New FTSE Frontier Markets Index is not very good, here is why

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New FTSE Frontier Markets Index is not very good, here is why

FTSE announced last week that they were going to join the Frontier Markets’ bandwagon and introduce a Frontier Markets’ index.  It has been a long time coming but is unlikely to give MSCI competition.

MSCI as usual was the first-mover, but S&P soon followed in 2008 and FTSE completes the trio of major global indices for Frontier Markets.  Both the S&P Index and the FTSE index are mere blips compared to the money indexed to MSCI’s index.

The table below outlines the key metrics of each index as at August 31, 2014.

FM Indices - Characteristics - 2014-08-29

You can find factsheets for each index, at the links below:

MSCI

S&P

FTSE

We have highlighted some of the issues with the MSCI Frontier Markets Index here, as well as changes made this year-here.  It is not a well-diversified index; either geographically or by sector.  Unfortunately, the FTSE index does nothing to address these two issues.  From a geographic perspective the best index from a diversification perspective is the S&P Frontier BMI index.  You can see the country weights as at August 31, 2014 below:

FM Indices - Country Weight - 2014-08-29

From an asset managers’ perspective, MSCI is expensive relative to the S&P index and the FTSE index.  For that reason alone, you may see asset managers shifting their benchmark.  Furthermore, we have to question the agenda at MSCI.  As an organization, ‘scatter-brained’ would be the best way to describe their approach to benchmarking.  Click on the link above to access their factsheets to see what we mean.  There are far too many indices for them to have any relevance at all.  We firmly believe in the idea of ‘less is more’ as far as benchmarks are concerned.  Asset Managers should be assessed to common benchmarks across the asset class rather than strategy-specific or characteristic-specific benchmarks. There is not enough ‘passive’ in MSCI’s approach to benchmarking.  The other risk of choosing an obscure benchmark is having that benchmark lose favour and MSCI terminate the index.

The methodology behind each country classification is a rather detailed and long-drawn out process, you can read up on it at the factsheets’ link above.  The main difference in management of the indices really comes down to sophistication.  MSCI is well-oiled machine.  Rebalancing, corporate events, IPOs are all incorporated into the index at lightning speed, and often at the same time as the event itself, whereas S&P and FTSE tend to rebalance and incorporate corporate events on a quarterly basis.  To be fair, part of this is driven by the lack of ETFs indexed to the S&P and FTSE.  If they were able to pick up a significant amount of ETF business we would expect this to change.

The indices differ on the specifics of market caps, liquidity requirements, foreign ownership caps and the like, but in the end they really get you to the same place.  FTSE’s governance is the weakest with their documents indicating only an annual review is required, whereas S&P and MSCI both mandate at least semi-annual reviews.

To conclude, in our view the FTSE index does not add any value to investors.  It is heavily weighted to Nigerian and Middle Easter markets, just as the MSCI index is, and it fails to differentiate itself in any meaningful way.  For managers it is cheaper and may warrant consideration as a benchmark, but other than that it is rather disappointing foray for FTSE.

Let us know if you have any questions on the three indices.

 

 

 

 

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