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Cost-Cutting Firms Aim at Index Providers, Consider Self-Indexing

The Financial Times, citing research from a UK-based consulting firm, reports that large index providers have reaped impressive gains from the passive investing boom, generating $3.5 billion in revenues last year, up 13 percent from the previous year. However, asset managers squeezed by a host of industry pressures -- including the high fees charged by index providers -- are considering options such as producing their own benchmarks or lining up lower-cost index providers. BlackRock and Invesco have taken their indexing inhouse, and Fidelity has produced proprietary indices while still using external providers. The FT report finds that other asset managers are choosing smaller, lesser-known index providers as well as non-commercial index providers such as academic institutions. According to the FT report, the three largest index providers, S&P Dow Jones, FTSE Russell and MSCI, control 70 percent of the market although smaller players have been cutting into their market share recently. The big three command profit margins up to 65 percent, and asset managers face a daunting challenge circumventing them since self-indexing is costly and complex and tends to invite regulatory scrutiny. 

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