Welcome to our new ‘Voice of IIA’ series, where IIA members’ key executives and researchers reveal the decisions, responsibilities, and personalities that drive the making and management of indexes globally.
Peter Gunthorp, FTSE Russell
In his role as Head of Equity Index Research at leading global index provider FTSE Russell, Peter Gunthorp leads a global team focused on the innovation, design and ongoing maintenance of equity index products to support institutional and retail investors. Peter, who is based in London, originally joined FTSE Group (now FTSE Russell) in 2010 and has more than 25 years of financial services experience. Peter began his career as a Quantitative Analyst at Clerical Medical Investment Management before spending 14 years at Nomura International.
Designing and maintaining a market index is part art and part science. IIA recently sat down with Peter to get his thoughts on how he approaches index design and product engineering.
IIA: What are some of the early questions and priorities today’s index designer must account for?
PG: The role of the index provider has certainly become higher profile and more complex in recent years. As index-based investing has grown the index community has become more varied and client requirements have increasingly focused on specific investment solutions. But in my mind index design can be broken down into answering three very basic questions.
The first relates to your client. What is the objective? Are you looking for broad market exposure, a more specific set of index characteristics or factor exposures? Will the index be used as the basis for an investment vehicle like an ETF or simply as a benchmark to assess an active managers investment performance? How important is investment capacity and ease of replication? Is there a specific risk budget? Answers to these questions will determine your approach.
IIA: So once you have formulated the approach, what comes next?
PG: Yes, that leads to the second question for the index provider. What’s the best way to design your index? Like Occam’s Razor, the simplest route is often the best route. This promotes transparency of methodology and understanding of the key determinants of index outcomes. Each design element will represent a tradeoff; methodology, weighting schemes etc. will all push you towards some of your objectives and move you further from others. This is the art of index design.
The third question comes from the market. How will you ensure your index remains fit for purpose? The market ecosystem is constantly changing and your index must evolve with it. Every index requires rigorous maintenance covering corporate action adjustments and periodic rebalancing. This enables the index to reflect updated information and ensures it remains representative and continues to meet its objectives. Governance and compliance oversight requires regular evaluation of the continued suitability of the index methodology to ensure it remains fit for purpose. The concept of “set it and forget it” may apply for some forms of passive portfolio construction but is not a model for a successful market index.
IIA: Finally, how did your background prepare you for the index industry?
PG: I actually came to the index industry from the investment management world, specifically quantitative portfolio management. And while, at first, the index industry may have seemed quite distinct from the investment industry, in my tenure at FTSE Russell I have seen these worlds come together. I am constantly working with our investor clients to address market issues and design new solutions to meet changing investment objectives. The only difference is that I am designing an index that helps our investor clients achieve their investment objectives through a transparent, rules-based methodology.