Money Talks

Why the flexibility? In a word, money.

Indexing is big business. Benchmark providers rely on asset-based fees from ETFs and mutual funds that track their measures. And some of their largest clients weren’t keen on change. BlackRock Inc., the world’s biggest money manager, argued in an open letter to MSCI earlier this year that broad indexes should be as expansive as possible, despite favoring one vote per share itself.

The proposed reforms would require funds to rebalance and “be costly for investors in index products,” Barbara Novick, BlackRock’s vice chairman, wrote in May. “Policy makers, not index providers, should set corporate governance standards.”

Indexers are already under scrutiny from those policy makers -- both in Europe, where the Libor fixing scandal yielded new rules this January, and in the U.S., where the Securities and Exchange Commission is considering whether these companies can continue to avoid registering as investment advisers like fund issuers.

New Gauges

Index providers are increasingly working with asset managers to structure custom gauges that command higher fees and blur the lines between indexer and adviser. MSCI, for example, attributed some of its earnings last quarter to “strong growth in factor and ESG indexes and custom and specialized index products.” ESG refers to environmental, social and governance concerns.

In a concession to critics, MSCI will start new benchmarks in the first quarter of 2019 that penalize companies with unequal voting rights, drawing from its aborted proposal. That plan would have affected roughly 10 percent of companies in its flagship all-country, world gauge known as ACWI, ejecting 12 stocks and decreasing the weightings of another 204, it said in June. Alphabet and Facebook Inc. were among those facing the largest cuts.

Companies with multiple share classes will now stay in MSCI’s flagship benchmarks. And companies like Snap -- which had been excluded -- can join from March 1.

“We wanted to keep the foundation and then offer the option to investors,” Remy Briand, chairman of the MSCI Index Policy Committee, said in an interview on Tuesday. “For quite a lot of investors, actually, the problem should be dealt with by either regulator or stock exchange.”