I got to interview some very interesting people as an Editor for Trader Monthly.
In this case of the article below, I spoke with Jono Steinberg about his new firm WisdomTree and how he put the deal together to launch the firm. Regardless of the topic, I had a chance to learn a lot from some of the best minds in the investment community.
This article was originally published in the June/July 2008 issue of Trader Monthly. It was edited by Rich Blake.
The Wisdom of Steinberg
Aided by two industry legends, Jonathan Steinberg transformed an ailing publishing business into an ETF juggernaut
By Michael Martin
As the bear market of 2001 — 2002 wore on, hobbling his personal-finance publishing company, Jonathan “Jono” Steinberg found himself fascinated with the potential implications of a growing but at the time overlooked securities market: exchange — traded funds. Gazing across the financial spectrum, Steinberg sold approximately 8,000 mutual funds and 5,000 hedge funds. ETF’s by contrast numbered just 100.
What if, thought Steinberg — who had never run a money management company before, just a struggling magazine called Individual Investor — someone built a company that invested solely in ETFs?
Low-cost, alpha-generating portfolios swirling in his head, Steinberg set out to transition his company (also called Individual Investor), wallowing in pink-sheet peril. “At one time our stock was trading — I’m serious — at one cent per share,” he recalls.
With a mere $93,000 in market cap remaining, Steinberg began to create a new business. Tapping hedge fund legend Michael Steinhardt as the primary backer and noted Wharton finance department professor Jeremy Siegel as his senior adviser, Steinberg launched a firm called WisdomTree. His goal: to become the Fidelity of ETF’s. His niche: dividend-weighted funds, as opposed to cap-weighted.
“When Jonathan was making his presentation, I stopped him in the middle and told him ‘Okay, I believe, I want to be part of this,’ Siegel says.”
Now, with more than 40 ETF’s and some $4.5 billion in assets, New York-based WisdomTree is well on its way to becoming a major force in financial services, with widespread distribution among CFP’s and brokers. Interestingly, professional traders have embraced the WisdomTree ETFs, which are distinct baskets of stocks grouped an array of sectors, flavors and styles. This industry following stems from these ETF’s extraordinarily tight spreads (.01) and robust liquidity. The wider the spreads, as far as ETF players are concerned, the more difficult it is to get trades done, because market makers will won’t take on the sellers inventory without extracting a shave and a haircut. The tight spreads reflect WisdomTree’s dividend-weighted approach; companies that make up each basket are selected and weighted based on the premise that cash dividends, not stock price alone, provide the more heuristic measure.
Steinberg was able to land Steinhardt and Siegel only after he spent the better part of two years pitching his idea to would-be backers, most of whom passed. Those who wanted in advocated a 2/20 structure, which ran counter to Steinberg’s vision of a sophisticated asset allocation approach for the little guy: low-cost, long-term Alpha generation.
To say Steinberg wished to avoid the lure of beefy hedge fund fee structures is not to imply he wasn’t out to make money. But he was also out to make a market and to cut his own path, having lived largely in the shadow of both his celebrity wife CNBC’s Maria Bartiromo, and his father, Saul, the well-known corporate raider.
As a child, Steinberg was always immersed in the world of deals. “I can remember being 5 years old and listening to my dad on the phone,” he says.” I grew up with finance.”
After attending Wharton, Steinberg did a stint as an analyst at Bear Stearns before launching Individual Investor in 1999 as the country’s personal-finance wave crested. Around this time, he hit it off with Bartiromo, one of its columnists. But the magazine was toast after the tech-bubble burst, publishing its final issue in July 2001.
By then, though, Steinberg was already planning his ETF-fueled reconstitution; he had renamed his company Index Development Partners. What he needed was backers — and he needed them fast. His colleagues, such as research chief Luciana Siracusano, had not been paid in months.
“I was a few weeks away from complete financial failure,” Steinberg admits. “I would have had nothing left.”
He met Steinhardt through a mutual friend. Apart from some minor similarities they had both gone to Wharton; their last names begin with the same five letters — Steinberg was coming to Steinhardt like a bolt from the blue. The hedge fund legend was deep in retirement and focused on giving away his Wall Street fortune to charity. He wasn’t especially interested in angel investing.
“If I met 140 guys, Steinhardt was, like, 138 on the list,” Steinberg says. “Michael was entirely skeptical — I had a failed media company to my credit.”
“I was skeptical,” Steinhardt confirms. “But he had a passion that really impressed me. I thought, ‘Well, if his math is right, then “yes”, he has something here.'”
Running out of time, money and sanity, Steinberg needed a break, and he was about to get one: Steinhardt saw something in the dividend-weighted investment strategy for an ETF. But he wanted back tests, and he wanted someone of stature to vouch for the model. Someone like, say, Jeremy Siegel.
It was the spring of 2003. As fate would have it, Siegel had dividend-paying stocks on the brain. He’d just been in Waco Texas, with President Bush, advising him along with some other economists and financial figures, about a proposed dividend tax cut. Not long after that, sensing a sea change coming, Siegel began to do his own back tests on dividend-paying stocks. But he didn’t get far; the modeling was tedious and complicated.
But Steinberg had completed back tests, and when he met with Siegel at Wharton in mid-2003, it was an immediate fill. With Siegel on board, Steinberg went back to close the sale with Steinhardt.
Having flirted with extinction, Steinberg’s company was not licked yet. No one was aware of the intellectual property the company had stored up, though, or its ETF plan.
In November 2004, Steinberg persuaded Steinhart to buy stock then trading at around $0.03 share, at $0.16 per share; months later, Steinhardt bought more, for a total investment of $7 million. The company changed its name to WisdomTree in September 2005; Steinhart became chairman of the board.
Today, WisdomTree has about 40 staffers. Siegel is it senior investment strategy advisor. Also on board as senior advisor is Arthur Levitt, the former head of the SEC.
WisdomTrees assets have skyrocketed, growing from zilch in June 2006 to $4.5 billion today. The company recently launched an institutional separate account platform, for which the minimum buy-in is $25 million.
“It’s very exciting right now looking back,” Steinberg says. “I remember how tough it was, all the rejection.” It was an experience, he insists he wouldn’t trade for anything.