Journal Of Indexes Analysis
By Journal of Indexes Staff

The Fleites Departure

The firing of Gus Fleites from State Street Global Advisors (SSgA) was a stunning event in the exchange-traded fund (ETF) industry. As I said in my Editor's Note at the start of this issue, Gus was the face of SSgA's ETF effort, and he had spoken about ETFs with energy and passion. When someone so prominent and forceful suddenly departs, people are naturally going to wonder about the implications.

This is why I am so pleased that Greg Ehret, Jim Ross and Gary MacDonald were willing to go "On The Record" with us on such short notice; this issue's back page interview answered a lot of questions, straight from the source.

Of course, it now turns to us - the indexing community - to analyze those comments and figure out exactly what they mean. I absolutely believe that SSgA's senior management does "get it" and will be looking to expand their ETF effort. Greg and Jim's comments clearly bear this out. It's just a matter of the investment/reward ratio: determining what amount of investment in new product development and sales and marketing makes the most sense to them. Jim and Greg (as any good manager should) will have to justify the level of means with the amount of the ends. Greg himself says that any expansion will be "meaningful and thoughtfully executed." I really think that gets to the crux of SSgA's current thinking. It says to me, "more, but in a calculated way."

In my numerous discussions with people at SSgA and around the industry, there is no question to me that their intermediary team is passionate and excited about the future of ETFs. Nonetheless, there is a difference between the team having the fire and senior management stoking that fire with the necessary dollars to fuel growth. SSgA has long lagged Barclays Global Investors (BGI) in terms of their ETF marketing budget, and Vanguard has ramped up their spending recently as well. SSgA has simply had a different philosophy about its ETF effort…and time will tell if that will change and to what extent.

Part of the reason for SSgA's different approach has been that - as a whole - they have been so successful with their broader "advisors" strategy. While the ETFs have just done OK (it's hard to argue with the world's largest ETF in terms of assets, but the subsequent streetTRACKS line has faltered), the company has seen strong growth in high-margin areas like separatelymanaged accounts and (gulp!) more active strategies. That's why Ehret and Ross emphasized the place ETFs have within the broader SSgA puzzle.

Gus had been speaking the same language, by and large...until the last few months, when he really began talking about mounting a significant effort on the ETF front, especially with all the recent growth in assets industry-wide, and the overwhelming success of GLD at SSgA.

My thinking continues to be that, most likely, one of a couple of things, (or a combination of both), forced the Fleites departure. Simply based on the way Gus had been talking and the manner of his departure, I assume that he went to SSgA senior management and demanded a ramped-up budget for the ETF effort - along the lines of that of BGI or Vanguard…say $50 or $80 million a year - and was met with a, "That's great. We love the direction. Here's $5 million." That and/or the fact that Gus may have rubbed some people the wrong way in his climb at SSgA and been caught in the corporate "orphaned protégé" syndrome when Tim Harbert died, seem the most likely culprits in his demise.

Bear in mind that, as is always the case in these situations, SSgA has been very tight-lipped about the circumstances surrounding the departure. Thus, my remarks are only speculation. But I do think they're educated speculation based on close contacts with a lot of people who are close to SSgA and familiar with the situation there. I'd even allow that I could be wildly off, and that Fleites may have been involved in some impropriety. But I doubt it.

Personally, I think there are tremendous opportunites lying ahead in the ETF industry. With actively-managed products on the horizon, leveraged products likely and now even ETFs based on other derivatives entering the mix, I really think at this point that it's looking like "Katie bar the door" for the ETF industry. I feel this even more strongly than I did two or three years ago. I think SSgA sees these possibilities, too, and that they'll play a part in realizing them. It's just a matter of scale.

Remember, SSgA is the world's largest investment manager, with about $1.5 trillion in assets. If you add up all ETF assets of every ETF in the world right now, they total just over $300 billion…just a third of SSgA's total reported AUM! But as history shows, the terrain can shift quickly…and it does appear that ETFs are on the front edge of such a change.

The good news is that SSgA is in a very interesting position to do some innovative things with ETFs. They already have the commodities experience with GLD, and commodities are one the hottest areas of ETF development right now. And they've got a wealth of experienced in enhanced and more active strategies, which could well be the next area ETFs are heading. I know from talking to the people around the industry that all sorts of different and interesting ideas have been percolating there.

As for Gus, SSgA will miss him. He was an extremely forceful and convincing personality, and he carried a lot of weight in the industry. I doubt we've seen the last of him. Although I don't know the terms of his exit from SSgA (vis-à-vis any non- ompete agreement, which would seem unlikely), my bet is that he'll be back in the industry soon … perhaps at one of the upstart ETF companies, or on the product development side at one of the exchanges.

Assuming he's legally able, don't be surprised to see him leap to the side of a competitor as possible payback. While it really is hard to imagine him being at BGI after all those years in direct competition, Fidelity certainly seems like a possibility, with its recent entry into the ETF business and ramped up index fund effort. And he wouldn't even need to move from Boston. Profunds, Rydex, Powershares, anyone? We're looking forward to seeing how this develops, with Gus, and especially with SSgA, the keeper of a wealth of ETF tradition and experience… at a crossroads in its history.