Presently, passive funds constitute an essential part of almost any well-balanced institutional portfolio, as well as an increasingly dominant feature across global capital markets. Index-based products aim to provide investors with low-cost, diversified, and transparent market access. According to Morningstar, “active U.S. equity funds have had outflows in every year since 2006 with roughly equivalent inflows coming into passive funds during that span”. The trend prolonged through the end of 2019, a year in which active-managed funds experienced $204 billion of outflows in comparison to $163 billion of inflows for passively-managed ones.
Cumulative Flows for Active vs Passive Equity Funds
When investing in an index-based product, passive investors effectively delegate decision-making (what and when) to index providers. In that sense, index investing represents a form of “delegated management” and every discretionary decision by index providers has a “flow through effect on the investor’s portfolio”[1]. It does not come as a surprise then, that with the outbreak in demand for passive investing products, movements in underlying benchmarks can have extraordinarily large consequences for financial markets.
Passive asset managers and product issuers are under extreme pressure from customers and regulators to meet the highest levels of data quality and accuracy in the valuation of their investment products. However, developing and managing an index is a complex and very time-consuming process that involves equal amounts of industry knowledge, mathematics, and data analysis. There is a plethora of indexes, each with their own unique set of rules, parameters, and calculations.
To attain a high degree of accuracy required, input data needs to be pristine, and corporate actions need to be identified and processed in a timely manner. From data management and consolidation, all the way to backtesting, calculation, and administration, it normally takes many iterations, and countless employee hours to manage an index business.
Furthermore, stakeholders — exchanges, issuers, asset managers, and end-investors — are demanding transparency, which has been translated in the emerging regulation of indices and index providers, such as the European Benchmark Regulation (BMR). These initiatives from regulators aim to set up and implement governance arrangements that identify, manage, and mitigate potential conflicts of interest in order to make index administration processes more transparent. In this scenario, the benefits obtained by product issuers and passive asset managers that outsource the administration of indices are numerous.
In sum, with the enduring shift from active to passive investing, index providers have become a critical component of the overall capital markets ecosystem. From their prior role as providers of performance benchmarks, they have evolved to become central keystones of the asset management industry. The figure below illustrates the central role of index providers in the age of passive investing.
If customization is the future, technology should be at the core.
So yes, index providers run highly complex and operationally-heavy businesses and should be properly compensated for it.
However, their strong position often creates a sub-optimal situation for clients, as index providers are not known to have incentives to reduce fees. The global index industry is very concentrated. Just three firms, MSCI, S&P Dow Jone Indices (DJI), and FTSE Rusell hold roughly 80% of market share[2]. This suggests that index providers operate in an oligopolistic industry, with high barriers to competition. Although the legacy of the three brands is unrivaled, new players with a strong focus on technology, innovation, and automation have the potential to change the status quo, and overall create more value for clients.
Companies like BITA, are clear examples of alternative business models that might change the way the industry operates.
Rather than focusing on the production of index ideas and concepts, BITA’s approach is heavily tilted towards technological enablement. BITA’s “infrastructure-as-a-service” model combines the best of two worlds. On one hand, it gives the power to clients to massively customize their exposures and effectively design, test and create their own indexes, but on the other hand, it allows clients to outsource operationally heavy topics such as data cleansing and normalization, corporate action processing and index administration, all while keeping overall ownership cost down for clients.
By harnessing the power of technology, big data, and automation to develop intuitive and high-performing indexing and systematic investing platforms. The company offers an end-to-end infrastructure on a modular basis. Its business model is straightforward and consists of Technology Licensing and Calculation Services. This enables a level of flexibility, customization, and performance never seen in the indexing industry.
Technology is not everything though. BITA is actively committed to the provision of high-quality, reliable, and transparent technology and index solutions. As a registered and licensed index administrator by BaFin under EU Benchmark Regulation (BMR), the company ensures the highest standards of index governance, transparency, and integrity of all its benchmarks.
BITA Index Services
BITA provides technology-driven indexing solutions, with a focus on flexibility and innovation. From highly flexible index development to calculation and global administration, BITA’s range of index services includes but is not limited to the following:
● Custom Index Development and Calculation
● Administration for Benchmark Providers
● Real-time iNAV Calculation services
● Basket Index Calculation
Custom Index Development and Calculation
BITA enhances clients’ product development capabilities, helping them to bring innovative products and investment solutions to the market while ensuring complete accuracy and reliability.
The company offers independent and objective outsourced custom index development services including research and creation of customized, innovative indexes in a matter of days. On top of that, its self-indexing technology allows clients to build their own calculation-ready indexes and systematic strategies in minutes.
Furthermore, BITA provides branded and unbranded calculation and dissemination of indexes in true real-time or End of Day (EOD) across different asset classes such as equities, fixed income instruments, FX, commodities, and more.
Global Index Administration
As a Benchmark Administrator, BITA is well-positioned to operate regulatory-compliant, conflicts-of-interest free, index administration services.
The company provides a wide range of administration functions, either individually or as full end-to-end administration. These functions include data collection and aggregation, data monitoring, methodology design and maintenance, oversight function, and governance.
BITA can customize its governance framework to carry out specific administrative functions aimed at assisting customers to meet regulatory requirements whilst retaining control, ownership, and intellectual property of its indices or benchmarks.
The company is able to license the complete indexing infrastructure for new and small index providers thanks to its most advanced technology. BITA’s flexible framework aims to help Benchmark Users who are looking to establish compliance by separating the administration function from their own business.
iNAV/iOPV Calculation
BITA’s seamless iNAV/iOPV calculation solution provides market participants and investment managers with a point of reference for trading and price determination.
Industry best practice requires that index-based funds calculate and publish the iNAV as part of their ongoing commitment to providing full transparency to investors, helping them to make informed investment decisions.
The company’s calculation service is characterized by its superior data quality, calculation efficiency, and dissemination flexibility. The iNAV/iOPV calculation uses real-time prices (whenever available) from cross-validated and observable market data, as well as the fund composition, which is updated daily.
Leveraging state-of-the-art technologies, the data is automatically processed for real-time calculation through our custom calculation engine. BITA can provide calculation 24 hours a day in a variety of currencies, and disseminate values through a flexible set of APIs or make them available at major data vendors terminals.
Basket Index Calculation
In order to comply with regulation requirements, some institutional clients are looking to retain intellectual property and keep tight control of their strategies, while outsourcing the calculation and ongoing maintenance of indexes and systematic portfolios.
BITA offers a fully-managed solution, designed to help clients to save time, capital, and internal resources. By leveraging its modern and scalable infrastructure, the company is able to deliver a highly customizable basket calculation service.
From a flexible intake of clients’ data and automated treatment of corporate actions, all the way to fast dissemination to clients, BITA can provide an industry-leading solution to host and custody the clients’ intellectual property.
As a Benchmark Administrator, the company ensures the provision of high-quality, reliable, and transparent index solutions, supported by well documented, repeatable processes and governance frameworks.
Why BITA? Integrity. Innovation. Service
BITA’s end-to-end infrastructure is designed to change the dynamics of the index industry, aiming to give customers more control of the product development process, with an emphasis on customization. The company delivers global multi-asset index solutions with a focus on flexibility, transparency, and quality.
BITA is committed to keeping investing in forward-looking technologies and intuitive platforms with the aim to provide institutional investors and product issuers with innovative, accurate indexing solutions.
To learn more about BITA’s Calculation Services visit the website at www.bitadata.com or contact via info@bitadata.com.
