Solactive: There’s a gap between the value investors get and the money they pay, 05 June 2014

Solactive: There’s a gap between the value investors get and the money they pay

SRP spoke to the firm's chief executive and founder, Steffen Scheuble, about the competitive landscape in the indexing market and Solactive's plans in the short term.

Solactive currently calculates more than 900 indices across all asset classes for more than 90 international clients in Europe, North America and Asia, and has approximately $20bn of assets invested in the firm's indices, primarily via ETFs and structured products. The idea of launching Solactive came about in 2006, says Steffen Scheuble, chief executive and founder of Solactive AG.

"At the time, I was working at Deutsche Bank, where I was responsible for the derivatives department for German-speaking countries, and ABN Amro started launching lots of structured products with thematic investments," he says. "We were looking for an index provider that could help us build a thematic range."

The S-BOX initiative, says Scheuble, came from the Stuttgart Stock Exchange and a Swiss consulting company which entered the index business with a fast (the ability to bring products to market within 24 hours), flexible and cost-efficient approach when delivering benchmarks.

"At the time there was no one out there with this kind of approach," says Scheuble.

Solactive (known as Structured Solutions until its rebranding during the summer of 2013) was launched officially in 2007, following a management buyout by Scheuble, followed in 2009 by the acquisition of the index business from the Stuttgart Stock Exchange.

Entering a space dominated by traditional index providers, says Scheuble, was a challenge in itself. "Obviously, we entered a space dominated by a handful of equity benchmarks (S&P500, Eurostoxx50) and we couldn't change that," he says. "But aside from the main equity indices, I strongly believe that the value you get for the money you pay is not worth it."

According to Scheuble, the way to enter was by building an index service based on efficiency and cost with a flawless IT platform and a flat-fee model to allow clients to pay for indices rather than for the assets embedded in them.

"We believe this is the right business model because the indices you use in your products don't contribute to the assets you raise," says Scheuble. "We think there is a gap between what index providers deliver and what clients have to pay to deploy those indices in their products and the feeling was that the gap was getting bigger and bigger as clients pay more and get less quality service. It was an obvious move."

Solactive now ranks third in the US in terms of ETFs linked to the indices it calculates, with a global number of 125 ETFs tied to its indices. However, Solactive's activities are 40% ETF-related and 60% non-ETF related and mainly structured products.

"Not in terms of assets but in terms of the number of indices," explains Scheuble. "Our focus over the last few years has been on the US ETF market as it is more developed. We have a strong foothold in the ETF market in the US, whereas we are only starting to make inroads in Europe."

Another achievement of Solactive, says Scheuble, is its state-of-the-art IT platform. "With an efficient infrastructure you can deliver more efficiently, especially in the structured products market where you have more complex indices, such as indices that use algorithms to compile these indices, or indices using an optimisation process, etc."

Scheuble believes current proposals to regulate benchmarks will have a positive impact on the index market.

"The new rules are trying to address how firms deal with conflicts of interests and also to increase transparency," he says. "We support the proposals because they will make the index space more transparent and regulated. In our case, we don't have an investment bank behind us or a firm that can have vested interests in the deals we do."

Index providers, says Scheuble, have been accused in the past of pushing indices using data mined because they can provide them with a higher income. "It is important that any bad practice is removed from the market and that all index providers out there have robust procedures in place for each index they sell."

According to Scheuble, the index marketplace is a space with a lot of value, and some investment banks have very successful index businesses with established income streams. But things have started to change, as demonstrated by the recent sale of HSBC's custom index business and the market rumours about index provider MSCI having approached Barclays to acquire its index business.

"I am convinced that it is cheaper to outsource everything when it comes to indices," says Scheuble. "I don't believe the current approach with investment banks developing their own indices will last a lot longer, as it has reputational considerations."

To be independent, says Scheuble, is an asset in itself. "There is no question about that," he says. In terms of credibility, adds Scheuble, the more institutional you go, clients demand quality and pricing; the more retail you go, the brand name is one of the main considerations because the retail client will recognise it and feel comfortable. "That's one of the reasons why investment banks approach independent index providers to outsource the calculation element and add transparency."

Going forward
Scheuble believes that Solactive's specialisation and efficiency in delivering indices will continue to play a pivotal role in the development of the firm.

"We want to build sustainable relationships with our clients," he concludes. "Most of our index projects are developed closely with clients, and we try to address the needs of a particular client at a time. We would never turn around and go with someone else's idea to a different client. For us, it is very important to have a close and straightforward relationship with clients."

Solactive has three new, innovative indices in the pipeline to be launched in the next couple of weeks, in the equity and bond space, with products based on them issued by an investment bank and an ETF provider.

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