Jonathan Steinberg was just a toddler when his father, the renowned corporate raider Saul Steinberg, jolted New York's financial elite by making a hostile takeover bid for Chemical Bank, then the nation's sixth-largest bank. Today, the son is taking aim at a much bigger target: the $12 trillion mutual fund industry and its tens of billions in annual management fees.
“Mutual funds are like black-and-white TVs,” declared Mr. Steinberg, 46, who is widely known as Jono. “Even after the first talkies, silent movie stars lasted a while. That's where mutual funds are now.” He even proclaims that his modest money management firm and its 61 employees “could do to Vanguard what Vanguard did to traditional mutual funds.”
That statement might sound a bit farfetched, considering Vanguard's nearly 13,000 employees and $1.8 trillion in assets. It also comes from a scion who has struggled in business for more than 20 years. Mr. Steinberg's magazine publishing venture, bought with his father's backing, went belly-up with the dot-com bubble. A hedge fund foray flopped. His biggest claim to fame might be that that he's married to CNBC anchor Maria Bartiromo.
But the stodgy world of mutual funds is taking Mr. Steinberg seriously. “You can't laugh off what Jono says,” warned Paul Justice, a senior analyst at Morningstar Inc., Chicago. “The truth is he's on to something.”
That something is an actively managed exchange-traded fund. The instruments “are the first thing to come along in 80 years that could materially hurt the business model of mutual funds,” Mr. Justice said.
WisdomTree Investments, which Mr. Steinberg founded and runs, is a leading manager of active ETFs. With investor interest in ETFs growing, WisdomTree turned a small profit of $155,000 in the first quarter, ending five years of red ink. Mr. Steinberg plans to list its stock on Nasdaq later this summer.
Active ETFs are the latest twist in exchange-traded funds, investment vehicles that emerged 18 years ago to give people the chance to buy into market indexes, such as the S&P 500, for a lower cost than mutual funds. ETFs are one of Wall Street's few thriving businesses. According to research from money manager BlackRock Inc., such funds attracted a total of $170 billion in new money last year, while investors yanked $132 billion out of mutual funds. In the U.S., $1 trillion is invested in 1,000 ETFs, compared with $12 trillion invested in some 8,500 mutual funds.
Like their mutual fund counterparts, active ETFs seek to outperform the market. Their lower cost is what makes them threatening to mutual funds. The average active ETF charges individual customers a fee of 0.55% — half that of actively managed mutual funds, which collectively raked in about $80 billion in fees last year.
For now, the 31 active ETFs in existence are truly small potatoes, holding less than $5 billion in assets. And plenty of people argue they will never be more than a sideshow.
Among them is Deborah Fuhr, global head of ETF research at BlackRock, who says active ETFs are unlikely to be embraced by institutional investors because federal regulations require such funds to disclose their holdings daily. That spoils any chance for the anonymity that big investors seek as they build up or wind down positions. Without support from institutions, active ETFs will never reach the level of trading volume and assets needed to move from niche product to mass-market force, according to Ms. Fuhr.
“I've covered ETFs since just about the beginning, and I just don't see active ETFs catching on in a major way,” she said.
Well hello, Bill Gross
“These firms have to be ready in case active ETFs really take off,” said Richard Keary, founder of New York consulting firm Global ETF Advisors. “The numbers show investors are shunning mutual funds for ETFs, so there is reason for the mutual fund firms to be worried.”
Active ETFs have no more enthusiastic proponent than Jono Steinberg, though he readily acknowledges it will take time for them to win over investors. He says they clearly need to establish a track record of beating actively managed mutual funds, but he also has no doubt such winning streaks will happen.
“It's coming, it's unstoppable,” Mr. Steinberg insisted. “The worst active ETF is better than the best active mutual fund,” he added, citing that ETFs have lower costs, provide daily updates of their holdings and can be traded quickly.
A triumph would be especially sweet for Mr. Steinberg, who has struggled for years to make his own name on Wall Street.
In 1988, after attending Wharton School of Business (where his father was a big donor), he spent $1 million in family money to buy a monthly tabloid called Penny Stock Journal. That morphed into Individual Investor magazine, which attracted 500,000 subscribers as the glossy charted the bull market's dizzying heights. In 1994, he launched a hedge fund called WisdomTree Associates and about that time wrote a book, “Midas Investing: How You Can Make 20% in the Stock Market This Year and Every Year.” He also began dabbling in stock indexes, creating such things as the America's Fastest-Growing Companies Index, in the hopes of generating popular market benchmarks.
“I wanted to be the next McGraw-Hill,” Mr. Steinberg recalled, referring to the company that owns the S&P 500 index and used to control BusinessWeek.
Through it all, his father loomed. In fact, Saul Steinberg was the biggest shareholder in his son's publishing company, according to a 1997 regulatory filing, controlling 21% of it personally or through his insurance conglomerate, Reliance Group Holdings.
The turn of the century was tough on both Steinbergs. Reliance sank into bankruptcy, and the media venture managed to be unprofitable during the roaring bull market. The money-losing hedge fund had been closed in 1998, and in 2001 the magazine's subscriber list was sold to Kiplinger's.
Jono started over. He kept his stock-index business and began looking for concepts that might interest investors. He settled on creating ETFs that invested in indexes composed of companies that paid generous dividends. He searched for backers and won over Michael Steinhardt, a retired hedge fund star who today owns a third of WisdomTree and serves as chairman.
Mr. Steinberg presented his ETF ideas and market research to Jeremy Siegel, a prominent Wharton professor and former columnist at Individual Investor, who agreed to lend his name to the project. (Mr. Steinberg's father is not an investor in the firm, a WisdomTree spokesman said.)
The serial entrepreneur has overcome several obstacles. The 2008 crash was particularly tough on WisdomTree's dividend-focused strategy because so many companies suddenly began hoarding cash. But Mr. Steinberg doggedly stuck to it, and WisdomTree has grown into the seventh-largest ETF manager in the past year, with $12 billion under management, according to Ms. Fuhr's research at BlackRock. (BlackRock's iShares division is the largest, with $465 billion.)
WisdomTree also offers the largest number of active ETFs — 12 —making it an attractive takeover target for a large mutual fund firm, Mr. Justice at Morningstar suggested.
Mr. Steinberg is basking in his newfound success. Although it took 18 years for ETFs to attract $1 trillion in assets, he predicts that amount will double in five years as more investors come to appreciate the benefits of the product.
“We face a golden age for investing,” he said. “I don't know why it wouldn't happen.”
Aaron Elstein is a senior reporter with Crain's New York Business, a sister publication of Pensions & Investments.
