Will they or won’t they? That’s the question everyone’s asking about the London Stock Exchange’s USD2.7 billion purchase of Frank Russell, the stock index to consultancy and asset management group.
LSE boss Xavier Rolet has certainly won admirers in the way he has carefully built up the 200-year old stock exchange, with the purchase of LCH.Clearnet particularly wise given sweeping regulatory that require clearing of swathes of the OTC derivatives market.
Expanding into stock indices is seen as a smart move to piggy back on the growth of passive funds as investors cotton on to the fact that often than not, salting away money into a passive fund can offer just as good or even better return as putting the cash into actively managed fund, especially when fees are compared.
The LSE became the sole owner of FTSE indexes a couple of years ago, giving it a good benchmarks footprint in Europe and Asia but not in the United States. Frank Russell, however, has a large presence in the world’s biggest capital market, with its Russell 2000 a major benchmark for tracking small caps.
“Globally, many exchanges are benchmark administrators or partner with independent administrators to provide indexes to the marketplace and I believe this will continue to be the case,” said Rick Redding, chief executive of the Index Industry Association.
The LSE’s current, modest U.S. footprint is limited to clearing swaps, and bonds.com, part of the MTS bond trading platform.
“It’s another milestone for the group and will accelerate growth in intellectual property,” Rolet said. “It will accelerate the group’s global expansion, especially in the key U.S. market.”
Some USD5.2 trillion track Russell indices, while USD4 trillion tracks FTSE benchmarks, the combination of which creates a global index provider with the breadth and scale to rival MSCI.
“The index administration industry is extremely competitive and investors benefit tremendously from that competition,” Redding said.
One aspect of the latest acquisition has people stumped, however.
“For an exchange to go into asset management is misguided because fundamentally you are at the service of investors and wealth managers. Does it make sense for the LSE to compete with clients, who are its liquidity providers?” said Georges Ugeux, chief executive and chairman of Galileo Global Advisors and a former top official at the New York Stock Exchange.
The Russell indices and even the consultancy business fits in with the exchanges ecosystem the LSE Group has built up and includes Turquoise, the pan-European trading platform, a bond trading platform, Borsa Italiana, and LCH.
Where does the asset management unit of Frank Russell, which has USD256 billion of assets under management, fit in to all this?
“This is the core question that Xavier Rolet has not answered yet,” Ugeux said.
An LSE spokesman said there is a comprehensive review under way about what to do with the asset management business, but it won’t be completed until later in 2014.
“It’s an important question and one that we don’t consider lightly. We don’t operate an asset manager at the moment,” the spokesman said.
Rolet had little choice in buying the asset management business as the sale was all or nothing - indices, consultancy and asset management business. There is already speculation that the latter will eventually be spun off, helping to pay for the rest of the Frank Russell assets.
“Eventually spinning off the asset management side and maybe getting everything else for free, that is a very good strategy.” Ugeux said.
“If indeed this is a two-step strategy where asset management is spun off, it would be important to know that, otherwise investors and the market are left in the dark about what is the fundamental strategy,” Ugeux added.
The LSE aims to close the deal by the end of 2014 or early in the first quarter of 2015.
The exchange is perhaps wise to try a different tack to enter the American market in a bigger given the difficulties rival Deutsche Boerse’s has faced there in making headway with core exchange activities like trading.
The landmark acquisition of Frank Russell raises another question: will this be the last hurrah for Rolet, who will have been in the hot seat at the LSE six years by May 2015? Antritrust concerns are also making more big exchange deals harder.
Fellow Frenchman Michel Barnier, who has just stepped down as the European Union’s financial services chief to return to French politics where there is a “lot to do”, was lauding Rolet in September as if France needs his financial savvy back home.