The HK$30 billion ($3.8 billion) Subsidized Schools Provident Fund has shifted its benchmark for two allocations, a Hong Kong equities and a developed markets fund, from MSCI to FTSE indices, says Mark Makepeace, FTSE's CEO. This latest victory makes it the tenth Hong Kong pension fund with over HK$500 million in assets to start following FTSE indices since last year when FTSE became the benchmark for Mandatory Provident Fund scheme performance measurement, he adds.
Selecting an index vendor is becoming an important part of pension funds' overall risk management and asset allocation process. "Pension funds are specifying what benchmarks their investment managers use more actively," Makepeace says. "We're spending more time with them and trying to understand what they want to do next."
FTSE is making aggressive inroads in Hong Kong against Goliath MSCI based on what it claims are more efficient and cheaper products. FTSE's indices are adjusted for free floats and also tend to cover up to 90% of a market's capitalization. "FTSE indices lower costs because they involve less turnover and less market impact," Makepeace asserts.
From FTSE's point of view, it is rapidly gaining market share, with revenues up over 50% so far this year. But MSCI is the 800-pound gorilla of indexing in Asia. Tim Kay, MSCI managing director, reckons 90% of Asia's pension assets benchmark against MSCI indices, although the figure would be less for Hong Kong itself. "I haven't seen a shift of business myself," he says. "The big pension funds continue to use a combination of various indices."
Kay concedes FTSE may have a short-term advantage in indirect trading costs for users, but notes MSCI is transitioning to a free-float basis. Soon such differences will be negligible, he reckons.
He also believes MSCI's huge market share will remain on the strength of the firm's long history in Asia, which dates back to the late 1960s, and its large team of professionals in Asia dedicated to client support (12 just for this end of the business, dwarfing FTSE's personnel here).
Smaller pension funds may be willing to shift to a FTSE index if it suits them, but probably will not use both. It involves a certain amount of time to understand them. Furthermore, fund managers are not happy about switches. For them it means having to learn the nuances of an index all over again, and introduces additional trading costs. But consultants are more likely to suggest a client look at alternatives to MSCI for particular asset allocations.
For FTSE's pension fund clients, socially responsible investing is a hot area, particularly in Europe and the United Kingdom but increasingly in Asia too. "Everyone has a different idea of what it is and questions about where to find performance," Makepeace explains. This is an area where index vendors are tailoring their wares for individual funds.