Local Analysis Cedes to Global View
Globalisation and monetary union are not the stuff of political harmony, but they have been an undeniable boon to index providers. Just as the increasingly global nature of industry and the introduction of Europe's single currency have meant that the world's maps have been redrawn, so indexers have remapped investment trends.
Rightly so. Index providers generate income from licensing their trademark indices to investment funds, exchange traded funds, derivatives traders and other financial groups. They are good branding tools and a way to attract business. But in order for them to be so, it is vital they keep up with changes in investment patterns.
The recent spate in cross-border merger and acquisition activity and the dramatic increases in cross-border investment have made investors move away from country-based strategies, to regional, and global sector-oriented strategies. They have turned their focus away from domestic equity markets and begun looking abroad.
Peter Jeffreys, in charge of development at Standard and Poor's Index Services, says: "The majority of European institutional investors have already begun investing on a regional basis. They have dropped country allocations in favour of eurozone sectors, and are now using sector indices as a way of enhancing value by way of playing, for example, underweight financials versus overweight industrials. You only need to do a comparatively small amount of that to get enhanced performance."
The corporates themselves have also changed. Because more and more of them are operating globally, so the place in which they are listed is increasingly irrelevant.
It has become more logical to define them by industry, not geography. The biggest and most successful companies are not limited to their own markets, they operate globally and their earnings are increasingly geographically diverse in origin.
But these changes have not only meant it no longer makes sense to have analysts and fund managers dedicated to particular countries. They have also necessitated new analysis and benchmarking tools - ones which reflected the move away from country-specific investing, towards a more global approach. So, no surprise then that in the latest bid to satisfy investors' increasing demands for risk diversification, banks and index providers have launched global industry-based indices.
FTSE sounded the starting gun in February this year, when it unveiled the world's first blue-chip global sector indices. FTSE constructed the indices based on feedback they received by going out into the market.
Carl Beckley, director of markets development for FTSE, says: "We produced the indices in conjunction with Merrill Lynch, and the feedback we have had from their clients was that the vast majority wanted global sector indices. They are definitely something the market has been after. Seventy per cent of European fund managers invest now on a sector basis."
The FTSE Global Sector Index Series is a family of 11 indices representing the most popular 11 groups from the 39 sectors of the FTSE global classification system. These include autos, media, banks, pharmaceuticals, basic industries, tech, energy, telecommunications, financials, utilities, and general industries.
FTSE's Beckley says: "These do not cover all of the market, but they were the sectors the market asked for. We went out to the market and asked them and this was the result. That said, I would expect to see changes and additions to the family of sectors as time goes on and fashions change. It's always very difficult to guess what people will want. …