JOI: Some people feel the Dow Jones industrial average is becoming irrelevant when compared with broader indexes like the S&P 500. How do you answer that?
Prestbo: Every index has a purpose—or should have, let's put it that way—and a way of achieving that purpose. The purpose of the Dow Jones industrial average is to be a shorthand indicator of the market. Is it a benchmark in the commonly understood sense of the word? No. It's 30 stocks. But that is, in fact, the purpose of the index: to use 30 well-chosen stocks of leading companies in their respective industries as a microcosm of the broader market. That's its purpose—always has been since Charles Dow invented it. He invented it in an era when there weren't S&P 500s or Russell 3000s or Wilshire 5000s or any of those. For many, many decades it was the beacon that people looked at to see what the market was doing.
Now there are many other choices of indexes. But the Dow has a place in that pantheon because of its nature. The shoreline is all populated with lighthouses now. It used to be the only one. Now there's a whole bunch of them. But that doesn't make any one of them irrelevant; it just means you use it differently than you used to.
JOI: What do you currently see as the unexplored territory in indexing? What's left to index?
Prestbo: I think bonds, as an asset class, are still pretty "benchmarky" in nature, and there are strategies in bonds that can be explored. One of the things that needs to be fixed in bonds is transparency of pricing. Wall Street has had that little cash cow for years, and I think it ought to be taken away from them.
I think there are other asset classes that can be gotten at one way or another. We've seen, for example, these hedge fund replication strategies. We don't know if they work, but the idea is interesting because it gives you access to active managers that you wouldn't otherwise be able to touch with a modest amount of money.
I think that gaining access either to parts of the overall capital market or to money management strategies that weren't accessible before are good places for indexing to proliferate again.
JOI: Is customization going to grow further?
Prestbo: Customization is a marketing thing. It is banks and the like saying, "We want to do this and we want to put our name on it." And that's all that is. It's really not about breaking a lot of new ground with customization—they're basically just rebranding it.
JOI: Can you handicap the current field of major index providers? Who do you think is going to, essentially, come out on top from the current field? Will there be further consolidation?
Prestbo: I hear rumors about various index providers that they might be rethinking the value of that line of business. That's new within the past couple years, as many, many more competitors have shown up in the field and market share is not as easy to come by. It's possible there could be more consolidation, but it's going to run into increased scrutiny by the government.
The S&P/Dow Jones indexes deal got several months of scrutiny, and in the end, they let it happen, but the next one might not be so easy. There's a whole bunch of itty-bitty players that come, go, consolidate—who cares?—but the big ones would likely have a harder time next time around to acquire one of the other major competitors. Nonetheless, scale does matter in the index provider business, and that's a reason for the S&P Dow Jones deal, and that will be the reason for any future combination.
As far as handicapping the players, MSCI is clearly the one to beat. It's on top of the pile now, and they aren't nearly as sleepy and complacent as they once were. They're much more aggressive and looking at the indexing field as part of a larger whole, which is a good strategy, too. Everybody else is going to try to knock them off their perch, but I think they've dug in pretty well.