Episode Transcript
Paul: In this episode of the podcast, we look at a new index series that addresses a very topical challenge. We're in the middle of the artificial intelligence boom, and global equity benchmarks are heavily concentrated in large technology stocks. This new index series is designed to help investors diversify away from software, semiconductors and those huge tech companies. It's called the FTSE Real Assets Industry Select Equity index series, or FTSE RAISE for short, and it focuses on companies with tangible, scarce, irreplaceable assets. To discuss the new FTSE RAISE index series, I'm joined by one of its designers, Matt Monach, who is senior manager in research at FTSE Russell. Matt, welcome to Index Ideas.
Matt: Very happy to be here.
Paul: So Matt what is the FTSE RAISE index series?
Matt: So RAISE is a transparent index framework for listed real asset equities. So essentially, companies tied to energy systems, infrastructure and natural resources, land and property. It gives investors a rule-based way to measure exposure to the physical economy, but within public equity markets.
Paul: And Matt, why have we built this index series now?
Matt: So the starting point was a portfolio problem. Coming from the buy-side, I tend to start with the allocation question. How would an investor gain broad listed equity exposure to real assets? And by mid-last year, by the mid of 2025, equity markets have become very concentrated and very dominated by the tech companies and the mega-cap companies. Essentially the tech dominance was very strong. But there was no clear benchmark for broad real asset equity exposure. Not commodities futures, not private infrastructure, not a narrow sector fund, but just broad exposure. And this is the gap that RAISE was built to fill.
Paul: Thank you. And which companies and industries are included in or excluded from the FTSE RAISE indices?
Matt: The index targets three broad groups: natural resource owners, regulated and network infrastructure and land or property owners. That means areas such as energy, metals, mining, forestry, etc., are included in RAISE and it intentionally avoids businesses whose value is mainly intangible. We're talking here mostly about software and related services.
Paul: And how do we weight the constituents in the FTSE RAISE indices?
Matt: The constituents are selected from the relevant parent benchmark and weighted by investable market capitalisation. This is not an equally weighted basket or an active stock picking list. It is a rule-based investable equity index using our FTSE Russell's standard framework.
Paul: And are there any other index construction steps that you'd like to mention?
Matt: This is actually a great question because one of the things that I would like to emphasise is that RAISE is not a blanket sector screen. The selection is done at the ICB subsector level and each subsector was reviewed for whether the economics are genuinely tied to real assets. Materials is a good example: we include areas like mining, copper, aluminium, gold, precious metals and forestry, where the economics are linked to reserves, deposits, land in general, scarcity or long-lived productive assets. But we exclude areas such as paper, textiles, iron and steel where the exposure is more manufacturing, processing and it's not necessarily the ownership of the underlying scarce real asset.
Paul: Thank you for explaining that. Which FTSE Russell index families are currently available in a RAISE version?
Matt: The series is currently available in three versions: FTSE Developed, Russell 1000 and Russell 3000, and all three combined account for most of the investable universe for our clients.
Paul: Okay, if I were looking at this as an investor or an asset allocator, why might I want to gain exposure to real asset equities rather than trying to buy the underlying commodities or assets themselves?
Matt: This is another great question. So commodities give direct exposure to spot and futures markets. Real asset equities give exposure to companies that own, operate or enable those physical assets. So it's both conceptually and practically a different exposure even though it might sound quite familiar or similar on the surface. So RAISE gives exposure and it's not a replacement for commodities. It is a listed equity way to capture commodity-sensitive and infrastructure-linked parts of the market. But with equity growth, which is a very important distinction. You can think about this in a way that commodities are an input, and RAISE captures those companies that own, transport, produce, store or monetise that input.
Paul: Matt, you've obviously done some back-tests of the index against the broad equity universe. What kind of performance has the FTSE RAISE index, let's say the one that's based on the FTSE Developed index, what kind of performance has it given over, say the last 25 years?
Matt: Over the last 25 years it's a mega cycle of the commodities boom first and then the narrow lead of the tech trades. Over the last 25 years the history is very cyclical. So real assets outperformed in regimes where commodities inflation and supply chains or infrastructure in general mattered the most. For example, the early 2000s was the tech bubble period. So it's 2001, 2002. Then for many years, real assets were performing very, very strongly. And then the periods when the technology-led cycle started, this is where real assets were underperforming. So currently real assets are near the 25-year lows. And this is, in my mind, the opportunity that RAISE helps investors measure. So the basic premise is built around the idea that the scarce resources, everything that is connected to the real economy is still relevant now, and it will be relevant into the future.
Paul: You've talked about returns there. What about correlations? What were the correlations of RAISE against that market cap-weighted equity benchmark, the FTSE Developed index and also against the underlying commodities themselves?
Matt: To answer your first question, against the broad equity benchmark, the correlation would be very high because the indices are still equity indices. So the correlations will be higher than 90%. And against the commodities, against the broad commodities index, they will be around 60%, depending on the flavour of the index. It's 58% to 64% over the last 25 years. This means in practice that it does co-move and captures a part of the movements in commodities. However, this is still real assets within equities. So they move more within the broad market equities than they do with commodities. However, they still have a meaningful co-movement with the commodities.
Paul: Thank you for explaining that so clearly. What about dividends, Matt? We're in a period when obviously tech-dominated global equity benchmarks, most of those companies pay either no dividend income or very little. What kind of dividend income stream do the FTSE RAISE indices offer by comparison with the market cap benchmark?
Matt: This is another very, very good question on point because income is a very important part of the proposition. Real asset sectors have regained pricing power in general in the recent high-inflation and higher-rate environments. So currently, the RAISE indices pay about twice the dividend yield of the FTSE Developed global equity markets. So it's quite a substantial income uplift for investors that are looking for dividends.
Paul: And Matt is FTSE RAISE the same or similar to what some market participants call the “HALO” trade? That's heavy assets, low obsolescence. People have been looking for companies that might be relatively immune to disruption from AI. Is FTSE RAISE similar to that, or are there any differences you'd like to point out?
Matt: It's very similar, but I would not say this is the same thing. HALO, the heavy assets, low obsolescence is a market narrative, and at the moment it captures the attention of most of the investors and RAISE is an index methodology. The overlap is that both focus on tangible, capital-intensive businesses, but may be less exposed to technological obsolescence. But I would avoid saying that these companies are immune to the broad AI theme. I would word it more precisely, that they are less directly exposed and often linked to the physical systems the AI economy itself depends on. A good example is the real estate. AI is very hungry for real estate and then the data centres keep on being built. So this is a huge part of the economy right now and into the future years, as well as the energy generation, because all the AI systems are very power-hungry. So that part, which is a big part of RAISE, it fuels the AI expansion further. So it's a very important question because it's not to be anti-AI, it's to diversify away from intangibles. However, the componentry, the backbone of the global economy, is still needed, whatever happens to the tech cycle and AI expansion going forward.
Paul: Right. Thank you very much for explaining that. It's an important distinction. And you've obviously been talking to FTSE Russell clients. What kind of feedback have you had from them?
Matt: So we had quite a few conversations because it's a very topical theme right now, and it gives the clients a clear framework for several conversations they are currently already having internally, such as market concentration, AI disruption, inflation, and commodity sensitivity. So clients recognise the theme, but at the same time, they also value the index discipline. The fact that our proposition is transparent, it's rule-based and it's grounded in the established FTSE Russell universes.
Paul: Where can listeners to the podcast go if they want to learn more about this new index family?
Matt: The best place would be to go on our website, LSEG.com. And there's a dedicated RAISE product page where listeners can find the overview, factsheets and all the related insights all in one place.
Paul: Well, Matt, thank you very much for joining me.
Matt: Thank you very much. It was a pleasure to be here.
