Russell Sale an Opportunity to Review Investment Benchmarks

One retirement industry expert says the London Stock Exchange Group’s purchase of the Frank Russell Company, also known as Russell Investments, is a good opportunity for retirement plan fiduciaries and investors to think a little deeper about how their portfolios are built and measured.

The London Stock Exchange Group (LSEG) owns the FTSE Group, the operator of indexes including the FTSE 100, which tracks the top 100 stocks traded in London. The deal with Northwestern Mutual brings together $5.2 trillion of assets benchmarked to Russell, according to the firms, and an estimated $4 trillion of equities benchmarked to FTSE. LSEG also gained control of Russell Investment Management as part of the deal, which has $256 billion of global assets under management and $2.4 trillion of assets under advisement through its consulting division. (See “Northwestern Mutual Sells Russell for $2.7B”)

Many retirement plans use Russell or FTSE indices, notes Jeff Elvander, chief investment officer for NFP Retirement. He says the deal probably will not have a major impact on the firm’s end clients in the retirement space—i.e., participants—but financial advisers and retirement plan sponsors may have more to discuss.

Elvander feels LSEG is a good fit because Russell remains with a parent company that lines up with its existing business model. “And it’s an established company that already understands the indexing business and already has the popular FTSE indices,” he adds. “The success of those products shows they get the industry and they’re really looking to bolster and expand their footprint. There were many different potential outcomes, and I think this is a good fit in terms of where Russell ended up.”

He tells PLANSPONSOR the most significant impact may be on plans using funds or model portfolios that Russell manages directly.

“I think that these sponsors will want to ask their advisers and consultants about what this means for their participants invested directly in Russell funds or portfolios,” he explains. “It’s not the biggest aspect of the deal—Russell only manages about $250 billion—but LSEG hasn’t had a direct investment arm as part of its operations before. So I think there should be some interest there for plan sponsors and participants just to make sure they understand how any products or services could be impacted by the transition.”

To date, Russell has not outlined specific plans to change that part of the business, Elvander observes, “but it may be in play moving forward, so it’s something sponsors should be aware of.”

Elvander predicts a muted impact for plans only using Russell indices, but it's still important for sponsors and their advisers to pay attention.

“I don’t think they will feel much of an immediate impact,” Elvander predicts. “However, it should probably be talked about in the ongoing discussion between the adviser and the sponsor. This deal becomes part of the larger benchmarking question. Plans should already be asking things like, how are my indices constructed? What are my benchmarks comprised of and why have we picked the benchmarks we are using today? The same thing applies whether we’re talking about sponsors using Russell, MSCI, FTSE or any other index provider.”

As Elvander observes, Russell is actually the larger of the two entities involved in the merger, so there is a lot of value LSEG is gaining too. “In fact, we may see more changes to the FTSE indices than the Russell indices, if that makes sense, just because LSEG is gaining all of this intellectual knowledge and capability from the Russell organization that it didn’t have before, coming from the Russell platform and the Russell staffers,” he continues. “So, sponsors will not just want to look at the Russell side but also at what changes could be pending for FTSE and LSEG.”

Looking at the existing indices offered by Russell and FTSE, Elvander notes there is just a little overlap in the global indices space. “Perhaps those indices will be blended in the future, or one will be chosen and the other will be phased out for business purpose," he speculates. Although it’s a relatively small overlap, he says "it could result in some assets needing to find new benchmarks at some point. This is true whether an index is cut or if its methodology changes significantly.”

Elvander concludes by observing there could be additional deals of this type in the future—given the nature of indexing as a scale business and the wider trend of consolidation in the investment services domain.

“It’s like when a recordkeeper has a platform that is built, and then makes acquisitions or creates partnerships to push it out faster,” Elvander explains. “Well, these indices are built and the owners are looking to leverage scale. I think you can draw something of a parallel across both the recordkeeping piece of the industry and the indexing-services side.

“In the end it’s an opportunity to ask the larger questions in terms of how assets are being benchmarked and whether sponsors and participants understand it all,” he says. “In a merger there tends to be some gains and some trade-offs. As I said earlier, I think this marriage between Russell and the FTSE Indices could be promising in terms of the indexing options that will come out in the future.”