Playing the Index Game

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Two recent tweets (yes, we have joined the 21st century) remind us that indexing is a potentially profitable business model for research providers.  Unfortunately it takes time and money — luxuries that are in short supply.

Euromoney completed its acquisition of HSBC’s Quantitative Techniques group last week.  The acquisition, rebranded as Euromoney Indices, launches Euromoney into the index compilation business to compete with FTSE and S&P/Dow Jones Indices.

The HSBC unit was maintaining 100+ equity and bond indices for HSBC’s Global Markets Division and 60 external clients.   HSBC agreed to purchase index calculation services from Euromoney Indices for a minimum period of three years.  Acquisition price was not disclosed.

Yesterday, NASDAQ OMX announced it is partnering with a quantitative boutique, Newfound Research, to create a suite of indices.  Newfound Research, consisting of 4 quants and a lawyer, specializes in creating index strategies for licensing.  Founded in 2007, it sub-advises on nine strategies, of which 3 are ETFs.

The new partnership with NASDAQ will add to the portfolio with four new products in the hopper: a Risk Managed Income strategy, a Global Defensive Equity strategy, a Target Excess Yield strategy and a U.S. Equity Dynamic Long/Short strategy.  The business model is to license the new indexes through separately managed accounts and, in some cases, through ETFs.

Indexing is a relatively low-cost entry into asset management.  You have to be a registered investment advisor (if you provide customized advice through your research you should be one already) and you have to have an investment approach.  The advent of actively managed ETFs makes any research product ETF-eligible.

The trick, however, is gathering assets for your index, which means partnering with established players like NASDAQ to help with the marketing.  The other challenge is that the low entry barriers and the proliferation of index creators (now including Euromoney) means that licensing fees are under pressure.

Back in the day, S&P would license its indices for fixed fees, before realizing that it would be much more profitable to share in the asset management fee.  S&P and FTSE now get basis points on the assets managed under their indices, which can be very profitable.  But the game has been getting more competitive, and index providers no longer have the leverage they once had.

Riedel Research partnered with Van Kampen back in 2009 to create an emerging markets unit investment trust which attracted $300 million in assets, not enough to make either party rich.  There is so much investment product available, it is hard to get shelf space.

We also reported on a forensic accounting ETF created by an analyst previously with CFRA and Behind the Numbers.  Launched earlier this year, the ETF’s NAV has nearly doubled yet has attracted a measly $7 million in assets.  With a management fee of .85%, it is generating less than $60k in fees.

But the index game is about time as well as assets.  Assets grow with time if performance is good, and word of mouth helps.  Nevertheless, time is finite and, even though indexing is a relatively low-cost form of asset management, so is money.  Most research providers will give the route a pass

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