France: MSCI

Fundamental to ETFs are the underlying indices.  Without an index, an ETF simply doesn’t exist.  Like a flame requires oxygen, an ETF requires an index.  Because indices are fundamental to ETFs and ETFs are fundamental to what we do at Lunt Capital, we’ve made an effort to talk with a number of index providers around the globe on our Investment Trek.

I had the opportunity to meet with Yves Bonamy at MSCI in Paris.  Thanks to Mike Gandy at MSCI in San Francisco for coordinating the meeting with his colleagues in Paris.

Like my earlier meeting that day, the “Black Monday” implosion of the equity markets was top of mind, so that’s where the discussion started.  Yves was somewhat philosophical about the market volatility.  As he noted, “As an index provider, our job is to calculate the value of indices… and not to try and determine if a particular day’s change is good, bad, or disastrous.”

Ryan Hessenthaler with Yves Bonamy

With the market chaos that had transpired in Asia and with Europe dropping deeper into the red, Yves’ viewpoint helped me to pause, take a step back, and consider the broader picture.  Financial markets will always have times when volatility is more pronounced than average.  It is in these times when emotions often get the better of us.  Our job as objective, rational, process-driven, long-term investors is not to try to play the short-term swings of the markets, but rather, to follow our process and have the discipline to invest through such volatile times.

Yves shared a summary of the French Asset Management Industry with me.  I’ve included a copy below for your reference.  Regarding asset management in France, Yves noted that the space is dominated by insurance companies and mega-banks who invest primarily in fixed income.  Accordingly, the equity markets in France are not as large as one might suspect.

Financial advice and professional management are still in the early phases for the average French citizen.  Yves estimated that only about 5% of French citizens might seek the help of an IFA.  Those who do talk with an IFA aren’t necessarily getting unbiased, independent advice as the IFAs are incentivized to sell house product.  Regulations are changing in France and fee-based advice should finally be able to take root… but progress is slow.

And in some cases, what looks like progress in France may be one step forward and two steps back.  For example, the French government is considering adding taxes to financial transactions as the market grows.  The large banks and lobbyists are trying to articulate the problems with such approach, not least of which is that the financial institutions will simply re-locate to another, more tax-friendly country in Europe such as Luxemburg or U.K.

Low carbon, environmentally-sensitive investment initiatives are a big theme in Europe currently.  Paris is hosting the upcoming United Nations Climate Change Conference which is adding tremendous focus on climate-related issues.  This focus is impacting markets.  Managers are required to measure and calculate the carbon footprint of their portfolios.  Low carbon indices are gaining significant traction throughout France and Europe more broadly.  What was once a satellite position in portfolios has become more of a core strategy.

Factor-based indices are growing rapidly at MSCI.  Of the $9 trillion of assets benchmarked to MSCI indices, $120 billion is benchmarked to factor-based indices.  This is an area that is seeing dramatic growth.  Factors are one of the key areas Lunt Capital focuses when managing its strategies.

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Special thanks to Brennan Staheli, Michael Willden, and the Lunt Capital team for their contributions to this report.