Joint Research Paper by BNY Mellon, Northern Trust, State Street, and The Spaulding Group

22 March 2016

The Spaulding Group, Inc. (TSG), the leading performance measurement service firm in the money management industry, announced today that the highly awaited research paper on market index comparability will appear in the Winter 2015-2016 issue of The Journal of Performance Measurement®. This paper represents the culmination of over a year’s worth of data gathering and research efforts in partnership with BNY Mellon, State Street, and Northern Trust. The paper builds on the principle guidelines to improve transparency on embedded fees for benchmark data*, and enables investors to make more informed decisions by understanding what they are paying for.

“We are incredibly excited to present this research as the results show that within the sets of comparable benchmarks we evaluated, each benchmark shows correlations greater than 99% with each of the other benchmarks. This suggests that investors may have the opportunity to consider lower cost providers when selecting indices. While it is limited to the US and global equity markets, we would expect to find similar results in many other markets,” said David Spaulding, DPS, CIPM, Founder and CEO of The Spaulding Group.”

“Asset owners are highly price sensitive and aware of every element affecting investment cost,” said Frances Barney, CFA, head of Global Risk Solutions–Americas with BNY Mellon. “Benchmark selection is closely tied to the asset allocation process, but investment decision makers may have had no way of knowing that different vendors offer varying cost structures. We hope to enable them to consider both quantitative and qualitative measures, including the cost of specific vendor data, the next time they’re choosing an appropriate benchmark for their firm’s investment objectives.”

“The financial community recognizes the importance of fee transparency and expense reduction for end-investors. Expanding access to data helps financial professionals make better investment decisions, and the latest research paper from The Spaulding Group helps us better understand the benchmark selection process both quantitatively and qualitatively,” said Joseph Nardulli, senior market data consultant within the Investment Risk and Analytical Services group at Northern Trust. “At Northern Trust, we want our clients to have access to information that allows them to determine the most appropriate benchmark for their needs.”

“Benchmark selection has historically been more of a passive decision at the beginning of the investment process with little thought into the cost impact for all stakeholders,” said Dax Johnson, managing director of Performance Services at State Street. “This research provides transparency around comparability, promoting a more active benchmark decision, and creates a strong argument for considering differing costs across comparable indexes when making decisions.”  

Over the past few years, the industry has witnessed a significant increase in the cost for market data, especially in the form of market indices. Although some investors assume that market indices are “free,” because they are easily viewed on the Internet, in fact market data providers incur costs to develop and maintain the indices, and thus charge fees for their licensing and redistribution. These costs have risen to the point where it is becoming more common for custodians to pass them along to their clients. While in the past the reporting and distribution of index data might have been seen as a “cost of doing business,” this is no longer possible due to these rising costs.

Even as many of the major index providers have increased fees, the market has seen a simultaneous emergence of low-cost providers. As the index landscape expands with more options, the challenge for investors is to determine whether each offering, high or low cost, provides a comparable level of market assessment.

In this paper, the authors seek to address this issue by comparing several available indices for both the global and US equity markets. Their goal was to ascertain how closely related each index is to the others, based on their published methodologies and statistical comparisons. By providing a framework for the comparison of indices, this research will help investors answer critical questions when evaluating index options, including:

  • When could a lower cost benchmark function effectively?
  • And when is a higher cost benchmark important because of specific construction methodologies, maintenance processes, or a particular brand value?

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