Rise of indexing leaves managers out of pocket

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The rising popularity of index-based investment products such as exchange-traded funds means active fund managers are missing out on billions of dollars in potential fees, according to a study from the Tabb Group, a US consultancy.

The report, to be released shortly, says index-based assets under management have risen 2,610 per cent since 1993, a rate that poses a danger to the active asset management community.

It adds that the nearly $1,000bn invested in index-based products in the US costs the active management community approximately $12bn in lost management fees yearly.

The figure is likely to rise rapidly in the coming years if hedge fund replication strategies, which are becoming increasingly popular, continue to prosper.

Tabb predicts that by 2009, nearly 70 per cent of all pension funds, representing $40,000bn, will use some sort of customised benchmark, heightening concern about prospects for success among active fund managers.

Index providers are revelling in the popularity of benchmarks and indices based on the benchmarks among institutional investors.

Index providers have seen revenues climb at a 22 per cent compound annual growth rate over five years, and analysts believe they will take in more than $1bn in revenues by 2009.

Adam Sussman, author of the report, said the foundations had been laid for future growth.

“MSCI, the index provider, just had a successful IPO and will be searching for acquisitions in the space. Rupert Murdoch will be looking for ways to monetise the index business he obtained through the purchase of Dow Jones.

“Markit recently bought iTraxx, while S&P, FTSE, and Russell continue to push out new products. It is only a matter of time until there is an index of indexers.”

He said growth was being fuelled by the need among pension plans to better measure the performance of alternative asset managers.

Meanwhile, ETF, Exchange Traded Note and other index managers were being driven to have more products in the pipeline.

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