This month, TAB launches a world first.
CAMFI – the Crowdfunding And Marketplace Finance Index - will be the first index to provide a single measure for global online crowdfunding and the marketplace finance industry. This development will change the way we view and interact with alternative finance, providing a clearer picture of what has occurred in the past so that we make better decisions for the future.
In this report, we’ll explore the history of financial indices, the underlying mechanisms and benefits of CAMFI, and explain why TAB feels it is the right time to launch this index.
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An introduction to financial indices
The FTSE Russell, Nikkei, CAC, DAX, Dow Jones... We hear these mysterious names every day in the media, yet few actually understand what they measure and what their metrics mean. Even if people know they are indices, they likely don’t know how they are constructed. So, what is a financial index? What do they measure? Why are they important?
What is an index?
In order to understand what an index is, it is best to ask, what purpose do indices serve?
Indices are used by financial services professionals for informational purposes. They use them everyday to trade financial securities worth trillions of dollars. An index provides valuable information to market participants by aggregating information. This aggregate allows investors, borrowers and regulators to track investments, providing transparency so market participants make better decisions. A second, more practical function of an index is as a benchmark against which money managers and other investments can be compared.
What makes an index?
In order to promote transparency and, as a result, provide trusted information, any index should make clear the rules and methodology relating to its construction. Further, it should provide full disclosure regarding the integrity of the data being used. Finally, an index must be entirely independent, not under the influence of any other party, especially any company or security participating in the index itself. Understanding that successful indices share these characteristics and, as a result, provide transparent, independent, actionable information, helps us to see why they were created in the first place.
The history of financial indices
Industrialisation in America meant stock markets thrived throughout the late 1800s. In order to track their progress, the first indices were constructed and published by newspapers as day-to-day summaries of stock price fluctuations. The first index was the Dow Jones Industrial Average (DJIA), an equity index created in 1884. They took an average of each stock price on the index and posted the metric to the local press each evening.
In 1928, given the growth of some participants, the DJIA moved to a price-weighting system, where each stock is weighted by price relative to the sum of all stock prices within the index. The DJIA remains one of the few price-weighted indices in operation today. Following the DJIA’s success, new indices emerged measuring products and sectors.
The most popular equity indices – S&P500, NASDAQ Composite, FTSE100 – employ the capitalization-weighting system, with components weighted by market capitalization. Indices are also used widely in fixed income, some of which focus on the entire bond market, whilst others focus on a definable slice of the market, like debt raised in healthcare. Like equity, bond indices measure the value of a section of the market, and they are computed by taking a weighted average of the prices of selected bonds. One example is the Barclays Capital U.S. Aggregate Bond Index, designed to track the taxable US bond market.
There is now an index for every asset class, from equity to debt to real estate to commodities, each created to provide transparency and timely information for market participants. And the importance of indices cannot be understated.
Following the rise in portfolio theory and financial innovation throughout the 20th Century, ETFs and tracker funds emerged. It is estimated that the ETF market worldwide is worth over $4 trillion today, providing low cost entry points for investors who want to track an index in any sector. But, despite decades of growth in alternative finance, there has not been an index that measures the health of the global crowdfunding and marketplace finance industry. Until now.
The current state of alternative finance
Over the past decade we have seen huge growth in alternative finance all over the world, with the market now worth over $145 billion, with China responsible for over two-thirds of that value. All sectors of peer-to-peer lending and crowdfunding continue to show significant year on year growth as the market continues to boom.
These numbers remain dwarfed by traditional financial services, but they are trending upwards, especially in alternative lending, with an infant industry still falling short of meeting ever-growing demand. This growth has given rise to huge opportunities, both in investment but also economic growth, employment and innovation. Alternative finance is now a significant part of the global economy and it is gaining great momentum, talent and publicity from influxes of capital and new market participants. It has evolved into an entirely independent asset class.
A new asset class appears when a number of distinct criteria are met. Alternative finance seems to have gone beyond that point. It is investable, meaning investors can access the alternative finance market via financial products. It has a solid political and economic profile, recognised by governments and regulatory bodies. It is beginning to show a history of positive, sustainable returns, although a longer track record is still required. Perhaps most importantly, alternative finance has reached maturation, where key indicators (such as the formulation of a secondary market in crowdfunding, or the inclusion of alternative investments in mainstream regulatory considerations) prove that it is not just a short-term fad, but it is a critical part of the global financial system.
Yet, despite its mass adoption and growth, measurement in crowdfunding and marketplace lending remain underdeveloped. In order for growth to continue, investors, borrowers and regulators are demanding more transparency. One crucial way of achieving transparency is via the formation of a globally recognised index for alternative finance. Up until now, there have been indices that compare geographies or specific sectors. But there has never been a global benchmark. Until now.
The necessity for increased transparency led TAB to develop the first global index for alternative finance with BBD and Hangzhou Ling Hao Technology Co., Ltd (JZT Data), with the Academy of Internet Finance in Hangzhou working alongside as academic advisor. This week, CAMFI – the Crowdfunding And Marketplace Finance Index – launches to the world.
As TAB CEO, Emily Mackay describes: “We’ve had the thought of building an index for a long time. When we met Helen Wang, CEO at BBD UK, and Professor Shenglin, of Academy of Internet Finance, with similar appetite earlier this year, the project took shape”.
CAMFI is designed to be a single numerical measure of the health of the global online crowdfunding and marketplace finance industry. It will also be the first global index that includes and measures China’s alternative finance output, a unique development given the relative opaqueness of the Chinese market.
By accessing, cleaning and presenting data in benchmark form, CAMFI will educate a generalist audience including public bodies, financial analysts, academics, SMEs and corporates, on the strength of the online finance industry. It will provide a single point of reference for all participants in alternative finance who want to quickly and easily check the health of the market.
How does CAMFI work?
CAMFI estimates the monthly overall climate of the global marketplace finance and crowdfunding industry, weighting rewards, equity and debt markets, to create a single global metric.
TAB used economic experts to judge how the measurements of different factors should be weighted against each other. Values have been computed using objective, quantitative analysis and formulae to measure the three main dimensions - scale, transparency and efficiency - based on campaign and platform data and statistics. For example, only regulated platforms are included. This process provides a metric that ranges from 0-200 with 100 to 200 considered “healthy”.
The world index most similar in construction and methodology to CAMFI is the global Purchasing Managers’ Index (PMI). Like CAMFI, PMIs are not based on opinions but data that reports exactly what is happening in the private sector. Identical data is used to compile the index in every country so international comparisons can be made. They are vital to many decision makers because they provide real evidence of economic conditions on a month-by-month basis.
PMIs are used by purchase managers and investors to keep track of business and investment opportunities both in local and overseas markets. Essentially, PMIs give a snapshot of the health of a country’s economy and cover every major economy, as well as emerging economies, to help give investors confidence about how a potential investment may develop. In the same way, CAMFI is to be considered a key barometer for the global online crowdfunding and the marketplace finance industry.
TAB’s Head of Analytics, Dr Simon Fothergill explained how developing CAMFI has not been simple to produce but, importantly, the index will become more accurate and valuable over time. “We’ve been careful with the instruments picked in order to maximise our coverage and we’re always re-computing historical values as new data is revealed so, over time, CAMFI will become more accurate and helpful for participants”.
This means the CAMFI value is an estimate that will be published monthly. One thing CAMFI will not provide is the ability to price financial securities. However, this is not being ruled out for some point in the future.
What does CAMFI intend to do?
The intention of CAMFI is to provide a consistent, transparent metric upon which market participants in crowdfunding and marketplace lending can make decisions. Throughout history, financial indices have been designed to provide information and transparency to market participants. If implemented successfully and adopted by a growing market, then the index will survive for centuries.
Mackay commented: “This index will be the single measure by which the world assesses the health of the industry. We anticipate all organisations involved in crowd and marketplace finance will watch this index for a signal of health.”
This is a bold intention and, if fulfilled, one that would be a significant development for alternative finance. Like PMIs, fundamental to millions of businesses and investors all over the world, the intention is that all alternative finance market participants will adopt CAMFI, with its metric being the foundation stone upon which real world decisions can be made.
Crowdfunding and marketplace lending have enjoyed growth for many years. The development and launch of a globally recognised index is a timely, vital and significant step forward for all involved in alternative finance, one that should promote growth and sustainability for many years to come.
CAMFI will provide a snapshot of the health of the industry and give timely warning signs as and when required by the market. It will also become more accurate and useful over time, as its track record and access to data improves. There is also scope for development, with CAMFI considered the first born in a family of metrics that will, in time, allow detailed understanding of different regions, industries and funding methods.
As a result of TAB's unparalleled access to data and its ability to present it in a clean, structured and beneficiated form, clients who enjoy access to CAMFI will be able to capitalise on new opportunities in this most exciting of asset classes.
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Why and how to measure stock market fluctuations? The early history of stock market indices, with special reference to the French case
Financial Market Indices: Facilitating innovation, monitoring markets
Andrew Clare & Steve Thomas
What Is An Index?
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