Whilst there are main global equity indices, there is no daily priced Global 500 index with funds tracking it. A Global 500 index is a more manageable universe for asset owners wanting an “Index-Targeted Exclusions Enabled” Separately Managed Account.
What is the Global 500 index, is there a Global 500 index fund and how to manage an exclusions policy
The glaring gap
There are dozens of competing World Equity indices from all the leading index providers and dozens of ETFs and index funds tracking those respective indices. But no index fund provider or ETF issuer has yet launched a Global 500 index fund or ETF. It’s a glaring gap.
This is odd as the replication costs would be lower for a 500-company index than they are for indices that include more companies, and yet the market-cap driven performance would be largely similar. We define “Global Equities” as Developed Markets & Emerging Markets and “World Equities” as Developed Markets only. What Global 500 groupings are there
Whilst the S&P 500 is the well known index for the US equity market, what Global 500 or World 500 groupings are there?
We have identified four, of which only two are investable indices, only one is Global, and neither has an investable index-tracking fund or ETF.
Comparing global and world equity indices
The table below compares the various different global and world equity indices and where our wished-for indices would fit in. Contrast the number of securities in the equity indices in the table below, by way of example.
So whilst there’s lots of excellent innovation from index providers, there’s still nothing that answers the question “How are those global 500 companies performing as a whole?” That would be the perfect data point addition to Saturday morning breakfast whilst perusing the Weekend FT. This is why we have put a tentative “??? Global 500” and “??? Global 500 Equal Weight” into that list.
We really hope someone will build it. Creation of these indices would also enable detailed analysis on valuations, factor characteristics, sector exposure. Whilst we expect it would be broadly similar to global large cap indices for risk-return characteristics, the focus on the top 500 makes it 1) easier to create a parallel Equal Weight index and 2) easier to handle an exclusions policy which is increasingly in demand for an active ESG approach. We are also not aware of any "vanilla" Global 500 Index from MSCI, Bloomberg Indices, FTSE Russell, Morningstar Indices, S&P Dow Jones Indices. If we have missed them – please get in touch. We are agnostic as to which index provider delivers on our wishlist. As an index provider ourselves, we could build our own Elston Global 500 Index (and may well do so for research purposes), but we are realistic as regards commercialisation and counterparty relationships between the largest index fund manufacturers and index providers: it’s not just about the idea, it’s about the delivery. And without commercialisation, indexing is an expensive hobby! So if it's cheaper, we would rather rent from one of our larger competitors than build our own. What are the advantages of a Global 500 index-based approach
If one the large index providers could create an investable vanilla Global 500 index, it would be a benefit for the whole industry. We see three key advantages of using a Global 500 index-based approach.
Lower replication costs
For any ETF or index fund tracking that index, the full replication costs will be lower as there are fewer securities within the index. It’s just unfortunate that as yet there is no Global 500 index but perhaps one of these big index providers will deliver on our wish list!
Enabling a parallel Equal Weight Index
By limiting the universe to 500 companies, it readily enables the creation of a parallel sibling index as an Equal Weight version of the index. The position size of an Equal Weighted index of 500 companies is of course 1/500th (0.20%) which is more meaningful than for an index with thousands of companies. Again, the fewer number of companies also means the lower cost to replicate. An ETF has recently launched tracking the MSCI World Equal Weighted index, which is interesting intellectual, but again has a very long tail of companies (765 or so). How are the largest Global 500 companies doing on an equal weighted basis? Nobody knows – there’s no index.
By being able to compare performance of both a traditional market cap weighted Global 500 and a Global 500 Equal Weight index, there is the opportunity to opt in or opt out of concentration risk. Furthermore the option of a Global 500 Equal Weighted approach is easier for managing an exclusions policy and is a fairer approach to fund managers if those exclusions include a number of large tech names. Enables more targeted exclusions policy
There has been no shortage of evolution of ESG focused indices that that embed an exclusions policy within an index methodology. For example, the MSCI ESG Screened indices can apply exclusion criteria on companies with material business involvement in “alcohol, tobacco, gambling, civilian firearms, military weapons, nuclear power, adult entertainment and genetically modified organisms (GMOs),” according to MSCI ESG Research. The level of research and resource supporting this is huge and high quality index providers like MSCI are leading the field in enabling a data-based ESG-oriented lense on investing.
For “off the shelf” investment funds used by institutional and retail investors, this reliance on index providers to create and implement an exclusions policy is a valuable service for those without the time or resource to monitor individual companies’ business involvement. But for some larger asset owners, their investment policy may have a different and evolving view on what an exclusion policy should look like. This can change dramatically and rapidly with current affairs. This has been the case in the university endowment space in the US and the UK where student activism around particular companies or types of companies has come head to head with the operational impossibility of policing look-through positions of traditional index-tracking and other collective investment funds. Some asset owners have tried to resolve this by embedding exclusions policy within their active mandates and working with index providers to create custom indices that align to their values and principles. But the challenge is complex to navigate and police when there are just so many companies that could trigger a controversy. Furthermore, structuring custom index or custom index funds is complex and a challenge to adapt to an ever evolving focus of stakeholder concerns. A smaller universe is easier to govern
The advantage of having a smaller universe of just 500 names to monitor is that there are fewer issues arising relative to the full investable universe of 8,406 global companies which active managers can select from, or the large- and mid-cap universe of 2,558 global companies that are the back-bone of index-tracking funds.
Restricting a universe to a Global 500 list of companies does not necessarily compromise on performance or diversification for market-cap weighted indices (their large size drives overall performance). And if asset owners are concerned about lagging a benchmark because an exclusion is applied to a heavily weighted company, that would be solved by using an Global 500 Equal Weighted index instead, so that performance comparison is fair. From an implementation perspective, a smaller universe means that rather than using funds to access index-tracking exposure, asset owners could use Separately Managed Accounts (SMAs). These are a portfolio of direct securities managed by a professional manager on the asset owner’s custody platform. They are similar operationally and legally to a bespoke discretionary private client portfolio. They are not a collective fund and do not use them. This gives the manager (in discussion with the asset owner) full control of every holding in the portfolio. Enables “Index Minus Exclusions” Separately Managed Accounts
Rather than being boxed in by the constraint of index providers and fund providers, asset owners could therefore use a Global 500 index (or a Global 500 Equal Weight index) as a performance benchmark and a starting point for an investment universe and an active creation and monitoring of an exclusion policy of those individual companies.
It then becomes relatively straightforward to apply an exclusions policy that can adapt as issues or controversies evolve. We see a growing mix of Separately Managed Accounts as a way of enabling more flexibility for asset owners in the US and UK.
The main advantage of using an “Index-Targeted Exclusions Enabled” / "Index Minus Exclusions" Separately Managed Account over a ready-made index-tracking product is resolving that key issue – control of underlying securities. Rather than customising the index, any performance differential relative to the main Global 500 or Global 500 Equal Weight index would show the cost or benefit of that exclusions policy.
Summary
Shrinking the investable universe to just the largest Global 500 companies would be a welcome development and it’s surprising that it has not been done sooner. For ready-made solutions such as index-tracking funds and ETFs in the retail market, it would lower replication costs. For research purposes, it would enable an interesting a parallel and relevant Global 500 Equal Weight index. For asset owners creating an “Index-Targeted Exclusions Enabled” / "Index Minus Exclusions" Separately Managed Account, it enables a flexible approach to accommodate the changing views of key stakeholders whilst keeping the benefits of a low-cost index-based approach, with “just” the largest 500 companies to monitor. Comments are closed.
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