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Salim Ramji on ESG Investing (Podcast) · Masters in Business

0:02
Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
0:07
Speaker 1: This week on the podcast, I have an extra special guest,
0:10
Speaker 1: and I know I say that all the time, but
0:13
Speaker 1: Salim Ramg, global head of I Shares and Index Investments
0:17
Speaker 1: for black Rock. I share runs about four point six trillion.
0:22
Speaker 1: Of the seven trillion in all of black Rock. Index
0:25
Speaker 1: investments is about two point three trillion. E t s
0:29
Speaker 1: are another two point three trillion, And really, who is
0:33
Speaker 1: there better in the world to discuss E t f
0:36
Speaker 1: s and indexing than Selim Ramg. We pretty much cover
0:41
Speaker 1: everything from passive to active. We talk about E s
0:45
Speaker 1: G as a rising investment class and why black Rock
0:49
Speaker 1: thinks that's gonna exceed a trillion dollars over the next decade.
0:52
Speaker 1: We discuss how the entire fixed income in bond market
0:57
Speaker 1: has moved so aggressively to e t f s from
1:00
Speaker 1: what used to be a bespoke, over the counter, sort
1:03
Speaker 1: of old school type of Wall Street trade. We also
1:07
Speaker 1: talk about the business of e t f s, how
1:09
Speaker 1: they've grown, how they've traded, and and then most importantly,
1:13
Speaker 1: we went over a variety of things involving governance and
1:18
Speaker 1: what Larry Fink is doing to drive better behavior amongst
1:23
Speaker 1: the C suite. In reality, black Rock looks at E
1:27
Speaker 1: s G as a fundamental risk factor and it's a
1:30
Speaker 1: way to help identify what companies are going to perform better.
1:35
Speaker 1: It's not politics, but it's risk management. The whole conversation
1:39
Speaker 1: was absolutely a tourtive force about indexing and E t
1:42
Speaker 1: f s. If you were at all interested in wealth management,
1:46
Speaker 1: or passive investing or active investing for that matter, you're
1:49
Speaker 1: gonna find this to be absolutely fascinating. With no further ado,
1:54
Speaker 1: my conversation with black Rocks Slim romj VISs Masters in
2:01
Speaker 1: Business with Barry Ridholts on Bloomberg Radio. My extra special
2:06
Speaker 1: guest this week is Salim Romjy. He is the global
2:09
Speaker 1: head of I Shares and Index Investments for black Rock.
2:13
Speaker 1: That group runs about four point six trillion dollars in
2:17
Speaker 1: client assets. Salim comes to us with an economics and
2:21
Speaker 1: politics degree from the University of Toronto and a law
2:24
Speaker 1: degree from Cambridge University. Salim rom Jim, Welcome to Bloomberg.
2:30
Speaker 1: Thanks a lot, Berry, It's great to be here. So
2:32
Speaker 1: that's an interesting background. Toronto to Cambridge University, doing law
2:38
Speaker 1: prior to joining black Rock, you were a partner at McKenzie.
2:42
Speaker 1: How did that transition from consulting to asset management come about?
2:47
Speaker 1: You know, I haven't thought about it in a while.
2:49
Speaker 1: I had worked with black Rock and worked with I
2:52
Speaker 1: Shares for a number of years as an advisor before
2:55
Speaker 1: I joined back with I Shares in two thousand and five.
3:00
Speaker 1: H and with black Rock had gotten to know UM
3:03
Speaker 1: the senior team around the time of the merger with
3:06
Speaker 1: b G I, and it was back in two thousand
3:09
Speaker 1: and thirteen UM, after I'd gotten to know a bunch
3:14
Speaker 1: of the senior leaders and a bunch of the members
3:15
Speaker 1: of the firm and really liked the culture that Larry
3:19
Speaker 1: had approached me and asked me whether I wanted to
3:23
Speaker 1: join the firm, and after a couple of discussions, I
3:27
Speaker 1: actually turned him down. He handled it pretty well, and
3:31
Speaker 1: a week or two later area I was speaking at
3:33
Speaker 1: a conference and our late partner, a guy named Charlie Halleck,
3:37
Speaker 1: who had really built the Aladdin business and was the
3:40
Speaker 1: co president of the firm before he died. He came
3:43
Speaker 1: up to me and he said, he said, I heard
3:46
Speaker 1: you turned us down. I said yes, and then he
3:49
Speaker 1: asked me why I was such an idiot. He put
3:51
Speaker 1: it in slightly more colorful terms than than that. But
3:54
Speaker 1: then he sat me down and explained to me. He
3:57
Speaker 1: answered his own question for about an hour and explained
3:59
Speaker 1: to me why I was such an idiot. And the
4:02
Speaker 1: very next day Larry called back concluded the two of
4:05
Speaker 1: them were in the hoots and I've accepted the offer.
4:08
Speaker 1: So I'd say it was a bumpy kind of pre start,
4:11
Speaker 1: but after a couple of wrong turns that came to
4:13
Speaker 1: the right decision and a blood ever since, ever since
4:16
Speaker 1: that day. That's pretty funny. I suspect you left out
4:19
Speaker 1: an important adverb. Absolutely absolutely so. So you go from
4:26
Speaker 1: global head of corporate strategy, how do you migrate to
4:30
Speaker 1: E T F and indexing from that? It doesn't seem
4:32
Speaker 1: to be a natural path, or am I you know,
4:37
Speaker 1: misunderstanding that looking in from the outside. Yeah, there was
4:41
Speaker 1: one important beat in between. And you know, I can't
4:45
Speaker 1: say I was. I was the head of strategy for
4:47
Speaker 1: for just over a year, and truthfully, I'm not sure
4:50
Speaker 1: that I had a major impact in that one year
4:53
Speaker 1: on the firm. But what it was really useful for
4:56
Speaker 1: me was I learned the culture from the inside. I
5:00
Speaker 1: built relationships. I've really learned how the place worked. And
5:04
Speaker 1: you know, black Rock's a unique place, and we're a
5:07
Speaker 1: large public company, but their aspects which feel like a
5:11
Speaker 1: small family run business because we still are run buyer founders.
5:15
Speaker 1: And I think for me in that first year, getting
5:18
Speaker 1: an appreciation of how the firm works and operates and
5:21
Speaker 1: what some of the magic is inside, I think was
5:24
Speaker 1: really important. The first place that Larry and Rob Pepito
5:28
Speaker 1: had asked me to go after that year was our
5:31
Speaker 1: US Wealth business. In our US Wealth business at the time,
5:35
Speaker 1: this is back in two thousand and fifteen, was really
5:39
Speaker 1: in the early days of bringing together their active investment
5:44
Speaker 1: teams and their index investment teams. You know, these two
5:47
Speaker 1: groups had kind of grown up as almost warring tribes,
5:50
Speaker 1: and the goal was, how do you bring them together,
5:53
Speaker 1: and how do you re orient the whole business around
5:56
Speaker 1: financial advisors wealth managers principally big fee based wealth managers,
6:01
Speaker 1: which you are well familiar with, and and how do
6:04
Speaker 1: you really re orient the business around helping those clients
6:08
Speaker 1: build a better portfolio. And so by the time I
6:11
Speaker 1: left a few years later, the US Wealth business became
6:14
Speaker 1: the source of more than half of I shares flows globally,
6:18
Speaker 1: and so I think it was a very natural than
6:20
Speaker 1: extension that when Larry called me up just around two
6:23
Speaker 1: years ago and said it was time for the next
6:26
Speaker 1: move that I went into this role around I shares
6:31
Speaker 1: and our index investing business quite fascinating. So let's talk
6:35
Speaker 1: a little bit about that index investing business. The index
6:39
Speaker 1: funds more or less have the assets run themselves, but
6:43
Speaker 1: the business of e t f s is anything but passive.
6:48
Speaker 1: How do you describe what your primary responsibilities are overseeing
6:53
Speaker 1: indexing and e t f s at black Rock. You know,
6:56
Speaker 1: one of the luxuries I had when I was running
6:59
Speaker 1: our client areas in US wealth was you always got
7:03
Speaker 1: to assume that everything worked. And in my current role,
7:08
Speaker 1: there's a lot of underlying engineering and precision and making
7:14
Speaker 1: sure that the whole ecosystem works. So one big part
7:17
Speaker 1: of what our teams do is really making sure that
7:22
Speaker 1: our index exposures whether they're in indexing, in ETFs, in
7:26
Speaker 1: index separate accounts, that they track precisely, that they have
7:31
Speaker 1: great liquidity, that they have great tax efficiency, that we're
7:35
Speaker 1: working with all of our partners across the ecosystem to
7:38
Speaker 1: make sure that they work all the time, and I
7:40
Speaker 1: think that's one huge undertaking in terms of people and
7:43
Speaker 1: technology and partnership across a broad range of providers. That's
7:48
Speaker 1: one essential part of the role, because you know, we're
7:51
Speaker 1: we're fond of talking about e t s as a technology,
7:54
Speaker 1: and they are. But the thing about a technology is
7:58
Speaker 1: that it's got to work not some of the time,
8:00
Speaker 1: but all of the time. And there's a big first
8:03
Speaker 1: order undertaking to make sure that that happens, both in
8:06
Speaker 1: the t S and in in our separate account. I'd
8:08
Speaker 1: say the second thing there is really about the nature
8:11
Speaker 1: of e t s themselves, and increasingly they're doing much
8:16
Speaker 1: more than they did, you know, twenty years ago when
8:20
Speaker 1: I sure has first got off the ground that what
8:22
Speaker 1: we're starting to do more and more is not just
8:25
Speaker 1: increase the access of the t f s and and
8:28
Speaker 1: some of the moves that a number of the platforms
8:30
Speaker 1: that announced last year towards commission free trading kind of
8:33
Speaker 1: certainly helped that, but they're starting to really be much
8:36
Speaker 1: more essential parts of whole portfolios, even beyond market cap
8:40
Speaker 1: weighted indices. So things like factors and things like e
8:44
Speaker 1: s G are increasingly things that take active risk are
8:48
Speaker 1: increasingly becoming part of what e t s do uh
8:52
Speaker 1: and I would say even deeper than that, and we
8:54
Speaker 1: can get into this in a little bit more detail
8:56
Speaker 1: whenever you want. They're also becoming essential parts of the
8:59
Speaker 1: capital market, and so a real force in terms of
9:02
Speaker 1: modernizing aspects of the bond market, for example, are what
9:06
Speaker 1: ETFs are doing. And so a second really important part
9:10
Speaker 1: is working with our clients and working with our teams
9:13
Speaker 1: all around the world to start to imagine and start
9:16
Speaker 1: to think through all the different ways in which e
9:19
Speaker 1: t s can do more, even well beyond what we
9:22
Speaker 1: already do with great precision across our traditional market gap
9:27
Speaker 1: wait in indicries. The final part of the job is
9:29
Speaker 1: really just connecting the dot. There's a lot of work
9:32
Speaker 1: that we need to do with our partners in a
9:34
Speaker 1: Latin about making it easier to access et s in
9:37
Speaker 1: the workflow with partners outside of black Rock to really
9:41
Speaker 1: make it easier to access and so it's really just
9:43
Speaker 1: staying alert and staying focused on other uses and other
9:47
Speaker 1: ways in which people are accessing these instruments all over
9:50
Speaker 1: the world. So we're definitely going to get to E
9:53
Speaker 1: s G and factor investing and FIXT income. But I
9:58
Speaker 1: have to ask one question in about the index providers
10:03
Speaker 1: like SMP and s c I and anybody else who's
10:06
Speaker 1: creating a popular index. How does that relationship work? How
10:11
Speaker 1: does black Rock either say I want that index in
10:15
Speaker 1: an E T F or go to an index creator
10:20
Speaker 1: and say we would like to see something like this.
10:23
Speaker 1: What is that relationship like? You know, it's a relationship
10:26
Speaker 1: not I guess when I talk about the the ecosystem
10:29
Speaker 1: in vague terms, index providers are one really important part
10:33
Speaker 1: of it, and sometimes it's really accessing intellectual property that
10:37
Speaker 1: they developed. You know, take your well known broad indices,
10:40
Speaker 1: whether it's uh MSTI and emerging markets or the SMP
10:44
Speaker 1: five or something like that, and being able to use
10:47
Speaker 1: that to be able to make sure that as we're
10:51
Speaker 1: being precise about what we're tracking to, we're tracking to
10:53
Speaker 1: something clients know and respect. And you know, there are
10:56
Speaker 1: other ways in which will work with them around new
10:59
Speaker 1: innovations in e s G, in factors in other areas
11:03
Speaker 1: as we keep expanding out the ecosystem. But I look
11:06
Speaker 1: at them as important partners, just as I look at
11:08
Speaker 1: exchanges as important partners, just as I look at authorized
11:12
Speaker 1: participants and market makers as important partners, which is that. However,
11:17
Speaker 1: you know, in our process to make high quality ETFs,
11:21
Speaker 1: there are a lot of relationships and partnerships that we
11:24
Speaker 1: need to forge outside of black Rock index Providers being
11:27
Speaker 1: one of them, to really make sure it operates as
11:29
Speaker 1: clients expect. Quite fascinating. Let's talk a little bit about
11:33
Speaker 1: the fee war for e t f s and indexing.
11:37
Speaker 1: I guess the few war is over. For investors who
11:40
Speaker 1: were evaluating various products, what else should they be considering
11:46
Speaker 1: besides the sticker price? The sticker price is important, and
11:50
Speaker 1: you know, I like to think we've been a leader
11:53
Speaker 1: in as we grow reinvesting a number of our gains
11:57
Speaker 1: back with our clients. Just you know, as context, over
12:00
Speaker 1: the past six years or so, we've reinvested six hundred
12:04
Speaker 1: million dollars back into the reductions, somewhere around one and
12:08
Speaker 1: a half to two and a half percent of our
12:10
Speaker 1: revenues in any given year. Uh, and we expect to
12:13
Speaker 1: continue to do that as we grow, particularly in our
12:16
Speaker 1: core series. But beyond the sticker price, there are a
12:20
Speaker 1: number of areas that are, if anything, more important, and
12:24
Speaker 1: I wish more attention was paid to those aspects, even
12:28
Speaker 1: as attention is paid to the expense ratios just I mean,
12:31
Speaker 1: look at taxes. If you think about a taxable investor,
12:35
Speaker 1: just in the United States, a typical active mutual fund
12:39
Speaker 1: has around a hundred and fifty hundred and sixty basis
12:42
Speaker 1: points annually of tax drag inequities and that's a huge
12:47
Speaker 1: edwin for most taxable investors. And so the tax efficiency
12:51
Speaker 1: of the rapper becomes a really important aspect to what
12:55
Speaker 1: the investor takes home at the end of each year.
12:58
Speaker 1: Liquidity and the ability to get in and out of
13:00
Speaker 1: an exposure relatively easily. That can add anywhere between fifty
13:05
Speaker 1: and a hundred basis points or more of cost at
13:07
Speaker 1: the time of the trade, and I think that's under
13:10
Speaker 1: appreciated as well. And the third piece, which is a cost,
13:14
Speaker 1: is really the cost of not tracking precisely to the index.
13:18
Speaker 1: We invest a lot in terms of people on technology
13:20
Speaker 1: to make sure we track precisely, but if you veer
13:24
Speaker 1: off by fifty basis points, that's ultimately a cost that's
13:29
Speaker 1: going to the investors. So I think the expense ratio
13:32
Speaker 1: has had a lot of attention, some of the attention
13:35
Speaker 1: we've caused, but I think things like tax efficiency, things
13:38
Speaker 1: like liquidity, things like tracking are even more important financially
13:43
Speaker 1: to investors, and I wish they got the same kind
13:46
Speaker 1: of focus. I hope they will get the same kind
13:48
Speaker 1: of focus in the minds of investors and those who
13:51
Speaker 1: advise them. Let's focus some attention on some of those issues.
13:55
Speaker 1: I'm not really worried about the tax inefficiency because active
13:59
Speaker 1: managers can make it up with their stock picking prowess,
14:02
Speaker 1: So I don't know if we really have to worry
14:04
Speaker 1: about that. But let's talk let's I'm I'm joking in
14:08
Speaker 1: case people don't realize that, but but let's talk a
14:12
Speaker 1: little bit about tracking error. How complex is it, especially
14:17
Speaker 1: in some of these really substantially sized dtfs, to make
14:23
Speaker 1: sure that they track precisely with the underlying index. I
14:28
Speaker 1: have to think that's a lot more work than people realize.
14:32
Speaker 1: One of the benefits I would say of having a
14:34
Speaker 1: single technology platform, which we view through a LATIN is
14:39
Speaker 1: the ability to really scale that across many trillions of assets,
14:43
Speaker 1: and being able to bring a degree of precision and
14:46
Speaker 1: a degree of expertise to it. But but if you
14:49
Speaker 1: look at across our teams who manage our index investing.
14:53
Speaker 1: It's a combination of great technology, it's a combination of
14:57
Speaker 1: that plus incredibly discipline process and there are hundreds of
15:02
Speaker 1: different elements in the process. And our teams, you know,
15:04
Speaker 1: they're rightfully called portfolio engineers because what they're really doing
15:08
Speaker 1: is a it's an engineering task to make sure that
15:10
Speaker 1: everything works and operates as it should. And it's pretty
15:15
Speaker 1: fundamental element of data science because we're always looking out
15:19
Speaker 1: in the securities markets, looking at our indices, looking at
15:22
Speaker 1: how our exposures track, and and particularly around the times
15:27
Speaker 1: that you have major index rebalances, you know, every quarter
15:31
Speaker 1: or twice a year all around the world. It's just
15:34
Speaker 1: making sure that that happens precisely. Really defines I think
15:39
Speaker 1: a good quality and a high quality index provider from
15:42
Speaker 1: someone who is a lot less preciser or just you know,
15:47
Speaker 1: not as well engineered. So there's been a lot of
15:50
Speaker 1: criticism of indexing over the past I don't know, twenty
15:54
Speaker 1: years really, since a great financial crisis, we've seen a
15:57
Speaker 1: lot of inflows into indexing. What do you make of
16:01
Speaker 1: some of the wacky your criticisms passive distorts, price discovery,
16:07
Speaker 1: and that it has this inherent monopoly problem how do
16:12
Speaker 1: you look at those sort of claims. Yeah, look, one
16:15
Speaker 1: is with a bit of a grain of salt. And
16:17
Speaker 1: these have been going on for you know, forty years.
16:19
Speaker 1: There's an ad that I keep in my office when
16:22
Speaker 1: when we get back to our office, which is from
16:25
Speaker 1: the late seventies, which talks about indexation being an American
16:29
Speaker 1: because you know, no American, but want just staverage returns.
16:32
Speaker 1: And so this narrative around indexation has been around for
16:35
Speaker 1: a while, and in any given period, even in the
16:38
Speaker 1: past few years, I'll see indexation be accused of, you know,
16:43
Speaker 1: being right at the center of concentrated capitalism. There was
16:47
Speaker 1: a piece a few years ago which accused us of
16:49
Speaker 1: being Marxists, and so, you know, I don't, to be honest,
16:53
Speaker 1: I don't pay a huge amount of attention to some
16:55
Speaker 1: of those kind of fringe theories. What I look at
16:59
Speaker 1: is two things. Look at the facts, and then I
17:01
Speaker 1: look at our clients. And what the facts say is
17:04
Speaker 1: that in the hundred and eighty trillion dollar marketplace of
17:08
Speaker 1: equity and fixed income securities, indexation in all forms ETFs
17:13
Speaker 1: funds separate accounts were one tenth of that active is
17:16
Speaker 1: about of that total marketplace, and if you look at
17:21
Speaker 1: it from an E t F lens, e t F
17:23
Speaker 1: s or five percent of the equity markets and one
17:25
Speaker 1: per cent of the bond markets. And as we look
17:28
Speaker 1: at things like price discovery, e t f s have
17:31
Speaker 1: really been a vehicle that's aided price discovery. It's especially
17:35
Speaker 1: true in the bond market. There are a number of
17:37
Speaker 1: third parties. Bank of England published a report a few
17:40
Speaker 1: months ago around this about how e t s aided
17:42
Speaker 1: price discovery, and other third parties have also come to
17:46
Speaker 1: similar conclusions on the facts. But the real thing I
17:49
Speaker 1: look to is our clients. And you know, we now
17:52
Speaker 1: have tens of millions of investors in r E t
17:56
Speaker 1: s and ultimately, if we provide something that's trans parent,
18:00
Speaker 1: we provide something that's good value. When we provide something
18:03
Speaker 1: that has integrity both in terms of our own produciary
18:06
Speaker 1: mindset and in terms of the engineering, more clients will
18:09
Speaker 1: come to us. And I think that's what really matters,
18:11
Speaker 1: and that's where we really keep the area of our focus.
18:14
Speaker 1: We always look at the facts, but every time we
18:17
Speaker 1: look at the facts on things like pricing and things
18:20
Speaker 1: like concentration, it's kind of the opposite of what has
18:24
Speaker 1: been speculated about is actually the truth. So it's those
18:27
Speaker 1: two things that are really I try and stay focused
18:30
Speaker 1: on and and some of the fringe theories get annoying
18:32
Speaker 1: from time to time, and but I try and keep
18:34
Speaker 1: a relatively level ahead and look, if the facts say
18:37
Speaker 1: something different, we'll come to a different conclusion that I
18:39
Speaker 1: think we're a long way away, you know, from us
18:42
Speaker 1: reaching some Marxist singularity that some of speculated may happen.
18:46
Speaker 1: Let's talk about an outlier products that's been out there
18:50
Speaker 1: that's very different than your core products. When when we
18:53
Speaker 1: look at the way some of the oil et F
18:57
Speaker 1: like USO have traded, or some of the VIX products
19:01
Speaker 1: that kind of went berserk a few years ago, how
19:04
Speaker 1: do you educate the public about your core products and
19:10
Speaker 1: why things like those two are really one officer in
19:13
Speaker 1: this case too offs they're not the normal E t
19:17
Speaker 1: F product. Yeah, I think like the the E t
19:20
Speaker 1: F has now been around for just over thirty years,
19:24
Speaker 1: and I should have been around for just over twenty years,
19:27
Speaker 1: and there now are several thousand E t F and
19:31
Speaker 1: and I think that there is you know, it's time
19:34
Speaker 1: that there was a more consistent way of naming and
19:39
Speaker 1: naming conventions around what appropriately should and shouldn't be called
19:43
Speaker 1: an e t F. For US, we think e t
19:47
Speaker 1: f s are really transparent, rules based diversified investments in
19:52
Speaker 1: a Body Act fund structure. And you know, we had
19:57
Speaker 1: joined with a coalition about a fid as than other
20:01
Speaker 1: et F providers that accounted for well over the assets
20:06
Speaker 1: of the industry, who felt pretty much the same way
20:09
Speaker 1: that a number of things that fit that description are
20:12
Speaker 1: appropriately ts. But you know, if you've got a commodity fund,
20:17
Speaker 1: including we've got some commodity funds and things like gold
20:20
Speaker 1: and silver that should appropriately be called a exchange traded
20:23
Speaker 1: commodity because it's different than some of the funds and
20:27
Speaker 1: the fund structures and some of the products out there
20:29
Speaker 1: that call themselves ets, you know, they're really just structured products.
20:34
Speaker 1: And I think that some of the providers that do
20:36
Speaker 1: that should really own that, and if clients or investors
20:39
Speaker 1: want to buy those, power to them. But I think
20:42
Speaker 1: that having clarity around you know, what is a transparent,
20:47
Speaker 1: rules based diversified investment fund versus what something else, be
20:51
Speaker 1: a commodity or be it like a structured product or
20:54
Speaker 1: a note, I think really helps investors and helps the industry,
20:58
Speaker 1: and so that's I We've been a really vocal part
21:02
Speaker 1: of this coalition, and I think that the time has
21:05
Speaker 1: come and the industry has come of age, that it's
21:08
Speaker 1: worth being able to provide that degree of clarity for
21:10
Speaker 1: investors to know exactly the type of structure that they're
21:13
Speaker 1: getting into. Quite fascinating. Let's talk a little bit about
21:17
Speaker 1: what's going on these days in fixed income. If you
21:20
Speaker 1: would have told me a decade ago that the Fed
21:22
Speaker 1: would be out buying fixed income ETFs, I would have
21:26
Speaker 1: looked at you like you had two heads. But here
21:29
Speaker 1: we are. The Federal Reserve is buying fixed income products
21:33
Speaker 1: in et F forms. What does that say about the
21:36
Speaker 1: viability of e t f s and their ability to manage? Yeah?
21:41
Speaker 1: I think at first, just as a disclosure, Barry, the
21:44
Speaker 1: mandate that black Rock has with the Federal Reserve is
21:48
Speaker 1: behind a wall with our financial markets advisory work. So
21:51
Speaker 1: I'm not involved in any way in terms of the
21:53
Speaker 1: FED and black Rocks work there. But if I could
21:57
Speaker 1: just paint a broader context and then answer your quest,
22:00
Speaker 1: and the broader context is this, which is that that
22:03
Speaker 1: fixed income ETFs are now a couple of thousand products
22:07
Speaker 1: and over one point three trillion dollars of assets, and
22:11
Speaker 1: they've been around for nearly twenty years. And when we
22:14
Speaker 1: look at uses by central banks around the world, they're
22:18
Speaker 1: well over thirty official institutions. About half of them would
22:23
Speaker 1: be central banks that already use fixed income ets in
22:27
Speaker 1: one form of the other. The Federal Reserve is kind
22:30
Speaker 1: of the next and obviously a very significant central bank,
22:34
Speaker 1: but it's joining a group that's already pretty significant size
22:37
Speaker 1: and in their use of fixed income ets. And when
22:40
Speaker 1: I look at why official institutions, why other asset managers,
22:46
Speaker 1: by pension funds, by insurance companies, so a whole range
22:49
Speaker 1: of institutional investors are turning to fixed income ETFs. You know,
22:54
Speaker 1: they're quite straightforward. They're much cheaper to trade than the
22:57
Speaker 1: underlying bond market. I think the events of February and
23:00
Speaker 1: March and April showed that they were much more liquid
23:04
Speaker 1: than the underlying bond market itself. I think they also
23:07
Speaker 1: showed that you could get better, more actionable prices in
23:11
Speaker 1: the E t F And they really are an improvement
23:15
Speaker 1: or a modernizing force relative to certain antiquated aspects of
23:19
Speaker 1: the bond market itself. And so for many of these
23:21
Speaker 1: institutional investors. Over the past few years, they've been turning
23:25
Speaker 1: to fixed income ETFs to get cheaper trades, more liquidity,
23:29
Speaker 1: better prices. I suspect that the reason why the Federal
23:33
Speaker 1: Reserve look to them was actually pretty similar to the
23:36
Speaker 1: reason why other central banks or other big institutional investors
23:40
Speaker 1: look to them, which is that they were transparent, easier
23:43
Speaker 1: way to access the bond market. Makes a lot of
23:45
Speaker 1: sense to me. Let's talk a little bit about that liquidity.
23:50
Speaker 1: In preparing for this conversation, I found a Baron's article
23:54
Speaker 1: that reported h y G the high yield Bonnie TF.
23:59
Speaker 1: The week of March three, it traded about sixty thousand
24:03
Speaker 1: times a day. The top five holdings in the e
24:07
Speaker 1: t F only traded about five times a day, which
24:10
Speaker 1: raises a really interesting question. Has black Rock replaced the
24:15
Speaker 1: bond trading desk of Old Wall Street. I wouldn't go
24:18
Speaker 1: that far, but let me let me explain two interesting
24:21
Speaker 1: things that have been going on. The second one answers
24:24
Speaker 1: kind of your your question, which is that the first
24:26
Speaker 1: one is really what's happened? And I think it's happened
24:29
Speaker 1: across you know, a dozen different instances of stress, including
24:34
Speaker 1: the financial crisis in the bond markets. Is that when
24:38
Speaker 1: the bond markets turned volatile, more and more investors turned
24:42
Speaker 1: to e t f s as a means by which
24:45
Speaker 1: to get good price discovery and good liquidity. And I
24:49
Speaker 1: think in that heightened period of volatility, probably the most
24:52
Speaker 1: significant volatility we've seen since the financial crisis of February
24:56
Speaker 1: and March and April, that the numbers you're citing showing
25:00
Speaker 1: actually what was happening, which is that board investors were
25:02
Speaker 1: turning to the bond ETF in this case h y G.
25:06
Speaker 1: But I could paint you the same example with very
25:08
Speaker 1: similar numbers a week before in LQV, in the treasury market,
25:13
Speaker 1: in emerging markets, in a whole series of different categories
25:18
Speaker 1: across the bond market of investors turning to e t
25:22
Speaker 1: F in times of volatility. And I think the latest
25:26
Speaker 1: period of volatility made that happen in a much more
25:29
Speaker 1: significant way. And when you dig underneath it, what's what's
25:33
Speaker 1: also happening underneath it is that e t f are
25:37
Speaker 1: part of a modernizing force in the bond market itself,
25:41
Speaker 1: and so whether it's dealers on Wall Street not having
25:45
Speaker 1: to deal with individual bond trades because they can do
25:50
Speaker 1: it in a basket. For certain low size, high efficiency,
25:55
Speaker 1: high scale bond trades, it's easier to do it through
25:58
Speaker 1: a portfolio trade or ruin with the e t F
26:02
Speaker 1: that the e t F is becoming a way in
26:04
Speaker 1: which certain segments of the market can move to a
26:07
Speaker 1: more electronic means of bond trading, to move to a
26:10
Speaker 1: more efficient way of bond trading, and to really start
26:12
Speaker 1: to modernize aspects of the bond market, kind of like
26:15
Speaker 1: the equity markets did fifteen or twenty years before. I
26:18
Speaker 1: think the big thing that's changed is that the e
26:21
Speaker 1: t F is bringing this degree of liquidity and bringing
26:24
Speaker 1: this degree of technology that starts to work in unison
26:28
Speaker 1: with how dealers operate, how some of these all to
26:31
Speaker 1: all trading venues operate, as well as how issuers like
26:35
Speaker 1: ourselves operate, to be able to remove some of the
26:38
Speaker 1: more antiquated aspects of the bond market, which which aren't
26:42
Speaker 1: really serving the needs of clients in the way that
26:45
Speaker 1: they need to anymore. Let's dive a little deeper into
26:48
Speaker 1: that because it's a fascinating subject. In the US equity markets,
26:53
Speaker 1: there are what the joke is the Wilson five thousand
26:56
Speaker 1: is about stocks in the In the bond market, if
27:01
Speaker 1: we include municipal bonds, treasuries, corporates, there are literally countless
27:08
Speaker 1: variations of duration and and it seems like there's millions
27:13
Speaker 1: of bonds. So when we look at the idea of
27:17
Speaker 1: net asset value versus trading price, whether it's for the
27:21
Speaker 1: agg or or anything like that. You know, with any
27:24
Speaker 1: equity index, everything in it is trading, if not all
27:28
Speaker 1: the times, right. But but when we look at these bonds,
27:32
Speaker 1: you know, so what what does that mean for actually
27:36
Speaker 1: considering that gap between n A V and price? And
27:40
Speaker 1: how do we figure out in A V when a
27:44
Speaker 1: lot of these holdings trade so infrequently but by appointment
27:48
Speaker 1: only look in normal markets, and we're tracking you know,
27:52
Speaker 1: several dozen measures around the quality of r E t
27:56
Speaker 1: f s, the quality of our competitor ETFs relative to
27:59
Speaker 1: the mark it's in which they operate, and particularly in
28:02
Speaker 1: times when markets are closed or you have certain dislocations
28:06
Speaker 1: in certain markets due to natural disasters or other events.
28:10
Speaker 1: The bond market those you said is really quite unique,
28:14
Speaker 1: and I think the the important facet of it is
28:16
Speaker 1: that it trades largely over the counter, and I think
28:19
Speaker 1: that the important modernizing aspect of the E t F
28:24
Speaker 1: is all about the E, which is that it trades,
28:26
Speaker 1: not exchange. And once it trains not exchange, prices become
28:30
Speaker 1: more transparent and access becomes much more widespread, because whether
28:37
Speaker 1: you're an institutional investor that's looking to be able to
28:40
Speaker 1: access the E t F or you're an individual that
28:43
Speaker 1: may be going on to a self directed platform, you're
28:46
Speaker 1: getting access to on exchange prices that in a very
28:50
Speaker 1: broadly accessible, almost democratized way. And I think with that
28:54
Speaker 1: on exchange pricing, what's happening is that it's becoming more
28:58
Speaker 1: transparent as to where actionable markets are. And if you
29:02
Speaker 1: combine it with the point that you've made it earlier
29:04
Speaker 1: about h y G trading a hundred and sixty eight
29:07
Speaker 1: thousand times in a day, what's happening is that the
29:11
Speaker 1: exchange for the exchange traded fund in moments of stress,
29:17
Speaker 1: is becoming the place in which actionable markets are made.
29:20
Speaker 1: In normal markets, they track pretty clearly, but in dislocated markets,
29:25
Speaker 1: the thing that's trading many many thousand times in a
29:29
Speaker 1: given day is really where actionable prices are relative to
29:33
Speaker 1: where the best assessment of the pre previous days nav
29:37
Speaker 1: might have been. I almost think about it by analogy
29:40
Speaker 1: is that if you think about this isn't a perfect analogy,
29:42
Speaker 1: but if you think about, you know, you might get
29:44
Speaker 1: an appraisal on your house. An appraisal on your house
29:48
Speaker 1: is based on the best comparables in your neighborhood and
29:51
Speaker 1: for other houses like yours. But the market for your
29:54
Speaker 1: house is the price at which you buy or sell.
29:57
Speaker 1: And in the case of exchange is and exchange traded funds,
30:01
Speaker 1: people are buying and selling in moments of stress, many
30:04
Speaker 1: tens of thousands of times a day, and that's where
30:08
Speaker 1: they're really becoming the point at which prices are discovered.
30:13
Speaker 1: And the final point I'd say to this berry is
30:15
Speaker 1: just that this isn't true for every fixed income ETF.
30:19
Speaker 1: It's not even true for every I shares fixed income ETF.
30:22
Speaker 1: But there are a number of you know, what we
30:25
Speaker 1: looks as flagship or tier one I shares ETFs that
30:29
Speaker 1: are trading on average more than a hundred million dollars
30:33
Speaker 1: a day, and many of these are Most of these
30:36
Speaker 1: exhibit these price discovery aspects UH and we think that
30:40
Speaker 1: that price discovery coupled with the transparency of being on
30:43
Speaker 1: an exchange is really the modernizing force that we're talking about.
30:48
Speaker 1: And I think that, if anything, the stresses of February
30:52
Speaker 1: and of March and of April in the bond market
30:55
Speaker 1: is accelerating this force because people see how they per
31:00
Speaker 1: formed under stress, and even the skeptics are now becoming
31:03
Speaker 1: some of our becoming our clients in terms of in
31:06
Speaker 1: terms of fixed income ets. Quite interesting. Let's talk a
31:09
Speaker 1: little bit about your boss's letter. Larry Think writes these
31:13
Speaker 1: letters to c e o s each year and it's
31:15
Speaker 1: been one of the hallmarks of his leadership at Black Rock.
31:20
Speaker 1: What is he looking for from the C suite? Does
31:22
Speaker 1: Does he believe he can cajole c e o s
31:26
Speaker 1: and CFOs into better ethical behavior? What are the purpose
31:30
Speaker 1: of those letters? Yeah? I think now when I look
31:35
Speaker 1: at particularly the letters around we'd issued in January, that
31:39
Speaker 1: the most important thing for me coming out of this
31:43
Speaker 1: year's letter was the notion that E. S. G risks
31:47
Speaker 1: and and he particularly focused on climate risk is an
31:50
Speaker 1: investment risk. And I think that's a really important and
31:53
Speaker 1: fundamental concept because it's not about cajolling people into certain behaviors.
32:00
Speaker 1: It's just recognizing that for long term investors and index
32:05
Speaker 1: investors are the ultimate long term investors because I can't
32:08
Speaker 1: I'm not permitted to sell the stock if it's in
32:10
Speaker 1: the index. I've got to hold it for as long
32:12
Speaker 1: as it's in the index. So we're the ultimate long
32:14
Speaker 1: term investors. Uh that that we're thinking about risk reward
32:19
Speaker 1: trade offs for companies and asset classes, and it's about
32:25
Speaker 1: E s G risks in this case, climate risk being
32:27
Speaker 1: an example as really being fundamental to the risk reward
32:31
Speaker 1: tradeoff of investments, or said differently, through research we've done
32:36
Speaker 1: within black Rock, research we've read and worked with with
32:39
Speaker 1: other third parties, it becomes a better way to do
32:44
Speaker 1: longer term investing is through an E S G lens.
32:49
Speaker 1: And so we really saw it, and Larry really saw
32:51
Speaker 1: it as fundamental to our fiduciary duty to help clients
32:55
Speaker 1: invest and help clients invest mindful of the different risks.
33:00
Speaker 1: You know, our firm was founded on a principle of
33:02
Speaker 1: risk management, and so just as we look at liquidity risks,
33:06
Speaker 1: just as we look at credit risks, just as we
33:08
Speaker 1: look at geo political risks, we also have to look
33:10
Speaker 1: at E S G engine risks and the practical application
33:15
Speaker 1: of this meant that for our active investors, they integrated
33:20
Speaker 1: E s G risks alongside all the other risks in
33:23
Speaker 1: terms of the trade offs that they're making. And for
33:26
Speaker 1: index investors or the area that I'm responsible for, what
33:30
Speaker 1: we set out to do was to really increase access
33:34
Speaker 1: through launching the breadth of product offerings in E s
33:38
Speaker 1: G investing, so that investors who wanted to be able
33:42
Speaker 1: to invest through an E s G lens could do
33:45
Speaker 1: so with the t S or with index funds while
33:48
Speaker 1: benefiting from all the efficiency and all the transparency and
33:51
Speaker 1: all the choice that we're able to offer through being
33:54
Speaker 1: a scale et F and index provider. And so it's
33:58
Speaker 1: really that fundamental peace Perry, which is it's about investment
34:01
Speaker 1: risk that influenced Larry's thinking and then influenced our thinking
34:06
Speaker 1: as fiduciaries. So here's the pushback I hear all the time,
34:10
Speaker 1: and full disclosure, I agree with you. I think that
34:15
Speaker 1: it's a great risk screen. Uh, you'll you'll avoid all
34:19
Speaker 1: sorts of headaches, especially on the governance side. It certainly
34:23
Speaker 1: looks like a risk management tool. But some of the
34:27
Speaker 1: pushback we've heard, including from the labor department has been
34:32
Speaker 1: this is just social justice warriors and politics and it
34:36
Speaker 1: has nothing whatsoever to do with assets or risk management.
34:41
Speaker 1: How do you respond to that sort of pushback, including
34:46
Speaker 1: when you have the head of the d o L
34:47
Speaker 1: saying I want to consider whether or not we should
34:50
Speaker 1: allow E s G products in in four oh one case. Yeah,
34:54
Speaker 1: I think the without getting into all the specifics of
34:57
Speaker 1: the d o L proposal in the Big Black Rock,
34:59
Speaker 1: has comm meanted on that separately. I think the fundamental
35:03
Speaker 1: and positive aspect is the notion that for us as fiduciaries,
35:09
Speaker 1: we have to be able to have conviction ourselves and
35:13
Speaker 1: be able to ensure that our clients equally have conviction
35:17
Speaker 1: that these are the right risk reward trade us and
35:20
Speaker 1: we're doing it to be able to improve their long
35:23
Speaker 1: term investment returns. And so the facts and the analytics
35:29
Speaker 1: and the evidence behind that and our discussions with clients
35:32
Speaker 1: are really going to be the determinants of that. So
35:35
Speaker 1: we're actually totally fine. Was saying the bar should be
35:39
Speaker 1: about value, not just about values, and it's really from
35:43
Speaker 1: that value lens that our whole thesis and and the
35:46
Speaker 1: letter that Larry authored back in January is rooted, So
35:49
Speaker 1: so we have no problem with that is a as
35:52
Speaker 1: a screen, if you will, because it's very fundamental to
35:54
Speaker 1: how we think about kind of the issue. The second
35:57
Speaker 1: thing that I'd say is that from an index lens,
36:00
Speaker 1: and actually from across all the assets the Black Rock manages,
36:04
Speaker 1: it's not our money, it's the client's money. And so
36:07
Speaker 1: one of the things that from an index lens that
36:10
Speaker 1: we can do within our I shares an index investing
36:13
Speaker 1: is to be able to offer client's choice. And so
36:16
Speaker 1: that's the reason why we've expanded our product lineup. Part
36:19
Speaker 1: of it was based on the investment thesis, and part
36:22
Speaker 1: of it was based off of the client demand that said,
36:24
Speaker 1: I just want this choice and I want the ability
36:27
Speaker 1: to choose which types of exposures I put my money in.
36:32
Speaker 1: And one of the great things about indexation is that
36:34
Speaker 1: you can offer that at scale. And so just as context,
36:38
Speaker 1: like a couple of years ago, we had about twenty
36:41
Speaker 1: e t F and index fund offerings and they mostly
36:44
Speaker 1: catered to socially responsible investing, kind of a niche category
36:49
Speaker 1: largely in Europe. Today we have over a hundred and
36:52
Speaker 1: twenty just a couple of years later, and it's really
36:55
Speaker 1: catering to a much more broad and mainstream audience all
36:58
Speaker 1: across the world, in the United States, in Europe, in Asia.
37:02
Speaker 1: And the thing that surprised me about that has been
37:05
Speaker 1: I always thought demand existed in Europe, but if you
37:08
Speaker 1: look at the you know, just over twenty billion dollars
37:11
Speaker 1: that we've raised in e t F E s G
37:14
Speaker 1: S sets to date, most of that has come from
37:17
Speaker 1: US investors who really just wanted the ability to for
37:21
Speaker 1: a provider to offer choice but still provide it with
37:24
Speaker 1: the same transparency and efficiency and and all the other
37:27
Speaker 1: aspects that they've come to enjoy around E t S.
37:30
Speaker 1: Let's talk a little bit about those fun flows. For
37:34
Speaker 1: the past i'll call it twenty years, it's been relatively modest.
37:39
Speaker 1: E s G has been historically, it's been a niche product.
37:42
Speaker 1: But black Rock is talking about one point two trillion
37:47
Speaker 1: in global sustainable et F assets within a decade. That's
37:51
Speaker 1: a giant number. We've seen some flows into sustainability and
37:56
Speaker 1: into e s G, but nothing that extrapolates out to
37:59
Speaker 1: one point to trillion. How do you guys come up
38:02
Speaker 1: with a number that emense? Yeah, I think it's two things.
38:06
Speaker 1: I'll look forward to returning to your show in ten years.
38:09
Speaker 1: If this is if we're still doing podcasts, it's ten
38:11
Speaker 1: years to see how accurate our projections are. But it's
38:14
Speaker 1: really two things. The first thing is just the nature
38:18
Speaker 1: of this client demand. And I've been surprised to the upside.
38:22
Speaker 1: You know, the twenty plus billion dollar number I sided
38:25
Speaker 1: and flows this year. I thought it would be three
38:28
Speaker 1: or four years before we could start to cite those
38:31
Speaker 1: kind of numbers. But I've been surprised to the upside
38:34
Speaker 1: at the client demand that exists for this particular type
38:39
Speaker 1: of investing capability. So I think that we're tapping into
38:43
Speaker 1: something which is deeper than just a niche, and it's
38:46
Speaker 1: pretty widespread amongst the demand or the latent demand. It's
38:50
Speaker 1: amongst institutions, amongst wealth managers in the United States and
38:54
Speaker 1: in Europe, in in all different kinds of investors looking
38:58
Speaker 1: to access this. But the second thing I think has
39:01
Speaker 1: been also overlooked, which is that in vexation hasn't been
39:06
Speaker 1: brought to bear in sustainability much at all over the
39:11
Speaker 1: past several years. And maybe that's because it was such
39:14
Speaker 1: a niche area of investment, and I think part of
39:16
Speaker 1: the demand that we're seeing an ep F form is
39:19
Speaker 1: also coming from the fact that we can offer this
39:22
Speaker 1: type of choice hundred twenty different offerings, that we can
39:27
Speaker 1: offer things that are at a fraction, you know, typically
39:31
Speaker 1: one fifth of the fee of a traditional E s
39:35
Speaker 1: G active fund. And I think those pieces which have
39:38
Speaker 1: really been driving the E t F business to go
39:41
Speaker 1: from you know, nothing to nearly seven trillion dollars over
39:45
Speaker 1: the past two or three decades, are now being brought
39:49
Speaker 1: to E s G itself, and I think this is
39:51
Speaker 1: fundamental to what I think that the e t F
39:54
Speaker 1: is now doing, which is that it's become a way
39:58
Speaker 1: in which to wrap different investor disciplines. You know, we
40:02
Speaker 1: we obviously started in market cap weighted indices and that
40:05
Speaker 1: was really the basis of I shares particularly, and developed
40:09
Speaker 1: in emerging market equities. We've expanded into fixed income, which,
40:13
Speaker 1: as we talked about, is a little bit more opaque,
40:15
Speaker 1: and we're bringing transparency and some modernizing forces. But some
40:19
Speaker 1: of the really exciting things are that we're developing in
40:22
Speaker 1: things like e s G, or in things like factors,
40:25
Speaker 1: or in things like some of our thematic EPFs E
40:29
Speaker 1: t F that essentially take active risk and they deviate
40:32
Speaker 1: from market cap weighted index. But what we're doing is
40:35
Speaker 1: that we're doing it in a way which is efficient,
40:39
Speaker 1: which is rules based, which is transparent, and ultimately we
40:43
Speaker 1: think that can offer a better deal for investors. And
40:47
Speaker 1: this is just the next evolution that we're not just
40:50
Speaker 1: seeing any t s, but we're trying to lead the charge.
40:54
Speaker 1: Within eye Shares is the ability to do more things,
40:57
Speaker 1: whether it's E S G or factors or fixed in
41:00
Speaker 1: come or thematics. Even as we continue to build out
41:03
Speaker 1: and expand in the traditional market cap way that arenas so.
41:07
Speaker 1: So let's talk about a market risk type et F.
41:12
Speaker 1: Why haven't we seen a bitcoin ETF approved yet? And
41:15
Speaker 1: is black Rock going to be the first firm? It's
41:17
Speaker 1: a launch one who knows and no. The answer to
41:20
Speaker 1: your question, our general philosophy is we want to get
41:25
Speaker 1: behind things that are long term, that are good for
41:30
Speaker 1: our investors and aren't just the one hit wonders. And
41:34
Speaker 1: there are many things that we have declined to do
41:37
Speaker 1: over the years which could have been commercially successful for
41:40
Speaker 1: you know, a year or several months or so, but
41:44
Speaker 1: really just aren't what we want to be into. But
41:48
Speaker 1: we are big believers in things like thematic ETFs, and
41:53
Speaker 1: and we did a lot of research in concert with
41:55
Speaker 1: our active investing teams around what do we think are
41:59
Speaker 1: the four or five biggest trends that are going to
42:01
Speaker 1: impact investing for the next decade or two. Things like
42:06
Speaker 1: generational wealth change, things like urbanization, things like the advent
42:10
Speaker 1: of new and disruptive technologies are examples of that. And
42:14
Speaker 1: we've then developed ETFs that cater to those particular trends.
42:19
Speaker 1: And we've done that first and foremost because we think
42:21
Speaker 1: those are good long term investments for clients that can
42:25
Speaker 1: deliver superior returns over time. And secondly, those are the
42:29
Speaker 1: types of trends that we want to get behind and
42:32
Speaker 1: what we want to be what we want to be
42:35
Speaker 1: known for. So uh, we we study what other firms do,
42:38
Speaker 1: but you know, there's a lot that others can launch,
42:42
Speaker 1: and and we're happy not to launch because of of
42:46
Speaker 1: our own stance in terms of we want to innovate,
42:49
Speaker 1: but we also want to be able to look our
42:51
Speaker 1: clients in the eyes a year from now, two years
42:54
Speaker 1: from now, three years from now, ten years from now,
42:56
Speaker 1: and be able to say that we put them in
42:58
Speaker 1: a good investment vehicle and not be able to let
43:01
Speaker 1: them down. So let's combine three things. Let's combine long
43:04
Speaker 1: term with our discussion of fixed income and our discussion
43:09
Speaker 1: of E s G and talk about muni bonds and
43:13
Speaker 1: green bonds. How do you navigate E s G in
43:17
Speaker 1: the fixed income space very carefully? It's a we have launched.
43:21
Speaker 1: We have launched E s G in fixed income, and
43:25
Speaker 1: but it's a much more complicated set of circumstances, in
43:29
Speaker 1: part because of data and being able to really understand
43:32
Speaker 1: the data well to be able to craft the right
43:35
Speaker 1: set of scores and scores that we believe in, and
43:38
Speaker 1: we're selective as to where we are expanding. And I
43:41
Speaker 1: think that's one of the benefits of having Black Rock
43:45
Speaker 1: and our whole history and legacy around fixed income is
43:49
Speaker 1: that we've got great active muni investors, and we've got
43:52
Speaker 1: great active fundamental investors, and we've got great teams who
43:56
Speaker 1: were able to really work with and think through some
43:59
Speaker 1: of these problems with to understand what's the right circumstances
44:02
Speaker 1: which to launch um some of these products, versus what's
44:05
Speaker 1: the right circumstance in which to hold back until the
44:08
Speaker 1: data is better, until the offering is better. So that
44:11
Speaker 1: when we launch, we can launch something that we can
44:14
Speaker 1: stand behind. So, um we are doing more a portion
44:17
Speaker 1: of the D and twenty products that I mentioned. While
44:20
Speaker 1: most of them are inequities, many of them are also
44:23
Speaker 1: in fixed income and we want to maintain our kind
44:26
Speaker 1: of innovation, but we also we also want to do
44:28
Speaker 1: it only when we feel we can really underwrite the
44:31
Speaker 1: true integrity and quality of the products that we offer.
44:35
Speaker 1: So so you mentioned active, what sort of demands is
44:38
Speaker 1: black Rock seeing from investors for actively managed e t s?
44:45
Speaker 1: And I know to some listeners that might sound like
44:47
Speaker 1: a contradiction in terms, but it isn't necessarily. So yeah,
44:52
Speaker 1: we're certainly seeing a lot of supply starting to starting
44:55
Speaker 1: to brew. I don't think you know we goes by,
44:58
Speaker 1: but you know, see a new filing from UM UM
45:00
Speaker 1: some manager look, I I'd sort of say, including us.
45:04
Speaker 1: And we've launched one or two truly active e t
45:09
Speaker 1: f s already. We've done it under the black Rock
45:11
Speaker 1: brand to make the distinction clear, and we obviously have
45:14
Speaker 1: plans to to expand. But what I'd say is that
45:18
Speaker 1: is two things. First, when you look at e t
45:21
Speaker 1: s through the lens that not actively managed but what
45:24
Speaker 1: takes active risk, so things that deviate from a market
45:27
Speaker 1: capuated index like factors or e s G or thematics.
45:31
Speaker 1: We already are the largest and the fastest growing active
45:35
Speaker 1: risk taking e t F firm. We've got over two
45:37
Speaker 1: hundred billion dollars in those categories. Those are growing at
45:40
Speaker 1: a very nice pace, and we're very optimistic that that
45:43
Speaker 1: will grow significantly into the future. When you look at
45:47
Speaker 1: actively managed e t F s, I think the perspective
45:51
Speaker 1: to keep in mind that the e t F itself
45:54
Speaker 1: isn't some magic pill that solves problems. That if you
45:57
Speaker 1: solve all problems. If you've got a underperforming expensive active
46:03
Speaker 1: manager in a mutual fund and then you put them
46:05
Speaker 1: in an e t F, you then have a underperforming,
46:09
Speaker 1: expensive actively managed ETF. And so it's not some magic
46:13
Speaker 1: that's going to recreate things. Certainly our efficiencies to the rapper,
46:18
Speaker 1: there certainly are areas about it that are compelling, But
46:21
Speaker 1: I think that the real test is going to be
46:24
Speaker 1: twofold one, do the active managers deliver in this rapper
46:29
Speaker 1: or not? The evidence from the mutual fund part of
46:32
Speaker 1: the industry has been I think you could say mixed.
46:36
Speaker 1: And second is active management willing to tackle the fundamental thing,
46:41
Speaker 1: which I think is fees. And when you look at it,
46:43
Speaker 1: at least in our own analysis, active management on a
46:46
Speaker 1: growth basis, you know, many firms do quite well. It's
46:49
Speaker 1: just that after fees is when you get the real underperformance.
46:53
Speaker 1: And so our own conclusion from that is that too
46:57
Speaker 1: many active managers are charging too much money for what
46:59
Speaker 1: it is that day deliver. So it'll be interesting to
47:02
Speaker 1: see if they really tackle that from a fee perspective
47:05
Speaker 1: in the context of the e t F wrapper or not.
47:08
Speaker 1: I think could of course do that in the mutual
47:10
Speaker 1: fund wrapper at any given time. They've chosen not to.
47:13
Speaker 1: But I think those are those are really the fundamental issues.
47:16
Speaker 1: The et F is just a rapper. We think it
47:18
Speaker 1: happens to be better than the rapper that was invented,
47:23
Speaker 1: but it doesn't solve all problems. It just helps bring
47:26
Speaker 1: greater efficiency and greater transparency, which benefits certain aspects but
47:31
Speaker 1: not every so. So, since you brought up fees, let's
47:34
Speaker 1: let's talk a little bit about that. We've been seeing
47:37
Speaker 1: an ongoing price war for for a long time. Where
47:42
Speaker 1: do you see I shares pricing heading towards let's say
47:46
Speaker 1: five years from now, slightly lower, meaningfully lower. At what
47:50
Speaker 1: point does pricing stabilize? And let me just add, I
47:54
Speaker 1: don't think anyone is really looking for free as we've
47:58
Speaker 1: seen with free trading turns out to be a little
48:00
Speaker 1: more expensive than than people expect. So in terms of
48:05
Speaker 1: greater efficiencies and greater scale, where do prices end up
48:09
Speaker 1: going to over the next five years. Yeah, Look, i'd
48:13
Speaker 1: say one thing, actually two things about that. Well, one
48:16
Speaker 1: thing we've been pretty public and vocal about. I think
48:19
Speaker 1: the other piece we've tried but will try and be
48:22
Speaker 1: more public and more vocal. The first thing is just
48:25
Speaker 1: from our own perspective. You know what what we see
48:29
Speaker 1: in terms of pricing, and I think in this case
48:31
Speaker 1: you're talking about the expense ratio of the funds itself,
48:34
Speaker 1: is that there there are a segment of clients who
48:37
Speaker 1: are very sensitive to the tr and many of those clients,
48:42
Speaker 1: if you change it, they will invest more money with you.
48:45
Speaker 1: And that's what we found over the past five years,
48:48
Speaker 1: over the past three years, over the past year, and
48:51
Speaker 1: that's why we've made the investments that we have over
48:53
Speaker 1: the past number of years that I mentioned, the six
48:56
Speaker 1: d billion dollars, and that's why we've been pretty public
48:59
Speaker 1: that you know, every year we intend to reinvest another
49:02
Speaker 1: one point five two point five of our revenues, so
49:05
Speaker 1: call it another hundred million dollars within pricing, so that
49:09
Speaker 1: the benefits as we grow also accrue to our fund
49:13
Speaker 1: holders as being a real benefit of our scale. So
49:17
Speaker 1: that's kind of one lens to look at it through.
49:20
Speaker 1: I think the other lens, which sometimes is less appreciated,
49:23
Speaker 1: is just all the different segments in which we operate
49:26
Speaker 1: within I shirts, there's one segment which is defined by
49:29
Speaker 1: our core, which is really that price sensitive segment, and
49:33
Speaker 1: that's important to us. That's where a lot of our
49:35
Speaker 1: pricing action has been concentrated. But in areas like fixed income,
49:40
Speaker 1: particularly those fixed income instruments that are outside the core,
49:44
Speaker 1: what clients really care about is they care about the liquidity,
49:47
Speaker 1: where they care about the bid offer spreads, or they
49:49
Speaker 1: care about other aspects of cost, which, as we talked
49:52
Speaker 1: about earlier, are often ten times is important to their
49:55
Speaker 1: total cost of what they own. And if you think
49:58
Speaker 1: about things like fact ers or e s G. Or thematics,
50:03
Speaker 1: what clients are really coming to us and those exposures
50:06
Speaker 1: for is a means to outperform, but for a very
50:10
Speaker 1: low thing. And so when they look at us in
50:13
Speaker 1: factors and when they look at us in E s G,
50:16
Speaker 1: they're often looking at us because we're a bargain, because
50:18
Speaker 1: we're off what they were paying a active manager in
50:22
Speaker 1: terms of fees to deliver that out performance. And so
50:26
Speaker 1: I think it's important to understand that full set. I
50:30
Speaker 1: won't bore you with their two other segments, and um
50:33
Speaker 1: that I didn't talk about precision instruments being among them,
50:36
Speaker 1: but I think we operate in all those different segments
50:40
Speaker 1: with very different segments of clients, from d I Y
50:44
Speaker 1: self directed investors all the way through to other active
50:48
Speaker 1: managers as well as the biggest segment being firms that
50:52
Speaker 1: you well know, which is large discretionary wealth managers. And
50:57
Speaker 1: so each of them have different factors that they look
50:59
Speaker 1: at in terms of price, tax, efficiency, tracking error, liquidity,
51:05
Speaker 1: and just the underlying quality and the ability to deliver
51:08
Speaker 1: that quality at scale, and that all goes into the
51:10
Speaker 1: formula round. So I know I only have you for
51:14
Speaker 1: a few more minutes, so let's jump to our speed.
51:17
Speaker 1: Rounds are are questions that we ask all our guests
51:21
Speaker 1: to get a little more insight into who they are.
51:24
Speaker 1: Let's let's start with under lockdown. What are you streaming
51:27
Speaker 1: these days? Give us your favorite either Netflix or Amazon
51:30
Speaker 1: Prime or podcast you're listening to. Tell us what's keeping
51:34
Speaker 1: you entertained while you're sheltering at home. You know, I've
51:38
Speaker 1: been watching a it's kind of an obscure TV show.
51:41
Speaker 1: It's called Kim's Convenience. It's about this family up in Canada,
51:44
Speaker 1: which is where I grew up, that runs a small
51:47
Speaker 1: convenience store. And my dad used to run a small
51:50
Speaker 1: convenience store and I used to work at it when
51:51
Speaker 1: I was a kid. And so that's my kind of
51:54
Speaker 1: if you will, comfort food TV that I've been watching.
51:57
Speaker 1: It's a great show, but I think it's more any
51:59
Speaker 1: other people who up in Canada and worked in the
52:01
Speaker 1: convenience store would love it. So I may not have
52:02
Speaker 1: broad appeal, but for me it has a lot of
52:05
Speaker 1: comfort appeal for sure Canadian convenience store workers. So so
52:12
Speaker 1: tell us about your mentors who helped shape your career.
52:16
Speaker 1: You know, gosh, there's been so many people along the way.
52:19
Speaker 1: Charlie Halleck, our late partner saved me from not just
52:23
Speaker 1: saved me from making a real career mistake. But I
52:25
Speaker 1: think was also in the couple of years that we
52:30
Speaker 1: worked together at the firm before he had passed, was
52:34
Speaker 1: both a really important mentor and at times a really
52:38
Speaker 1: harsh critic. And I think some of the things that
52:41
Speaker 1: people sometimes misunderstand about mentors that you know, they think
52:45
Speaker 1: mentorship is just being a good cheerleader and a good supporter.
52:49
Speaker 1: Sometimes mentorship is really about tough love. Charlie, for me,
52:53
Speaker 1: was very much about tough love. But he really became
52:56
Speaker 1: a really really important guide for me to really understand
53:00
Speaker 1: Black Rock, to really understand how it worked, to really
53:02
Speaker 1: understand some of the genius of the firm that a
53:06
Speaker 1: relative newcomer might take years and years to appreciate. I
53:11
Speaker 1: got a crash course in a couple of years through
53:14
Speaker 1: Charlie that you know, I will certainly always be grateful for,
53:18
Speaker 1: along with him, of course, correcting my career with his
53:21
Speaker 1: own blunt style when I had mistakenly turned the firm down.
53:25
Speaker 1: That's tell us about some of your favorite books. What
53:28
Speaker 1: what are you reading now? What have you enjoyed reading?
53:31
Speaker 1: You know, I was reading a little bit earlier on
53:33
Speaker 1: what i'd call a bunch of disaster and despair books.
53:37
Speaker 1: My wife thankfully taught me out of it, because there's
53:39
Speaker 1: a whole genre about, like The Twilight of Democracy is one,
53:43
Speaker 1: which is actually really good book. But I've now moved
53:45
Speaker 1: to reading a biography of Wellington which looks to be
53:49
Speaker 1: very good. And I'm also reading a book called wolf
53:53
Speaker 1: Hall that I have owned but haven't read, And so
53:57
Speaker 1: I'm using this to make a dent in both of those.
53:59
Speaker 1: Of a big gang will file in case you have
54:00
Speaker 1: a guest, but we'll fall at Wellington kind of a
54:03
Speaker 1: bit better, and at times at least the Wellington piece
54:06
Speaker 1: can be uplifting, quite interesting. What sort of advice would
54:10
Speaker 1: you give to a recent college grad who was interested
54:14
Speaker 1: in a career in either wealth management or indexing or
54:19
Speaker 1: E T S. I think the important thing is each
54:25
Speaker 1: of those industries, right, So just take wealth management, which
54:29
Speaker 1: you are very familiar with having built a firm, or
54:31
Speaker 1: asset management. They're going through vast changes, and I think
54:36
Speaker 1: that you know, it's all great to talk about change
54:39
Speaker 1: in the abstract real time, it could be painful and
54:42
Speaker 1: it can be challenging, and so I think they're really
54:47
Speaker 1: exciting industries. Their industries that I've been part of for
54:50
Speaker 1: a few decades, two decades, but but I think for
54:53
Speaker 1: a new graduate, it's really making sure that one they're
54:58
Speaker 1: up for that and two that they really love client service,
55:03
Speaker 1: because whether you're a fiduciary wealth manager or whether you're
55:06
Speaker 1: a fiduciary assid manager, you've got to be comfortable with
55:10
Speaker 1: the notion that you're here to serve the client. But
55:13
Speaker 1: it isn't your money, it's theirs, and you've got to
55:15
Speaker 1: get joy out of that aspect of it, which I
55:19
Speaker 1: think is inherent to both of those businesses as much
55:22
Speaker 1: as you know constant radical changes as well. And our
55:26
Speaker 1: final question, what do you know about the world of
55:29
Speaker 1: indexing and ets today that you wish you knew twenty
55:33
Speaker 1: years ago when you were first getting started in this field.
55:37
Speaker 1: So I'm going to give you a boring answer to
55:39
Speaker 1: this one, very which is that in the late nineties
55:41
Speaker 1: I was a very unsuccessful occasional day trader and I
55:46
Speaker 1: had a good run up and then it all ended
55:47
Speaker 1: in tears around the late two thousand and two thousand
55:50
Speaker 1: and one. It took me away from the market, was
55:53
Speaker 1: shy about the market for a few years after that,
55:57
Speaker 1: and I think that the thing that I wish I knew,
56:00
Speaker 1: it's just the importance of staying invested. Now, that's a
56:03
Speaker 1: boring and reliable answer, but I am the beta guy,
56:06
Speaker 1: so you believe in boring and reliable over the long term.
56:10
Speaker 1: And but it really has paid off. And and just so,
56:13
Speaker 1: the thing I wish I knew was that I'd stopped
56:15
Speaker 1: worrying about kind of timing the market and I just
56:18
Speaker 1: really focus on staying in the market. And for investors
56:22
Speaker 1: like me, and I think for many investors, we were
56:25
Speaker 1: able to take a long term view. That's probably the
56:28
Speaker 1: soundest and best way to build wealth over the long term.
56:31
Speaker 1: You know, I totally agree with that answer. Thank you,
56:35
Speaker 1: Silim Ramje for being so generous with your time. We
56:38
Speaker 1: have been speaking with Silim ramg the global head of
56:41
Speaker 1: Eye Shares and Index Investments for black Rock, which his
56:45
Speaker 1: division runs about four point six trillion in client assets.
56:49
Speaker 1: If you enjoy this conversation, be sure and check out
56:52
Speaker 1: well our previous podcasts. We're up to about three fifty.
56:56
Speaker 1: You can find that at iTunes, Spotify, Google podcast Us, Stitcher, Overcast,
57:01
Speaker 1: wherever your final podcasts are sold. We love your comments,
57:06
Speaker 1: feedback and suggestions right to us at m IB podcast
57:11
Speaker 1: at Bloomberg dot net. You can check out my weekly
57:14
Speaker 1: column at Bloomberg dot com Slash Opinion. Sign up for
57:18
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57:21
Speaker 1: on Twitter at rid Halts. Be sure to give us
57:23
Speaker 1: a review at Apple iTunes. I would be remiss if
57:27
Speaker 1: I did not thank our crack staff that helps put
57:29
Speaker 1: these conversations together each week. Tim Harrow is my audio engineer,
57:34
Speaker 1: Michael Boyle is my booker. Slash producer. Ticob Valbrun is
57:38
Speaker 1: our project manager. Michael bat Nick is our head of research.
57:43
Speaker 1: I'm Barry Rid Hults. You've been listening to Master's Business
57:47
Speaker 1: on Bloomberg Radio.