It’s not quite a full scale revolt but there is growing anger in the world of fixed-income management about the fee increases levied by FTSE Russell, the entity owned by the London Stock Exchange, which has a dominant position in providing bond indexes and associated analytics in the Canadian market.

“It’s a big issue because they are getting some hefty price increases,” noted one manager adding the move is part of a plan to make FTSE’s offering, which allows a manager’s performance to be measured against a benchmark, more of a profit center. “They want to take the data and the analytics surrounding that and make more profit.”

As “keeper of the data,” this manager said FTSE “is looking at how different portfolio managers are using the data and coming up with some new and exciting charges.”

FTSE-owned Universe bond index

And the excitement? This manager has heard the increases range from 30 per cent to 400 per cent. Another manager referred to an eight-fold increase — a gain, he said, that derives from a lack of competition and because most clients specify the FTSE-owned Universe bond index — the most widely used — as its benchmark. In a lower fee world, it’s tough to pass on the increases.

Accordingly, portfolio managers need the index and its inner workings, including weights, to assess their performance. (And low fee charging ETF bond funds, which try and match the index, need the analytics more than most managers.)

Noted one manager: “If you need it for pricing and analysis, you must have a contract and you have to abide by the terms,” they said, adding FTSE has put all sorts of fees into their contract. “FTSE refuses to negotiate anything on the contract provisions and pricing.”

In an emailed statement FTSE said, its “primary focus is to deliver best-in-class products and services to our clients through ongoing engagement, research and innovation.”

The indices

The statement added the indices “are a core part of our fixed-income and multi-asset strategy and we continue to invest in improving the operational platform and the governance processes.” By “innovating and developing the analytics and indices offering in line with market developments (the aim is) to deliver increased value to end investors. We apply a clear and transparent commercial framework across our global client base, with a tiered pricing system directly linked to a customers’ individual usage.”

How did it get to this given Canada has had bond indexes for 70 years? Those original indexes were developed by McLeod Young Weir and later sold to the TSX and then to LSE.

Over the years there have been new entrants: Wood Gundy and RBC Capital Markets entered the fray but couldn’t gain enough traction. And foreign firms — including Barclays and B of A Merrill Lynch — have had a small local presence as part of their global offerings, though Canada wasn’t a large priority. (Both providers have since sold their index businesses.)

“There are some alternatives but they are not very well recognized,” said one bond manager. “It’s all driven by what the client wants.”

The Canadian situation parallels what’s happening elsewhere. A recent article on Bloomberg, titled “Indexers race to defend $1 billion bonanza,” spoke of the numerous cross currents in investment management including the move to passive investing, to managers changing index providers to get a break on fees, to some managers moving to create their own indexes, and to some new market entrants. But change is slow because of the strong position held by the Big Three: S&P; MSCI and FTSE Russell, which generated more than US$1 billion in revenue in the first half of the year.

Financial Post

bcritchley@postmedia.com