S&P Acquires Smith Barney Global Indexes

November 12, 2003

In a deal that could signal another significant reshifting of the index industry, S&P completed the long-awaited deal to acquire the SSB/Citigroup Global Indexes.

New York - 12 November 2003 - In a high profile acquisition for the indexing industry, Standard & Poor's announced it has inked a deal with Citigroup to transition over Smith Barney's global benchmark index business (previously the Salomon Smith Barney (SSB) Global Equity Index System) to S&P's Index Services. The indexes will be renamed the S&P/Citigroup Global Equity Indices. The existing S&P indexes, including the S&P 500, will not be affected by the announcement, according to S&P.

'Through the addition of this world-class benchmarking business, Standard & Poor's becomes a full-service index provider, offering the marketplace a wider range of index products and services,' said Paul Aaronson, executive managing director, Standard & Poor's. 'With the new S&P/Citigroup index series, Standard & Poor's boosts its ability to offer broad market benchmarks as well as custom indices on a global basis, building on the extensive index data, calculation and analytical tools available in both the S&P/Citigroup and investable indices Standard & Poor's has developed over the last 75 years.'

The SSB Global Equity Indexes were introduced in 1989, and were the first global index series to be fully float-adjusted for crossholdings and investment restrictions. The non-U.S. components of this series has some institutional following, with several billion dollars in indexed assets tied to both its large/mid-cap Primary Market Index (PMI) and it's small-cap Extended Market Index (EMI).

S&P/Citigroup constituent issues will be classified according to the Global Industrial Classification Standard (GICS).

David Blitzer, chairman of the S&P Index Committee, below talks about the ramifications of the announcement.


Q: What is the long-term vision for the new S&P/Citi indexes? What was the core strategic significance of the acquisition?

A: We think they're a good set of global benchmarks that cover the whole waterfront of the international markets. They're not going to become the basis for trading products - they're not designed for that. They're benchmark indexes, and that's what they'll remain.

The indexing business in general has slowly but surely developed two focuses. One focus is benchmarks, and the other is developing indexes designed to support tradable products - the S&P 500 being a prime example of a tradable index, with all the assets tied to it. Tradable products include futures, options, and ETFs. With benchmarks, the idea is that you have to cover the entire accessible market, and do it as cleanly as possible. With tradable products, liquidity counts more than anything else - it's like location in real estate . . . liquidity, liquidity, liquidity. Traders want something they can hedge.

Our sense is that index providers should be in both camps. With one or two exceptions, it's very difficult to argue successfully that an index does both - benchmark and tradable product. Making sure that all stocks are liquid usually means excluding some of them! We made the move because we think it's important to have a leading position in both camps.

Q: MSCI recently introduced a domestic family of benchmarks that have been adopted by Vanguard's index funds. Now S&P is entering the international space with the new S&P/Citi indexes. There's a lot going on there in terms of moving into each other's turf.

A: I agree. From our perspective on benchmarking, the S&P/Citi indexes have everything that investors want. They have a float-adjusted history going back to 1989, which is longer than anyone else. They've been float-adjusted since the beginning. They've operated on a consistent methodology since the beginning.

Citigroup and Smith Barney are broker/dealers that wanted a lot of trading activity around the indexes, so their strategy was to get investors to use the indexes as benchmarks, and then generate trading activity. MSCI's approach, on the other hand, seems to be to using indexes as benchmarks, then sell data. A lot of MSCI's revenue is data-related, which is not true of S&P.

What S&P brings to the table is our desire to be independent about everything and everyone. Broker/dealers are interested in trading activity by nature, but that might not be the best way to build an index business.

Q: You recently co-wrote a concept paper that took a critical look at free-float adjustment. Could we possibly see S&P/Citi float-adjusted indexes for the U.S. stock market? This would be a way to introduce new float-adjusted indexes without moving the liquid blue-chip S&P 500 to free float.

A: Frankly, we could do that without the S&P/Citi Global indexes. When we were working on the float paper we actually were nervous about the timing of releasing it so close to the S&P/Citi announcement, as if we're questioning our own validity. That's certainly not the case. The float paper came about because the last two years lots of people have been asking why we don't adjust the S&P 500 for free float. As we started looking into it, the first thing that struck me was that I didn't find any really good discussion on why you should float adjust. The arguments we used to get were all about liquidity - if you float-adjust a stock it can get into an index and still be liquid. I don't think that works. For example no amount of float adjustment is going to get Berkshire Hathaway into a tradable index. There's nothing wrong with Berkshire Hathaway or Warren Buffett, but he manages the stock so that it's illiquid.

The first thing we did was understand the reasons for float adjustment. We looked at government ownership, strategic holdings, and cross-holdings. We found that in the U.S., strategic holdings are very rare, and typically not long lasting. This seems to be a quirk with U.S. economic history and anti-trust laws. In Europe, on the other hand, you'll often find stocks that have been held for three generations. Bill Gates' holdings in Microsoft are already down under 15%. The Rockefellers essentially owned the oil industry at one point, but it dissipated very quickly. The U.S. just doesn't have strategic holdings of any significance.

We also learned, in terms of the S&P 500 and its risk properties, that float adjustment wouldn't make a lot of difference. So we faced a conundrum - lots of people wanted the S&P 500 to move to free float, but our research showed it made no difference. So over the next few weeks we're going to be listening very closely to feedback from the concept paper. We have a couple more months before we say anything on this matter, given the timing of most of the annual filings and other factors. I honestly don't know which way we're going to go at this point.


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