Index Industry Market Share Concentration: The asset management industry responds

A stat in a recent FT article on Index market share really jumped out at me:

The big three index providers, S&P Dow Jones, MSCI and FTSE Russell, have increased their dominance in recent years. Their combined market share has risen to nearly 80 per cent from about two-thirds in 2012, according to Burton-Taylor.

A 20% increase in market concentration over 5 years is remarkable. Yet there are signs that the asset management industry has had enough. Enter self-indexing, from the giant investment manager Fidelity. Writes Institutional Investor:

Fidelity says it is the first to offer zero expense ratio self-indexed funds to consumers. The move is significant as passive-fund providers race to cut costs and capture market share of retail investors.

Fidelity aren't alone. Schwab, BlackRock, State Street and Invesco have all followed suit.

Still, indexes are likely to remain a huge part of the market data industry. Only the largest investment managers could afford to offer fee-free funds, or subsidize a self-indexing business. And only the strongest, most trustworthy brands - Fidelity, BlackRock and the like - could pull of self-indexing.

There are risks to transparency. Will investors be able to audit an asset manager's index structure and methodology? Are the savings in fees large enough to offset the reassurance investors get from owning a fund that's benchmarked to an independent and (ostensibly) trustworthy third party like S&P or MSCI?

The Index industry, for its part, highlights the regulatory and data management complexities of the business:

However, assuming the role of an index provider is something that should not be taken lightly. Running global indexes in real-time within a regulated environment is not as easy as it looks. Do you have the right mix of people with index and data expertise? Are you willing to invest in data, infrastructure and governance? Are you able to achieve a desirable scale and profit margin to deliver cost savings to investors? What is your risk appetite related to brand and investor impact?

Let's see what happens. The Index industry will likely remain robust and sizable for the foreseeable future. Ever more asset classes and asset variants are available to investors and benchmarks are needed. As trading commissions continue to shrink, fund variety should expand, along with indices.