The most popular bond index has been known by three names over its 25-year history, but has – and always will be – “the Agg” even though it undergoes its fourth name change.
Five years after the Bloomberg acquisition
‘, the Bloomberg Barclays Fixed Income Indices are, as of today, renamed Bloomberg Fixed Income Indices, after the agreed transition period.
The name change includes the Agg, now the Bloomberg US Aggregate Bond Index, which is widely regarded as the best total index in the bond market, representing high-quality US government and corporate bonds.
But there is more in store for Bloomberg beyond its dominance among fixed income indices. Since the acquisition of Barclay in August 2016, Bloomberg’s index business has expanded to include benchmarks for stocks, multi-assets, crypto, ESG and thematic strategies. Total assets following its indices more than doubled during the period. As a non-traditional financial data company and index provider, Bloomberg also brings a new level of transparency to the business.
Barron’s chatted with Steve Berkley, CEO of Bloomberg Index Services, and Dave Gedeon, Head of Multi-Asset Index, about the company’s growth and their outlook for the broader index industry. The conversation has been edited and condensed.
How has index activity evolved over the past five years?
Stéphane: When you look at the history of indexes, it started out as the purview of the banks. Investment banks like Lehman Brothers (the original owner of the Agg) or Merrill Lynch would set a benchmark, hoping it would become an industry standard. Asset managers who wish to follow indices would have access to this information through their relationship with banks. When the index rebalancing took place, trades would inevitably go through the banks and that’s how they made money. It was an efficient and profitable business model.
Over time, the buy-side organizations started looking for the best deal. With the advent of regulations, the responsibilities associated with doing things incorrectly are also increasing. Banks realized that they needed to focus on their core business and therefore began to divest from index activities. For example, Barclays sold their index unit to Bloomberg, Citi sold theirs to FTSE, and Bank of America Merrill Lynch sold theirs to
Acquirers were generally data providers and did not make money on transactions.
What does this change mean for investors?
Stéphane: Historically, index data users tended to be the privileged few. Given the business model and the limitations of technology at the time, information was only really available to large institutions. Bloomberg has exposed many clues on our terminal. In doing so, we democratize information and put power in the hands of investors.
For example, we have a product called IQ on the terminal, which stands for index query. It allows investors to create their own indices, see their performance and backtest the data. They can then come and ask us to run this custom index for them every day. The vision is that you can do things that only very sophisticated investors could do before. You don’t need millions of dollars. Right now the product is only available to a few, but we are in the process of rolling it out to a larger group of investors.
What’s next for Bloomberg’s index business?
Stéphane: The continued growth of ETFs has had a positive impact on our business. We have been able to extend our product line, both deeper into existing references and more broadly across multiple asset classes and regions. The fixed income franchise, which we acquired from Barclays five years ago, will continue to be an important part of our business, but we are also expanding our capacity through other acquisitions like the
Bloomberg Commodity Index
(BCOM) achieved last year, and through organic growth on the equity front.
We also help customers create personalized and tailor-made products with different parameters, generally aiming for better performance or less risk. For example, fixed income managers may place bets over time based on predictions of rising or falling returns. They can also make quality bets, overweighting junk bonds for higher returns.
Bond indices weighted by factors other than market cap haven’t really taken off like similar strategies for stocks, although investing in a bond index weighted by market cap is not the best strategy.
Stéphane: The challenge with this type of product is that the smart-beta strategy itself might be the right one, but the costs associated with implementing the strategy are often prohibitive, as bond markets are less liquid than equity markets.
When we create or improve an index, it can’t just be academic exercises, it needs to be a benchmark that investors can actually use. And we do this through shared ownership with the investment community. We would reach out to investors to understand what the bottlenecks are and do our best to resolve those issues, whether they are issues on our side, in the markets, or with the regulators.
Where do you see most of the growth opportunities for index business over the next 5-10 years?
Dave: As investors become more sophisticated and access to markets becomes easier, the demand for complex investments increases. The possibility of simplifying this to a transparent rules-based index will have a lot of appeal.
Options are a big area. There have been a number of interesting and successful options products. These indices take different types of strategies that target particular income or risk profiles, and bundle them into a simplified product for a broader investor base. They are still extremely small compared to the wider asset management world, but they are growing because they offer something investors were not able to achieve on their own before.
The opportunities in the crypto markets are also evident. We just launched the Bloomberg Galaxy DeFi Index last week.
What are some of the challenges of indexing cryptocurrencies?
Dave: One of the big challenges is figuring out what the best price is. Crypto asset price data is not from the New York Stock Exchange or the Hong Kong Stock Exchange, it is from
and Gemini and others. One of our jobs is to aggregate all of this trade data and create what we consider to be an accurate price for a particular part.
The other challenge is figuring out which assets to include or exclude. The decision can be made based on liquidity, negotiability, and even transparency of the protocol behind a coin. There’s a lot more to say, hey, it’s the price of Bitcoin.
Bloomberg is also launching its own thematic indexes such as Bloomberg Electric Vehicles Index. How do you plan to differentiate yourself in a field already saturated with many established rivals?
Dave: With larger index providers, when they partner with experts in the field to create a thematic index using natural language processing and document scraping, this process is proprietary and often cannot be shared.
At Bloomberg, we have our own data and analysts. Because all search information is internal, we can publish it directly to the terminal. Any subscriber can consult our thematic baskets, click on each name and see analysts’ research on this subject. Each quarter, as the index is updated, you can also see the reasons why a business is added or deleted.
Other indexers do not offer the same degree of transparency. I think it gives us a competitive advantage and the possibility of becoming the preferred reference for a particular theme, even if one already exists.
Thanks, Steve and Dave.