The London Stock Exchange Group’s (LSEG) recently signed agreement to acquire American data provider Mergent is the latest in a shift towards customized, passive investment products. Mergent, which supplies data on 380,000 corporate bonds, 3.6 million US municipal bonds, and 250 million public and private firms, will be put to work supporting the creation of multifactor-based, passive investment products for FTSE Russell, a LSEG subsidiary. The deal is expected to close in January 2017.
Appetite for expensive, actively managed investing has been declining in the postfinancial-crisis period as investors’ faith in its ability to outperform benchmark indexes has eroded. Factor investing, a lower-risk portfolio diversification strategy based on stock attributes or characteristics, is becoming more popular as a result. Types of factor can include volatility, quality, liquidity, and risk, and can be combined to form multifactor indexes.
Growth in (multi)factor investing has been rapid, and multifactor exchange-traded funds (ETFs) are very much in vogue. More than a third of the 200-plus multifactor ETFs currently on the market are less than a year old. Significant success has been found already, for instance John Hancock’s Multifactor Large Cap ETF or Goldman Sachs’ series of successful ETFs, such as Goldman Sachs ActiveBeta International Equity ETF.
Mark Makepeace, CEO of the FTSE Group, anticipates the current 70% share of actively managed funds (versus passively managed) to shrink to less than 50%. The hype around this style of investing is considerable, with one analyst even describing it as a “free lunch” (in the short term at least, until the popularity of the approach pushes up valuations to the point they no longer generate viable returns).
According to FTSE Russell, Europe is leading the way in factor investing uptake, with over 50% of European asset owners having taken up factor index products (the majority of which are multifactor) in 2016. North American uptake is the lowest of the three major regions, at 28%, lagging the Asia/Pacific region as well at 38%.
FTSE Russell also reports that of those owners already with factor index allocation, 76% plan on increasing their exposure within the coming 18 months, and of those without, 52% expect to make an allocation in the same time period. It is perhaps the lag in the North American market that pushed the FTSE Group to acquire Mergent and catch up with the entrenched MSCI and S&P.
And it’s the underlying data and analysis of companies such as Mergent that are allowing for greater capacity, precision, and nuance in index creation, in turn allowing investment firms to meet rising demand.
Malcolm Gledhill is Dun & Bradstreet’s expert on the European marketplace. Malcolm joined Dun & Bradstreet’s Macro Market Insight team in 2014 before moving to the Company team in 2016, and has a BA from the University of Southampton.