, in New York City. Mark is an index industry veteran, having worked for over 20 years at MSCI, latterly as executive director and chairman of the firm’s index committee. IndexUniverse.eu editor Paul Amery recently asked Mark what he thinks of the latest competitive battles in the index business and where the industry is heading.

IndexUniverse.eu: Mark, a lot has been going on in the indexing business—battles over market share and pricing, self-indexing, increased interest from regulators—what do you make of it all?

Sladkus: Indexing is a very competitive business and increasingly so, as a lot of services have become commoditised. There will always be interesting innovations in indexing, but the differences between different index approaches were so much greater a decade ago than now.

IndexUniverse.eu: Could you give some examples?

Sladkus: There used to be major differences in methodology between the leading index firms, with some offering broad benchmarks and others narrower, more tradable ones. There were big gaps in different index firms’ coverage of countries and companies, and uneven approaches to treating companies with restricted free floats within indices, for example.

But now there is much more agreement in these areas. So you’re talking basis points in return differences between different index versions, compared with hundreds of basis points in the past.

And in the early days of the indexing business, having access to long-term data series, covering the underlying equity or bond markets, was really valuable. Now it’s very easy to gain access to decades’ worth of securities market data.

IndexUniverse.eu: So if everything is commoditised, there shouldn’t be major differences in cost between one firm’s index version and another’s. And yet we highlighted recently that different index versions of the same market can vary in cost by a factor of a thousand or more. What do you make of this?

Sladkus: I think it’s fair to argue that there is less to differentiate between different index versions of the same underlying market than differences in price would suggest. And we’re going to see some price compression.

IndexUniverse.eu: How important is the current trend towards strategy indexing—embedding an investment strategy in an index and offering it as a way to achieve excess performance?

Sladkus: I think this is a healthy trend, as long as people are clear what a particular index is meant to represent. But we need to be careful when people are using indices as performance benchmarks. People should choose the right benchmark and we should be aware of possible conflicts of interest.

For example, if you manage portfolios with a value tilt, and you believe that in the long term value stocks will perform better than growth stocks, your performance is going to look better if you benchmark yourself against the MSCI EAFE index (for example), than against the MSCI EAFE value index, which embeds that tilt towards value that you are pursuing in your fund.

So a manager should choose a benchmark that’s closely aligned with his or her investment objective.

Ultimately, it’s also good for asset owners like pension plans to have this choice of indices, as this will also allow them to assess if an active manager is producing added value or just using a systematic investment strategy that can easily be replicated at low cost.

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