Our objective is to gain a better understanding of the decisions made by index vendors, and how they impact the risk/reward characteristics of the indices.
- We provide a walkthrough of the construction of two global equity benchmarks (MSCI GIMI and the FTSE GEIS) to highlight the practical considerations the benchmark vendors make on behalf of the asset manager. For a global investor, some of these considerations have a measurable impact on positioning; among these are free-float adjustments and companies with ambiguous country classifications.
- We document that both returns-based and holdings-based analysis indicates a convergence in the risk/reward relationship between the two global benchmarks, possibly driven by a market consensus on “best practice” for global equity benchmark construction.
- Recent, well-publicised index benchmark switches might indicate that choice of a global benchmark for equities is mostly a matter of cost for many investors. In our opinion, besides cost, a potential differentiator in the future might be increased transparency in some areas of the index construction process. In this note, we highlight free-float adjustments as one such area.