The world of indexing looks ripe for disruption: it has been dominated by the same four companies for a long time, which enjoy fat margins for a service that is partly commoditized.
And now a startup called All-Index has launched with the aim of doing that, by making it cheap and easy for index users – investment banks, ETF manufacturers and asset managers – to easily design, test, and share indexes.
Earlier this summer the Bern, Switzerland-based company launched a basic version of its Software-as-a-Service model in Paris, and intends to roll it out to Hong Kong and Mumbai.
The firm’s CEO, Christian Kronseder, was previously COO at Stoxx, one of the big-four. “When it comes to indexing, the use of technology and digitalization has not arrived,” he said.
He was also head of RBS’s structured product platform. Other backers include Damien Fontanille, head of Europe, formerly head of RBS structured products marketing in London; Chris Ryan to head Asia Pacific, the previous APAC head of MSCI; and Robert Bareder, CFO, who was previously CFO at RBS Switzerland. (Ryan was also co-founder of DigFin.)
No change in indexing
This lack of digitization means the process to customize indexes is slow. A slicker tech platform would enable providers such as MSCI, Standard & Poor’s, FTSE Russell and Stoxx to meet requests much faster. “They can’t scale because they lack the technology,” Kronseder said.
Indexes got their start has benchmarks for major asset classes: the S&P 500 for U.S. equities, the Bloomberg Barclays Global Aggregate Index for bonds, the MSCI World for global equities. There are thousands of indexes that serve different purposes, from thematic investments to smart-beta strategies, to simple building blocks in a portfolio for cheap exposure to niche asset classes – and now even for invoices.
Investment banks build short-term structured products that track an index. Exchange-traded funds exist to provide the same exposure as an underlying basket of securities. And asset owners giving out mandates will usually select an index to serve as a benchmark against which asset manager performance will be measured. While a 12-month structured product doesn’t need a very strenuously backtested index (to see how it performs in different conditions), an ETF that is meant to track the stock market over decades would need to be sure the underlying index was stable and reliable.
The launch of All-Index comes at a time when other companies are also trying to take a shot at the big-four index vendors. In the U.S., where indexing has been around for 40 years or so, some asset managers such as Vanguard and Fidelity have introduced self-indexing, that is, they make their own.
There has also been a spate of niche index companies that have emerged, such as Solactive, a German shop that creates indexes for investment themes around socially responsible mandates, adding data from unorthodox data feeds, such as FactSet.
A SaaS alternative
All-Index is not trying to become an index vendor; Kronseder says he hopes to make them his clients too. Rather All-Index wants to sell subscriptions to its software that would allow banks, ETF shops and asset managers to build and backtest lots of indexes at once, as well as create fact sheets, rule books and other documentation, which they could share with their own clients or counterparties.
All-Index has built a platform where all kinds of indexes can be backtested almost immediately with just a few mouse clicks.
But by doing so it aims to disrupt the salespeople at big index vendors, who have traditionally been the gatekeepers around the data and the process of creating indexes. “This shifts power to the client by letting them control how and when to backtest,” Kronseder said.
If the SaaS model works, All-Index could look one day to morph into an electronic marketplace for indexes, and become a broker – but that’s just an idea. First it has to prove banks and asset managers will want to use it.
That won’t be easy.
Brand and cost…
It’s true that the big four charge a lot for creating indexes and then selling insights from the component data, such as performance attribution. All-Index is lining up deals to purchase the same data from the same sources, such as Bloomberg and Refinitiv. It will charge far less for the analytics. “Vendors charge more because they claim it’s their brand,” Kronseder said.
But speaking with people on the client side, vendors such as MSCI do have a brand. It makes it easy for an asset manager, for example, to pitch an investment idea to a sovereign wealth fund or a pension fund – asset owners won’t ask questions if the index is from a known entity.
The same goes for regulators. “It’s faster to get regulatory approval [for an investment product] if the index vendor is known to be qualified,” said Rebecca Chua, founder of Hong Kong-based Premia Partners, an ETF manager startup focused on Asia-listed products.
All-Index’s model is not to replace an MSCI or FTSE Russell, but to let clients come up with their own indices more quickly and cheaply. But this assumes an MSCI would then do business with an ETF manager, say, that wanted to create its own product and get the vendor to buy it.
A startup like Premia Partners wouldn’t have that clout, but a global asset manager or leading bank might. But an executive at a leading global asset manager in Hong Kong said: “The branding power of index vendors is real, it’s important, and it will persist.” That’s especially true in Asia, where asset owners are usually less sophisticated when it comes to indexes.
…and regulation
Moreover, costs in the index space may not remain as low as they appear. “Regulation will find you at some stage,” said a Singapore-based former head of a large ETF business.
In Europe, mainstream indexing is becoming caught up in issues related to Libor – the London Interbank Offer Rate, the de-facto benchmark to price all sorts of instruments, which is supposed to be phased out due to fixing scandals. The Libor fiasco has led regulators to look at indexes in general, including how banks and asset managers use indexes that score well on backtests with very selective inputs, but which lack investment merit.
Big players will be able to absorb new compliance costs far more readily than niche ones. And they have established procedures around quality control – one reason why they can be slow to respond to market requests for customized products.
A startup like All-Index will also face distribution costs, which market executives warn could be higher than expected.
Kronseder says All-Index has so far bootstrapped its initial build. It hopes to generate enough revenue to grow organically, but may decide to seek out venture capital: “It could be helpful to have the oomph of a proper VC behind this.”
Control over data
Nor have the large vendors been inert, waiting to be disrupted. MSCI is the leader for institutional investors. It bundles the indexing with analytics from Barra, a data company it owns. In the U.S., S&P acquired artificial-intelligence firm Kensho, and has rolled out big-data driven indexes (but only in the U.S.).
That said, people contacted by DigFin said the big four do deserve disruption: they make margins as high as 65% to 70% and have grown comfortable behind their well-known brands. The fundamentals of the indexing business haven’t changed in an era when the rest of the industry is dealing with digital challenges. And there is a trend, in the U.S. at least, of proliferating business models to bring down fees.
“The big four have had their day. It’s time for a competitor,” said the Singapore-based executive.
Asia will be difficult to crack, however. Index-based investing has shallow roots in the region. That’s especially true on the retail asset management side. The dominance of bank distribution in wealth management means their salespeople have little incentive to sell low-cost ETFs. Even mature markets such as Japan have not shifted away from transactional selling to adopt advice-based models.
Institutions and regulators in the region are usually conservative, so they will not be as ready as their U.S. peers to accept newfangled approaches to indexes.
Against that trend, a startup like All-Index is betting the demand among clients to control their data will prove stronger.
