WisdomTree Investments: September 9th 2005 Update

I will get back to Lo's paper soon, but I just thought I would update my prior post on IXDP, Index Development Partners, WisdomTree Investments or whatever else you want to call it.

Today, they announced the hiring of Richard Morris as the Deputy General Counsel (article here). This new addition interests me, because he seems to fill part of the hole I mentioned in my prior post; that is, regulatory issues and concerns. Morris was senior counsel at Barclays as Barclays went out to launch its very first iShare, which has since become the 800 lb. gorilla in the ETF market. His experience at the SEC further reinforces the unique regulatory skill-set he can bring to the table at IXDP. Putting it all together, their management team is now as follows:

1. CEO: Jonathan Steinberg


2. Chairman: Michael Steinhardt


3. Director of Fund Services: Michael Jackson


4. CFO: Mark Ruskin


5. ETF Distribution: Ray DeAngelo


6. Senior Investment Strategy Advisor: Jeremy Siegel


7. Senior Analyst: Jeremy Schwartz


8. Deputy General Counsel: Richard Morris


9. Board of Directors: Jeremy Siegel, Frank Salerno, James Robinson IV, Michael Steinhardt, Jonathan Steinberg

Looked at another way, they now have 7 senior managers. Two deal primarily with general operations (Steinberg and Ruskin). One deals primarily with more ETF-specific operations (Jackson). Two are solely geared towards the research and development of innovative indexes (Siegel and Schwartz). One will deal primarily with the legal and regulatory issues associated with ETF sponsorship (Morris). One is geared primarily towards marketing newly sponsored ETF’s to various clients and platforms—brokerages, retirement platforms, individual investors, hedge funds, mutual funds (DeAngelo). Thus, the management team seems to flow from the index creation process all the way to the marketing of funds to a wide array of investors.
Key take-aways to me at this point:

1. Regulatory concerns seem less of a constraint to me than they did pre-Morris.

-However I am still confused as to how they can go about expediting the sponsorship process.

1. IXDP’s management team has far more depth and breadth than that of PowerShares, which may allow for more explosive growth post-sponsorship than PS could ever dream about.

-PS now has around $500M AUM, 4 partners and around 8 employees. It has 4 ETF’s and 24 awaiting approval (article here).
-Its head portfolio manager doesn’t have quite the same reputation as Jeremy Siegel.
-PS’s distribution and marketing capabilities seem relatively constrained.

1. My initial estimates for cost were no good; way too low.

-My gut is saying that they’ll need a lot more than $4M in steady state to run the operation they’re looking to run. The size and stature of the management team implies very ambitious plans.

1. The kicker, it seems, is whether or not enhanced indices will attain proof of concept. And can IXDP pay the education costs necessary to spread the word, as BGI has (and PS currently isn’t)?

-I am not yet sure PS has proven that enhanced indices ‘works’; will these indices really outperform over the longer term?
-PS doesn’t have the infrastructure to do the marketing necessary to educate consumers properly. I don’t expect IXDP to get any real substantial spillover education benefits from PS.
-BGI, as a case in point, has spent large amounts of money marketing its products—seminars, white papers, advertisements, and more (article here). This is in addition to large sums of money they’ve spent to construct and rebalance the $115B AUM in the 99 ETF’s that currently trade under the BGI name. BGI itself has around 2,000 employees.

1. The future for IXDP still seems bi-modal to me.

-Cost structure getting large, will have to get larger.
-High education costs with little help at this point (unless they or their indices are bought out).

I haven’t had the time to do proper due diligence on just how costly this will be, but one might want to take a step back and think about just how many of the first movers marketing truly new products were the eventual beasts in the space they were moving to occupy. BGI had marked advantages, most notably a large base of capital which it could fall back on to pursue a longer term goal. Will IXDP, through Steinhardt and other financiers, be able to secure enough financing to do the same as an upstart with no parent?