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Indexing Was Huge in 2019 But the Real Money Was in Index Stocks

Claire Ballentine and Vildana Hajric

(Bloomberg) -- As money managers bemoan the fees lost to passive investing, there’s one sector of the financial world just fine with the shift: The companies that create the indexes tracked by trillions of dollars in assets.

S&P Global Inc., the creator of financial benchmarks including the S&P 500 Index, is up 60% this year, more than double the return of its flagship gauge of U.S. stocks. Meanwhile, rival MSCI Inc. has jumped 74%, its best yearly gain in a decade.

Such eye-popping performances show just how transformative the meteoric rise of indexed investing can be for the companies at its heart. Although passive strategies have been luring cash from actively managed approaches for some time, this year assets in U.S. indexed equity mutual funds and ETFs topped those in active stock funds for the first time ever. The providers of the gauges underpinning those funds earn a slice of every dollar tracking their benchmarks.

“There’s this big secular growth because of the movement to passive,” said Hamzah Mazari, a managing director at Jefferies in New York. “Over time, that will continue to be a pretty strong tailwind for these companies.”

Cost savings are a key driver of that shift, with passive equity funds charging an average 10 cents per $100 invested in the U.S., versus about 70 cents for active funds.

However, companies that provide indexes and benchmarks have benefited from the trend because they typically charge a licensing fee based on how much money is pegged to their gauges. So, the more money that is passively managed, the more revenue they bring in.

S&P Global reported a 9% increase in revenue in the third quarter from a year earlier, led by growth in its ratings and index divisions. MSCI’s share price jumped at the end of October after results showed a rise in operating revenue, driven in part by a 10% increase in its index segment.

A spokesman for S&P described 2019 as an exciting year for the company, highlighting S&P’s recent acquisitions of Kensho Technologies to boost its artificial intelligence expertise, and RobecoSAM’s ESG ratings business. A representative for MSCI was not immediately available to provide a comment.

But while index companies’ share prices have skyrocketed, the asset managers that license their benchmarks aren’t generating the same enthusiasm. A gauge of fund companies and custody banks has lagged the broader market, rising 22%. And BlackRock Inc. -- the world’s largest issuer of exchange-traded funds -- has returned slightly less than the S&P 500’s 28% advance.

“Every fund manager is benchmarking against the S&P 500 or MSCI and it’s very, very tough to replace that,” said Mazari. “These index providers have a very big moat around their business.”

To contact the reporters on this story: Claire Ballentine in New York at cballentine@bloomberg.net;Vildana Hajric in New York at vhajric1@bloomberg.net

To contact the editors responsible for this story: Jeremy Herron at jherron8@bloomberg.net, Rachel Evans, Brendan Walsh

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