Russell’s O’Keeffe: The Vanguard Deja Vu

October 05, 2012

What Vanguard did this week sounds terribly exciting but, truth be told, it’s all happened before, Russell Indices’ O’Keeffe said.


Vanguard certainly dropped a bomb on the world of indexing this week, or did it? Sure, it dumped 22 MSCI indexes in favor of benchmarks from FTSE and CRSP. But if you think back to 2003 when Vanguard ditched S&P and embraced a relatively unknown indexing firm called MSCI, it really has all happened before.

That’s what Ken O’Keeffe, managing director of Investable Products at Russell Indices, told IndexUniverse Correspondent Cinthia Murphy when they crossed paths this week at the Morningstar ETF Conference in Chicago. O’Keeffe also touched on growing price pressures in the world of benchmarks and the rising importance of various types of intelligent beta indexes.


Murphy: It was surprising to see that Russell’s smart-beta funds are being shut down, because there seems to be an increasing demand for these enhanced-beta strategies. Anything you can say about what happened there and what happens to the indexes under the Russell ETFs?

O’Keeffe: At Russell Indices, we treat Russell ETFs like any other client, so we were obviously disappointed to see our client shut down their funds. There’s nothing else I could say about that because I’m the index provider. But some of those indexes will actually be successfully marketed to other ETF providers. There’s nothing I can say beyond that right now because those funds are still live through the end of this month.

Murphy: Is there a particular spot as far as smart beta goes that is untapped or that needs more concentrated efforts right now as far as being accessible to investors?

O’Keeffe: The end-investors are looking for ways to enhance their portfolios by potentially diversifying their portfolios, by reducing volatility in their portfolios, by enhancing the returns on portfolios, and that enhancement might be in more alpha or in getting more returns in terms of income. You continue to see a lot of emphasis on those types of products. And Russell is really at the forefront of a lot of that—Russell fundamental indices, Russell equal-weighted indices—there are a lot of Russell products designed to address that end-investor need.

Murphy: Market-capitalization-weighted indexes have ruled much of the game up to now, but even index providers behind some of the biggest market-cap strategies are turning to various screens in search of that quasi-active enhanced beta portfolio. Think indexes like the S&P 500 Low Volatility index, for instance. Is this the way indexes are headed?

O’Keeffe: I certainly see a big trend in smart beta-types of products, absolutely. Our CEO at Russell Investments refers to the index team as the “transparent quant gods,” and that’s a simple of way of thinking, “OK, you are giving me the return of the market with Russell 1000, Russell 2000, but products like Russell fundamental, and Russell factor indices, high-dividend indices, they are transparent quantitative methodologies that give you extra yield in the case of high dividend; lower standard deviation on your portfolio in the case of low volatility.



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