Norges Bank Investment Management (NBIM) published a Discussion Note today where we review construction practices and performance of global equity benchmarks from the perspective of a large long-term global asset owner.
Our objective is to gain a better understanding of the decisions made by index vendors, and how they impact the risk/reward characteristics of the indices.
We provide a walkthrough of the construction of two global equity benchmarks; MSCI GIMI and the FTSE GEIS, to highlight the practical considerations the benchmark vendors make on behalf of the asset manager. For a global investor, some of these considerations have a measurable impact on positioning; among these are free-float adjustments and companies with ambiguous country classifications.
We document that both returns-based and holdings-based analysis indicates a convergence in the risk/reward relationship between the two global benchmarks, possibly driven by a market consensus on “best practice” for global equity benchmark construction.
Recent, well-publicised index benchmark switches might indicate that choice of a global benchmark for equities is mostly a matter of cost for many investors. In our opinion, besides cost, a potential differentiator in the future might be increased transparency in some areas of the index construction process. In this note, we highlight free-float adjustments as one such area.