Q&A with Sebastian Ceria, CEO of Qontigo
As the founder and CEO of fintech Axioma, and now the CEO of newly launched analytics and index provider Qontigo, Sebastian Ceria has for over 20 years been immersed in the sweeping changes that continue to transform the business of investment management. We sat down with Ceria for a look at what he sees ahead — for both investment managers and the vendors who serve them.
Q: The shift from active management to passive continues and passive AUM has reached new highs. What’s next on the horizon as passive continues to evolve?
Ceria: What’s next is what I refer to as “the new passive.” Because passive isn’t just about market exposure anymore. Passive is increasingly defined by thematic exposures, factor exposures or what we generally refer to as smart beta. That’s the next iteration of passive. To get there, you must be able to build portfolios that have precisely targeted exposures. And that requires both sophisticated portfolio-construction capabilities and access to the analytics needed to not only measure those exposures, but to make sure you are capturing those exposures in the passive vehicle you’re building.
The new passive is all about the marriage of indexing and powerful analytics. It’s about leveraging factors and smart beta to create passive vehicles that address increasingly specific investor concerns. At Axioma, we started building such vehicles in partnership with index providers Russell and STOXX in 2011. Other firms, like MSCI, have also done pioneering work in this area and it’s a theme that index providers have now clearly embraced.
Q: When you talk about passive these days, one of the themes that’s gaining a lot of traction is ESG. How do you see that unfolding?
Ceria: The challenge with ESG is that the definition of ESG is very much in the eyes of the beholder. The ESG market is no longer just looking for another set of new scores or a new universal definition. Investment managers want index providers to adapt their passive vehicles to the unique ESG views held by their clients. Here, too, we’re talking about the next iteration of passive. But instead of generic passive vehicles — i.e., with generic ESG scores—we’re talking about custom passive vehicles that incorporate proprietary ESG definitions. ESG today is all about the ability to customize and tailor.
Q: The ongoing growth of passive has challenging implications for the industry, in terms of heightened competition and margin compression. How do you see that playing out and how do firms need to respond?
Ceria: In my view, it’s only going to get worse and only those who adapt will survive. That may sound harsh, but margins in the investment-management business are likely to continue to shrink and I believe we’re going to see some significant industry consolidation going forward. That said, when it comes to margin compression, the best friend of investment managers is technology. And that goes for both active and passive managers. More and more clients are looking for a new paradigm in terms of technology because it’s the only thing that’s going to enable them scale in a cost effective and efficient manner — and, by the way, adapt and survive. The talk now is all about cloud-based infrastructures, microservices architectures, and access to APIs that allow clients to flexibly leverage technology via more modern interfaces. Let’s not forget, this wasn’t the case for most of the industry, even just five years ago. So the conversation around technology has changed dramatically.
The inescapable reality is that firms — whether active or passive — have to raise their game. And the way to do that is either by delivering competitively superior risk-adjusted returns, by being more efficient — i.e., achieving the advantages and economies of scale — or some combination of the two. And the deployment of modern technology is an essential element in that overall mix. Yes, technology enables managers to efficiently scale. But it also allows firms to maximize the execution of their unique investment strategies by fully leveraging the most powerful analytics, tools and data available. Ultimately, technology is about the ability to achieve actionable insights that support a firm’s alpha-generation strategy and enable them to outperform.
Q: We’ve talked about how the business of investment management is changing and how managers need to adapt. But what about your space, the vendor side? How do vendors need to change and adapt?
Ceria: That’s a good question. I believe vendors today have to do — at least — three things: one, make sure your commercial model is aligned with that of your client; two, leverage modern technology; and three, make sure you have a holistic approach to the marketplace — one that embraces openness and flexibility.
So let’s take a moment to parse this. First, commercial models. The point is, in an environment of shrinking margins, a vendor can’t simply charge a client an amount based on the vendor’s IP. Clients should pay an amount that reflects how much the client makes by leveraging your products and IP. And sometimes that’s going to mean less and sometimes more. For example, take an ETF provider. Some ETFs generate a lot of fees because clients are willing to pay 50 basis points but there are other ETFs where clients are paying close to zero fees. So a vendor cannot have an AUM pricing model because it isn’t aligned with the client’s model — and that just doesn’t make sense. Ultimately, the vendor’s commercial model has to adapt to how the client charges for the product.
Second — and this one is easy — vendors must embrace modern technology, just like their clients. Again, we’re talking about cloud-based, open architectures that allow clients to implement the best-of-breed solutions that are optimal for their particular investment strategies and approach.
And third, as a vendor today, it’s essential to be a holistic provider — meaning one who not only sees multiple asset classes, analytics and indexing as a joint value proposition, but one who also has an open architecture that easily interoperates with other tools. Because those things taken together are essential to giving clients the power and flexibility to succeed today.
That, by the way, is precisely what excites me about being the CEO of Qontigo. Because by combining Axioma’s expertise in analytics, portfolio construction and cloud technology with the indexing capabilities of STOXX and DAX, we’ve created a vendor with all of the above.
Sebastian Ceria, Ph.D., is CEO of Qontigo, which was created from the combination of Axioma, STOXX, and DAX and launched in September 2019. Qontigo is a subsidiary of Deutsche Börse Group.