Index track records “undermined”, investors say

Survey1Many of Europe's largest pension funds believe index transparency is inadequate and that rules governing transparency of indices in Ucits funds should also extend to other investments.

Investors consider index transparency to be “logical and indispensable” says the Edhec-Risk Institute, which surveyed 109 institutional investors across Europe including some of the largest pension schemes.

About a third (35.8%) of respondents say they are either somewhat dissatisfied or very dissatisfied with transparency levels. A similar number (30.3%) are very or somewhat satisfied.

But many agree (80.8%) that a lack of transparency “undermines the credibility of reported track records … in particular for new forms of indices”.

Indexation has become more complex in recent years with the rise of indices that offer an alternative benchmark to traditional cap-weighted forms.

As well as providing a benchmark, newer forms of indices – often referred to as “smart beta” – attempt to tap higher returns than their cap-weighted cousins.

Noël Amenc, an Edhec director, says: “Transparency guarantees the efficiency of an index market that is becoming increasingly complex and sophisticated. The market needs to form opinions by sharing information and expertise.”

He adds: “It is difficult to accept index providers conducting most of their marketing either with the idea of being a market reference, in the case of cap-weighted indices, or with simulated historical track records of outperformance, in the case of smart beta indices, without giving markets the means to check and question the [representativeness] or the outperformance.”

Edhec says that, with a single exception, the index providers analysed as part of the study do not give access to the historical constituents of the indices, and for a significant number of smart beta indices, the methodologies described do not allow the indices to be replicated.

Other findings of the survey include:

  • 85.2% of investors say transparency as the best mitigator of conflicts of interest;
  • Only 2.8% are satisfied with disclosures designed to impart an understanding of the objectives and key construction principles of indices;
  • There is a strong conviction that the rise of strategy indices makes transparency even more important (77.1%).

In 2012, the European Securities and Markets Authority published guidelines for Ucits index funds which centred heavily on transparency. The Edhec survey finds 70.6% agree with the idea that the transparency rules should be extended to non-Ucits products and mandates.

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