How asset managers are using index providers now

Life is getting more complex for asset managers. That may well be the topline summation of the Index Industry Association’s (IIA) fourth annual survey of global asset managers. The survey found that a rapidly changing economic environment, the emergence of private markets, changing views on ESG, and the rise of AI are all creating more complex situations for asset managers to deal with. As they look to unpack that complexity, the IIA CEO says that major asset managers including Canada’s pension funds are leaning on index providers.

Rick Redding outlined his main takeaways from the survey and highlighted the areas of complexity that have become pain points for asset managers. He outlined what index providers have done and can do in these situations to help asset managers manage this growing degree of complexity and the skills that major asset managers can look for as they seek to address a growing list of complex problems.

“I saw the need for asset managers to reach out and get help from different people in the ecosystem,” says Redding, when asked about the survey. “The challenges are coming from technology and from market forces. The business is changing and we may need different types of skillsets in this industry going forward.”

AI in asset management

Greater tech skills are first on Redding’s list of necessary investments in the asset management space. That is driven largely by the rise of AI. Asset managers are looking more closely at how AI can benefit their businesses, but Redding says that integrating AI will require new skillsets and talent pools.

Those new skillsets are being applied in three areas. One is investment operations, the administrative, marketing, compliance, and communications piece that has already begun to be explored significantly. The second is in investment research, using AI to help add efficiencies to some of the ‘grunt work’ of asset management. Even going so far as to have AI predict earnings.

The third AI area Redding sees being applied is investment management, the prospect of using AI to manage money and potentially outperform investment benchmarks. Redding says he’s seen asset managers constructing paper portfolios and trialling AI management, but that the eventual adoption of an AI manager will come gradually. That said, he expects some form of that to come and sees asset managers already demanding the skills to facilitate it.

ESG, more complex than we thought

The Environmental Social and Governance (ESG) investment criteria that more asset managers are adhering to have become more complex than initially anticipated, in Redding’s view.

That begins with the inherently subjective nature of ESG. Two asset managers may disagree on the full list of criteria that should be included in an ESG strategy. He expects that eventually there will be firmer definitions of ESG that asset managers coalesce around, but in the meantime these managers are requiring more and more data from their index providers.

Redding cites the survey results, which found that around one third of global asset managers are now asking index providers for help with ESG data. It’s part of a wider trend that he believes the survey highlights: a growing demand for index providers to help asset managers.

How asset managers are using index providers

The survey of asset managers found a growing number have sought different solutions from their index providers to manage that complexity. Those include thematic indexes, direct indexing, custom indexes and more. The survey found that 20 per cent of global asset managers are planning to use more index providers over the next 12 months.

Redding says that even applies to some of Canada’s massive pension funds. Even these huge asset managers with massive scale and enormous pools of talent are relying on index providers to manage these emerging themes and complex subjects.

That use, Redding says, begins with benchmark construction. He emphasizes that there are around 3.5 million indexes globally against around 13,000 ETFs. Rather than using indexes as a product, many asset managers are preferring to use them as either a benchmark or a source of data. He argues that as Canadian asset managers find themselves staring down further complexity, index providers may be able to help provide some clarity.

“People think of an index provider as someone who just calculates and administers an index, but there’s a lot more to it than that,” Redding says. “A lot of them provide very good research. A lot of asset managers can go to the index provider and have them create something with key parameters, something that can be backtested. A lot of the work that was done by the street years ago has been overtaken by the index providers.”