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.
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.
Lu Global reverses the Lufax story
Lufax began as a P2P and became a wealth manager – in Singapore, it’s adding secondary trading.
Lu Global, a wealth-management fintech in Singapore, has just launched a marketplace to enable its customers to trade the same products they bought on the company’s website.
Kit Wong, CEO at Lu Global, says the company has developed its consumer-facing business and is now selling both funds and structured products.
But it believes some clients want to get out of these positions, particularly structured notes. Instead of having to hold them to maturity, they can now see if other users in the Lu system are willing to buy them (at a discount).
Wong says the firm, which has a capital markets services (CMS) license in Singapore, serves about 300,000 customers. Some are resident in Singapore (where the business can only market to accredited investors), others are from outside, who can be either professional investors or retail.
The biggest segment of investors are mainland Chinese, who already know the Lufax brand, but there are also a lot of Taiwanese and Hongkongers, and a growing number of Southeast Asian users, Wong says.
The electronic marketplace has just gone live, so it has no volumes to speak of. Lu Global does not take positions in this secondary trading environment – it merely matches its existing customer base in case users want to make trades among themselves.
Lu Global declined to state its assets under management. Wong says the largest number of products are mutual funds, issued by the likes of BlackRock and Pimco – but the biggest volumes are in structured products.
He believes this may have to do with economic and political uncertainty in the region, which is spurring demand for products with known outcomes and terms.
But such products only pay out upon maturity – and the same destabilizing factors may be leading more investors to want to cash out early, even if they do so at a loss. But providing a marketplace not only gives them access to liquidity (assuming there’s a buyer on the other side) but also lets them sell at a better rate.
The launch of this product is a strange parallel to parent Lufax’s journey. Shanghai-based Lufax began in 2011 as a peer-to-peer marketplace for transactions, financing, and investment management. It exited the transactions and financing aspects to focus just on wealth management.
Lu Global built itself first as a marketplace for wealth products – but now it’s expanding into secondary trading, creating a marketplace for customers to exchange financial products before they reach maturity among themselves – a different kind of P2P than lending, which mainland authorities are clamping down on.
Half of Invesco’s China sales now via digital
But as the PRC joint venture learns how to distribute digitally, Invesco remains unsure of robo’s role in Asia.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. See also strategies from AllianceBernstein and BEA Union Investments. Go here for more insights into digital asset and wealth management.
Invesco is using its joint venture in mainland China, Invesco Great Wall, to figure out digital distribution.
The business now manages about $50 billion of assets, of which about 80% is retail, making it the fourth-largest Sino-foreign fund house in China. Over the past two years, half of retail inflows have come from new digital channels, as opposed to the traditional reliance upon banks, says Andrew Lo, senior managing director and Asia-Pacific CEO of Invesco in Hong Kong.
This is in keeping with a broader trend in the global mutual funds industry, which is shifting from one based on products to one focused more on investment solutions. “There’s an emphasis on designing outcomes for clients, such as through asset allocation or structuring,” to combine types of risk and asset classes.
That’s driven both by client demand as well as market volatility and challenges to active fund houses to deliver alpha (outperformance) on a net-free basis, compared to ultra-affordable passive investments tracking a benchmark.
That’s been an emerging story for the funds industry over the past decade. But on top of that is a new wrinkle: the ability to use technology to speed up operations and to reach more people.
“Technology is now changing the distribution landscape,” Lo said. “In China, it’s having quite an impact on reaching retail investors.”
For now this has been a story unique to mainland China, where existing bank channels (which dominate funds distribution in most Asian markets) are not well developed, and where regulation favors digital disrupters like Ant Financial.
The power of digital was evident in Ant’s success with money-market funds (under an affiliated fund house, Tianhong Asset Management), but it has now extended to equity and quant products onshore – products that Invesco’s J.V. now sells through fintech channels, including Ant, East Money Information, JD.com (Jingdong) and Snowball Finance (Xueqiu).
This has not been straightforward, however. Fund management companies are designed to cater to bank distributors, and are built on old-fashioned tech.
“We learned how to do digital marketing,” Lo said. “It’s very different to traditional distribution. It’s iterative, it changes fast, and you have to listen to customer feedback.” Partnering with digital channels has also required a different sense of product design, and to rebuild the company’s operational process to support round-the-clock digital sales and support.
Lo says the experience will be increasingly relevant as other markets digitalize, although they may need to be tweaked, depending on local regulation, client behavior and distributor demands. “Some things we can learn and apply elsewhere as the world goes digital,” Lo said.
The onshore funds market manages about Rmb14 trillion (almost $2 trillion) in total assets among 135 asset managers authorized to sell to retail clients, of which are 44 Sino-foreign JVs.
But most of these JVs are run by the local partner, with foreign shareholders having less influence. They are limited to stakes no greater than 49%, and local partners are often banks or other powerful institutions. One analyst told DigFin that local fund houses are not particularly bold when it comes to digital channels; and even if they are, the lessons don’t flow to the foreign partner.
But Invesco Great Wall’s case is different. Both Invesco and Great Wall Securities own 49%, with two other shareholders holding another 1% each. Given that Great Wall Securities has its own in-house funds business, it has been willing to let Invesco drive the business. (Beijing has recently permitted J.P. Morgan Asset Management to take a 51% stake in its funds J.V.) Invesco Great Wall is also among the oldest funds JVs in China. It is today led by Shenzhen-based CEO Ken Kang Le.
In China, Invesco is leading the way in digital opportunities. Elsewhere it seems to be running with the rest of the herd. In the U.S. and the U.K., it has made digital acquisitions: Jemstep, a B2B robo-advisor that services U.S. bank distributors, and Inteliflo, a British platform to support financial advisors.
“We haven’t found the right use case in Asia,” Lo said. Onboarding a digital B2B (of B2B2C) platform needs scale, but Asia is fragmented, with each market requiring its own business and compliance needs.
“Digital transformation is still evolving,” Lo said. “My guess is it can be like it is in China, where it’s a real thing that has become a major part of the industry.” But what that looks like elsewhere remains hard to know – or at least hard for justifying a business case.
New China distribution not just for money-market funds
Investors on digital platforms are beginning to look to other products, says BEA Union’s Rex Lo.
This week DigFin is highlighting three asset-management firms’ approach to digital distribution, particularly in China. We will also provide strategies from Invesco and AllianceBernstein. Go here for more insights into digital asset and wealth management.
Retail investors in China accessing funds via digital platforms are beginning to diversify away from money-market funds. That is creating opportunities to push ETFs and active funds, says Rex Lo, managing director for business development at BEA Union Investments.
China’s retail funds industry is mainly about money-market funds (MMFs). The total industry size is Rmb13.2 trillion, or $1.9 trillion, of which MMFs account for 57%, or Rmb7.7 trillion.
Among MMFs, by far the biggest player is Tianhong Asset Management, whose product, Alibaba’s Yuebao fund, is Rmb1.2 trillion in size, or $162 billion – the largest money-market fund in the world.
It’s no surprise then that digital distribution platforms in China mainly cater to MMFs. Lo says until recently, MMFs accounted for about 80% of all funds sold on digital platforms. This is propelled businesses such as Tianhong (which of course is sold via Ant Financial) and a few bank-affiliated fund houses with big MMF products, such as CCB Principal and ICBC Credit Suisse.
But it has made digital distribution of limited interest for fund houses looking to sell equity funds or other actively managed products; for them, traditional distribution via banks has remained the only viable channel.
MMFs: less big
Lo thinks this is changing, however.
The popularity of MMFs lies mainly in the fact that they offered high returns combined with guarantees, real or assumed by investors – assumptions the government has been reluctant to upset.
Yuebao and other MMFs usually invest in non-standardized wealth-management products (themselves supposedly “guaranteed”, with investors assuming a government backstop), that returned 5% to 8% to those managers. They in turn offered investors 5%, an equity-like return on what’s meant to be an ultra-safe and liquid asset class.
Over the past few years, however, Chinese banking and securities regulators have been trying to shift the funds industry onto a footing that respects risk and return, and clamping down on the supply of shadow-banking instruments available to portfolio managers.
“Today MMFs return only a little over 2%, while A shares are doing well,” Lo said. “As demand for money market funds declines, turnover has fallen, so these distributors are now promoting index or active funds.”
In recent months, Lo says, MMFs account for only 70% of sales on digital channels, with ETFs now gaining ground.
Accessing the mainland market
BEA Union is able to sell its Hong Kong-domiciled Asia fixed-income fund to Chinese retail investors through a scheme called MRF, Mutual Recognition of Funds.
This program, which began in 2015, allows fund managers on either side of the border to sell eligible products through a master-agent arrangement. Regulators in mainland China have been slow to approve such funds, however, and there are only seven Hong Kong products available via MRF, including BEA Union’s (and 48 mainland funds available for sale in Hong Kong).
Lo is hoping to take advantage of the shifting fortunes among asset classes to use digital channels to push BEA Union’s bond fund.
Platforms such as Ant Financial are requesting the fund house for more material around equities and active funds management. It’s a big, long-term commitment to investor education – especially for foreign fund managers whose ranking is low on Ant Financial and other digital platforms.
“Domestic investors want familiarity,” Lo acknowledged. “But we continue marketing because we want to be on the platform. Today it’s more for exposure than real [inflows], and ticket sizes are as small as Rmb100 ($14). But if you have 100,000 investors, that becomes a lot of money.”
The intention of this ongoing marketing is to become sufficiently well known among Ant’s users to take advantage when retail investors want to invest overseas.
New ways of doing business
Adding platforms such as Ant to traditional distribution methods has been an eye-opener, Lo says. “They don’t think like a traditional finance company. They’re a fintech, so they’re very responsive and open to new ideas. And they’re independent – they’re not a bank with its own funds J.V. – so there aren’t conflicts of interest.”
Marketing was not the only part of business that had to adjust.
“I was amazed when we began to work with these firms,” Lo said. “Enhancements that would take months to get done in Hong Kong take them a few days. We can learn a lot from working with fintechs.” It’s knowledge that will come in handy as more banks in Hong Kong and Asia add mutual funds to their mobile trading apps, as Standard Chartered did earlier this year.
There are limits, however, to how far a fund house can go selling products on mainland China’s digital platforms.
Those channels are limited to funds from either local licensed retail-facing houses, or offshore products eligible via MRF. The retail funds market in China, at $1.9 trillion, is only a fraction of the total investments industry, which is about $9.7 trillion – but that includes separate licensed businesses for asset managers linked to insurance companies, or to trusts, or to banks. Those businesses for now can’t market to retail or use sell via e-commerce players.
BEA Union is a joint venture formed in 2007 between Bank of East Asia and Germany’s Union Investments. Its initial business model was to service local pension and insurance customers, so its investment expertise has been mainly in Asian fixed income. It has since developed funds in Hong Kong and Asia equities, and its total AUM is now $11.2 billion.
It is the only foreign fund house to establish a wholly owned foreign enterprise (Woofie) in Qianhai (part of Shenzhen), as opposed to Shanghai. This was partly because the authorities in Qianhai were very welcoming, and because Bank of East Asia has a presence in southern China, and the fund house hopes to take advantage of this should cross-border opportunities emerge (under the concept of a “Greater Bay Area”).
This medium-term ambition is another driver of BEA Union’s strategy to build an online brand on Ant Financial and other digital platforms.