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DIY Investor Magazine
/
September 2016
Bats initiative comes at a time when index investing
is becoming increasingly popular with retail investors;
Hargreaves Lansdown recently included thirteen
low cost tracker funds in its influential Wealth 150 list
and said that the proportion of its clients investing in
trackers had doubled in the last five years.
Holly Mackay, of Boring Money, said the inclusion of
passive funds was a ‘positive step’ because the best
buy list was ‘a hugely influential funnel for DIY investors’
fund selections’
The provision of market data has long been an
area of contention and increasingly so as prices
were increased; consumers of data such as wealth
managers and brokers create much of the liquidity in
markets and feed information to the exchange yet are
forced to buy the data back.
Fund managers ‘had found there had been a significant
rise in the cost and complexity of pricing,’ said Mark
Hemsley, CEO of Bats Europe. ‘You’ve got an incredibly
frustrated user base just looking for competition.’
Most index providers license them to asset managers
and brokers; in a move that revolutionises data
provision, Bats’ new indices are free of charge to
private and professional investors, media firms and for
benchmarking purposes.
They have been developed with the help of wealth
management firms and retail brokers, including Alliance
Trust Savings, Charles Stanley Direct, Hargreaves
Lansdown, Rathbones, Selftrade, AJ Bell and TD Direct
Investing, which between them control more than £160
billion of client assets.
WHAT IS AN INDEX?
A group of stocks designed to reflect the
performance of a market, or a portion of a market
(e.g. an industry sector).
An index can start at any value; investors track the
change in the value to see market movements rather
than the value itself.
An index generally comprises a portion of the overall
universe of stocks in a geographic region, business
sector or other grouping. Commonly referred to
as ‘benchmarks’ the index reflects a market’s
performance.
Indices are typically named to reflect the:
• Index creator/owner
• Specialisation (geography, business
sector, grouping)
• Number of stocks in the index, e.g.
Bats UK 100 index
HOW IS AN INDEX CREATED?
The way of calculating an index varies and is
proprietary to each index creator/owner. A number
of rules are required to ensure the index value is
only affected by the change in the value of the
individual stocks – e.g. the performance of larger
companies has a greater impact on the value of a
market capitalisation weighted index than smaller
companies.
REBALANCING
An index is reviewed on a regular basis to ensure it
remains representative of the relevant market. Upon
review, known as a rebalance, constituents can be
removed and replaced by companies that better
reflect the overall market. Bats new indices are
rebalanced on a quarterly basis.
COMPONENT COMPANIES
A company is considered eligible to be an index
constituent if it meets the criteria stipulated in
the index’s rules such as a minimum market
capitalisation, a minimum percentage of its shares
listed, and to possess a minimum level of trading
liquidity.
