We strive to design investable asset classes that Wall Street has been researching, publishing and is already known by numerous institutions as a great investment theme. To date, we have not reinvented the wheel. We are taking existing institutional investment strategies and creating new vehicles that open the investment strategies to all investors.
This index certainly fulfills our goal. There has been significant research performed studying the growth of wealth globally. Beginning in the later half of the last century, rapid wealth growth in G8 countries was joined by institutions and families in what were classified as "emerging markets."
Today, as wealth accumulation accelerates and concentrates the "rich get richer." This is not some Republican conspiracy, this is a global phenomena. The top 20% of people, and institutions in terms of assets and income globally, also account for the majority of the money invested in the capital markets. It is their participation in the capital markets generating loads of passive income, which protects and grows their assets, and creates the investable strategy upon which we base this index (and ETF).
On Sunday, two reporters underscored trends in two of our three, almost equally represented sub-sectors, which were combined to create this index. Barry Rehfeld, of the New York Times published an article on Sunday that highlighted asset managers.
The Funds Are Good. The Fund Companies Are Better.
Investors in the market for mutual funds may want to consider a promising alternative: shares of asset management companies that sell the funds. Over the long run, after all, these companies have produced much better returns than mutual funds over all.
For example, while the Standard & Poor's 500-stock index gained an annualized 11 percent over the last five years and domestic equity mutual funds rose by an average of 14 percent, according to Morningstar, the five largest publicly traded asset management firms gained an average of 30 percent, annualized. Those companies were BlackRock, Legg Mason, AllianceBernstein, Franklin Resources and T. Rowe Price.
Their comparative advantage over the average mutual fund isn't likely to falter any time soon, many analysts say. "I'll take the returns of the stocks over the funds over any time frame," said Rachel Barnard, a Morningstar stock analyst.
Much of the money management firms' allure is in their business model, which generates returns in good years and bad. They collect fees on assets under management, and, with some exceptions, the fees generally increase in proportion to asset growth.
So the New York Times, and Morningstar are presenting historical data, and common sense themes that support our investment strategy. Part two of my clipping of Mr. Rehfeld's piece is that this is already occurring globally. He is backed up by analysts at Goldman, and Deutsche.
Many strategists who are bullish on the industry say that asset management has become global in scope and that there are plenty of growth opportunities abroad for American fund companies. "Looking across the globe, there's a massive amount of money to manage," Mr. Irizarry said (a Goldman Sachs analyst who follows asset managers). Foreign markets, with their higher savings rates and higher economic growth projections, are the places to look for it, he said.
In a similar vein, Chris Spahr, an analyst at Deutsche Bank, said: "The U.S. is a mature market, but there are a lot of countries that are where we were a decade or two ago. They're looking to invest their money, and there are a number of U.S. managers that have the fund performances, the asset mix, the distribution, the advertising and the sales force to compete for it abroad."
Another observation supporting all three sub-sectors on a global basis comes from huge news in May of this year. China, the world's most populous country, is allowing its citizens, some of which are in the top 20%, to participate in the capital markets outside China. The government's direct intension was to cool off the Chinese stock market as so much money is chasing too few investments. The unintended consequence is the "opening of Pandora's Box" by adding the wealthiest in China to the global capital markets, by injecting a new enormous stream of liquidity.
In last week's Barron's there was a piece on the demise of floor brokers by Michael Santoli. He ended it with a bullish comment supported by Wall Street research on the global investment case for another of our sub-sectors: exchanges.
NYSE shares have suffered from expectations that the company, fresh off its purchase of European derivatives exchange Euronext, is hot to buy a U.S. futures mart, such as the InterContinental Exchange (ICE) or Nymex Holdings (NMX). The stock trades at 25 times forecast 2008 earnings, a sizable discount to other exchanges' shares. Lehman Brothers analyst Roger Freeman upgraded the NYSE last week to a Buy, arguing that an ICE or Nymex purchase would be minimally dilutive or accretive.
Wealth accumulation is still accelerating within the United States, and other developed nations. These populations are already taking advantage of the capital markets and are teaching the next generation its benefits.
Brokers, our third sub-sector, such as the firm's quoted in these media clips are already serving the needs of the global 20%.Thier opportunities continue to grow along with the volume of deals to advise, restructuring and issuing debt and equity, and serving the insatiable needs of hedge funds, mutual funds and other asset managers. This too is occurring on a global basis.
Clear Indexes LLC has scoured the planet to identify all of the potential constituents in each of these three subsectors. The final index comprises firms poised to benefit from this global trend and have sound enough fundamentals to be selected by our 100% rules-based methodology and have my money on the first set of tickets when the ETF launched.
This strategy is long understood by Wall Street, and in fact on its third day of trading it was announced that options would be available the following week on the ETF. Because the structure of this instrument is an ETF, its not just institutions that can take advantage, financial advisers, and individuals can do their homework, and use this investment strategy to achieve the performance and attributes they seek for their portfolios.
EXB 1-month chart: