Latest / Masters in Business / Building New Financial Products with BlackRock's Stephen Cohen

Transcript

Building New Financial Products with BlackRock's Stephen Cohen · Masters in Business

0:02
Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Masters in
0:11
Speaker 1: Business with Barry Ritholtz on Bloomberg Radio.
0:17
Speaker 2: This week on the podcast Another Banger. Steve Cohen is
0:21
Speaker 2: BlackRock's Chief Product Officer and head of Product Solutions. Blackrock
0:26
Speaker 2: runs three and a half trillion dollars of the world's
0:28
Speaker 2: largest asset manager. Their I shares ETF division is over
0:33
Speaker 2: five trillion dollars. There are a few people in the
0:36
Speaker 2: world better situated to identify what is happening in the
0:41
Speaker 2: world of asset and wealth management than Steve Cohen. Not
0:45
Speaker 2: just fixed income, active index, bitcoin, digital assets. They're also
0:53
Speaker 2: moving into private center alternatives, whether that's an ETF which
0:56
Speaker 2: is part of that platform, is something else. Entirely thought
1:00
Speaker 2: this conversation was fascinating, and I think you will also
1:03
Speaker 2: with no further ado. BlackRock's Chief Product Officer and head
1:08
Speaker 2: of Product Solutions, Steven Cohen.
1:11
Speaker 3: It's great to be here.
1:12
Speaker 2: We're going to talk a lot about what you do
1:14
Speaker 2: at black Rock and how the company has been growing.
1:17
Speaker 2: But I want to start with your background degree in
1:21
Speaker 2: economics from Southampton College. Was the plan always to go
1:25
Speaker 2: into investment strategy or what were you thinking back then.
1:29
Speaker 3: I'm not sure I had a plan.
1:31
Speaker 4: I studied economics at school and then at university, and
1:37
Speaker 4: I was always I was always very interested in this
1:40
Speaker 4: kind of concept of the markets. I didn't have any background,
1:42
Speaker 4: no family background in markets or investing, but I always
1:47
Speaker 4: found reading up about markets interesting. And what kind of
1:53
Speaker 4: got me in it was a slight fluke. We were talking
1:55
Speaker 4: about flukes before the show. One of my neighbors was
1:59
Speaker 4: at telecoms engineer and he used to go round to
2:02
Speaker 4: all the banks installing the dealer boards. And he one
2:05
Speaker 4: day and I was talking to him, any one day,
2:06
Speaker 4: it's like.
2:07
Speaker 2: Various ATMs automatic tele machines we call them.
2:09
Speaker 4: Here dealable the phone phone systems, the trading floors, you know,
2:14
Speaker 4: with all the with all the.
2:17
Speaker 2: Die balls, and I was missing.
2:19
Speaker 3: Which maybe he installed those as well. I don't know.
2:21
Speaker 2: Those were the big ATM manufactur.
2:24
Speaker 4: And U and he said, so I got talking about it,
2:26
Speaker 4: and I mentioned this interest, and he said, well, why
2:29
Speaker 4: don't you do a day's work experience with me.
2:30
Speaker 3: We'll go to a bank.
2:31
Speaker 4: So we went to one of the banks, I can't
2:32
Speaker 4: remember which one it was, and I walked onto this
2:35
Speaker 4: trading floor and you know for someone who had no
2:39
Speaker 4: experience or never experienced this before. It was amazing these
2:43
Speaker 4: people shouting. There was screens and flashing numbers and stuff
2:46
Speaker 4: like that, and I thought, you know what this this
2:48
Speaker 4: looks pretty cool. This buzz was was the kind of
2:51
Speaker 4: combination of an opportunity to work in something that that
2:56
Speaker 4: took economics and markets and the world, and then this
3:00
Speaker 4: kind of feeling of a buzzy environment that was the thing.
3:03
Speaker 4: And so I applied to a number of banks and
3:06
Speaker 4: at a university got an opportunity to go to UBS.
3:08
Speaker 2: So that was your first gig right out of school.
3:10
Speaker 2: You're working with convertibles and fixed income and something similar
3:14
Speaker 2: at I G. Bearings. Tell us about your work at
3:19
Speaker 2: UBS and ing what sort of job was it?
3:22
Speaker 3: So I worked.
3:23
Speaker 4: I originally started in fixed income and then and then
3:27
Speaker 4: went into convertible bonds and a lot of what I
3:30
Speaker 4: spent my time doing was kind of more market strategist
3:33
Speaker 4: type of role, so talking to clients about what was
3:37
Speaker 4: going on in the markets, what was going on in
3:38
Speaker 4: the bomb markets, trade, developing trade ideas for clients, and
3:44
Speaker 4: that's also how I got involved in spending quite a
3:47
Speaker 4: lot of time on the Japanese markets, which I found
3:50
Speaker 4: incredibly interesting and really got to understand the Japanese culture
3:55
Speaker 4: and the way the way the country operated.
4:00
Speaker 2: And is that what led you to no Mura or
4:03
Speaker 2: did Nomura come first and then the Japanese.
4:06
Speaker 3: Ev that kind of led? Yeah, it did.
4:08
Speaker 4: So getting involved in Japan kind of lent me to
4:11
Speaker 4: doing to do in combotible bonds, originally at Ing and
4:14
Speaker 4: then with a group of US at Nomura, and and
4:20
Speaker 4: that's where I spent a lot more time on the
4:22
Speaker 4: Japanese markets. And I think it's all part of how
4:25
Speaker 4: you I think back to those days. You know, Japan
4:29
Speaker 4: was very different to what it is kind of now.
4:30
Speaker 4: The market, definitely, the market at the time was about
4:33
Speaker 4: nine The Nikko was about nine thousand nine to ten thousand, given.
4:35
Speaker 2: World down from thirty.
4:38
Speaker 4: Nine thousand and now we're back at forty six thousand,
4:40
Speaker 4: so there was like a proper v shape of that market.
4:42
Speaker 2: I took three and a half days.
4:44
Speaker 4: And I took three and a half decades, and I
4:45
Speaker 4: managed to do the middle bit, which was not necessarily
4:47
Speaker 4: the most exciting bit. I've gotta be honest, but I think,
4:51
Speaker 4: you know, again, it was what was interesting about it
4:53
Speaker 4: is you learn about kind of an economy and therefore
4:58
Speaker 4: a stock market that is in such a different place
5:00
Speaker 4: as it was then to you know, look at the
5:02
Speaker 4: US market or the European markets at the time.
5:04
Speaker 2: So that raises a really interesting question. How do you think,
5:07
Speaker 2: how do you think about the nineteen nineties, even the
5:10
Speaker 2: two thousands, you're numuro till twenty eleven, How do you
5:14
Speaker 2: think about those decades versus today? That world doesn't seem
5:20
Speaker 2: like it's that long ago, but it really feels like
5:22
Speaker 2: it was so different.
5:23
Speaker 3: It feels incredibly different. I think for Japan it's completely different.
5:28
Speaker 4: You know, if you go back to, as you say,
5:30
Speaker 4: the late nineties, early two thousands, you know, the banking
5:35
Speaker 4: crisis that was part of the bubble and the collapse
5:38
Speaker 4: had still not been solved, and it was only really
5:42
Speaker 4: in the early early to mid two thousands that they
5:44
Speaker 4: finally got their arms around the banking system. And one
5:47
Speaker 4: thing you read about history, and unless you can get
5:49
Speaker 4: the banking system operating properly and lending, you really struggle
5:54
Speaker 4: to get an economy going. The second thing that's really
5:57
Speaker 4: interesting I think is so different is back then you
6:00
Speaker 4: every six months every year that would be a government
6:02
Speaker 4: led fiscal impulse, and you know, they used to call
6:06
Speaker 4: it the building the roads to nowhere, paving the entire
6:09
Speaker 4: country just got to kind of spend and spend and spend,
6:13
Speaker 4: and the reaction of the market to that was this
6:17
Speaker 4: is going to have no impact. The reaction now so
6:20
Speaker 4: fiscal spending is actually, this is great. This is kind
6:23
Speaker 4: of part of the economy the country of being back
6:26
Speaker 4: on its feet. You're now talking about inflation being potentially
6:29
Speaker 4: an issue in Japan, whereas there it was all about deflation.
6:32
Speaker 4: So it's quite amazing how it has turned around, and
6:34
Speaker 4: you're seeing that in the bomb market and just the yields.
6:37
Speaker 2: One of the things I'm kind of fascinating about following
6:41
Speaker 2: the Japan bubble parking in eighty nine and how long
6:45
Speaker 2: it took to recover from that is the concept and
6:48
Speaker 2: apologies in advance from my mispronunciation of Kiritsu, which is
6:54
Speaker 2: the Japanese concept of these vertically integrated companies manufacturing, retail,
6:59
Speaker 2: bank thinking like just every sector. If there's a banking problem,
7:04
Speaker 2: the entire economy seems to run into trouble because that
7:08
Speaker 2: whole vertical Sometimes it's Mitsubishi, sometimes it's whatever. Each of
7:13
Speaker 2: these entities are giant, and if the bank has a problem, wow,
7:18
Speaker 2: you're really doing some damage.
7:20
Speaker 4: Yeah, because I think if you look back to the
7:22
Speaker 4: history and again this is this is changing in the
7:24
Speaker 4: different to the way we'd think about kind of Western
7:27
Speaker 4: markets and companies. But Japan historically it was a bank
7:32
Speaker 4: lending market, and you've got financing through bank lending all
7:35
Speaker 4: the stock market and so banks were just so central
7:38
Speaker 4: to the way the economy operated. And you see parallels
7:41
Speaker 4: to that in Europe a little bit less here in
7:43
Speaker 4: the US.
7:43
Speaker 3: It's very different.
7:44
Speaker 5: Now.
7:45
Speaker 4: You know, there's there's the banking sector, which is obviously
7:47
Speaker 4: very critical to the way companies are financing, but you
7:49
Speaker 4: have this huge kind of private sector. You have private lending,
7:53
Speaker 4: direct lending, things like that. So again it's good. I
7:56
Speaker 4: think one things I've learned over my career and have
7:59
Speaker 4: the opportunity to work in different markets, as you start
8:01
Speaker 4: to see these the way these economies operated different, and
8:04
Speaker 4: therefore the impact on the markets and therefore investors is
8:07
Speaker 4: very very different.
8:08
Speaker 2: So you stay at Nomura till twenty eleven, how did
8:11
Speaker 2: you what brought you from the Mura to Blackrock?
8:16
Speaker 4: So I had an opportunity, you know, having had a
8:18
Speaker 4: lot of great experiences. Twenty eleven, Blackrock was probably eighteen
8:25
Speaker 4: months into the integration of the I shares business or
8:29
Speaker 4: the indexing business, and really focused on how do we
8:33
Speaker 4: expand this business, particularly how do we expand icees, this
8:37
Speaker 4: ETF business. And back in twenty eleven Europe, European ETFs
8:43
Speaker 4: was still a very nascent industry. You know, now it's
8:46
Speaker 4: like a two and a half trillion dollar industry. European
8:49
Speaker 4: I shares is over a trillion dollars. Back then, it
8:54
Speaker 4: was very much still the very early days, and you
8:56
Speaker 4: could see what was happening in the States, and so
8:59
Speaker 4: when I was speaking to black Rock, you could see
9:03
Speaker 4: this really interesting opportunity to kind of take all of
9:05
Speaker 4: what I'd done before in terms of the market's kind
9:08
Speaker 4: of background and the breadth of experience, and then apply
9:11
Speaker 4: it to this thing that was still pretty new. And
9:15
Speaker 4: the kind of mission was, how do you educate people
9:19
Speaker 4: about what an ETF is, how do you help people
9:23
Speaker 4: start to think about how to use an ETF in
9:25
Speaker 4: a portfolio? And by the way, also what are the
9:28
Speaker 4: ETFs that don't exist yet that could exist? And again
9:31
Speaker 4: you always have to. It's quite hard if you always
9:34
Speaker 4: have to cast a barrier. You aways have to cast
9:36
Speaker 4: your mind back to what it was then versus your
9:38
Speaker 4: perspective of where you are today.
9:40
Speaker 3: It was still fairly, you know, plain vanilla.
9:43
Speaker 2: In terms of what go back to the nineteen nineties.
9:45
Speaker 2: I'm pretty sure the cues were around then, and Spy
9:49
Speaker 2: might have been around. This is before Really I Shares
9:52
Speaker 2: were still part of Barclays. But no one really thought
9:56
Speaker 2: that ETFs were a giant waiting to take place, or
10:01
Speaker 2: I should say very few people like that. The ones
10:04
Speaker 2: who did ended up being at the head of a
10:07
Speaker 2: giant wave. What made you realize fifteen years ago that hey,
10:13
Speaker 2: this I Shares thing is going to be big one day.
10:17
Speaker 3: Honestly, it was talking to the people in I Shares.
10:20
Speaker 4: It was having kind of been introduced to them and
10:22
Speaker 4: having been approached to go and talk to them. It
10:26
Speaker 4: was I learned a lot from just sitting down and
10:28
Speaker 4: understanding this. I'd sat in banks, we traded ETFs. They were,
10:34
Speaker 4: to be honest, a very very small component of what
10:36
Speaker 4: we of what we did. It was only really when
10:38
Speaker 4: I spoke to the people at I Shares and a
10:40
Speaker 4: Black Crock and understood the history of how I Shares
10:43
Speaker 4: had grown and where it was then, and that sense
10:47
Speaker 4: of mission, that sense of kind of the purpose of
10:50
Speaker 4: giving more access to investing two people, you know, and
10:54
Speaker 4: creating more transparency that they had lived as they'd grow
10:58
Speaker 4: in the US business and they were growing the European business,
11:02
Speaker 4: and that kind of just captured you. And I think frankly,
11:07
Speaker 4: in the last fifteen years I've seen that I've been
11:09
Speaker 4: fortunately been part of kind of driving that, but it
11:12
Speaker 4: was very clear that there was a big opportunity to
11:14
Speaker 4: do something different in an industry, an asset, and from
11:18
Speaker 4: an industry that hadn't really been shaken up. And I
11:20
Speaker 4: think one thing that ETFs have done and I Shares
11:23
Speaker 4: has lid this is really shaken up the industry on
11:27
Speaker 4: behalf of end investors in a couple of ways.
11:30
Speaker 2: At the very least, they're very low cost, and it's
11:33
Speaker 2: raised questions about are do most not all, but do
11:37
Speaker 2: most active managers actually justify their fees relative to their performance.
11:42
Speaker 2: And then second, helping to move a lot of mom
11:47
Speaker 2: and pop investors at least having a core as passive
11:51
Speaker 2: indexing as opposed to an allocation that's nothing but active managers.
11:56
Speaker 2: I mean I Shares has been the biggest driver of that.
12:00
Speaker 2: When you started at Blackrock, what was the first job?
12:04
Speaker 4: So I started in the I shares business and I
12:06
Speaker 4: actually set up an investment strategy team and what we
12:12
Speaker 4: did was go out and talk to clients about what
12:15
Speaker 4: was going on in markets.
12:16
Speaker 3: You know, we were part of Blackrock. Now my chairs
12:18
Speaker 3: was part of Blackrock, and so.
12:19
Speaker 4: There's a huge pedigree of investing and how do you
12:23
Speaker 4: take that externally to our clients and educate them about
12:29
Speaker 4: how ETFs could be used to implement these ideas build portfolios.
12:35
Speaker 4: I have say in the early days, a lot of
12:36
Speaker 4: it was just educating people on what is an ETF, like,
12:39
Speaker 4: how does it actually work, what is a creation, what
12:42
Speaker 4: is a redemption? And what do I need to understand
12:45
Speaker 4: and know. Secondly, how do I then think about putting
12:49
Speaker 4: them in a portfolio? And what's interesting I remember a
12:54
Speaker 4: couple of years in probably probably eighteen months into my
12:58
Speaker 4: time at Blackrock, did a big study on how do
13:01
Speaker 4: you blend active and indexing? And we're very allergic to
13:04
Speaker 4: the word passive. As you know, we used to go
13:07
Speaker 4: out and say to people, which we still do. You know,
13:09
Speaker 4: every decision you make is active, right, right?
13:11
Speaker 2: If you be cap weighted, I mean it could. It's
13:13
Speaker 2: a decision an equal cap totally.
13:15
Speaker 4: You know, investing in US equities is a decision as
13:17
Speaker 4: an active decision, then deciding to use an ETF is
13:21
Speaker 4: an active decision. So we would, you know, we would
13:24
Speaker 4: talk to clients about and what does it mean to
13:26
Speaker 4: use an ETF, how does it fit with with active management,
13:30
Speaker 4: which again go back to I think it's pretty well
13:32
Speaker 4: accepted now. I think Black Crockers and the ETF industry
13:35
Speaker 4: has played a big, big role in this. But the
13:37
Speaker 4: concept of blending indexing and active managers and alpha in
13:40
Speaker 4: one portfolios's that's kind of very accepted. People kind of
13:44
Speaker 4: get that. It's pretty standard. It wasn't back then ten
13:47
Speaker 4: fourteen years ago, and in some respects it was slightly
13:50
Speaker 4: religious in terms of indexing or like you're either passive
13:54
Speaker 4: or you're active.
13:55
Speaker 2: I recall the phrase that was used in the two
13:58
Speaker 2: thousand's Core and Satellite COREN Satellite, and you don't hear
14:02
Speaker 2: that all that much anymore. Now. It's you have a
14:06
Speaker 2: passive core and you're you're decorating it with active choices
14:10
Speaker 2: around it.
14:11
Speaker 4: Yeah, it's kind of how do you get the best
14:13
Speaker 4: out of out of everything? How do you say, you
14:17
Speaker 4: know what, Actually, here's an area where I think that
14:21
Speaker 4: we can deliver alpha, which is really what you're when
14:23
Speaker 4: you say active, what you're really saying is like alpha,
14:26
Speaker 4: something beyond the index. And I come back to a
14:29
Speaker 4: point you made earlier bout it about how the industry shifted.
14:32
Speaker 4: I think what ETFs did is they shone a light
14:35
Speaker 4: on what is what is performance? And you know, if
14:40
Speaker 4: you can get the index through an ETF, it's very efficient,
14:45
Speaker 4: then as an active manager, you've got to deliver something more,
14:47
Speaker 4: and many, many active managers a black rock do deliver more.
14:50
Speaker 4: But I think that that element of the more became
14:53
Speaker 4: a very important component of the industry and component of
14:56
Speaker 4: how for many investors they could then blend these these
15:00
Speaker 4: different tools together to create better portfolios. And I think
15:04
Speaker 4: that's the journey to me in the last kind of
15:06
Speaker 4: twelve fourteen years has been so exciting.
15:09
Speaker 2: You said when you began, you went out and spoke
15:11
Speaker 2: to a variety of black rock clients. Were these mom
15:15
Speaker 2: and pop investors, were these institutional clients. Were they brokers
15:19
Speaker 2: and rias that are investing in ETFs on beha for
15:23
Speaker 2: their clients, who were the folks that you first reached
15:25
Speaker 2: out to.
15:26
Speaker 4: It was pretty broad actually, it tended to be wealth managers,
15:30
Speaker 4: and it tended to be institutional investors, which would be
15:33
Speaker 4: you know, primarily compension funds. But what's interesting is how
15:38
Speaker 4: that has, how that's expanded over the last again, in
15:44
Speaker 4: the last kind of decade. You know, if I look
15:46
Speaker 4: at if I look at the breadth of users now,
15:50
Speaker 4: is anything from central banks through to you know, entrytail
15:53
Speaker 4: investors in four oh one K plans or the equivalent
15:56
Speaker 4: in Europe. And I think that's been one of the
15:59
Speaker 4: secrets to why ETFs have grown so quickly is that
16:03
Speaker 4: they actually are very much a product or a tool
16:09
Speaker 4: for anybody and everybody. So it started very much with
16:13
Speaker 4: I would say, kind of wealth manager and PNCH funds,
16:15
Speaker 4: but it grew out and out and out, and frankly,
16:17
Speaker 4: in Europe we learned a lot from the way the
16:19
Speaker 4: US industry had grown. We talk all the time about
16:23
Speaker 4: how the European ETF industry is probably about ten years
16:26
Speaker 4: behind the US, and so there's a bit of a
16:29
Speaker 4: roadmap there and I think we're seeing that happen in
16:33
Speaker 4: Real Time.
16:34
Speaker 2: Coming up, we continue our conversation with Steve Cohen, black
16:37
Speaker 2: Rock's Chief Product Officer and head of Global Product Solutions,
16:41
Speaker 2: discussing the idea of private market assets in an etf rapper.
16:47
Speaker 2: I'm Barry Rittaults. You're listening to Masters in Business.
16:50
Speaker 3: On Bloomberg Radio.
17:05
Speaker 2: I'm Barry Ridults. You're listening to Masters in Business on
17:08
Speaker 2: Bloomberg Radio. My extra special guest this week is Steve Cohen.
17:12
Speaker 2: He's black Rocks Chief Product Officer and head of Global
17:16
Speaker 2: Product Solutions. He also sits on black Rocks Global Executive Committee.
17:22
Speaker 2: When I look over at Europe and especially the UK,
17:26
Speaker 2: it seems like index adoption has been very slow. People
17:32
Speaker 2: haven't quite bought into the concept of hey, before you
17:35
Speaker 2: go after alpha, at least start with beta. That hasn't
17:39
Speaker 2: really found a lot of traction there yet or are
17:44
Speaker 2: you seeing that start to change in Europe.
17:45
Speaker 3: We've seen that change.
17:47
Speaker 4: It's definitely behind the US, but it is definitely happening,
17:52
Speaker 4: and I think the same forces and drivers that we've
17:55
Speaker 4: seen in the US are very much applicable to Europe
17:58
Speaker 4: and ultimately will be to Asia as well, which I
18:00
Speaker 4: think will go on that kind of same journey. So
18:03
Speaker 4: I think it's just more of a matter of time
18:05
Speaker 4: or timing as to where we are now.
18:10
Speaker 3: Versus the US.
18:11
Speaker 4: And there are different country dynamics that everywhere in the
18:13
Speaker 4: world play into why different parts of the industry move
18:18
Speaker 4: quicker or slower.
18:20
Speaker 3: But I think the direction is definitely the same.
18:21
Speaker 2: Different regulatory regimes, tax treatment, technology. Is the technology really
18:28
Speaker 2: all that different? You would think that adoption maybe some
18:31
Speaker 2: countries not a lag, but not ten years.
18:35
Speaker 4: Yeah, I think it's just so I think the last
18:37
Speaker 4: ten years in the US, if we are today in
18:41
Speaker 4: somewhere like Europe in the ETF industry where the US
18:44
Speaker 4: was ten years ago, I think the next ten years
18:46
Speaker 4: in Europe will be faster than the last ten years
18:48
Speaker 4: in the US. Makes sense, Yeah, it's because I think
18:50
Speaker 4: that partly because there is a roadmap that the US
18:54
Speaker 4: has created. It's different because of regulation, all the things
18:58
Speaker 4: that you mentioned. But I think that everything is happening
19:02
Speaker 4: so much faster now, and you've seen that in ETFs,
19:05
Speaker 4: You've seen that in other parts of the industry as well.
19:08
Speaker 2: So let's talk a little bit about what you've been
19:11
Speaker 2: doing at black Rock for almost the past fifteen years.
19:15
Speaker 2: You begin in twenty eleven. The growth must have been explosive.
19:19
Speaker 2: What was that like watching this rocket ship take off?
19:24
Speaker 3: It's been fantastic. It's been an amazing experience.
19:27
Speaker 4: You know, the firm has grown so quickly in the
19:30
Speaker 4: last ten to fifteen years, and not just grown in
19:34
Speaker 4: terms of assets, which is obviously one way to measure growth,
19:37
Speaker 4: but also just the breadth of what Blackrock does for
19:42
Speaker 4: our clients and the breadth of the number of clients
19:45
Speaker 4: that we talk to. What's I think so for someone
19:48
Speaker 4: like me, what's been so great is the ability to
19:54
Speaker 4: be involved in lots of different parts of the firm,
19:57
Speaker 4: and you know, whether that was again growing the European
20:00
Speaker 4: I shares business, whether that was running fixed income I shares,
20:04
Speaker 4: which was a fantastic opportunity and time or moment in time,
20:09
Speaker 4: I should say, in terms of really not just growing
20:13
Speaker 4: fixing commtfs, but changing the bomb market and the impact
20:16
Speaker 4: we've had there to now where again the breadth of
20:18
Speaker 4: the company with private markets and things like that. So
20:21
Speaker 4: it has been a great journey to be on personally,
20:24
Speaker 4: but also to see it from the inside.
20:27
Speaker 2: Can you explain what a chief product officer does at
20:30
Speaker 2: a large asset manager. It's sort of an unusual title
20:34
Speaker 2: in the world of investing.
20:36
Speaker 4: Yeah, So there are a number of things that I
20:38
Speaker 4: look at and my team look at. One is, how
20:42
Speaker 4: do we continue to make sure that our product range
20:46
Speaker 4: is at the forefront of innovation in terms of where
20:50
Speaker 4: the industry is going. How do we make sure that
20:52
Speaker 4: what our clients are looking for with delivering in whatever
20:56
Speaker 4: format they're looking at. And I think one of the
20:58
Speaker 4: biggest shifts that we've seen in the industry we talk
21:01
Speaker 4: before about kind of how you blend active at indexing
21:04
Speaker 4: kind of together, how that's become more commonplace and kind
21:07
Speaker 4: of more more accepted. I think the other thing that
21:10
Speaker 4: is happening is that the way all of our clients
21:14
Speaker 4: are consuming investments or accessing markets is also shifting. So
21:19
Speaker 4: this concept that you know, pretty much for the whole
21:22
Speaker 4: time that we were growing the I shares business, when
21:25
Speaker 4: we talked about growing ETFs, we were really talking about
21:28
Speaker 4: were also talking about growing indexing.
21:29
Speaker 3: That was very synonymous.
21:31
Speaker 4: Right when you talk about growing ETFs, now you're not
21:34
Speaker 4: just talking about growing indexing, You're talking about lots of
21:36
Speaker 4: different things, active, ETFs, digital assets. And so I think
21:41
Speaker 4: this concept of how we ensure that as we look
21:44
Speaker 4: across all of the investment capabilities we have as a
21:47
Speaker 4: firm that we want to bring to our clients, that
21:49
Speaker 4: we're delivering them in a way that works for our clients,
21:52
Speaker 4: that requires us to think a little bit differently to
21:55
Speaker 4: the way we've had too in the past, and the
21:57
Speaker 4: way I think the way the industry has And so
21:59
Speaker 4: that's we've brought all this together into my role and
22:02
Speaker 4: my group, and that includes driving the I shares business
22:06
Speaker 4: and the growth of ETFs, making ETFs more central to
22:10
Speaker 4: what we do in the firm, but also looking across
22:13
Speaker 4: all of our liquid active business, our private markets businesses,
22:17
Speaker 4: with our investment teams and those business leads to ensure
22:21
Speaker 4: that our product range works for our clients, and then
22:24
Speaker 4: helping them, helping our clients actually get the best out
22:28
Speaker 4: of what we have.
22:31
Speaker 3: I started an investment strategy.
22:32
Speaker 4: We spent a lot of time talking to clients about
22:34
Speaker 4: what's going on in markets, how to build better portfolios,
22:38
Speaker 4: how to get the best out of the tools that
22:40
Speaker 4: they have that we need to build, and then what's next,
22:44
Speaker 4: what's the next trend or theme that's on people's minds.
22:47
Speaker 2: So I'm hearing two approaches. One is a top down here,
22:52
Speaker 2: what's going on in the world, what's out there that's
22:55
Speaker 2: interesting that perhaps we're not addressing, and a bottoms up
22:58
Speaker 2: what our clients askoking for? What do they think they want?
23:03
Speaker 2: What do we think they need? What? What's the key
23:06
Speaker 2: driver of new offerings. We could talk a little bit
23:10
Speaker 2: about ibit, which is a unicorn, the the Bitcoin ETF
23:17
Speaker 2: approaching one hundred billion dollars in assets. I think it
23:20
Speaker 2: could be the fastest ETF to one hundred billion dollars.
23:24
Speaker 2: I don't even know what's close. Maybe GLD, but that
23:29
Speaker 2: that was a long time ago. How do you think
23:33
Speaker 2: about coming up with new products? How much of it
23:35
Speaker 2: is driven by client demand and how much of it
23:39
Speaker 2: is driven by just looking from the top down and saying,
23:42
Speaker 2: here's a hole that we really should fill.
23:45
Speaker 4: It's a real mixture, it is. You know, we'll have
23:49
Speaker 4: a lot of ideas. We'll have a lot of ideas
23:53
Speaker 4: that are driven by investment views we have as a firm,
23:57
Speaker 4: by our investment teams, by working with other people in
24:01
Speaker 4: the industry, and we will combine that with what we're
24:07
Speaker 4: hearing from clients and where clients are. You know, we're
24:09
Speaker 4: engaging with clients all the time around you know their
24:12
Speaker 4: portfolios and seeing where are their kind of gaps in
24:16
Speaker 4: a portfolio or where are there sometimes it's sometimes there
24:20
Speaker 4: are investment opportunities, but there isn't a way to get
24:24
Speaker 4: to it. Again, come back to what ETFs have done,
24:27
Speaker 4: like how do you give that access to to something
24:30
Speaker 4: that was new? If you think about ibit, you know,
24:32
Speaker 4: bitcoin obviously had grown already to a pretty sizable kind
24:36
Speaker 4: of industry.
24:37
Speaker 2: I think when ibit launched, bitcoin was a little over
24:40
Speaker 2: a trillion dollar or something.
24:42
Speaker 3: Like roughly that.
24:42
Speaker 4: Yeah, and so there was a sizeable kind of industry
24:47
Speaker 4: already out there. But for many clients or many potential investors,
24:52
Speaker 4: the ease, the comfort, the knowledge understanding of an ETF
24:57
Speaker 4: rapper was a great.
24:59
Speaker 3: Way of allowing them.
25:01
Speaker 4: To buy into crypto bitcoin in this case, and make
25:06
Speaker 4: it potentially a bigger part of the portfolio. What's interesting
25:10
Speaker 4: is the number of you know, in that explosive growth
25:13
Speaker 4: that ibit has had, the number of buyers investors of
25:20
Speaker 4: ibit who are already holders of bitcoin in other forms
25:24
Speaker 4: was quite notable, and so I think it kind of
25:27
Speaker 4: tests to this idea of actually, how do you access
25:31
Speaker 4: different markets, sometimes in quite traditional ways, and how do
25:34
Speaker 4: you bridge between this kind of traditional world and this
25:37
Speaker 4: decentralized world. And you're seeing the same thing with Ether
25:40
Speaker 4: as well with our Ether fund.
25:42
Speaker 2: So you know, the classic bitcoin issue is, wait, I
25:46
Speaker 2: have to make sure that this drive doesn't get damaged.
25:48
Speaker 2: I have to keep in the safe. What's my password? Hey,
25:51
Speaker 2: this is a lot of money and it's a bigger
25:53
Speaker 2: pain in the neck to keep track of than the
25:56
Speaker 2: rest of my assets. I can own this in ETF
26:00
Speaker 2: Why do I ever want to own bitcoins directly? He
26:04
Speaker 2: seems to be what a lot of people are saying.
26:06
Speaker 4: That, and that's what we heard over and over again,
26:09
Speaker 4: both again from people who had held or hold bitcoin
26:12
Speaker 4: in digital wallets and felt that this was kind of
26:15
Speaker 4: an easier, better way to hold.
26:17
Speaker 2: It, especially when you read the numbers. Twenty five percent
26:22
Speaker 2: of all coins. Ever, mind it might even be thirty
26:24
Speaker 2: percent have been lost either the price were damaged or
26:28
Speaker 2: the passwords were lost.
26:29
Speaker 3: Which is there's some great stories out there.
26:31
Speaker 2: Crazy guy who went out and bought a landfill because.
26:33
Speaker 3: He's because he was trying to find the two.
26:36
Speaker 2: Hundred million dollars worth of bitcoin on the drive, that
26:38
Speaker 2: was accidentally thrown away.
26:40
Speaker 4: I mean, so you know, putting in a nice are
26:42
Speaker 4: probably would have been at least an easier way of
26:48
Speaker 4: owning a landfill.
26:49
Speaker 2: It's but it's kind of amazing. But it raises a
26:54
Speaker 2: question that I've been thinking about for a while. Alternatives
26:59
Speaker 2: and private whether it's private equity, private debt, private infrastructure,
27:03
Speaker 2: and real assets are probably the fastest growing segment of
27:08
Speaker 2: the market. Are we ever going to see something like
27:11
Speaker 2: that in an ETF wrapper and illiquid art in an ETF.
27:17
Speaker 3: Possibly.
27:19
Speaker 4: Look, it's definitely something that a lot of people are
27:21
Speaker 4: looking at, including ourselves, But there are a lot of
27:24
Speaker 4: ways to I think the biggest story, I think people
27:26
Speaker 4: jump towards the kind of private markets in ETFs, and
27:29
Speaker 4: the real story is how do you open up access
27:32
Speaker 4: appropriately for more people to access private markets as part
27:36
Speaker 4: of the portfolio. So, if we think about a world
27:38
Speaker 4: which we believe in which you're kind of moving from
27:40
Speaker 4: called it sixty forty, you know, the traditional portfolio to
27:43
Speaker 4: more of a fifty to thirty twenty where twenty is
27:45
Speaker 4: private markets. And that's applicable to somebody who owns a
27:49
Speaker 4: defined benefit scheme. In fact, they've got that already probably
27:52
Speaker 4: more through the way the scheme's managed. But actually if
27:55
Speaker 4: you then apply that to, say to other pension types
27:58
Speaker 4: like a defined contribution SCI or a wealth investor, that
28:02
Speaker 4: kind of journey towards incorporating more private markets into a
28:05
Speaker 4: portfolio for all of the diversification reasons that we've talked
28:09
Speaker 4: about a lot that how that happens is the real work,
28:17
Speaker 4: and that may end up requiring an ETF, but I
28:21
Speaker 4: think there are a lot of other ways that could
28:23
Speaker 4: open up the door to private markets being a bigger part,
28:27
Speaker 4: either either a completely new part or a bigger part
28:29
Speaker 4: of a portfolio for you know, an individual retiree or
28:34
Speaker 4: an individual investor. Again comes back to what we were
28:36
Speaker 4: saying earlier on about rather than thinking about different product
28:41
Speaker 4: types an ETF or a mutual fund being associated with
28:44
Speaker 4: one type of strategy, it's actually saying.
28:48
Speaker 3: What are the strategies that we believe would help a
28:52
Speaker 3: client an investor have a better portfolio for whatever their
28:55
Speaker 3: goals are, and then how do you best put that together?
28:58
Speaker 2: So it's it's less about the product, more about the
29:01
Speaker 2: solution to those To.
29:02
Speaker 3: Me, it's about the portfolio. Yeah, what's the solution exactly?
29:05
Speaker 4: What are you trying to achieve, you know, and if
29:07
Speaker 4: it's long term retirement or retirement income, whatever it is,
29:11
Speaker 4: And then what does the portfolio need to look like
29:13
Speaker 4: or should look like, and how does it evolve over time?
29:15
Speaker 3: And then how do you do it right?
29:17
Speaker 4: And what are the kind of mixture of tools that
29:19
Speaker 4: are most appropriate to get you there?
29:22
Speaker 2: So that's the shift in thinking. So let's dive into
29:25
Speaker 2: that a little bit. You know, the advantage of stocks, bonds, convertibles.
29:30
Speaker 2: They all come with AQSIP number. It's pretty standard in
29:33
Speaker 2: terms of the custodian ship where it's held. What sort
29:39
Speaker 2: of public information is about available, the due diligence you
29:42
Speaker 2: can do about it, how to get liquid when you
29:45
Speaker 2: want to get liquid? All those stocks, bonds and put
29:49
Speaker 2: convertibles as sort of a hybrid. Everybody knows how to
29:53
Speaker 2: operate around that. It seems like when we look at privates,
29:58
Speaker 2: they're all one offs. The custodianship are all a single thing.
30:02
Speaker 2: Doing the due diligence is time consuming and expensive. The
30:07
Speaker 2: hope is they're they're not correlated and you're giving up
30:11
Speaker 2: liquidly in exchange for the liquidity premium. Can that ever
30:16
Speaker 2: be standardized? Enough that as a wealth manager, I could say, Hey, Steven,
30:23
Speaker 2: I want to move ten twenty percent of these clients'
30:26
Speaker 2: assets to a diversified set of equity, debt, and real assets,
30:32
Speaker 2: and I want some liquidly Like is this a pipe dream? Oh?
30:36
Speaker 2: And I don't want any k ones because they're a
30:38
Speaker 2: disaster to deal with. Like, if that were something that
30:43
Speaker 2: was turnkeen available, I would think that every wealth manager
30:48
Speaker 2: in America would rush in that direction. How long might
30:51
Speaker 2: it be before privates look something like public markets, or
30:59
Speaker 2: at least the pain points are are reduced to something tolerable.
31:04
Speaker 4: I think we're we're on a journey, and I think
31:07
Speaker 4: that that is about, first of all, developing investment strategies
31:12
Speaker 4: and therefore and being able to put them in products
31:15
Speaker 4: that work for a wealth manager. Secondly, there's a big
31:18
Speaker 4: you know, the operational lift, right the technology development that
31:22
Speaker 4: is happening, and.
31:22
Speaker 3: We're working We're working with a number of.
31:26
Speaker 4: Firms around how can we make sure that, for example,
31:28
Speaker 4: model portfolios can incorporate private markets in a more efficient
31:32
Speaker 4: kind of easier to use way. It's going to be
31:36
Speaker 4: different to public markets. It should be different to public
31:38
Speaker 4: markets because I think the role of an infrastructure, for example,
31:41
Speaker 4: in a in a in a portfolio is different to
31:44
Speaker 4: the role of owning stocks or owning bonds, and I
31:46
Speaker 4: think that part of you know, part of the way
31:50
Speaker 4: we've always thought about the role of stocks and bonds
31:52
Speaker 4: has been different as well. You know, bonds is a
31:54
Speaker 4: ballast to a portfolio stocks as a growth driver.
31:56
Speaker 3: For example. I think you think.
31:58
Speaker 2: About when barns we generated attractive.
32:02
Speaker 4: Yields, Maybe that'll come back, you know, we might need
32:05
Speaker 4: a bit of inflation, but yeah, one day, one day,
32:09
Speaker 4: so we be back on the podcast to cover that off.
32:12
Speaker 4: But I think that different role is very important. But
32:14
Speaker 4: there's a lot of development that is happening to be
32:18
Speaker 4: able to make that more efficient than it has been historically.
32:23
Speaker 4: And I think that's I think we will see a
32:26
Speaker 4: lot of change in the next couple of years.
32:27
Speaker 2: You mentioned technology. Let's let's dive a little deeper into that.
32:31
Speaker 2: Black Rock acquired Prequin and acquired e front and I'm
32:36
Speaker 2: read about some integration into your Aladdin platform. How significant
32:41
Speaker 2: are those tools when it comes to offering private market
32:46
Speaker 2: investments to the public.
32:49
Speaker 3: Incredibly important.
32:50
Speaker 4: I think that you know, for anybody who is for
32:54
Speaker 4: a wealth manager who is running a portfolio for a client.
32:59
Speaker 4: The it's not just as you know, it's not just
33:01
Speaker 4: about buying the different products or doing the asset allocation.
33:04
Speaker 4: It's also about the risk management of what does that
33:06
Speaker 4: portfolio look like. And that's really what a laddin is about.
33:11
Speaker 4: And as more and more investors, whether that is a
33:16
Speaker 4: retail investor or wealth wealth investor, or whether it's a
33:19
Speaker 4: big pension fund, incorporate private markets into portfolios and blend
33:24
Speaker 4: private and public. And I think again, if you go
33:27
Speaker 4: back over that ten to fifteen year journey, we started
33:29
Speaker 4: with indexing on one side of the floor and active
33:34
Speaker 4: on the other side, and we gradually brought those together
33:36
Speaker 4: and that became commonplace to blend. And I think we're
33:38
Speaker 4: now in that world of starting to blend public markets
33:41
Speaker 4: and private markets, which historically were completely distinct, and were
33:45
Speaker 4: starting to kind of blend those because the industries are
33:49
Speaker 4: crossing over, more companies are staying private for longer, et cetera,
33:52
Speaker 4: et cetera. So as we bring those together, the need
33:56
Speaker 4: to be able to risk manage and understand those portfolios,
34:00
Speaker 4: those in different scenarios is incredibly important. That's what a
34:03
Speaker 4: laddin is about.
34:05
Speaker 3: With prequel.
34:06
Speaker 4: What is so exciting is that I think over time
34:10
Speaker 4: the private markets will become more transparent, there will be
34:13
Speaker 4: more data available and around, and very similar to what
34:17
Speaker 4: a Laddin and Blackrock did with public markets will happen
34:20
Speaker 4: in the private markets as well, and that I think
34:22
Speaker 4: will help more and more investors access private markets in
34:26
Speaker 4: the way and understand what it is that they have.
34:29
Speaker 4: Partly of which is again understanding the different liquidity and
34:33
Speaker 4: being comfortable that they're different for a reason. And you're
34:36
Speaker 4: not trying to create a one size fit fit's all.
34:38
Speaker 4: You're trying to create a portfolio that delivers the right outcomes. Aladdin,
34:43
Speaker 4: I think is going to be critical for that.
34:45
Speaker 2: So let's talk a little bit about product development just
34:48
Speaker 2: in the ETF space. This year, over a thousand new
34:52
Speaker 2: ETFs have come out, or at least we're on pace
34:55
Speaker 2: to do that by the end of this year. This
34:58
Speaker 2: sort of hybrid development of ETF, so everything we've talked
35:03
Speaker 2: about seems to be very thoughtful and very measured with
35:07
Speaker 2: a really specific approach. Kind of feels like the rest
35:11
Speaker 2: of the industry is just throwing stuff up against the
35:13
Speaker 2: wall to see what sticks. How do you look at.
35:16
Speaker 3: This we can only focus on what we do, so.
35:20
Speaker 2: But you have to be aware of what. But you
35:22
Speaker 2: are all aware of what's going on three x inverse bitcoin,
35:26
Speaker 2: like what and why do I want that? Or why
35:29
Speaker 2: does anyone want that?
35:31
Speaker 3: Yeah, you'll have to ask them.
35:33
Speaker 2: I mean, I guess it's they want to give people
35:35
Speaker 2: an opportunity to make any type of trade and every
35:39
Speaker 2: type of trade. I'm assuming that's not your approach.
35:43
Speaker 4: I think there is a lot out there of throwing
35:45
Speaker 4: things outlet sticks. Our approach is very much where do
35:49
Speaker 4: we believe that we can develop products, strategies, exposures that
35:55
Speaker 4: are going to help create better portfolios. Right, And if
35:59
Speaker 4: you look at the solution of the ETF industry and
36:01
Speaker 4: what's happened, is it started, you know, go back thirty
36:05
Speaker 4: thirty plus years ago. It started very much with how
36:08
Speaker 4: do you give access to kind of broad in disease,
36:11
Speaker 4: And then it was how do you inequities? Then how
36:13
Speaker 4: do you give access to more granular exposure like sectors
36:16
Speaker 4: or different countries. Then it was how do you move
36:19
Speaker 4: into different asset classes like fixed income for example, And
36:22
Speaker 4: then more recently it's been something like kind of digital
36:24
Speaker 4: assets with ibit and that's really been the journey of IAS, right,
36:29
Speaker 4: and I think that's been therefore the journey of the
36:32
Speaker 4: industry as as we've led it that it remains very
36:37
Speaker 4: much of you how we think about continuing to expand
36:40
Speaker 4: the ICES platform, and that includes now using the ETF
36:44
Speaker 4: technology we've built to take things like active funds and
36:47
Speaker 4: wrap them into an ETF, because the ETF is a
36:50
Speaker 4: more efficient way for many investors to actually own those
36:55
Speaker 4: different strategies.
36:56
Speaker 3: But again, it starts with the strategy, and I think.
36:59
Speaker 4: That for us, it's about how do you what is
37:03
Speaker 4: it that you're developing in terms of an exposure or
37:06
Speaker 4: a strategy, why how does it fit with the world
37:09
Speaker 4: that we see today in terms of where we think
37:11
Speaker 4: the world is going from a market standpoint and a
37:13
Speaker 4: macro standpoint, How does it fit in terms of kind
37:16
Speaker 4: of a portfolio construction standpoint. You're going to have waves
37:19
Speaker 4: of innovation right now, we're having a huge wave of
37:22
Speaker 4: ETF launches, and in particular the last two three years,
37:25
Speaker 4: you know, the ETF is it's it's gone from being
37:28
Speaker 4: kind of very much on the side of the industry
37:29
Speaker 4: to being very central. We're excited about that, you know,
37:32
Speaker 4: that's what we were, what's what we've built at black
37:34
Speaker 4: Rock and I Shares. But it's also meant that ETFs
37:38
Speaker 4: are very much kind of being used more broadly, and
37:40
Speaker 4: you know that's going to be I think, part of
37:42
Speaker 4: how the industry evolves and then it kind of matures.
37:45
Speaker 2: Especially on the active side, where you get all the
37:48
Speaker 2: benefits of mutual ownership without the capital gains penalty that
37:55
Speaker 2: you get in mutual funds. So it makes sense that
37:59
Speaker 2: a lot of act of ETFs would develop where they
38:03
Speaker 2: might have been active mutual funds.
38:05
Speaker 3: YEA.
38:06
Speaker 2: What else do you see as changing or in the
38:09
Speaker 2: midst of transforming? Is it by asset class, is it
38:14
Speaker 2: by you mentioned geography or a sector? What is really
38:18
Speaker 2: in flux these days?
38:19
Speaker 3: So I think that.
38:22
Speaker 4: You know, when you look at I'll give you a
38:23
Speaker 4: couple of good examples. So digital assets, I think it's
38:29
Speaker 4: kind of fairly early days. Ibit is incredibly fast growing.
38:33
Speaker 4: It was the fastest to twenty to thirty, to forty
38:35
Speaker 4: to fifty and now hopefully to one hundred billion as
38:37
Speaker 4: an ETF, and we you know, we have an ethereum METF.
38:40
Speaker 4: I think there will be more product development in something
38:42
Speaker 4: like that and again for us, that's about bridging this
38:45
Speaker 4: kind of defile world with the traditional kind of finance world.
38:50
Speaker 4: That's one area. The second area is take something like
38:54
Speaker 4: fixed income. You know, we've been building out fixed INCOMEMTF
38:58
Speaker 4: industry for twenty years. The industry is now two and
39:02
Speaker 4: a half ish trillion dollars. We think it's going to
39:05
Speaker 4: be six trillion by kind of twenty thirty. The growth
39:08
Speaker 4: is huge. Less than two percent of bombs in the
39:12
Speaker 4: world are in an ETF.
39:14
Speaker 2: Wow.
39:14
Speaker 4: So it feels and having been I can tell you,
39:17
Speaker 4: having been on the journey and been out there, you know,
39:20
Speaker 4: kind of pounding the streets on the value of fixed
39:22
Speaker 4: income ETFs over the years, it feels like this has
39:26
Speaker 4: become really really big, and it has. And yet when
39:28
Speaker 4: you think it in the context of the one hundred
39:30
Speaker 4: and forty trillion dollars of fixed income out there, you know,
39:34
Speaker 4: ETFs are still a pretty tiny part of the market
39:37
Speaker 4: in terms of how people own bonds.
39:39
Speaker 2: It's relatively large compared to it was, but an absolute term.
39:43
Speaker 4: And in absolute terms, I still you know, we're still
39:45
Speaker 4: to using out the sports terminology of've given it to
39:49
Speaker 4: the World Series, you know, the first inning maybe the
39:52
Speaker 4: second inning. And then even if you look at what's
39:55
Speaker 4: really fascinating is you if you look at and we
39:58
Speaker 4: talked about active activity, and again that's still very early stagment.
40:02
Speaker 2: I'm fixed income. They actually seem to do very like
40:05
Speaker 2: the broad the Bloomberg ag includes everything good, bed and different.
40:10
Speaker 2: It seems like it's relatively easy to capture a little
40:15
Speaker 2: bit of fixed income alpha with a handful of screens.
40:18
Speaker 2: You're taking out the lowest credit quality, or you're taking
40:22
Speaker 2: out the riskiest credit that you're not getting compensated for.
40:26
Speaker 2: Why does fixed income active seem like it's a better
40:31
Speaker 2: bet or a higher probability bet than active equity.
40:37
Speaker 4: I think the historically fixed income, and I go back
40:39
Speaker 4: to when I started, was very much a world of
40:44
Speaker 4: limited transparency and kind of understanding. Frankly, I think the
40:48
Speaker 4: understanding for most investors of fixed income relative to I
40:51
Speaker 4: don't mean I don't mean investors who are doing fixed
40:53
Speaker 4: income all every day, but for most retail investors in particular,
40:58
Speaker 4: I think people have a much more from affinity to
41:01
Speaker 4: stocks than they do for bonds in terms of kind
41:03
Speaker 4: of the understanding. Bonds feel complicated at times, it feels
41:07
Speaker 4: like an it's a world we don't quite understand, whereas
41:10
Speaker 4: equities you kind of you know, you know, Google or
41:13
Speaker 4: whatever it is. And so I think there's always been
41:16
Speaker 4: a sense of kind of outsourcing those decisions kind of
41:19
Speaker 4: more so. The other thing is that the the indexing
41:24
Speaker 4: market in fixed income has been slower to evolve. So
41:28
Speaker 4: you mentioned the AG, and people tend to when they
41:31
Speaker 4: think about fixed and indexing, they automatically go to the AG. Sure,
41:34
Speaker 4: the AG is one index, and it's a very specific
41:36
Speaker 4: index in terms of what it is. It doesn't have
41:39
Speaker 4: a huge amount of credit in it, for example, But
41:42
Speaker 4: there are other indices with Blueberg for which we have
41:47
Speaker 4: products like Universal that actually are much more representative of
41:50
Speaker 4: fixed income. So part of it also is you know,
41:53
Speaker 4: what are you benchmarking yourself against? And I think we
41:55
Speaker 4: went through that experience with equities, and we are going
41:59
Speaker 4: to go through that or going through that experience with
42:01
Speaker 4: fixed income. And the other thing we're seeing with fixed
42:03
Speaker 4: income is that we're developing and building the more granular
42:08
Speaker 4: strategies in fixed income. So we're carving up the market
42:11
Speaker 4: in fixed income the way we did inequities through ETF.
42:14
Speaker 4: So if you want to own zero to three year
42:17
Speaker 4: government bonds, own SCALF, if you want to own long
42:19
Speaker 4: term trgies, own TLT, if you want to earn bits
42:22
Speaker 4: of the different types of credit crossover, you can now
42:26
Speaker 4: do that through ETFs. So you know, it is an
42:28
Speaker 4: amazing tool. And what's fascinating about fixing btfs is that
42:32
Speaker 4: some of the fastest growing users are asset managers, so
42:36
Speaker 4: fixed income managers using ETFs as a way to be
42:39
Speaker 4: better at their job. And I think again that's that
42:42
Speaker 4: blending of indexing. But even in the equity world, you know,
42:46
Speaker 4: equity indices are revolving. We were saying, if you look
42:50
Speaker 4: back to two thousand, you know, the top seven, you know,
42:53
Speaker 4: the whole kind of SMP was worth the equivalent to
42:55
Speaker 4: what the top seven stocks were worth, you know, six
42:57
Speaker 4: months ago. And so you mentioned earlier in the program
43:00
Speaker 4: equal weight SMP. We're seeing a lot of demand right
43:04
Speaker 4: now for things like equal weight or capped indices. We
43:09
Speaker 4: launched a top twenty fund top TI. We did the
43:12
Speaker 4: same thing with NASTAC. You know, even the S and
43:15
Speaker 4: P five hundred. Owning the top twenty stocks versus owning
43:19
Speaker 4: the five hundred stocks is a very, very very different game.
43:23
Speaker 4: And so even something like large cap US equities, which
43:28
Speaker 4: you would have thought there was nothing else to innovate in.
43:31
Speaker 4: Even that has been the area where we've probably done
43:33
Speaker 4: more in the last six months than many other areas
43:35
Speaker 4: because the dynamics of the US equity market have shifted
43:39
Speaker 4: so much in the last couple of years and investors
43:41
Speaker 4: are looking for different things.
43:43
Speaker 3: Come me up.
43:43
Speaker 2: We continue our conversation with Steve Cohen, black Rock's Chief
43:47
Speaker 2: Product Officer and head of Global Product Solutions, discussing what
43:52
Speaker 2: goes into product development in finance. I'm very ritt alts.
43:56
Speaker 2: You're listening to Masters in Business on Bloomberg Radio. I'm
44:13
Speaker 2: Barry Ridults. You're listening to Masters in Business on Bloomberg Radio.
44:18
Speaker 2: My extra special guest this week is Steve Cohen. He's
44:21
Speaker 2: black Rocks Chief Product Officer and head of Global Product Solutions.
44:26
Speaker 2: He also sits on black Rocks Global Executive Committee. Since
44:31
Speaker 2: we've been talking about technology and you mentioned the top seven,
44:35
Speaker 2: I'm legally obligated to ask a question about artificial intelligence
44:40
Speaker 2: and AI. What is AI doing to your business of
44:45
Speaker 2: developing new products? How we thinking about either AI as
44:49
Speaker 2: an asset class or actually deploying AI to help build
44:54
Speaker 2: new products.
44:55
Speaker 4: I think we're seeing AI in probably three areas. The
44:59
Speaker 4: first one is, obviously, AI is an investment theme, which
45:02
Speaker 4: is very well publicized, et cetera. And we're seeing that
45:06
Speaker 4: through things like data centers, obviously, stocks, credit, et cetera.
45:14
Speaker 4: The second one is AI in terms of investment strategy.
45:19
Speaker 4: For example, Blackrock were very fortunate to have a systematic
45:24
Speaker 4: group investment group that has a forty year track record
45:28
Speaker 4: and history of delivering really great performance. And you know,
45:32
Speaker 4: they would argue they were doing AI well before it
45:35
Speaker 4: was called AI, when it was called machine learning or
45:37
Speaker 4: whatever it was called before Black around.
45:39
Speaker 2: Most people think it's a new thing. You know, Watson
45:43
Speaker 2: played Jeopardy and I forgot the one was a deep
45:46
Speaker 2: blue played.
45:47
Speaker 3: Chess and go.
45:48
Speaker 2: Those were thirty years ago.
45:50
Speaker 4: Yeah, so you know, it's gone through its iterations and
45:54
Speaker 4: so you know, and they've got some fantastic examples of
45:58
Speaker 4: the way they've used machine learning stroke now AI to
46:03
Speaker 4: really understand you know, every single day they will pass
46:08
Speaker 4: thousands of reports, earnings calls, et cetera.
46:12
Speaker 3: Transcript for.
46:15
Speaker 4: Sentiment and you know, and the result, the investment results
46:19
Speaker 4: of those of those signals that they create are really
46:23
Speaker 4: quite quite fascinating and very lucrative in terms of investment alpha.
46:28
Speaker 4: And so we're really seeing a huge demand right now
46:31
Speaker 4: for systematic investing. And this is something that historically people
46:36
Speaker 4: were nervous was because it was a black box and
46:38
Speaker 4: they didn't understand it. And now people are using things
46:41
Speaker 4: like chat, GPT, et cetera, which is a black box,
46:44
Speaker 4: but they're seeing the value they're getting. And so what's
46:45
Speaker 4: interesting is is a psychological shift and a greater acceptance
46:49
Speaker 4: of saying, actually systematic investing using AI. That's really interesting
46:54
Speaker 4: and exciting. And so I think the second thing is
46:57
Speaker 4: we're seeing it through using AI to be better investors.
47:01
Speaker 4: And then the third one is product development, and so
47:04
Speaker 4: how can we use the data that we are able
47:07
Speaker 4: to collect and effectively deploy big data and the AI
47:14
Speaker 4: that we've developed in house that sits on that to
47:17
Speaker 4: identify what are some of those themes that are coming up,
47:20
Speaker 4: what are some of the things that clients are talking
47:22
Speaker 4: about or being picked up in the news or whatever
47:25
Speaker 4: it is, and be more kind of systematic, I would say,
47:29
Speaker 4: in being able to see what those are. And also
47:32
Speaker 4: we are able to use it to test and stress
47:34
Speaker 4: test strategies that are new in different market environments. So
47:37
Speaker 4: it's a really again, it's a really exciting time for
47:41
Speaker 4: product development because it's giving us new tools that we
47:43
Speaker 4: didn't have before.
47:45
Speaker 2: So Blackrock tends to come out with these very well
47:49
Speaker 2: thought out, very rational products. And the question that I've
47:53
Speaker 2: been thinking about when I first started doing my homework
47:57
Speaker 2: for this is what are some of the crazy years
48:00
Speaker 2: that you looked at and said, yeah, no, that's just
48:03
Speaker 2: a bridge too far, Like what hasn't come out because
48:06
Speaker 2: it was just too either not solving a problem or
48:10
Speaker 2: just too wild and reckless.
48:13
Speaker 4: Oh, there's a whole treasure shove of Yeah, we could
48:15
Speaker 4: do another podcast, I'm sure. But you know, typically what's
48:18
Speaker 4: interesting about it is there are two reasons why you
48:23
Speaker 4: might end up like that. One is it's it's a
48:26
Speaker 4: crazy idea, but there's just really no demand for.
48:29
Speaker 2: It, and well that's an easy business which is an
48:34
Speaker 2: easy business decision.
48:35
Speaker 3: The second time often is you're just too early, uh huh.
48:38
Speaker 3: And you know, I.
48:39
Speaker 2: Mean there could have been an ETF for eth and
48:43
Speaker 2: bitcoin ten years ago if the SEC would have allowed it.
48:46
Speaker 4: If they were allowed it, yeah, yeah, So sometimes it's
48:48
Speaker 4: the regulatory Yeah, it could be. It could be that
48:51
Speaker 4: the industry, the industry in the broad sense of the word,
48:54
Speaker 4: regulators or whatever, aren't quite ready. You're not you're not
48:57
Speaker 4: able to actually build the thing that you've got an
48:59
Speaker 4: idea for. It could be that the market is not
49:01
Speaker 4: quite ready. Fixed income ETFs is a good example. We
49:04
Speaker 4: looked at things ten years ago and decided that actually
49:08
Speaker 4: the fixed income market wasn't ready. We weren't quite ready
49:12
Speaker 4: to be able to do that in an ETF A
49:15
Speaker 4: decade on, and by the way, we launched a bunch
49:18
Speaker 4: of those as well, knowing that it would take a
49:21
Speaker 4: long time. We didn't expect to launch it it would
49:24
Speaker 4: take off straight away, knowing that it would take time
49:26
Speaker 4: for the kind of market to get there, but we
49:28
Speaker 4: were comfortable we could manage that fund. And so often
49:32
Speaker 4: you end up in a situation where you're kind of
49:34
Speaker 4: waiting for maybe the liquidity of the market to be
49:38
Speaker 4: broad enough that an ETF works. So you know it's
49:41
Speaker 4: going to work in the future, it's just a little
49:43
Speaker 4: bit early now. So it a couple of different reasons
49:45
Speaker 4: why that may be the case.
49:46
Speaker 2: So that raises a question what's next on the product roadmap?
49:50
Speaker 2: So We've talked about digital and crypto, we've talked about
49:54
Speaker 2: fixed income, and we've also talked about privates. What are
49:58
Speaker 2: you seeing as the next ten years.
50:01
Speaker 3: It's really across the whole waterfront of what you just said.
50:04
Speaker 4: I mean, obviously with HPS and GIP, with our new partners,
50:09
Speaker 4: there's a lot of opportunity we believe to develop in
50:12
Speaker 4: the private credit and the infrastructure space, and also the
50:14
Speaker 4: crossover of those kind of areas. I think, this crossover
50:20
Speaker 4: of public and private markets and what does that look
50:22
Speaker 4: like in portfolios, whether that's within a fund or in
50:24
Speaker 4: a portfolio, I think is going to be a big
50:28
Speaker 4: and very interesting theme. And the third area I think
50:31
Speaker 4: is we you know, we constantly obviously we're always working
50:35
Speaker 4: with our active portfolio managers to develop better strategies and
50:40
Speaker 4: new ideas they have, but we are always always looking
50:44
Speaker 4: back as well, because I think you can fall into
50:47
Speaker 4: the trap of thinking you've done it. And I mentioned
50:49
Speaker 4: the example of you know, US large cap equities and indexing,
50:52
Speaker 4: and why would you ever look at that as an
50:55
Speaker 4: innovation area because these markets keep changing and I think
50:58
Speaker 4: the world where the world we're in right now, and
51:01
Speaker 4: a good example of the last six months, the number
51:03
Speaker 4: of clients around the world, particularly outside the US, who
51:06
Speaker 4: are questioning their US dollar exposure is pretty significant. And
51:10
Speaker 4: what does that mean for time? Look at the move
51:12
Speaker 4: in gold suddenly that is you know the thing visual
51:15
Speaker 4: and so you know, you see you have to I
51:18
Speaker 4: think you have to be willing to question the environment,
51:21
Speaker 4: the macro, the market environment and say, actually, what does
51:24
Speaker 4: that mean for.
51:27
Speaker 3: Things that we kind of thought we'd done?
51:30
Speaker 4: And I think that creates a lot of opportunity for
51:31
Speaker 4: our clients to reinnovate things.
51:34
Speaker 2: So before I get to my favorite questions, I have
51:37
Speaker 2: one last broad question for you. What do you think
51:41
Speaker 2: investors and clients are not thinking about talking about overlooking
51:47
Speaker 2: but perhaps should be aware of it? Could be an
51:50
Speaker 2: asset of geography, a data point of policy. What is
51:55
Speaker 2: below the radar that really should be front and center.
52:00
Speaker 4: I think there are things that are kind of half
52:02
Speaker 4: on and half off the radar, are like, you know,
52:04
Speaker 4: the impact of what's happening in demographics and immigration and
52:08
Speaker 4: changes like that, and what does that mean for inflation
52:13
Speaker 4: for the different types of income streams that people are
52:16
Speaker 4: going to need is something that's it's kind of talked about,
52:20
Speaker 4: but always slightly in the background. I think that's going
52:22
Speaker 4: to come more and more to the form it ties
52:25
Speaker 4: into the fiscal policy kind of which is very much
52:27
Speaker 4: kind of talked about. I think that's one thing. I
52:30
Speaker 4: think the second thing is we're still we're still living
52:32
Speaker 4: through a lot of the post COVID impact. And you know,
52:35
Speaker 4: we COVID is kind of done and it feels like
52:39
Speaker 4: it was many, many years ago, but there are a
52:41
Speaker 4: lot of industries, and luxury is a good example, which
52:43
Speaker 4: is still being impacted by what happened then, both in
52:46
Speaker 4: terms of the lockdown and then the immediate kind of
52:49
Speaker 4: boom that happened afterwards. There are still a lot of
52:51
Speaker 4: things that are still trying to work their way through
52:53
Speaker 4: the through the system, as it were, and that tends
52:56
Speaker 4: to be something I think people have kind of forgotten,
52:58
Speaker 4: but from an investing standpoint, is actually pretty important.
53:03
Speaker 2: I completely agree with you. It's funny. We were just
53:05
Speaker 2: having a conversation the other day about housing and someone
53:09
Speaker 2: asked why we have such a shortfall of single family
53:13
Speaker 2: homes in the United States, not even talking about affordability
53:16
Speaker 2: of homes, just sheer number. And the answer was, that's
53:21
Speaker 2: a hangover from the financial crisis fifteen sixteen years ago.
53:26
Speaker 2: Following that boom and bust, a lot of builders shifted over,
53:30
Speaker 2: pivoted over to multi family houses and apartment buildings, not
53:34
Speaker 2: single fans. So it's fifteen years ago and we're still
53:37
Speaker 2: still suffering the effects of it. It's amazing how long
53:42
Speaker 2: a tail some of these things happen. All Right, tom
53:44
Speaker 2: I don't have you all day. I know you have
53:46
Speaker 2: a flight to catch tomorrow, so I have to get
53:49
Speaker 2: you out here at a decent hour. Let's run through
53:52
Speaker 2: some of our favorite questions, starting with tell us about
53:55
Speaker 2: your mentors who helped shape your career.
54:00
Speaker 3: So I've I think I've been very lucky.
54:02
Speaker 4: I've in each stage of my career, I've always had
54:05
Speaker 4: I think somebody who has been whether a manager or
54:10
Speaker 4: a mentor, but really helped me think through and frankally
54:15
Speaker 4: just supported me in my career. I think, to particularly
54:18
Speaker 4: jump out one is the person who actually took me
54:23
Speaker 4: to eye Injie Bearings and who I first worked with there,
54:27
Speaker 4: who sadly is no longer with us, but was just
54:30
Speaker 4: an incredible friend and in quite a pivotal time in
54:34
Speaker 4: my career, really helped me think through what do I
54:38
Speaker 4: want to do next and kind of set me on
54:40
Speaker 4: that next kind of journey. And then the other one,
54:43
Speaker 4: I have to say a shout out to someone who
54:46
Speaker 4: was very early in my career, who I worked with,
54:48
Speaker 4: who I kind of looked up to in terms of
54:50
Speaker 4: their success, who became my wife.
54:52
Speaker 3: So that became a kind of a good men.
54:54
Speaker 4: She continues to mentor me in slightly you know, different
54:57
Speaker 4: more direct ways.
54:58
Speaker 2: That's a nice a couple of mentors. Let's let's talk
55:01
Speaker 2: about books. What are some of your favorites. What are
55:03
Speaker 2: you reading recently?
55:05
Speaker 3: A big fan arm of people like Ian McEwen.
55:10
Speaker 4: I know the names, Martin Amos, They're just great, great authors.
55:15
Speaker 2: Give us some titles, Martin Amis and Ian and.
55:19
Speaker 4: Yeah, there's a great book Ian McEwen called Sweet Tooth,
55:22
Speaker 4: which is all about it's got a great twist which
55:24
Speaker 4: I won't go into, but it's nineteen fifties, nineteen sixties
55:27
Speaker 4: kind of spies in the in the UK. And there's
55:31
Speaker 4: a book by Martin Amos.
55:33
Speaker 3: Which is the first I can't remember the full title.
55:38
Speaker 3: It's Time something, but it's written backwards.
55:41
Speaker 2: I kind of remember my wife reading something like that
55:44
Speaker 2: from Martin A MSA, I don't remember the title.
55:46
Speaker 4: Fast it's fascinating. He writes it backwards, so everything happens backwards.
55:50
Speaker 4: So the day starts with the character going to bed,
55:55
Speaker 4: and it's the it's written in the as the consciousness
55:59
Speaker 4: of the man, and so it's brilliant.
56:03
Speaker 3: It's just I'll dig up the very cleverly written sound.
56:08
Speaker 4: A good story, not quite inception, but it's in that
56:13
Speaker 4: guise of trying to think about how time works. And yeah,
56:20
Speaker 4: I won't spoil it for you, right right, but it's
56:22
Speaker 4: the kind of book where even the most simple paragraph
56:25
Speaker 4: you kind of reread it because you're trying to get
56:27
Speaker 4: your head around the fact that it's being written backwards.
56:29
Speaker 2: Huh. Speaking of Inception, what's keeping you entertained these days?
56:34
Speaker 2: What are you streaming, either watching or listening to?
56:38
Speaker 3: So we've been on a bit of a marathon recently.
56:40
Speaker 4: We've done Yellowstone eighteen eighty three, nineteen twenty three, and
56:43
Speaker 4: land Man.
56:43
Speaker 2: That is all on my in my queue and I
56:46
Speaker 2: haven't started. I saw the first Yellowstone on a plane
56:49
Speaker 2: and I'm like, oh, I got to drag my wife
56:51
Speaker 2: into this.
56:51
Speaker 3: Well it's good, you need to commit, but it's well
56:56
Speaker 3: worth it very very yeah, very gripping, all very different
56:59
Speaker 3: as well.
57:00
Speaker 2: So you're you're a brit giving me an American Western recommendation.
57:07
Speaker 2: Let's let this New Yorker give you an m I
57:10
Speaker 2: five London recommendation. Have you seen the film Black Bag?
57:15
Speaker 3: I have you have?
57:17
Speaker 4: I saw it on a plane. I spent a lot
57:18
Speaker 4: of time on plane. Okay, I actually saw it on
57:20
Speaker 4: a plane. It was very good, very.
57:22
Speaker 2: Cool, upside surprise hopect very good.
57:24
Speaker 3: I never heard of it. And then I assume you
57:26
Speaker 3: watch Slow Horses.
57:27
Speaker 2: That's where I was about to go. Is so I
57:30
Speaker 2: I had my wife watching through the second season and
57:34
Speaker 2: she kind of tapped out. I'm trying to bring her
57:36
Speaker 2: in for the most recent season you've.
57:37
Speaker 4: Got again in We're very much the We won't watch
57:40
Speaker 4: it until it's all out.
57:42
Speaker 2: We we've made that mistake not doing that with certain things.
57:47
Speaker 2: It's it's incredibly big, Like what is this watching one
57:51
Speaker 2: show a week? What are we living in the nineties?
57:53
Speaker 3: I called.
57:57
Speaker 2: It really is? Final two questions, What sort of advice
58:00
Speaker 2: would you give to a recent college grad interested in
58:04
Speaker 2: a career in fill in the blanks? Investing ETFs, financial product,
58:09
Speaker 2: developing fixed income what's your advice for that person?
58:15
Speaker 1: Go for it.
58:16
Speaker 4: I think that I really think this industry is changing
58:19
Speaker 4: so quickly. I think it's changing faster than i've in
58:23
Speaker 4: my kind of career in terms of what is happening,
58:26
Speaker 4: which I think creates a lot of opportunity for somebody
58:30
Speaker 4: starting out. My advice I always give to all of
58:33
Speaker 4: our analysts who are starting out, in fact that I
58:36
Speaker 4: give it to pretty much all of our team is.
58:38
Speaker 3: You've got to keep learning.
58:40
Speaker 4: This is constantly changing, and you've got to just you've
58:45
Speaker 4: always got to be on that kind of learning curve,
58:48
Speaker 4: and that's how you get better. It's also where the
58:50
Speaker 4: opportunities come from a career standpoint.
58:52
Speaker 2: Makes a lot of sense. Our final question, what do
58:55
Speaker 2: you know about the world of investing product development ETFs
58:59
Speaker 2: today would and helpful back in the nineteen nineties when
59:03
Speaker 2: you were first getting started.
59:05
Speaker 4: Well, if I've known that bitcoorin was going to be
59:07
Speaker 4: one hundred and twenty thousand, I probably would have.
59:08
Speaker 5: Done that's done something different, say that you know everything
59:12
Speaker 5: right back up the truck on Amazon in two thousand
59:14
Speaker 5: and two or ninety eight, or a Microsoft from the IPL.
59:19
Speaker 4: I think one thing it does lend itself to And
59:21
Speaker 4: it sounds a bit strange for somebody who started out,
59:23
Speaker 4: you know, on a bond trading floor doing bond maths.
59:28
Speaker 4: Is you realize over time only when you look back
59:30
Speaker 4: the power of compounding. I know everyone writes about compounding,
59:33
Speaker 4: and you learn about it obviously, but it's only when
59:36
Speaker 4: you have been around for a while and you look
59:38
Speaker 4: back at what compounding actually means as both an investor,
59:42
Speaker 4: you know, you know, managing your own kind of future
59:45
Speaker 4: retirement and wealth, and then or as or as somebody
59:49
Speaker 4: who works with clients about managing portfolios or compounding actually
59:55
Speaker 4: does imply. And I was thinking about that the other day.
59:59
Speaker 2: Actually, it's very counterintuitive. There's nothing in the natural world,
1:00:05
Speaker 2: in your ordinary experience as a mammal, that would give
1:00:10
Speaker 2: you any insight into just exactly how exponential it is. Yes,
1:00:15
Speaker 2: it's really fascinating. Well, thank you, Stephen for being so
1:00:19
Speaker 2: generous with your time. We have been speaking with Stephen Cohen.
1:00:22
Speaker 2: He is BlackRock's chief product officer and head of Global Solutions.
1:00:27
Speaker 2: If you enjoy this conversation, check out any of the
1:00:30
Speaker 2: five hundred and eighty six we've done over the prior
1:00:34
Speaker 2: dozen years. You can find those at iTunes, Spotify, Bloomberg YouTube,
1:00:39
Speaker 2: wherever you find your favorite podcast. Be sure and check
1:00:42
Speaker 2: out my new book, How Not to Invest The ideas, numbers,
1:00:46
Speaker 2: and behavior that destroys wealth and How to Avoid them
1:00:50
Speaker 2: at your favorite bookstore. Now, I would be remiss if
1:00:53
Speaker 2: I did not thank the correct team that helps put
1:00:55
Speaker 2: these conversations together each week. Alexis Noriega is my radio producer.
1:01:00
Speaker 2: Anna Luke is my podcast producer. Sage Bauman is the
1:01:05
Speaker 2: head of Podcasts at Bloomberg. Sean Russo is my researcher.
1:01:10
Speaker 2: I'm Barry Rudolts. This has been Masters and Business on
1:01:13
Speaker 2: Bloomberg Radio.