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Indices and Benchmarking - February 22, 2010

The investment world is going through a period of reflection and change - an interview with Mark Makepeace

In this month's interview, Mark Makepeace, Chief Executive Officer of FTSE Group, discusses the newly-launched FTSE EDHEC-Risk Efficient Index series, the prospects for alternatively weighted indices with respect to market-cap weighted indices, and the future growth drivers for FTSE Group.

Mark Makepeace

FTSE Group and EDHEC-Risk have recently come together to launch the FTSE EDHEC-Risk Efficient Index series. Could you tell us about the reasons behind this partnership and what your hopes are for the efficient indices?

Mark Makepeace: FTSE and EDHEC-Risk are ideal partners as FTSE bring indexing expertise to the table and EDHEC-Risk bring both their academic research and technical knowledge. Together, we have begun to explore new and exciting ways to provide a better range of benchmarks for portfolio managers. The FTSE EDHEC-Risk Efficient Indices, which use a risk approach rather than the traditional market capitalisation-weighted approach to indexing, address what we see as a need for more advanced benchmarks for equity investors.

You mentioned recently in the Financial Times that you expect the majority of core funds to be benchmarked against fundamental and more efficient indices in 20 years' time. What underlying factors have given rise to this belief? Is the move to alternative indices already a notable trend within FTSE's business?

Mark Makepeace: AT FTSE, our largest clients drive our research and thinking. Some of the world’s largest asset owners use FTSE’s global equity benchmarks extensively in their investment processes and it is these same clients that have been investigating and experimenting in developing what they see as a better approach to creating a passive benchmark for their equity holdings. At this stage, these clients are looking to diversify core passive equity funds beyond market-cap weighted indices. I do not believe that they will cease using market-cap weighted indices but they are exploring how they can diversify their core passive holdings across 2-3 different weighted approaches. Both the fundamental and efficient approaches are ideas that these investors are looking at seriously.

The FTSE EDHEC-Risk Efficient Index series is currently offered for the UK, the Eurobloc, the USA, Japan, and Developed Asia-Pacific ex-Japan. Do you expect certain regions of the world to adopt alternatively weighted indices more rapidly than others?

Mark Makepeace: I would say that the demand for these indices is not so much influenced by where the investor is geographically based but more on the level of sophistication and the size of the institutional investor involved. Those institutional investors with their own in-house teams are the most likely first adopters of the new efficient indices. They are generally the largest and most sophisticated asset owners globally and tend to lead the way in progressive thinking and adopting these new types of equity benchmarks.

FTSE is probably best known for the flagship FTSE 100 index in the UK. Would you be concerned that some of the criticism of cap-weighted indices in the academic literature (including EDHEC-Risk's own research) might be seen as detrimental to your core business?

Mark Makepeace: No, market-cap weighted indices will continue to be widely used. They are the most accurate measure of a market’s performance. However, new indices which we are designing and bringing to market (such as the FTSE EDHEC-Risk Efficient Indices) are intended to offer a better approach for passive benchmarks or for replicating specific investment strategies.

FTSE is a global index provider which seeks to understand the issues investors face and to help them in finding suitable solutions – whether customised for an individual client or provided to everyone. It is also a time when investment theory and accepted practices are being questioned and we, at FTSE, want to be part of process of finding better ways to understand the markets, structure portfolios and construct appropriate performance benchmarks.

The world of indexing is rapidly changing and it is exciting for us to be part of the change.

More globally, what do you see as being the key growth drivers for FTSE's business in the next decade?

Mark Makepeace: Innovation and change on a global scale and across multi asset classes. We pride ourselves in working with some of the world’s largest and most sophisticated asset owners. I keep repeating myself, but the investment world is going through a period of reflection and change and FTSE seeks to be at the heart of the debate about how to adapt to this changing and challenging new environment.

We have created an academic board where some of the brightest and most able thinkers from our industry come together to question established thinking and help us develop new ideas and approaches. I think this approach at FTSE has been recognised by asset owners and consultants globally. As a result we have been voted the Index Provider of the Year by Global Pensions magazine for 4 out of the last 5 years.

What has your experience been so far of working with an academic research centre such as EDHEC-Risk?

Mark Makepeace: It has been a pleasure working with EDHEC-Risk. The people are very bright and motivated. They are well known as a leading global centre for research and as a world renowned business school, however, they are also very focussed and business friendly. By partnering with EDHEC-Risk, we are seeking to combine the best in academic thinking with practical solutions for advancing the design of benchmarks. I think the partnership has got off to a very promising start!

About Mark Makepeace

Mark Makepeace is FTSE Group's Chief Executive and company founder. He established FTSE Group as an autonomous company in 1995 and has been responsible for the company's global expansion since. Under Mark's leadership, FTSE Group has grown from a small UK business to a global world-leader in the design and management of stock market indices.

During his career at FTSE Group, Mark has forged alliances with stock exchanges around the world and extended FTSE’s range of indices to cover Developed, Emerging and Frontier markets worldwide. He has also pioneered a number of technical enhancements in index design and construction including the introduction of free float, country classification and the treatment of multinational companies within global indices.

Mark has also formed productive and long-lasting relationships between FTSE Group and charity organisations, in particular with children’s charity UNICEF. He has been awarded an Honorary Fellowship from UNICEF, in recognition of the innovative fundraising model created by the FTSE4Good Index Series. Mark began his career in the City in 1985 with London Stock Exchange, where he worked on the deregulation of London's equity markets - the "Big Bang".

As a keen runner, Mark spends much of his leisure time training and participating in marathons, and is also a dedicated supporter of Chelsea Football Club.