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Jeremy Schwartz Discusses Investment After the Financial Crisis · Masters in Business

0:02
Speaker 1: This is Master's in Business with Barry Ridholts on Bloomberg Radio.
0:09
Speaker 1: This week on the podcast, I have a special guest.
0:12
Speaker 1: His name is Jeremy Schwartz. He essentially runs the research
0:16
Speaker 1: division at Wisdom Tree Investments. I was kind of surprised
0:20
Speaker 1: to learn his nickname is Junior Jeremy. He has been
0:24
Speaker 1: working with Professor Jeremy Siegel at Wharton for almost twenty years.
0:29
Speaker 1: Uh and he is a really knowledgeable and up to
0:35
Speaker 1: his elbows in all of the specifics of creating ETFs
0:41
Speaker 1: focusing on valuation, dividends, earnings. They have carved out a
0:47
Speaker 1: niche in the world of investing in ETFs um that
0:51
Speaker 1: kind of bypassed the question I was gonna ask, Hey,
0:53
Speaker 1: what makes you guys different from filling the blank, Black Rock, Vanguard,
0:57
Speaker 1: Dimensional funds, whatever. But Jeremy does a great job explaining
1:02
Speaker 1: what they do, what it's like to work in a
1:05
Speaker 1: fund where you have legends of finance like Michael Steinhardt
1:09
Speaker 1: as chairman and Jeremy Siegel as as one of the
1:12
Speaker 1: chief advisers, and Jonathan uh Stein putting this together. Really
1:17
Speaker 1: a fascinating conversation for anybody who is at all interested
1:21
Speaker 1: in indexing factor based investing valuation e t f S.
1:27
Speaker 1: I think you're gonna find this to be an absolutely
1:30
Speaker 1: fascinating conversation. It's something I've been trying to do for
1:35
Speaker 1: a long time. We we Jeremy and I just keep
1:38
Speaker 1: ships in the night. Our schedules just didn't work out,
1:40
Speaker 1: and I'm glad I finally got him into the studio
1:43
Speaker 1: with no further ado. My conversation with Jeremy Schwartz. My
1:52
Speaker 1: special guest today is Jeremy Schwartz. He is the Director
1:57
Speaker 1: of Research at Wisdom Tree Investments, where he has been
2:00
Speaker 1: asconce since two thousand and five, having risen through the
2:04
Speaker 1: ranks from senior analyst to deputy director to essentially head
2:09
Speaker 1: of research at the firm. He is responsible for the
2:12
Speaker 1: construction process and oversees all of research across the wisdom
2:17
Speaker 1: Tree equity family. Jeremy Schwartz, Welcome to Bloomberg Berry. Thanks
2:22
Speaker 1: for having me. Let's begin with the fun stuff. You
2:25
Speaker 1: were um an early higher at wisdom Tree. You started
2:29
Speaker 1: in oh five, is that right? That's right, and you
2:32
Speaker 1: had around two thousand and eight, recently received a promotion
2:38
Speaker 1: right into the midst of the financial collapse. What was
2:42
Speaker 1: that collapse like while you were working at wisdom Tree
2:46
Speaker 1: and since also a startup asset management firm going into
2:49
Speaker 1: the biggest financial crisis. It's the Great Depression, pastic time
2:53
Speaker 1: and you have value oing to investment philosophies, dividend based
2:56
Speaker 1: investment strategies. Financials were big parts that dividend paying universe, right,
3:00
Speaker 1: So it was a tough environment. Also, you know, wisdom
3:03
Speaker 1: Tree was really trying to establish yourself as a pioneer
3:06
Speaker 1: in e t s. It was early days in ets
3:08
Speaker 1: when we started, oh six, there was three t s
3:11
Speaker 1: maybe three billion under management, so we were trying to
3:13
Speaker 1: novel indexing approach and so we were built not for
3:16
Speaker 1: small success. We really had bigger ambitions in mind. So
3:20
Speaker 1: we had high break events um and really trying to
3:23
Speaker 1: have a big team to to put us on the map.
3:25
Speaker 1: So it was certainly a challenging moment going through the
3:28
Speaker 1: financial crisis UM. But we bottomed around three billions of
3:31
Speaker 1: assets in two thousand nine, a little bit below three billion.
3:34
Speaker 1: Today were forty five billions. We've seen mammoth growth over
3:37
Speaker 1: last ten years. But yeah, it was very trying times
3:39
Speaker 1: and you didn't know could you survive, could you get
3:41
Speaker 1: past that crisis point. Everybody has a story about what
3:46
Speaker 1: was going on in their shop in the midst of
3:48
Speaker 1: the crisis, from from Vanguard to Morgan Stanley to Dave
3:52
Speaker 1: Rosenberg tells the story of his first day at work
3:55
Speaker 1: in the private sector was the day of the eighty
3:57
Speaker 1: seven crash. Tell us what was going on behind the
4:00
Speaker 1: scenes at Wisdom Tree when it felt like the world
4:04
Speaker 1: was coming to an end. I mean, what's amazing is
4:06
Speaker 1: I was on vacation in the first week of October.
4:09
Speaker 1: We had a family vacation plan. We were on a
4:11
Speaker 1: cruise in two thousand and eight, October two thousand and eight,
4:14
Speaker 1: leaving from Asia and Asia cruise. You know, we're in
4:18
Speaker 1: starting in Japan, going to Hong Kong, China, and I
4:21
Speaker 1: looking at the screens on TVA, Am I gonna have
4:24
Speaker 1: a job when I get back? I mean, it was
4:25
Speaker 1: really unbelievable. You see the market falling ten percent um
4:28
Speaker 1: and I didn't know, you know, where we were just
4:30
Speaker 1: as a firm wise, like how close we were to
4:33
Speaker 1: just not surviving during the depths of the crisis, Like
4:35
Speaker 1: we were weeks away from not being able to make payroll?
4:37
Speaker 1: Is that true? You were actually that close in March
4:39
Speaker 1: of O nine. Yeah, I mean we were definitely bleeding losses.
4:43
Speaker 1: We definitely had you know, a capital raising in March
4:45
Speaker 1: of O nine. Um, and that put us on. The
4:48
Speaker 1: markets turned around and we were sort of off to
4:50
Speaker 1: the races after that. But yeah, we were we were
4:52
Speaker 1: close in March of O nine. Did you guys have
4:54
Speaker 1: a white night? Or was it the existing funders and
4:57
Speaker 1: founders basically reached a little deeper into their pocket. It's
5:00
Speaker 1: a combination. Um. So A I G came in during
5:02
Speaker 1: two thousand nine. Uh, and there was a you know,
5:05
Speaker 1: that's hilarious, isn't it. A I G said it's a
5:08
Speaker 1: Wisdom Tree. Hey, let us help you out. You guys
5:10
Speaker 1: look like you can need a little assistance. They were
5:12
Speaker 1: investing in the investment management side. They saw the growth
5:15
Speaker 1: potential of ETS as part of ASID management and they
5:18
Speaker 1: did make an investment that that's that's fascinating and the
5:22
Speaker 1: structure currently of Wisdom Trade, it's been a publicly traded company.
5:25
Speaker 1: And one of the background is we had Jonathan Steinberger CEO,
5:29
Speaker 1: had a media company in nineties and two thousand's and
5:32
Speaker 1: he saw INDEXI and ETS when he was doing publishing.
5:36
Speaker 1: Was called Individual Investor Group, and so he was. He
5:40
Speaker 1: saw McGraw hill, he saw indexes, he saw ETS and
5:42
Speaker 1: he's trying to create his own indexes, license him to
5:45
Speaker 1: become ETS. Well. During the tech bubble, he sold the magazine,
5:49
Speaker 1: kept the indexes and was trying to relaunch the firm
5:52
Speaker 1: UM and it was really he had this shell company
5:54
Speaker 1: is really literally a penny stock trading and then he
5:58
Speaker 1: re raised capital and No. Four to real waunch the
6:00
Speaker 1: business UM with Michael Steinhardt, Professor Siegell, Jim Robinson from
6:04
Speaker 1: American Express funding the business and OH four and relaunching UM.
6:08
Speaker 1: But that was that was the history back back then.
6:11
Speaker 1: So it's always been publicly traded because of Johano's previous
6:15
Speaker 1: magazine days. So that's some trinity behind behind the company.
6:19
Speaker 1: That's quite a list of heavy hitters. Yeah, I mean,
6:21
Speaker 1: you think going from trading at a few pennies right
6:24
Speaker 1: before the funding, Michael funded it in oh for at
6:28
Speaker 1: sixteen cents and the day they announced, just these these
6:32
Speaker 1: people coming together, I think it closed at a dollar
6:35
Speaker 1: dollar dollar fifty something like that. That Steinhardt guy is
6:38
Speaker 1: an up and comic. Keep an eye on, Keep an
6:40
Speaker 1: eye on him. The other thing that I find kind
6:42
Speaker 1: of fascinating, And I think I kind of knew this
6:44
Speaker 1: about you, but forgot about it. You were Jeremy Siegell's
6:48
Speaker 1: assistant at Wharton. You helped him edit subsequent editions of
6:53
Speaker 1: Stops for the Long Run. You practically co authored a
6:56
Speaker 1: book with him. What on earth was it like being
7:00
Speaker 1: next to Jeremy Seagal during all the unbelievable um? And
7:03
Speaker 1: he was he was a fountain hose of knowledge. I
7:04
Speaker 1: was just trying to soak it all in. Um. I mean,
7:06
Speaker 1: I got so lucky of when I got to Warrant.
7:08
Speaker 1: It was so the bubble um. That's when I first
7:12
Speaker 1: got to warr And I've done internships at Prudential, you know,
7:16
Speaker 1: sort of caught up in the tech craze. You know,
7:18
Speaker 1: he wrote our Internet socks that were valued in April,
7:21
Speaker 1: then big cap tech socks or suckers bet in March
7:23
Speaker 1: of two thousand. I meet him right after that article
7:25
Speaker 1: comes out. He's, you know, reevaluating his own portfolio from
7:29
Speaker 1: being just vanguardists and fire from the nineteen seventies and
7:32
Speaker 1: all of his researches around. Okay, I'm telling people to
7:35
Speaker 1: sell tech stocks, yet my own portfolios vanguardist be five hundred.
7:38
Speaker 1: What should I be doing? And so I helped him
7:41
Speaker 1: do a lot of that research. I met him in
7:43
Speaker 1: two thousand one. I took well, I met him through
7:45
Speaker 1: a bunch of programs. I took his class in oh one.
7:48
Speaker 1: I needed something to do for a few months before
7:50
Speaker 1: I supposed to go to Australia from a semester abroad,
7:53
Speaker 1: ended up working for him. Never went to Australia. Took
7:56
Speaker 1: off like two years of school to work for him
7:58
Speaker 1: full time on his books. You know, obviously set my
8:01
Speaker 1: future path. I just dedicated really my life after that
8:04
Speaker 1: towards working with him, and I sort of knew it
8:06
Speaker 1: could be more than books. One day, because I sat
8:08
Speaker 1: in his office, I heard every conversation he had, and
8:10
Speaker 1: I knew what people wanted to do with him, and
8:12
Speaker 1: he just you know, he was very much in low
8:15
Speaker 1: fee I Vanguard, I buy the market, but he really
8:17
Speaker 1: was struggling with what is the best way to index?
8:20
Speaker 1: And so I saw there could be a potential to
8:22
Speaker 1: do more with him. Um and wisdom Tree came along
8:24
Speaker 1: with the perfect fit. But it was you know, he
8:28
Speaker 1: wasn't just unbelievable mentor and teacher and still is something
8:31
Speaker 1: I still interact with him all the time today. How
8:33
Speaker 1: has the company changed over the past decade since the
8:37
Speaker 1: financial crisis? You know, when we started out that the
8:40
Speaker 1: idea was very simple, is everything's market cap weighted. You
8:43
Speaker 1: need some relative discipline to rebounce back to value, help
8:47
Speaker 1: try to protect investors from bubbles and things get it
8:49
Speaker 1: really expensive. So the original conception was these value based
8:53
Speaker 1: rebalancing dividend earnings waited type portfolios and in other words,
8:59
Speaker 1: moving away from the heavy market cap waiting towards something
9:03
Speaker 1: with a different flavor. Yes, the idea was to be simple,
9:06
Speaker 1: rules based, transparent but managed valuation risk for the market.
9:11
Speaker 1: And that was the original conception, and that just applied
9:13
Speaker 1: in every region around the world, and we blanketed the
9:16
Speaker 1: world with equities for that. UM. We've certainly branched out
9:21
Speaker 1: and continue to develop products UM currency hedging became a
9:24
Speaker 1: very major focus of the firm. UM that's one things
9:27
Speaker 1: that's really taken off. It's one thing that I'm very
9:29
Speaker 1: passionate about, where I think we have some really unique
9:31
Speaker 1: ideas that are different than the way people traditionally allocated
9:35
Speaker 1: or nationally and let's talk about that because d x
9:39
Speaker 1: J was essentially your baby. That's the wisdom Tree Japan
9:44
Speaker 1: Yen currency, hedged e t F and full disclosure. I
9:48
Speaker 1: own it, clients of my firm own it when we
9:51
Speaker 1: want a Japan exposure, and recognized that uh Abonomics and
9:56
Speaker 1: their version of QWI was gonna really put a little
9:59
Speaker 1: pain on the end as the dollar was getting stronger.
10:02
Speaker 1: It was the perfect product. Thank you well, we appreciate
10:05
Speaker 1: your support, UH And I think, listen, I think currency
10:09
Speaker 1: is one of these very misunderstood phenomenas, and I you know,
10:12
Speaker 1: I think so it's great to see Japan take off.
10:15
Speaker 1: It was the first currency GT have to really illustrate
10:17
Speaker 1: how currencies and stocks can work together. That often a
10:20
Speaker 1: declining currency can be very good for the stocks in
10:23
Speaker 1: that market and they move in such big directions. I mean. So,
10:26
Speaker 1: so let me interrupt you there because there's a really
10:28
Speaker 1: interesting story about d x J. It's been trading for
10:32
Speaker 1: how long now. It was one of our original et
10:35
Speaker 1: s and O six now it was unhedged when we
10:37
Speaker 1: launched it. It was given way to Japan and it
10:40
Speaker 1: was going it was doing better than the MSCI capway
10:42
Speaker 1: of Japan by points a year, but it was you know,
10:46
Speaker 1: nobody cared enough. And as we were looking at it,
10:48
Speaker 1: and we're saying, and at the time, the end was
10:51
Speaker 1: super strong and the stocks were super weak. Dollar was weak,
10:54
Speaker 1: The end was strong, and things were about to reverse,
10:56
Speaker 1: and we kept saying, this may not go on forever,
10:58
Speaker 1: this might turn around. And you could say, everybody else
11:01
Speaker 1: has these two bets. They have the stock bet and
11:03
Speaker 1: the currency additional risk, and the currency moving ten to
11:06
Speaker 1: fifteen percent a year. So while our our our value
11:09
Speaker 1: added on the stocks that might have been a hundred
11:10
Speaker 1: basis points, if the currency goes against you ten percentage
11:13
Speaker 1: points a year, good luck, right, So we said, just
11:15
Speaker 1: he'ld be so different by just focusing on the stock
11:18
Speaker 1: alone and not take this second So when did the
11:20
Speaker 1: currency hedge enter that particular holding? Ap All? Right, now,
11:25
Speaker 1: I remember I haven't seen that holding, and your a
11:30
Speaker 1: u M was fairly low, the inflows were fairly low.
11:34
Speaker 1: It was doing okay, and then suddenly, you know, suddenly
11:38
Speaker 1: it was like a fuse was lit and off to
11:41
Speaker 1: the races. How did that come about? And what was
11:44
Speaker 1: it like watching these giant inflows on a product you
11:47
Speaker 1: essentially created? So we were the first firm to do
11:50
Speaker 1: currency hedging in e t F FORMA. It's not a
11:52
Speaker 1: new concept. People have been doing charging and they've been
11:54
Speaker 1: teaching on the c f A text books for years,
11:56
Speaker 1: but we're the first one to do it in ETS.
11:58
Speaker 1: We've done our first one on a broader national basis
12:00
Speaker 1: a few months before d x J, which was what
12:02
Speaker 1: was the which is now h E d J, which
12:04
Speaker 1: was we start off with just broad EFA hedging. And
12:07
Speaker 1: what's interesting is we then made the second for listeners
12:11
Speaker 1: who are IFA is your is your core international index
12:15
Speaker 1: that people follow? It's all the twenty one developed markets
12:18
Speaker 1: of the x US without the emerging markets Europe, Australasia, Asia,
12:23
Speaker 1: so Hong Kong, Australia, it's it's Europe, Australia, Far East.
12:27
Speaker 1: Is that essentially the shorthand? Yes? And so now how
12:31
Speaker 1: do you do a currency hedge on a broad region
12:34
Speaker 1: that has a dozen different currencies. It's really the same
12:37
Speaker 1: way as d x J, just with multiple currencies, as
12:39
Speaker 1: you have the underlying stock exposures, and then you add
12:42
Speaker 1: a currency forward on top that's designed to neutralize and
12:45
Speaker 1: get you back to just the underlying stock exposure. So
12:48
Speaker 1: you're rolling these currency forwards on a monthly basis. But
12:51
Speaker 1: it's pretty plain vanilla, simple um. Which is the ironic
12:54
Speaker 1: thing is people think of hedging as the more exotic play,
12:58
Speaker 1: and I say, it's actually more plane vanilla. So it's expensive.
13:02
Speaker 1: You're dealing with a lot of different it's complicated, and
13:06
Speaker 1: make the counter argument, so it's really not expensive. So
13:08
Speaker 1: it's expensive in Brazil. Brazil costs you ten percent a
13:11
Speaker 1: year in Ifa, you're being paid to hedge is actually
13:14
Speaker 1: a better than free proposition, and it's been better than
13:17
Speaker 1: free probably for the last thirty years. So the idea
13:19
Speaker 1: that it's expensive is one of these myths that I
13:21
Speaker 1: keep trying to come back on. And I actually feel
13:24
Speaker 1: like we have this branding problem in hedging, which is
13:26
Speaker 1: you can't go back and change history. But if I
13:29
Speaker 1: if you call your international stock fund, your international double
13:32
Speaker 1: decker fund, which is your international stock plus currency fund,
13:37
Speaker 1: who would buy that? I don't know. They wouldn't. They
13:40
Speaker 1: would say, I just want the stocks. I don't want
13:41
Speaker 1: a double decker fund. And the problem is people think
13:45
Speaker 1: of the hedge is a double decker. No, the hedges
13:47
Speaker 1: plane vanilla stock exposure, not stock plust current. So let
13:50
Speaker 1: me push back a little bit on the European hedge fund.
13:54
Speaker 1: You have a eurohedged e t f UM, but not
13:58
Speaker 1: every country in Europe is on the euro so you're
14:02
Speaker 1: ex Switzerland, your excellent, a lot of the Nordic countries,
14:05
Speaker 1: your Xenland. How European is the European fund. So HD
14:10
Speaker 1: d J, which we start off as our broad EF proxy.
14:13
Speaker 1: We saw the success in d x J. The japan
14:16
Speaker 1: in you know, went from a hundred million. The earthquake
14:19
Speaker 1: happened and people really started training it after literally the
14:22
Speaker 1: earthquake to tsunami, everything that took place there that whacked
14:25
Speaker 1: the end and suddenly you had some well the end
14:28
Speaker 1: went up a lot, but people were starting to say
14:31
Speaker 1: it might not continue. And that's when it really started.
14:34
Speaker 1: That was trading five years six years ago, and so
14:38
Speaker 1: that's when I started training and started seeing some interest UM.
14:41
Speaker 1: And that's when we had the idea to make the
14:42
Speaker 1: broad h E d J, which was at the start
14:45
Speaker 1: just the whole international basket. We focused it on the
14:47
Speaker 1: single currency, the Euro because we saw, hey, people can
14:50
Speaker 1: grasp the idea that a single currency the end. They
14:52
Speaker 1: started training d x J. We made the hedge h
14:56
Speaker 1: e d J just the euro Zone only, so it
14:58
Speaker 1: is just zero specific um. Euro is the biggest currency
15:02
Speaker 1: in the IFA international complex. It's a third called a
15:04
Speaker 1: third of IFA's Euro traded stocks. So we did focus
15:07
Speaker 1: on the single currency so we can make it easier
15:09
Speaker 1: for people to make that decision. One currency Germany, France, Spain,
15:15
Speaker 1: all those Euro only countries. So yes, each e J
15:18
Speaker 1: is Euro only, but you could you could have a
15:20
Speaker 1: broader Europe fund that you hedge the euro the pound.
15:22
Speaker 1: This was frank the Norway. You could do that too.
15:25
Speaker 1: We've focused on Euro only. That that's what I I
15:29
Speaker 1: think d x J is unique because you have one
15:32
Speaker 1: country with one currency, with a fairly uniform population and
15:37
Speaker 1: a behavior set that is very very similar. I'm not
15:40
Speaker 1: saying everybody acts and things alike in Japan, but it
15:44
Speaker 1: is unique in that there is no other sizeable country
15:48
Speaker 1: other than the United States that that has that same
15:51
Speaker 1: sort of Japan is also unique in the currency market
15:54
Speaker 1: where you actually need a week end for the stocks
15:56
Speaker 1: to do well. So it is correlated, right, There is
16:00
Speaker 1: a real economic linkage between the currency and the stocks,
16:05
Speaker 1: and you do see profits the last five years as
16:07
Speaker 1: the currency is weaken profits have soared, so there is
16:10
Speaker 1: a real direct economic benefit. But even for small cab
16:13
Speaker 1: companies which are more local to Japan, even they trade
16:16
Speaker 1: inversely correlated to the end. So Japan just the way
16:20
Speaker 1: people trade it, you need a week end to really
16:22
Speaker 1: be bullish Japan today. Um So it's one where when
16:26
Speaker 1: you hedge, you actually increase the volatility for the broader
16:29
Speaker 1: international basket where I'm talking about. That's where the opportunity
16:33
Speaker 1: really is. You know, for the going forward basis Europe
16:35
Speaker 1: and Japan. Maybe there's a hundred billions of assets between
16:38
Speaker 1: Europe and Japan. Mutual funds, there's one point a trillion
16:41
Speaker 1: dollars in IFA that are basically unhedged, but thirty percent
16:45
Speaker 1: of Japan's now hedged, of Europe's hedged. The big opportunity
16:49
Speaker 1: and that I'm focused on, or we had with some
16:51
Speaker 1: tree really focused on our the EFA complex. We're adding
16:55
Speaker 1: currency adds your expected risk profile, not your expected return profile,
16:59
Speaker 1: you're did risk profile. That's pretty fascinating. Let's talk a
17:03
Speaker 1: little bit about what's happening in the world of asset management.
17:08
Speaker 1: We've heard that indexing is worse than Marxism, that this
17:12
Speaker 1: is an American. It's the end of the world. I
17:15
Speaker 1: think that everybody who is making those arguments are sort
17:18
Speaker 1: of self interested in talking their own books. But let's
17:22
Speaker 1: at least discuss how indexing might be affecting, uh, the
17:27
Speaker 1: price discovery mechanism. What what are your views on this? Yeah,
17:30
Speaker 1: I don't think it's worse than Marxism. It's actually the
17:33
Speaker 1: definition of what people need. They want lower fees. Right,
17:36
Speaker 1: Amazon is bringing down fees for retail customers, and essentially
17:40
Speaker 1: indexing is bringing down fees for active or asset management generally. Um. Now,
17:46
Speaker 1: there's this idea that our et s to story of
17:48
Speaker 1: the market is that flows to passive causing this quote
17:50
Speaker 1: unquote bubble in the markets or pushing up prices. For
17:54
Speaker 1: every buyer there's a seller. So I just see fees
17:56
Speaker 1: coming out of the system. Investors are being better off
17:59
Speaker 1: with fees not going to the active managers are keeping
18:01
Speaker 1: it in investors pockets. For you to say that the
18:04
Speaker 1: flows too passive over the last decade, and passive is
18:07
Speaker 1: taking a large amount of money or last decade for
18:09
Speaker 1: them to be driving up the market prices. There people
18:12
Speaker 1: are buying the passive, who are they selling? Are they
18:15
Speaker 1: selling value managers? Are they selling the people who's who
18:19
Speaker 1: buy cheaply and just buying the more expensive stuff? And
18:22
Speaker 1: it has been a growth led market over the last
18:23
Speaker 1: ten years. But when I look at the flows to
18:26
Speaker 1: the styles, let's say us large cap, I don't see
18:29
Speaker 1: the flows dramatically leaving value if anything. Or the last
18:32
Speaker 1: ten years you've seen flows leaving growth. You're seeing active growth,
18:36
Speaker 1: seeing out flows, and you're seeing just general trends towards indexing,
18:40
Speaker 1: which makes you question, are the flows to passive really
18:42
Speaker 1: driving up the prices of these sort of quote unquote
18:45
Speaker 1: expensive parts of the market. So I see it as
18:47
Speaker 1: a big win for investors are keeping the fees. I
18:49
Speaker 1: don't see them as dramatically changing. And I think Vanguard
18:52
Speaker 1: did a study saying that feed compression saved investors over
18:57
Speaker 1: forty billion dollars over the past twenty year. That's a
19:00
Speaker 1: lot of money, and that's going to continue. I mean
19:02
Speaker 1: that's people people worry. You know, what percentage of the
19:06
Speaker 1: market can be indexed. It could be a lot higher
19:08
Speaker 1: than where we are today, and it should be a
19:10
Speaker 1: lot higher. There's a lot of active managers who aren't
19:12
Speaker 1: adding value, and so in the future are not adding
19:15
Speaker 1: value active managers that Bill Miller calls them the closet index. Yeah.
19:18
Speaker 1: I love that conversation, and it's it's I see more
19:22
Speaker 1: and more of what we're trying to do at Wisdom
19:23
Speaker 1: Trees is you know, we started off ten years ago
19:26
Speaker 1: trying to provide low tracking indexes so get you very
19:31
Speaker 1: broad exposure. Are broad diven weighted portfolios have fifteen hundred stocks,
19:35
Speaker 1: are broad earnings waited portfolios have two thousand stocks, And
19:38
Speaker 1: there we're tilting towards value and quality factors that we
19:41
Speaker 1: think can add value over the market. So maybe we
19:43
Speaker 1: add a hundred bases points over long periods of time
19:46
Speaker 1: with two percent tracking error in the earnings indexes. That's
19:49
Speaker 1: low tracking air portfolios. Those are the closet index trackers
19:52
Speaker 1: Miller is talking about, and we're doing it in sort
19:54
Speaker 1: of low fee index type format. Increasingly, where I think
19:58
Speaker 1: the future is that we're going to be going for
20:00
Speaker 1: the higher active share, higher alpha strategies and trying to
20:03
Speaker 1: get more activeness into the portfolios as well. So so
20:07
Speaker 1: let's touch on that because that's a fascinating subject. First,
20:11
Speaker 1: I noticed you have I don't want to say a
20:13
Speaker 1: dividend way across everything. But but dear lord, dividends are
20:18
Speaker 1: really the mother's milk of wisdom tree? Is it? Is
20:22
Speaker 1: it profitability and valuation? Or what is it about dividends
20:26
Speaker 1: that are special? And the past decade is seen a
20:30
Speaker 1: cheat money allowed a ton of buy backs? What does
20:33
Speaker 1: what do all those buy backs due to dividends? I
20:37
Speaker 1: personally would rather see dividends as an investor than buy backs.
20:40
Speaker 1: But tell me your perspective. Yeah, finance one oh one,
20:43
Speaker 1: assets are president value of cash flows for stocks? Cash
20:46
Speaker 1: flows are dividends. Where do we do is come from?
20:48
Speaker 1: They come from earnings. So when we started ten years
20:50
Speaker 1: ago dividends and earnings, where the two families we created
20:53
Speaker 1: dividends and earnings? Okay, two separate families. We launch the
20:57
Speaker 1: US Earnings Family Global dividen. How many different funds were
21:00
Speaker 1: in that group in in earnings? We have today approximately
21:06
Speaker 1: six across different regions and different that's in the US.
21:10
Speaker 1: So what are the six in the US? Total market? Large, mid, small,
21:14
Speaker 1: And then we have some specific um sort of domestic
21:17
Speaker 1: economy and exporter strategies. And then and what about dividends?
21:21
Speaker 1: There's a the exact number I'm gonna lose because it's
21:24
Speaker 1: like it's a large number. UM. So we do cover
21:28
Speaker 1: the world with dividend focused strategies. UM. We do India.
21:31
Speaker 1: We have an earning fund because diven end earnings fund.
21:34
Speaker 1: India is earnings because they don't pay a lot of dividends,
21:36
Speaker 1: and so we're the first firm to do India local
21:38
Speaker 1: shares in two thousand eight. So we have the broadest
21:41
Speaker 1: India Index or India Earnings Wait Index, and that's the
21:44
Speaker 1: country we're super bullshot over. The I couldn't agree more.
21:47
Speaker 1: But it's valuation sensitive and we wanted to own the
21:50
Speaker 1: broadest cross sections. So the tradial Eta sixty seventy stocks,
21:53
Speaker 1: we have two D plus stocks, so that's one where
21:56
Speaker 1: earnings waited. We did do UM, but the idea was
21:59
Speaker 1: dividends are the subjective measure around the world, and every
22:02
Speaker 1: region outside the US N plus to the market pays
22:05
Speaker 1: a divon. It's really the U S where we do
22:06
Speaker 1: a lot of buy backs because of stock options. If
22:08
Speaker 1: you have a stock option, you don't like to pay
22:10
Speaker 1: a DIVD because your stock goes down by the amount
22:12
Speaker 1: of the dividend. Because we have literally penny for penny
22:15
Speaker 1: and so that's what when we started doing stock options.
22:19
Speaker 1: Two is when we started paying divids less. I mean
22:21
Speaker 1: the power issue used to be seventy in the old days.
22:24
Speaker 1: It's been you know, thirty to pent in the last
22:27
Speaker 1: twenty thirty years. UM. But so clearly buy backs are
22:30
Speaker 1: impacting the available cast for dividends. People are doing as
22:33
Speaker 1: much buybacks as dividends today. So when people look at
22:36
Speaker 1: the two percent diven yield and say we used have
22:38
Speaker 1: a four percent diven yield, will net buy backs have
22:40
Speaker 1: been one and a half to two percent? And so
22:42
Speaker 1: that what that means is and they're actually net buy
22:44
Speaker 1: back So there who docing shares out standing, which means
22:46
Speaker 1: future dealing growth will be higher. Um. And so i've
22:49
Speaker 1: you know, we've focused when people say, do you have
22:52
Speaker 1: a dividend plus net buy back index, we've often set
22:55
Speaker 1: our earnings indexes represent that because you would basically add
22:58
Speaker 1: at historically would more technic alogy companies, which is what
23:01
Speaker 1: had earnings and buybacks but no dividends. Now in our
23:04
Speaker 1: large cat doing next you have more tech companies financial So, UM,
23:09
Speaker 1: I gotta ask you the question that always has been
23:12
Speaker 1: scratching my head on an earnings based set of holdings.
23:18
Speaker 1: The US, we have completely wacky accounting rules and regulations.
23:23
Speaker 1: How do you manage to square the circle of every
23:27
Speaker 1: region of the world. Every country in the world has
23:30
Speaker 1: our own set of accounting standards and and rules, and
23:34
Speaker 1: you end up with, Hey, a pe of ten in
23:37
Speaker 1: this country maybe nothing like a pe in ten of
23:40
Speaker 1: ten in a different country. You just made my case
23:43
Speaker 1: for divin waiting around the world. That's exactly why we
23:45
Speaker 1: did dividends around the world was it's an objective measure.
23:48
Speaker 1: When we started ten years ago, you didn't have to
23:50
Speaker 1: worry about different accounting centers. Now we really don't have
23:53
Speaker 1: any cross country earnings waited funds. I mean, we have
23:56
Speaker 1: the India Fund. Um we do have any that's not exact.
24:00
Speaker 1: You are emerging market consumer fund has an earnings model,
24:04
Speaker 1: but that's you know, it's like a one off fund
24:06
Speaker 1: for US. So so in other words, when you go
24:08
Speaker 1: in country by country, you're really doing the valuation screen
24:11
Speaker 1: specific to that country, and the top ten percent across
24:15
Speaker 1: every country. What does it make a difference how their
24:17
Speaker 1: math is. It's still the cream of the crop in
24:20
Speaker 1: each country. And that is why dividen just cut across
24:22
Speaker 1: all the countries, and so I think that's the that's
24:24
Speaker 1: the key there. Um, you can fake earnings, you can't
24:27
Speaker 1: fake dividends. For only so long can you fake the dividends.
24:31
Speaker 1: Let's talk a little bit about the future of asset management. Um,
24:35
Speaker 1: there's a sense that the Vanguard effect, the compression of
24:39
Speaker 1: fees everywhere, is not just a brief phenomena or a
24:44
Speaker 1: shallow phenomena. But hey, it's all going to zero eventually,
24:49
Speaker 1: discuss Listen to the drive for fees lower puts more
24:52
Speaker 1: money back in investors pockets. I think it's generally the
24:56
Speaker 1: trend it's going in. It's across all segments, from asset
24:58
Speaker 1: management to advisors to everywhere. Is that's where it's going.
25:03
Speaker 1: How low can it go? It's getting close to zero.
25:06
Speaker 1: I mean it's at a few basis points for pure beta.
25:09
Speaker 1: I mean wisdom Tree was set up living in a
25:11
Speaker 1: Vanguard world, and we were saying, we have our mission
25:14
Speaker 1: in life only mission life was can we do better
25:17
Speaker 1: than Vanguard after fees, after taxes? You got improved on
25:19
Speaker 1: the Vanguard experience because you know they're gonna always have
25:21
Speaker 1: the lowest fees. Nobody can compete, So they're built for
25:25
Speaker 1: that for forty years, there's nobody even close to them,
25:29
Speaker 1: So dimensional funds maybe, so it's no, I mean, they're
25:31
Speaker 1: they're they're well, they're a little more expensive, they have
25:34
Speaker 1: a little deeper research bench, but you know, they're considered
25:38
Speaker 1: factor slash active. So it's there's a there's a little
25:42
Speaker 1: more on it, pure beta, zero cost beta. You're going
25:45
Speaker 1: to have that out there. But so the question is
25:47
Speaker 1: how can you add value on top of that? So
25:49
Speaker 1: we think of that as an investment firm. Can our
25:51
Speaker 1: individual products add value after fees, after taxes? But then
25:56
Speaker 1: also then how when you deliver advice, can you try
25:59
Speaker 1: to package it in a way that adds value as well?
26:01
Speaker 1: And that's really so our first ten years that was
26:04
Speaker 1: in was about building great products, and I think the
26:06
Speaker 1: next ten years is really how do we help our
26:09
Speaker 1: clients and how do we deliver advice in a cheaper
26:12
Speaker 1: format enabled by technology. So we're making a lot of
26:15
Speaker 1: investments in that technology side to really help advisors grow
26:19
Speaker 1: and and and leverage their businesses and then um, you know,
26:22
Speaker 1: just bring costs down there as well. So let's let's
26:25
Speaker 1: look at that um advisory firms and advisors are looking
26:30
Speaker 1: for more than just asset management. What do you you
26:36
Speaker 1: sit in a fairly unique position in the in the
26:38
Speaker 1: food chain. What do you think the financial advisors are
26:41
Speaker 1: looking for and how do you guys create something unique
26:45
Speaker 1: for that audience. Yeah, everybody is talking about the robo world, right,
26:50
Speaker 1: the betterments of the wellffronts and and this online direct
26:53
Speaker 1: to consumer model. We are very advisor driven, so you
26:57
Speaker 1: know we're we have an advisor solutions program. We made
27:00
Speaker 1: a big investment in a firm called advisor Engine that
27:03
Speaker 1: is really a full technology stack try to help people
27:06
Speaker 1: manage from client on boarding, account opening digital. It's a
27:10
Speaker 1: very digitizing your investment practice and that's gonna be an
27:13
Speaker 1: increasing part of what we do over time. I see
27:15
Speaker 1: it from just the conversation we've had in the last
27:17
Speaker 1: few months going out with Advisor Engine together. Um, they're
27:20
Speaker 1: becoming an increasing partner. But as well as you know
27:23
Speaker 1: are we're also we've been investing in technology ourselves for
27:27
Speaker 1: the last few years, and so we created some great tools.
27:30
Speaker 1: We call it portfolio construction services on our website, just
27:33
Speaker 1: digital portfolios, a way to do analytics, institutional caliber stuff
27:36
Speaker 1: that people pay very high fees for. We're trying to
27:39
Speaker 1: provide for free that will help you look at your portfolio,
27:42
Speaker 1: look at different factor exposures, stress test, it creates some mappings,
27:46
Speaker 1: edit your own what we spit back out it there
27:48
Speaker 1: for you. So it's a really trying to help people
27:52
Speaker 1: with their portfolio management side. That's available to any advisor
27:55
Speaker 1: or anybody who goes to the wood and financial professionals
27:59
Speaker 1: uh through you know, there's you gotta have to log
28:02
Speaker 1: in on our website and that's all you need as
28:04
Speaker 1: a financial professional and you can get access to the
28:06
Speaker 1: portfolio tool. So you mentioned robo advisors. I'm a little
28:11
Speaker 1: bit of a contrarian because, hey, you know what, if
28:14
Speaker 1: you give me two hundred million dollars in venture capital
28:17
Speaker 1: money from marketing, I could raise three or four billion dollars.
28:21
Speaker 1: But the better way to think about it is, Wait,
28:23
Speaker 1: you've spent a hundred million dollars to generate four or
28:26
Speaker 1: five million dollars a year in revenue. How is that
28:29
Speaker 1: going to take over the world. Yeah, I don't want
28:30
Speaker 1: to comment on valuations there, but it's it's everybody's going
28:34
Speaker 1: to have some element of that. I mean, it's that
28:36
Speaker 1: that technology all clients are going to access their accounts online.
28:41
Speaker 1: I think everything place already now is increasingly I mean,
28:45
Speaker 1: if you think about it, everybody who's got a custodian
28:47
Speaker 1: be a Schwab or TV, your fidelity, you get a
28:50
Speaker 1: full dashboard online. You could see your holdings. You can
28:53
Speaker 1: more or less see your performance. What what the robos
28:57
Speaker 1: seem to do is come up with an asset allocation
28:59
Speaker 1: mob all relative to your risk tolerance. How unique is
29:03
Speaker 1: that and and is that gonna spread to the rest
29:06
Speaker 1: of the industry. I think, you know, our our firm
29:10
Speaker 1: has been investing on the advisors side. We think there
29:12
Speaker 1: there will be some people who like to go direct
29:14
Speaker 1: to consumer and people manage our own money and do
29:16
Speaker 1: that through through what they're offering, and they have very
29:19
Speaker 1: good jet you know, generic offerings. Is that Is that
29:22
Speaker 1: going to be true for the average high net worth family.
29:24
Speaker 1: Someone has three million dollars five million dollars in the market.
29:27
Speaker 1: Do they want to pick up the phone and speak
29:29
Speaker 1: to somebody or they want to log in? I think
29:31
Speaker 1: most people there's a spa is how much of the
29:34
Speaker 1: wealth around is is advisor overseeing versus direct? I think
29:39
Speaker 1: we're still we've always from the beginning in position for
29:42
Speaker 1: working with advisors and financial intermedis. I think that's how
29:45
Speaker 1: we continue to see. You know, so all of our
29:47
Speaker 1: investments in technology advisor solutions is really trying to help
29:50
Speaker 1: advisors build their businesses and it's very tough to find
29:53
Speaker 1: that individual client, and that's what we're going to continue
29:56
Speaker 1: position for. I'm curious as to how much of a
30:00
Speaker 1: fear of robo advisors is a generational thing that the
30:05
Speaker 1: older advisors see the new technology and fear it, and
30:09
Speaker 1: the younger advisors say, yeah, this is just another tool
30:11
Speaker 1: in our another arrow in my quiver. And the research
30:15
Speaker 1: we've seen is that even the older generations they've been
30:17
Speaker 1: working with technology, you know, the successful people, they've been
30:21
Speaker 1: operating with technology. So they even the seventy year olds,
30:24
Speaker 1: they need they want your a digital experience. UM So
30:27
Speaker 1: if you if you're not on board with upgrading your technology,
30:30
Speaker 1: if you're still in the paper world, clients are going
30:33
Speaker 1: to go to firms that have the digital offerings. And
30:36
Speaker 1: so that's that's the trend that we see just continuing
30:38
Speaker 1: and we want to help on the clients that we
30:40
Speaker 1: work with do that and do it do it well.
30:43
Speaker 1: So you mentioned fees earlier, we've been talking about that
30:46
Speaker 1: for for forever. UM Very recently Fidelity introduced the concept
30:52
Speaker 1: of the Falcrum fee, which is a reduced fee if
30:56
Speaker 1: they're not out not out performing a particular benchmark. Is
31:00
Speaker 1: that's something that potentially can catch on. What are your
31:02
Speaker 1: thoughts on these fulk room fees. Conceptually, it's a very
31:05
Speaker 1: interesting I mean, it's a it's what you would think
31:08
Speaker 1: you want as a consumer products. If you're manager, you're
31:10
Speaker 1: trying to outperform. Your manager doesn't outperform, you should pay less.
31:13
Speaker 1: And so conceptually I'm I'm aligned with it. The incentives
31:17
Speaker 1: are very hard to align it in sort of a
31:19
Speaker 1: public vehicle like in ETFU. There are some people who
31:23
Speaker 1: are starting to experiment with that, so we're definitely watching
31:25
Speaker 1: that closely, UM, and and you just you want to
31:28
Speaker 1: make sure if you're doing it, you've got align when
31:31
Speaker 1: people are invested in the fund, you know, time periods,
31:34
Speaker 1: the incentives for both the investors in the fund. Properly
31:37
Speaker 1: timing up who's paying what when is not a straightforward
31:42
Speaker 1: proposition in the public vehicle like ETFs, I mean, as
31:45
Speaker 1: a doing a one on one, separate account where you
31:47
Speaker 1: can manage your time horizon with your performance in the
31:50
Speaker 1: fund super easy to think about. But as a ute
31:54
Speaker 1: et f rapper, that's a challenge that seems challenging me.
31:57
Speaker 1: But you know, I'm sure there's gonna be ways of
31:58
Speaker 1: looking at that and we'll we'll study that and see
32:01
Speaker 1: think about it. So you guys are are pretty heavy
32:04
Speaker 1: value oriented, you're pretty heavy divinend oriented. These are part
32:09
Speaker 1: not that dividends are. But it's the same traditional FAMA
32:14
Speaker 1: fringe factor models. What do you think of the rise
32:17
Speaker 1: of so called smart beta, which really is factor investing
32:21
Speaker 1: with a little bit of a different marketing twist, and
32:24
Speaker 1: you guys get painted with that same brush. What you
32:29
Speaker 1: call things is always an interesting term, and we used
32:31
Speaker 1: to call things passive alpha when we first started passive alpha,
32:35
Speaker 1: trying to get rules based ways of generating alpha in
32:38
Speaker 1: a lot of ways. I think what we're trying to
32:41
Speaker 1: provide is lo fi alpha, or you could say modern alpha.
32:43
Speaker 1: You know the idea I like that modern alpha in
32:46
Speaker 1: other words, low fie passive technology twist. And so you're
32:53
Speaker 1: using technology algorithms to add value. It's going to be
32:56
Speaker 1: increasingly you're you're using smart technology, which is its century
33:01
Speaker 1: technologies to try to add value UM and so increasingly,
33:04
Speaker 1: where we might have been low tracking error alpha, we're
33:08
Speaker 1: increasingly going to be going after the higher tracking air
33:10
Speaker 1: real value added defined tracking a sort of how much
33:14
Speaker 1: risk versus the benchmark you're taking. So we're not talking
33:17
Speaker 1: about active share, we're talking about risk adjusted returns. Yeah,
33:21
Speaker 1: we active share is a component of that. So the
33:23
Speaker 1: more active share you are, the higher tracking AIR is
33:25
Speaker 1: likely to be because the more mismatch you are from
33:27
Speaker 1: the front. So UM, I think about it as the
33:32
Speaker 1: closer you are to the benchmark, the lowrier tracking AIR
33:34
Speaker 1: will be. And that's what just a total market, if
33:37
Speaker 1: you have two thousand stocks, you're gonna have a pretty
33:39
Speaker 1: low tracking air. Let's talk about a little bit about bonds.
33:41
Speaker 1: We haven't gotten to fixed income at all. How are
33:44
Speaker 1: you perceiving what's going on in that space? Can you
33:48
Speaker 1: create alpha in the fixed income side? What? What do
33:51
Speaker 1: you guys? Absolutely so we do. We have enhanced yield
33:56
Speaker 1: bond indexes. And actually you know we're here in the
33:58
Speaker 1: Bloomberg offices. Were part here with bloom Bloomberg on a
34:01
Speaker 1: number of fixing come indexes Yield Enhanced Bloomberg Barclay's Total
34:06
Speaker 1: fixing income indexes where you're just you know, historical yields
34:10
Speaker 1: are as low as they've been in the US market,
34:13
Speaker 1: duration is the highest. But can you sort of rewaight
34:16
Speaker 1: the agg away from just treasuries, which have been huge issuance,
34:19
Speaker 1: low yield, high duration, reweight towards credit, which is what
34:22
Speaker 1: your traditional active corporates tips, what reads. What are you
34:25
Speaker 1: adding to. It's the traditional investment grade agg universe, but
34:29
Speaker 1: just rebucketing it to have constraints so you don't an
34:32
Speaker 1: increase ration too much, You don't tilt to credit too much,
34:35
Speaker 1: but it really it tilts to credit in away from
34:38
Speaker 1: treasuries and a constrained fashion. So we have a short
34:40
Speaker 1: term version the e t F is SHAG s h
34:43
Speaker 1: a G. The longer term is AGGIE so AG y
34:47
Speaker 1: UM as a way to just yield enhancing the agg
34:49
Speaker 1: we're definitely seeing traction there. It's early days um, but
34:52
Speaker 1: I think that's our first factor investment in fixed income.
34:54
Speaker 1: But we've also done fundamentally screened sort of credit screen
34:59
Speaker 1: so looking at in the high old market as an example,
35:01
Speaker 1: screening out bonds with negative free cash flow, not just
35:04
Speaker 1: issuing market cap, which gives the biggest way to the
35:07
Speaker 1: biggest indebted issuer, screen out those bonds with negative free
35:10
Speaker 1: cash flow, and that's a quality portfolio on bonds that
35:13
Speaker 1: we've we have four different funds screened around that as well.
35:16
Speaker 1: Can you stick around a little bit about we'll keep talking.
35:19
Speaker 1: We have been speaking with Jeremy Schwartz. He is the
35:21
Speaker 1: director of research at Wisdom Tree Investments. If you enjoy
35:25
Speaker 1: this conversation, be sure and stick around for the podcast
35:29
Speaker 1: extras where we keep the tape rolling and continue chatting
35:32
Speaker 1: about all things value, et F and divinend oriented. Be
35:37
Speaker 1: sure to check out my daily column. You can see
35:39
Speaker 1: that at Bloomberg view dot com. Follow me on Twitter
35:42
Speaker 1: at Hults. I'm Barry Riholts. You're listening to Masters in
35:46
Speaker 1: Business on Bloomberg Radio. Welcome to the podcast. Jeremy. Thank
36:02
Speaker 1: you so much for doing this. We have been talking
36:05
Speaker 1: about doing this for like a year and a half.
36:07
Speaker 1: I'm like, oh, I have to get you on the
36:09
Speaker 1: show for for forever. So I'm so glad we managed
36:13
Speaker 1: um to get in to get you in. And by
36:16
Speaker 1: the way, Medina and you could keep this in that
36:20
Speaker 1: last conversation where he was describing Junior Jeremy in the intro.
36:25
Speaker 1: I love that we should keep that on the broadcast portion.
36:30
Speaker 1: So just just not or say yes or something, and
36:33
Speaker 1: I'm fine. Um So, so anyway, let's talk a little
36:39
Speaker 1: more about Siegel, because I'm endlessly amused by him. In
36:44
Speaker 1: full disclosure, I used to bust his chops heading into
36:47
Speaker 1: O eight o nine about um, just buy and hold
36:51
Speaker 1: and kind of forget to me. The O eight o
36:54
Speaker 1: nine crisis was You're never gonna call every crisis, but
36:57
Speaker 1: dear Lord, you can if you looked. I used to
37:00
Speaker 1: call it the leaping dolphin. Remember the three D pictures
37:04
Speaker 1: people used to have on the wall, the posters where
37:07
Speaker 1: it didn't look like anything, but if you caught it
37:09
Speaker 1: at just the right angle, Oh, there's the leaping dolphin.
37:12
Speaker 1: That That's kind of how I felt about the last crisis.
37:15
Speaker 1: But full full disclosure, I'm endlessly impressed, entertained, amused by
37:22
Speaker 1: Siegell for so many reasons. Him and Bob Shiller buddies.
37:27
Speaker 1: Are there two more opposite personalities. I've got a great
37:30
Speaker 1: story on sea so um in a way of when
37:33
Speaker 1: I was courting my wife. So my wife likes to
37:35
Speaker 1: joke that, you know, I met her in two thousand one,
37:39
Speaker 1: and I met the love of my my true life,
37:41
Speaker 1: of my life in two thousand one, which is when
37:42
Speaker 1: I started working for Siegel also, but you know that
37:45
Speaker 1: first summer I started working for him, she was taking
37:48
Speaker 1: a class where she had to do a book report
37:51
Speaker 1: reviewing and contrasting Irrational Exuberance with which Bob Schiller's book
37:57
Speaker 1: where he had had briefed Um green Span in ninety six,
38:01
Speaker 1: and then green Span went out and gave the Irrational
38:04
Speaker 1: Zuberan speech based on Schiller's work, and then Schiller named
38:08
Speaker 1: the book Irrational Zuberans. Yeah, And so you know, they
38:11
Speaker 1: talked about how they vacation together. So on one of
38:13
Speaker 1: those two thousand one summer vacations there in Ocean City,
38:17
Speaker 1: Segul invited me to a barbecue and stay with them
38:19
Speaker 1: for the weekend. In Ocean City. Schiller was coming down,
38:21
Speaker 1: The New York Times was coming to profile and they
38:24
Speaker 1: did the walks on the beach with the New York
38:26
Speaker 1: Times Profile, And so I got to invite my wife
38:29
Speaker 1: to the she was my girlfriend obviously at the time,
38:32
Speaker 1: just to impress to the barbecue, and she had to
38:34
Speaker 1: be she was doing this book report on Irrational zuber
38:38
Speaker 1: and she tells the professor, I have to miss class.
38:41
Speaker 1: I'm going to this barbecue with siegu and Schiller and
38:44
Speaker 1: can I come? But she got to, you know, she
38:47
Speaker 1: wrote her paper and she was giving examples of we
38:51
Speaker 1: went to Atlantic City and they're playing black jack and
38:53
Speaker 1: Siegel was into black jack, playing the cards, best odds
38:56
Speaker 1: in the house, and Schiller didn't even you know, didn't
38:59
Speaker 1: want to play the black chacked tables. And she put
39:01
Speaker 1: that in her paper on the stories of how even
39:03
Speaker 1: they're gambling. You know, Siegel embraced the risk of liking
39:07
Speaker 1: to play black shack and Chiller was so risk averse
39:09
Speaker 1: and didn't want to play blackjack. She gotten you know,
39:11
Speaker 1: eight plus on the paper. But that was, you know,
39:14
Speaker 1: in an interesting time. So that's those stories of them
39:16
Speaker 1: vacation together are real. Um. And actually my first project
39:20
Speaker 1: where I got to show Siegel my writing was also
39:23
Speaker 1: really to Bob Schiller. So in what way go explain that?
39:26
Speaker 1: So Stocks to the Long Run you know, came out,
39:30
Speaker 1: he did the second dition. I was working with him
39:32
Speaker 1: on the two thousand two edition, and right after I
39:34
Speaker 1: spent the weekend or you know that vacation, I said,
39:37
Speaker 1: you know, of all the stuff topics you have in
39:39
Speaker 1: socks long when you have nothing on behavioral finance. Um,
39:42
Speaker 1: and your best friend is Bob Schiller. Come on, and
39:45
Speaker 1: you wrote a paper with Richard Taylor, and Faylor just
39:49
Speaker 1: won the Nobel Prize for a lot of his work,
39:51
Speaker 1: and Siegel and Taylor had collaborated on some work together.
39:54
Speaker 1: So I said, let's you should add a chapter. And
39:56
Speaker 1: he's always had quantz and math people, but he never
39:59
Speaker 1: had a writer. Um, So I said, why don't you
40:01
Speaker 1: let me take a stab at it? And so I
40:03
Speaker 1: wrote the behavioral finance chapter for a Doctor long Run.
40:07
Speaker 1: And you could see if you read it, it's very
40:08
Speaker 1: different than any other chapter in the book. Is actually
40:10
Speaker 1: written as a conversation between a psychologist. You know, a
40:13
Speaker 1: couple goes to their psychologists and having all these behavioral
40:16
Speaker 1: issues and the psychologist walks him through all their behavioral
40:19
Speaker 1: finance problems. You can see it's very different than the
40:21
Speaker 1: rest of the book. That that that's so funny. You know.
40:24
Speaker 1: I have a number of Schiller stories, but the only
40:26
Speaker 1: one I want to share is after he did the show,
40:30
Speaker 1: I wasn't gonna put Bob Schiller on on a subway.
40:33
Speaker 1: He had to go somewhere else. So I got a
40:34
Speaker 1: car and I took him in a cab pouring rain,
40:39
Speaker 1: tons of traffic. I was afraid we're gonna be late,
40:42
Speaker 1: but he gets into the back of the cab and
40:44
Speaker 1: immediately puts on a seatbelt, and I'm like, Ah, this
40:47
Speaker 1: is a person who really understands risk. Yeah, you can
40:51
Speaker 1: see carry throughout there all all their lives. So so
40:54
Speaker 1: let's talk a little bit about segull. I have a
40:56
Speaker 1: couple of seagulls stories. Also, I really enjoy him. When
40:59
Speaker 1: he was on the podcast. I think it was the
41:02
Speaker 1: first time I met him in person, as opposed to
41:05
Speaker 1: a disembodied head on tv um or a voice in
41:08
Speaker 1: in an in an earpiece while you're debating him about something.
41:12
Speaker 1: And the only way I could really describe him is
41:16
Speaker 1: filled with childlike wonders. Am I overstating that at all?
41:21
Speaker 1: I mean his passion for teaching, his passion for the markets.
41:24
Speaker 1: It's just that's what gets people excited. I mean why
41:27
Speaker 1: he's the most popular professor at Wharton, And let me
41:30
Speaker 1: stop you there. Year after year he is consistently voted
41:33
Speaker 1: by Wharton students their favorite professor, and in the NBA
41:37
Speaker 1: World you have to pay for your classes, so it's
41:40
Speaker 1: a real market based system. If you have a certain
41:41
Speaker 1: number of points, you can allocate it. And I remember
41:44
Speaker 1: when this was. I haven't kept tracked with the points,
41:47
Speaker 1: but when I was there, he was always the most
41:49
Speaker 1: highly bid professor. And it's why it's while he starts
41:53
Speaker 1: his class, his first half hour of every class is
41:55
Speaker 1: essentially just to look at the markets, and he that
41:58
Speaker 1: day he has his Bloomberg term know up, He's walking
42:01
Speaker 1: through what's going on news wise, and so it's the
42:04
Speaker 1: only you go to Wharton and you think this is
42:06
Speaker 1: the most practical thing to learn about the markets, but
42:08
Speaker 1: it's really the only class that actually does really go
42:11
Speaker 1: through what's happy in the real time, actual market. And
42:14
Speaker 1: looking at the other thing about him that I found
42:16
Speaker 1: so amusing, he look, we go a little long the
42:20
Speaker 1: whole ideas. These are deeper dive conversations. He's sitting where
42:24
Speaker 1: you were sitting, and about an hour into the conversation
42:28
Speaker 1: and I'm doing it now, he starts just you know,
42:31
Speaker 1: it's it's swivel chair. He just starts rocking back and
42:33
Speaker 1: forth while while gesticulating and and answering the question. And
42:38
Speaker 1: then he started and I'm wearing just one earpiece. The
42:42
Speaker 1: guest isn't wearing anything. He starts spinning in circles on
42:45
Speaker 1: the It was the most amusing, charming and transing thing.
42:49
Speaker 1: And if you listen towards the ends of the Seagull podcast,
42:54
Speaker 1: you could kind of hear him whipping around the microphone
42:57
Speaker 1: as he spins around, because like he really gets into
43:01
Speaker 1: it and was he's presenting. He's pacing back and forth,
43:04
Speaker 1: and he's like I can see him jumping on a
43:07
Speaker 1: desk and waving his arms. He gets animated. That's for sure.
43:11
Speaker 1: That that's that's really interesting. Um, So let's talk a
43:14
Speaker 1: little b about some of the things we missed during
43:17
Speaker 1: the broadcast. There were a couple of questions I had
43:20
Speaker 1: to ask you because, uh, we talked about a lot
43:23
Speaker 1: of things we hardly mentioned. Some guy named Michael Steinhardt,
43:29
Speaker 1: legendary investor, uh, founder of Wisdom Tree. Tell us about
43:35
Speaker 1: his role with the creation and development of the country
43:38
Speaker 1: of the company and what sort of working relationship you
43:43
Speaker 1: have with him. So I would say, he's the chairman
43:45
Speaker 1: of the company. He was the original backer and the
43:47
Speaker 1: sort of he funded the company. So Jonathan Steinberg was
43:51
Speaker 1: in Luciana Sasano was their intellectual property stort, developing the
43:54
Speaker 1: firm after the magazine initial investor group. But Michael, you know,
43:58
Speaker 1: he hadn't done anything. He had retired, He closed his
44:01
Speaker 1: fund after literally starting the hedge fund industry, hadn't the
44:04
Speaker 1: best for twenty nine years, I think something like returned
44:08
Speaker 1: an incredible track record, and then he closed the fund
44:11
Speaker 1: in ninety four, dedicated his life to charity, Like you
44:16
Speaker 1: still have seven years of a booming bullmarket. He's like, nope,
44:19
Speaker 1: I'm done. Yeah, he just he That's another story for
44:23
Speaker 1: another day. But he closed it. He didn't do anything
44:26
Speaker 1: finance wise. He was giving back, giving his money to charity,
44:29
Speaker 1: and he didn't do anything literally in finance until Wisdom
44:32
Speaker 1: Tree uh in decade later, two thousand four year, so
44:35
Speaker 1: he met John oh and John O was had the
44:37
Speaker 1: idea about the et F structure and and really this
44:39
Speaker 1: better way performance based indexing was his concept, and Michael was.
44:44
Speaker 1: I mean, there's a story I remember from the early
44:46
Speaker 1: days that Michael said, you know, if I was presented
44:48
Speaker 1: with the opportunity to fund Vanguard, I would have that
44:51
Speaker 1: I would not have. He would not have because he
44:53
Speaker 1: was not about tracking the market. He was about beating
44:56
Speaker 1: the market and he wanted he saw this idea of
44:58
Speaker 1: trying to generate better performance, a very performance oriented culture,
45:03
Speaker 1: and so that's what really inspired him to get involved
45:05
Speaker 1: with JOHNO and John Oh you know, linked it up
45:08
Speaker 1: with Siegel and we helped validate their initial research and
45:10
Speaker 1: gave some academic back into why we think this could
45:13
Speaker 1: work going forward and that there was something to this.
45:16
Speaker 1: And that's how the that sort of trinity came together
45:19
Speaker 1: of Steinhardt funding, Professor Siegel joining and also fund to
45:22
Speaker 1: get back and back in a four and joining the
45:24
Speaker 1: senior advisor, and then they brought me on together. But
45:27
Speaker 1: it's it's um, it was that performance oriented mindset that
45:31
Speaker 1: Steinhardt really wasn't inspired by. H That's quite fascinating. And
45:36
Speaker 1: I don't know Jonathan stein but I know his father
45:40
Speaker 1: was Soul Stein, who ran Reliance Insurance. This is back
45:44
Speaker 1: in the eighties and nineties, way back when. Yeah, and
45:47
Speaker 1: I didn't really get to know Saul, but in the
45:49
Speaker 1: in this in this small world, um, you know, I
45:51
Speaker 1: used to work in the Steinberg teacher call at Wharton
45:53
Speaker 1: and Professor Siegel is the shared by Saul Steinberg. So
45:56
Speaker 1: it's a small, interconnected world of how it all comes together. Um,
46:00
Speaker 1: but yeah, it's been. It's been a great relationship. And
46:03
Speaker 1: he's also one of these passionate about et s, passionate
46:06
Speaker 1: about what we're doing, and really is assembled just a
46:08
Speaker 1: remarkable team at with some tree. So you guys are
46:12
Speaker 1: so valuation oriented, I would be remiss if I did
46:16
Speaker 1: not ask you about valuations of stocks and bonds. First,
46:22
Speaker 1: since we talked about Chiller, let's talk about the cape ratio.
46:25
Speaker 1: Does the cape ratio tell the full story? Um, it's
46:29
Speaker 1: a it's a it's a complicated question there. Um you
46:32
Speaker 1: know it's Siegel has done a lot of work on this,
46:34
Speaker 1: and which I find, by the way, I find hilarious
46:36
Speaker 1: that the two of them are arguing in white papers,
46:39
Speaker 1: good naturedly about what is the value of the cape?
46:43
Speaker 1: Is it worth something? Is it not worth a lot?
46:45
Speaker 1: Is it just here you're expected returns? Or does it
46:47
Speaker 1: really give us buying cell signals? And Siegel loves the framework.
46:52
Speaker 1: He thinks that it has been one of the better
46:54
Speaker 1: predictors of long term returns. He thinks the earnings numbers
46:57
Speaker 1: are biased and that is creating problems. So counting numbers
47:01
Speaker 1: changed the O nine crisis, which is still in the CAPE. Basically,
47:05
Speaker 1: three firms wiped out all of the earnings of the spire.
47:07
Speaker 1: They were small firms. Wait to say that again? Three
47:10
Speaker 1: How is that possible? Three firms wiped out all of
47:13
Speaker 1: the earnings of the sp basically Bank of America's City
47:16
Speaker 1: Group A I G. The way they do not exactly
47:19
Speaker 1: small firms, no, but but at the time they were
47:21
Speaker 1: by market value, they were small by market values, almost
47:24
Speaker 1: giant companies with the so so go go. We'll go
47:29
Speaker 1: through an example here, but by market value they were
47:31
Speaker 1: small at the time, and they destroyed all of the earnings.
47:34
Speaker 1: So you're investing, and take a simple to stock example
47:38
Speaker 1: the city and but take a simple example you have
47:43
Speaker 1: of your portfolio. Okay, let's say you have a hundred
47:47
Speaker 1: forty billion ten billion dollars. One firm is is ten
47:51
Speaker 1: billion of profits, another firm is is negative nine billion, okay,
47:55
Speaker 1: and the first one So you have a hundred fifty
47:59
Speaker 1: billion market cap set and firm nagative nine billion profits
48:01
Speaker 1: called ten billion. So you have one billion of total
48:05
Speaker 1: profits for the combined firm hundred sixty billion market cap.
48:09
Speaker 1: So is your p D sixty, or is your pe
48:13
Speaker 1: of your portfolio at what is the trooper? What is
48:17
Speaker 1: the troop or folio P? And the way S and
48:20
Speaker 1: P does their earnings is dollar for dollar, and so
48:23
Speaker 1: that's makes sense. It's a it's a problem in the
48:26
Speaker 1: way of the accounting on the on the P ratios.
48:29
Speaker 1: So so here's the pushback on that. When you look
48:31
Speaker 1: across the universe of earnings. Let's let's hold McDonald's and
48:37
Speaker 1: g e Aside, who absolutely in the recession, so we're
48:41
Speaker 1: an earnings crunched, but they still were on the green
48:43
Speaker 1: side of the ledger more or less. But you have
48:47
Speaker 1: Lehman Brothers going to zero when Bear Sterns earnings you know,
48:50
Speaker 1: both of them deeply negative. And then there's a hundred
48:54
Speaker 1: other financial related firms who saw their earnings compressed, be
48:59
Speaker 1: it Black Rock or U B A U B S
49:03
Speaker 1: is a A d oh, so not that, but you
49:05
Speaker 1: could look at a ton of different Every bank, the
49:08
Speaker 1: home builders totally one of the crapper, The broker dealers
49:11
Speaker 1: got slacked, the community banks did really poorly. So while
49:16
Speaker 1: those three firms had like a massively negative earnings number,
49:21
Speaker 1: everybody else's numbers really came down or we're you know
49:25
Speaker 1: what best flat, And that's before we start talking about industrials.
49:30
Speaker 1: Auto sales fall off the cliff. I mean, you could
49:33
Speaker 1: go down the list of of sectors. So while for
49:37
Speaker 1: sure these three companies had an outsized impact, the rest
49:40
Speaker 1: of earnings fell. Well that that's the question how much
49:45
Speaker 1: did they really fall? And so I think if you
49:47
Speaker 1: look at things like the niper profits um National incomproduct
49:51
Speaker 1: account profits or their GDP numbers where they count profits,
49:53
Speaker 1: they didn't fall anywhere near as much. And so when
49:56
Speaker 1: you do these perations, but that's not what we use
49:58
Speaker 1: for pe earning, the questions how do you get a
50:01
Speaker 1: real earnings number? And what is the real earning series?
50:04
Speaker 1: And so there's there's biases in the numbers, and you
50:08
Speaker 1: could you could debate on how much the magnitude is.
50:10
Speaker 1: But they changed the accounting rules, so now you're forced
50:12
Speaker 1: to mark down losses. I mean, Buffett writes about this
50:15
Speaker 1: all the time. He says, I can never write up
50:16
Speaker 1: the value my assets. You can only mark down the
50:19
Speaker 1: value of assets, and so the accounting rules are one
50:21
Speaker 1: side of there. But they suspended that for banks right
50:24
Speaker 1: after what was it the October o eight debacle, and
50:28
Speaker 1: then again in um the first the whole, um, the whole.
50:33
Speaker 1: I'm trying to remember with the which accounting rule changed,
50:37
Speaker 1: but essentially essentially we allowed banks that you could segment them,
50:41
Speaker 1: you don't have to write them down. So for all
50:43
Speaker 1: we really know, these banks were insolvent and we're running
50:46
Speaker 1: on fumes and government handouts. So I'm pushing back on
50:51
Speaker 1: the well, things really weren't that bad, they were got awful. Then,
50:55
Speaker 1: Oh no, I get that they're got awful, um, but
50:57
Speaker 1: the question is that it's been a poor in the
51:01
Speaker 1: last three years. It's certainly been a very poor predictor,
51:03
Speaker 1: and so the question about that. So the question is,
51:05
Speaker 1: in fact, you're you're better off buying when earnings are
51:08
Speaker 1: worth their worst than buying when the earnings are worth
51:10
Speaker 1: the better best. And it will kept you out of
51:13
Speaker 1: the market for basically all but a few months, I
51:15
Speaker 1: mean even O nine, right, a few months after the
51:17
Speaker 1: market rebounded, oh nine, it was telling you to stay
51:20
Speaker 1: out of the market. And the market's up to two
51:22
Speaker 1: to three x since then. So and then the question
51:24
Speaker 1: is at least three x in the US, to say
51:26
Speaker 1: the least. And so you know, in terms of going forward,
51:29
Speaker 1: how do you look at valuations today, I'd say, you know,
51:33
Speaker 1: the S and p P s around twenty times earnings.
51:36
Speaker 1: And this is going back and forth with Seagull, but
51:37
Speaker 1: he would say the earning seal is close to five
51:39
Speaker 1: percent today, and so you get a real earning seal
51:41
Speaker 1: of five percent versus historical average of what sixteen is
51:46
Speaker 1: the average pe. So when he says stocks are long,
51:48
Speaker 1: when you had a six seven long term real return,
51:50
Speaker 1: that's basically one divided by the six team. So that's
51:53
Speaker 1: where you get the sixth six seven real return. Inverting
51:56
Speaker 1: it will take out the zeros. It's just the earning sale.
51:58
Speaker 1: It's just povere versus EO repeat, and so you get
52:01
Speaker 1: six seven um today. If it's the piece twenty, you
52:04
Speaker 1: get a five percent earning sield. You know, the historical
52:07
Speaker 1: equity premium phrase two years of data was three. Today
52:11
Speaker 1: the real equity you could say the real equity premium
52:14
Speaker 1: is like four and a half because the tenure tips
52:16
Speaker 1: is at fifty and you have a five earning sield.
52:19
Speaker 1: And on top of that, and this is a whole
52:21
Speaker 1: another conversation, but on top of that, when you look
52:24
Speaker 1: at the money being thrown off by companies like Google
52:28
Speaker 1: and Amazon and Facebook. It's not like the old days
52:31
Speaker 1: where you're building a railroad, you hire ten thousand people
52:34
Speaker 1: and buy you know, endless tonnage of steel. Look at
52:38
Speaker 1: look at what'sapp or look at Instagram or some of
52:41
Speaker 1: these other things where it's twenty people are worth five
52:45
Speaker 1: billion dollars and their core structure is a handful of
52:47
Speaker 1: laptops and some Internet connectivity. And that's the worry that
52:50
Speaker 1: people say, Well, margins are going to mean revert and
52:53
Speaker 1: they're gonna be the problem that we're at these high
52:56
Speaker 1: valuations and margins are are high and they're gonna head downward.
52:59
Speaker 1: So that the most barrish argument is that margins have
53:01
Speaker 1: to mean reversion, but they may not because of what
53:03
Speaker 1: you're saying, that different return on capital, that you just
53:08
Speaker 1: have a different profile. M You know, the problem with
53:10
Speaker 1: mean reversion is, hey, if you're waiting for mean reversion
53:12
Speaker 1: and the leather belt companies and steam engines, that that
53:16
Speaker 1: isn't happening. And you know, I always I never want
53:19
Speaker 1: to come across as an apologist for expensive stocks. But
53:23
Speaker 1: that's before you even start talking about the frictions of
53:27
Speaker 1: executing a trade. Buying a stock buying an ETF. It
53:30
Speaker 1: used to be immensely expensive to go out and just
53:33
Speaker 1: buy a stock. That isn't the case anymore, right, So
53:35
Speaker 1: if you may have had to pay more than one
53:37
Speaker 1: probably paid more than one to two percent to actually
53:39
Speaker 1: get market like portfolios and get these diversified portfolios where now,
53:43
Speaker 1: like we talked in the first segment, they're basically free
53:45
Speaker 1: to get diversification. And so how much higher should pe
53:48
Speaker 1: ratios be going forward compared to the past, and you
53:50
Speaker 1: don't have that friction, You can say you could justify
53:53
Speaker 1: a compared to a six ten p um And whenever
53:57
Speaker 1: you really did have single digit ps, you had double
53:59
Speaker 1: digit interest rates. So how far are we from double
54:02
Speaker 1: digit interest rates? So the pushback on stocks are expensive?
54:05
Speaker 1: Stocks are cheap? Hey, stocks are cheapest hell throughout the
54:08
Speaker 1: seventies because you can get ten percent in treasury. So
54:11
Speaker 1: why would you be invested in stole if you could
54:13
Speaker 1: get ten percent in treasuries today? And we gladly go
54:16
Speaker 1: all my portfolio bonds. But if you're getting tempercent treasuries,
54:19
Speaker 1: we have an inflation problem which is going to be different,
54:22
Speaker 1: which let's talk about bonds. So there's a huge swath
54:26
Speaker 1: of bond bears who have been declaring the end of
54:29
Speaker 1: the thirty year Paul Volcan induced bond bull market. For
54:33
Speaker 1: I don't know, about ten years we've been hearing this
54:35
Speaker 1: is the end of the bond market our bonds. By
54:39
Speaker 1: the way, you guys value the way Wisdom Tree values
54:43
Speaker 1: fixed income? Are we in a bond bubble? Well, segu
54:47
Speaker 1: and I had did some op eds in the Law
54:48
Speaker 1: Street Journal together. You don't get to choose your title
54:52
Speaker 1: in the Wall Street Journal. So that's true. By the way,
54:53
Speaker 1: for everybody who writes a column. People don't know this.
54:57
Speaker 1: The editors choose the headline and very often it's clicking
55:01
Speaker 1: and catchy, but may not reflect the nuances of what
55:05
Speaker 1: you wrote. And the nuance of the article was by
55:07
Speaker 1: different paint stocks over tips because you had a you know,
55:09
Speaker 1: a one percent ten year tips. The first article in
55:13
Speaker 1: had one percent ten year tips, and we said you
55:15
Speaker 1: could get stocks yielding three and six years ago. That
55:20
Speaker 1: worked out. That was a good, good call. The article
55:23
Speaker 1: is the Great American bond Bubble. So the title was, yes,
55:25
Speaker 1: there's this huge bubble and bonds. Because you had this
55:28
Speaker 1: one percent tips, then you had this negative tips shield
55:30
Speaker 1: you had negative one percent, which was really and which
55:33
Speaker 1: a few years later you had bond yields. In the
55:36
Speaker 1: U S. You would say, I'm going to give the
55:37
Speaker 1: US government a hundred dollars and get back ninety dollars
55:40
Speaker 1: after inflation ten years later on the expectation that it
55:43
Speaker 1: wasn't even disinflation, that there was full blown deflation coming away.
55:47
Speaker 1: It was just massive risk aversion. It's like, why would
55:49
Speaker 1: you give the government and take back You would never
55:52
Speaker 1: think you would have a ten year negative tips shield,
55:54
Speaker 1: but guess where you do have that today? You still
55:56
Speaker 1: have huge negative tips or inflation adjust body was in Europe.
56:00
Speaker 1: I mean Germany's tenure tips are negative, which which is
56:05
Speaker 1: not a surprise when you look at you had a
56:09
Speaker 1: financial crisis hit the whole world. But the order of
56:13
Speaker 1: recovery was the U S was the first and most
56:15
Speaker 1: aggressive responder. As much as people screamed about KWI and Zurup,
56:20
Speaker 1: we were the first there. Then it's arguable that Japan
56:24
Speaker 1: was next and Europe is still the lagger. Is that
56:27
Speaker 1: a fair description? Yeah? And I think even from where
56:29
Speaker 1: quee and monterary policy is going, you have the FED
56:32
Speaker 1: is quote unquote normalizing we're raising rates, we're reducing our
56:35
Speaker 1: balance sheet. You have Japan targeting zero yields on the tenure,
56:40
Speaker 1: so they sort of outsourced their monetary policy to the US.
56:44
Speaker 1: You have the ECB negative rates at the short end,
56:47
Speaker 1: you have them still aggressively expanding the balance sheet. Um,
56:50
Speaker 1: but you could still say, why should somebody have a
56:52
Speaker 1: negative inflation adjusted body for tenure? And that's a pretty
56:57
Speaker 1: aggressive statement that that's rational unless you're you really have
57:02
Speaker 1: an expectation that we're entering a period of deflation and
57:06
Speaker 1: your money is worth more today than tomorrow. I mean,
57:09
Speaker 1: that's the only way I can rationalize it. And these
57:11
Speaker 1: inflation adjusted yields, I mean, it's it's it's hard. It's
57:14
Speaker 1: just a sign of risk aversion that you don't trust
57:16
Speaker 1: money in the banks, that makes sense, and you don't
57:18
Speaker 1: want to get the negative you know, the CBS at
57:20
Speaker 1: negative forty and so they're they're they're sort of taxing
57:23
Speaker 1: your money by keeping them in and cash at the bank.
57:27
Speaker 1: You and I can talk about this stuff forever, but
57:29
Speaker 1: I only have you for a finite amount of time.
57:32
Speaker 1: So what say we jump to my favorite questions that
57:35
Speaker 1: I ask all of my guests. The first one is
57:40
Speaker 1: tell me something about your background that most people don't know.
57:44
Speaker 1: You know. So, and I think about this. I have
57:46
Speaker 1: two young daughters there, two and five, and you think
57:49
Speaker 1: about how much of where what you do at a
57:52
Speaker 1: young age influences You're like, you sort of think back
57:54
Speaker 1: to like where how do I get to where I am?
57:56
Speaker 1: And there's obviously the proximate causes getting linked up with
57:59
Speaker 1: Siegel at at Pen and how did I get hooked
58:01
Speaker 1: up with that and the people you met at Pen?
58:03
Speaker 1: But I actually go back to my dad says it
58:05
Speaker 1: goes back to when I was two and he would
58:08
Speaker 1: read me the you know, the Wall Streetjournal page in
58:10
Speaker 1: stock pages, showing me numbers and getting me interested in
58:12
Speaker 1: stocks from two years old on his knee, you know.
58:15
Speaker 1: So he thinks it was that that early. Um, I
58:18
Speaker 1: think about when did I really get good at math?
58:21
Speaker 1: And so when I was in first grade, Um, my
58:24
Speaker 1: parents moved to Baltimore for six months and I went
58:26
Speaker 1: to this Hebrew day school where they taught half the
58:28
Speaker 1: day in Hebrew and half the day in English Hebrew.
58:31
Speaker 1: So I spoke more Hebrew in first grade than I
58:33
Speaker 1: ever did ever. Again, so we moved down to Florida
58:35
Speaker 1: and that was end of that. But I was you
58:38
Speaker 1: could could have started speaking Yiddish in parts of so
58:40
Speaker 1: Supposedly when I moved back to South Florida, I was
58:42
Speaker 1: teaching people Hebrew in my class. But in first grade
58:46
Speaker 1: I was already in second grade math, so they accelerated me.
58:49
Speaker 1: And then I just always thought of myself as really
58:51
Speaker 1: good in math, sort of advanced from that one. You know,
58:54
Speaker 1: that first grade where you just get this edge from
58:57
Speaker 1: a different school and you transfer back to a different
58:59
Speaker 1: schoo And how much that then to establish my foundation
59:04
Speaker 1: throughout the rest of middle school, high school, college, coming
59:07
Speaker 1: in with a year's worth of credit so I could
59:09
Speaker 1: take off a year to work with Siegel. All these
59:11
Speaker 1: things started from basically when I was in first grade.
59:14
Speaker 1: You had you had an edge in first grade, and
59:16
Speaker 1: you just carried that forward, never let anybody catch up.
59:19
Speaker 1: I mean, it's it's hard to but I think it
59:21
Speaker 1: does carry all the way back there. So here's a
59:25
Speaker 1: silly question for you, but I'm assuming we can expand
59:29
Speaker 1: on it. Who are your early mentors and feel free
59:32
Speaker 1: to talk about Siegel although we've really discussed him a lot.
59:36
Speaker 1: At what you want or or describe other mentors. Yeah,
59:39
Speaker 1: I mean, so he's obviously been the number one that
59:41
Speaker 1: shaped the last twenty years. Um. I think one of
59:44
Speaker 1: the things that I hope to embody UM is he
59:47
Speaker 1: he said to me, you know, despite all he had
59:49
Speaker 1: obviously was successful from the books and the speaking and
59:52
Speaker 1: then wisdom he took it to another level. But he
59:55
Speaker 1: told me once that despite all that success, se um like,
1:00:01
Speaker 1: the impact he had on me over time was like
1:00:04
Speaker 1: just more even more rewarding. So I hope to have
1:00:07
Speaker 1: that influence on people who work with me. And so
1:00:10
Speaker 1: for I'm sure that my team is listening in when
1:00:13
Speaker 1: the podcast comes out, I hope to have that influence
1:00:15
Speaker 1: on them. And uh, you know, you have to embrace
1:00:18
Speaker 1: it like I embrace it with him, and you gotta
1:00:20
Speaker 1: push me to hopefully know my team tries to take
1:00:22
Speaker 1: me up on that. Beyond that, I mean the co
1:00:24
Speaker 1: founder's Wisdom Tree Jonathan Steinberg, which Channa Circustano gave a
1:00:28
Speaker 1: trust in me at a young age. I mean I
1:00:31
Speaker 1: was when I joined them twenty two years old, twenty
1:00:33
Speaker 1: three years old, and they made me head of research
1:00:35
Speaker 1: for his twenty seven managing a few billion dollars. So
1:00:39
Speaker 1: the trust and confidence in just seeing talent and trying
1:00:43
Speaker 1: to help you put them in a position to do well.
1:00:46
Speaker 1: Was was unbelievable. So they've mentored me in in unbelievable ways,
1:00:49
Speaker 1: um and and Seorat of I try to aspire to be.
1:00:52
Speaker 1: I mean, John O, our CEO, is really unbelievable character
1:00:55
Speaker 1: and it really leads us in a way that just
1:00:58
Speaker 1: what he's been able to overcome in terms of building
1:01:01
Speaker 1: Wisdom Tree, I mean, it's the odds were definitely stacked
1:01:03
Speaker 1: against him, and he's just built this incredible team and
1:01:07
Speaker 1: motivated us all to rally around it and keeps us
1:01:10
Speaker 1: motivated every day. So let's talk about investors. What investors
1:01:14
Speaker 1: influenced your approach to markets? Valuation, ETFs, etcetera. UM, some
1:01:22
Speaker 1: of the standards, I mean, it's very value based investing.
1:01:24
Speaker 1: So it's it's you know, you've read everything Buffets written
1:01:27
Speaker 1: and so the Behavioral Finance Crew from Failure and all
1:01:30
Speaker 1: all that he's written on on behavioral finance Schiller and
1:01:34
Speaker 1: that it's it's it's a it's a standard thing in
1:01:37
Speaker 1: the value quality type investing is a lot of it. UM.
1:01:41
Speaker 1: The one of the books I remember and he's they're
1:01:44
Speaker 1: also getting a great following now. You know, in terms
1:01:46
Speaker 1: of the quant finance group, you know, you've read things
1:01:48
Speaker 1: like What Works on Wall Street from the O'shaughnessys. That
1:01:52
Speaker 1: was one of the first books I read with working
1:01:54
Speaker 1: with Siegel, So all those, So it's a lot of
1:01:56
Speaker 1: the standard quant value quality type folks. So let's let's
1:02:00
Speaker 1: talk about books. This is everybody's favorite, UM question. I'm
1:02:05
Speaker 1: going to put down O Sam's What Works on Wall Street?
1:02:08
Speaker 1: What are some of your favorite books? By the way, fiction, nonfiction,
1:02:12
Speaker 1: investment related, whatever? What? What do you what have you
1:02:15
Speaker 1: enjoyed reading? What are you reading now? Yeah? And and
1:02:18
Speaker 1: and there's actually an overlap there from from O. Sam.
1:02:21
Speaker 1: So Patrick's reading list is probably one of my go
1:02:23
Speaker 1: to sources. UM. I think on a personal level, one
1:02:26
Speaker 1: of the books that I read that has influenced me
1:02:30
Speaker 1: in my thinking is there's a book Mountains Beyond Mountains
1:02:33
Speaker 1: from from Tracy Kidder who profiled Paul Farmer, and you
1:02:38
Speaker 1: know he it was a really moving book for me
1:02:40
Speaker 1: and as I thought about how do I become, you know,
1:02:43
Speaker 1: is there some charities to embrace? But Farmers started this group,
1:02:47
Speaker 1: Partners in Health, and it's one that I've embraced personally
1:02:50
Speaker 1: partners in health. Yeah, so he's just as a one man.
1:02:54
Speaker 1: He's a Harvard doctor goes to Haiti. That the book
1:02:58
Speaker 1: was all about his expeditions to Haiti and how is
1:03:00
Speaker 1: devoting his life to improving the health conditions in Haiti.
1:03:03
Speaker 1: But it's now expanded to their like in twelve different countries.
1:03:06
Speaker 1: But it was one that I found an O'Shaughnessy's list,
1:03:09
Speaker 1: and it's it's one that it definitely touched me and
1:03:11
Speaker 1: I sort of spread that to my friends who are
1:03:13
Speaker 1: involved in health and in health policy. It's it's a
1:03:16
Speaker 1: really fascinating book. What are you reading right now? What's
1:03:19
Speaker 1: on your nights? Then one that I think is actually
1:03:22
Speaker 1: for the next decade that I just i'm sort of
1:03:24
Speaker 1: in finishing is um Destined for War, which I Destined
1:03:29
Speaker 1: for War Wow, which is some title which I picked
1:03:32
Speaker 1: up from Kyle Bass on one of the other podcasts
1:03:35
Speaker 1: I just listened to, and so he it talks about
1:03:38
Speaker 1: it's a Graham Allison, I think is the author, and
1:03:43
Speaker 1: it talks about it really the US versus China, and
1:03:48
Speaker 1: so it's it's as you think about the two rivalries
1:03:51
Speaker 1: over the next ten years. China is ascending, It's challenging
1:03:54
Speaker 1: the US, and the book goes through the times in
1:03:58
Speaker 1: history you had these ascending rival and it's it goes
1:04:00
Speaker 1: back to Athens and Sparta, and it goes through all
1:04:04
Speaker 1: these different examples of when you had these up and
1:04:06
Speaker 1: comers rivaling. You know, the statu the embedded powers and
1:04:10
Speaker 1: attentions that creates. And I do think China's ascendance is
1:04:13
Speaker 1: one of the big stories for the next ten years, no,
1:04:16
Speaker 1: no doubt. And thank you for not using the word frenemies.
1:04:18
Speaker 1: I I we all really appreciate that. Um. So you've
1:04:23
Speaker 1: been in the industry for almost twenty years. Is that
1:04:26
Speaker 1: a fair statements? Since when did you graduate? Warden? So
1:04:29
Speaker 1: I've been working, I'd say, really I would. I would
1:04:32
Speaker 1: mark my start date of two thousand one once I
1:04:34
Speaker 1: started working for Segull, but we graduated three al right,
1:04:37
Speaker 1: So you're you're fifteen years coming up on on on
1:04:40
Speaker 1: twenty years. What do you think is the most significant
1:04:43
Speaker 1: changes that have taken place taken place over the course
1:04:46
Speaker 1: of that arc of time within the financial industry. Certainly
1:04:51
Speaker 1: ETFs have exploded, and that's right where trillion now something
1:04:55
Speaker 1: that we were three billion to ten times that, right,
1:04:58
Speaker 1: So that's certainly the one of the major trends and
1:05:01
Speaker 1: we're I'm lucky to be part of it and trying
1:05:03
Speaker 1: to shape it and try to continue to shape it.
1:05:06
Speaker 1: And certainly technology has just advanced just such remarkable space
1:05:10
Speaker 1: that that's the next ten years is gonna be all
1:05:12
Speaker 1: about how you marry technology increasingly with investments, and that's
1:05:18
Speaker 1: I hope to be part of that as well. And um,
1:05:20
Speaker 1: your ears must have been burning last week. I was
1:05:22
Speaker 1: in an e t F event, um, and your name
1:05:25
Speaker 1: had come up several times. I believe one of your
1:05:28
Speaker 1: staff members was was actually there. Um, So let's talk
1:05:32
Speaker 1: about the next major shifts. It's the rise of etf
1:05:35
Speaker 1: is is the biggest single factor over the past ten
1:05:39
Speaker 1: fifteen years. What do you think the next major change
1:05:42
Speaker 1: is gonna be. Well, everything has been broad based exposure
1:05:48
Speaker 1: so far, so you really where there's still the highest
1:05:52
Speaker 1: feet So if you think about this active passive shift,
1:05:56
Speaker 1: there hasn't been. I mean, the hedge funds is in
1:05:59
Speaker 1: some ways so the most expensive part of the market.
1:06:02
Speaker 1: Where you know, our CEO likes to say, John likes
1:06:04
Speaker 1: to say that the rich get the worst advice, and
1:06:06
Speaker 1: so they get put in this most expensive advice for sure. Yeah,
1:06:09
Speaker 1: the most expensive and worst together. Come. Come for the
1:06:13
Speaker 1: high fees, stay for the under performance and the not
1:06:15
Speaker 1: ability to get your money back, no transparency, and so
1:06:19
Speaker 1: it's it's going we're going to increasingly go after that.
1:06:23
Speaker 1: And and so we start off as very broad based beta.
1:06:25
Speaker 1: We're doing more along short, more alternatives. We're gonna go
1:06:29
Speaker 1: after that too. So alternatives being hedge funds, private equity,
1:06:32
Speaker 1: venture capital. You think that entire UM, well, private equity
1:06:37
Speaker 1: can't be in ETF al right, that's no doubt about that.
1:06:39
Speaker 1: But is that sector of the of the investment world
1:06:43
Speaker 1: ripe for disruption UM We definitely, we definitely think about that.
1:06:47
Speaker 1: We figured out how do we rope that into things
1:06:49
Speaker 1: like our advisor engine UM Investment partnership in terms of
1:06:53
Speaker 1: bringing that technology oriented to the masses. But there's gonna
1:06:57
Speaker 1: be elements of trying to I think there's more we
1:06:59
Speaker 1: can do there on the private side. But but in
1:07:02
Speaker 1: the where the public side where you can where we
1:07:04
Speaker 1: focus on the et F market, we're definitely gonna think
1:07:06
Speaker 1: about doing alternatives and long short strategies. Tell us about
1:07:09
Speaker 1: a time you've failed and what you learned from the experience. UM,
1:07:13
Speaker 1: I mean I think about our E T s. I
1:07:15
Speaker 1: mean every E t F is a little startup, and
1:07:17
Speaker 1: so we have a number of ETFs that fail. You
1:07:19
Speaker 1: close ets down, UM, you try to examine why your
1:07:23
Speaker 1: thesis when you start, UM, when you launched it, and
1:07:27
Speaker 1: it didn't gain assets attraction? What caused that? So we're
1:07:31
Speaker 1: constantly evaluating our failures and trying to learn from them
1:07:34
Speaker 1: and figure out can we do things differently over time?
1:07:38
Speaker 1: And a means of our greatest success stories have come
1:07:40
Speaker 1: from changing. As we talked about earlier on, you change
1:07:42
Speaker 1: funds that didn't take off, and you change them UM,
1:07:45
Speaker 1: and then you say, you know, why did I miss
1:07:47
Speaker 1: that segment? Things that took off that you could have
1:07:49
Speaker 1: been their positioned well for and you try to learn
1:07:52
Speaker 1: from all those things. So let me let me ask
1:07:54
Speaker 1: the part B to that question. You guys have over
1:07:58
Speaker 1: fifty different funds, how and some of them have clearly
1:08:03
Speaker 1: caught a little lightning in a bottle. They've done really well.
1:08:05
Speaker 1: How do you try and sprinkle that into a fund
1:08:10
Speaker 1: that might not be doing as well as as you
1:08:12
Speaker 1: had originally hoped for when it was launched, and I
1:08:15
Speaker 1: mean doing as well in terms of performance, I mean
1:08:18
Speaker 1: resonating with investors in attracting assets. Yeah, we close. We
1:08:21
Speaker 1: have close to a hundred funds in the US today,
1:08:23
Speaker 1: so we have a very broad menu um and they
1:08:27
Speaker 1: are all I actually view all of our ets as
1:08:29
Speaker 1: little options where your paints. You know, you're paying a
1:08:32
Speaker 1: fixed cost and you've got to figure out until they
1:08:34
Speaker 1: get to break even, and so you're paying this sort
1:08:37
Speaker 1: of option premium until they potentially can have big upside.
1:08:40
Speaker 1: And so at some point you have to say, that's
1:08:43
Speaker 1: a good way to contextualize that. It's it's right they
1:08:45
Speaker 1: either you're either willing to pay that option premium because
1:08:48
Speaker 1: you still think that option might really take off and
1:08:51
Speaker 1: then it has really big payoffs. It makes sense to me,
1:08:54
Speaker 1: and so that's really how I think about it. And
1:08:56
Speaker 1: so as long as we're still convinced there's a market opportunity,
1:08:59
Speaker 1: we you know, when we started in O six oh seven,
1:09:01
Speaker 1: we didn't have that kind of runway. We had to
1:09:03
Speaker 1: be much more careful. We have more runway today. You
1:09:07
Speaker 1: can afford to nurture things that might be a little
1:09:10
Speaker 1: pricey while internally to run it while waiting for it
1:09:14
Speaker 1: to hit break even for better because you believe in
1:09:16
Speaker 1: the you have a high degree of conviction and in
1:09:19
Speaker 1: the idea, and we do close things down. You know,
1:09:21
Speaker 1: of course from time to time when you've just given
1:09:23
Speaker 1: up and you think you've given it its time and
1:09:24
Speaker 1: you've let a play out, but you know, we want
1:09:27
Speaker 1: to try to give things to take three to five
1:09:29
Speaker 1: years before you evaluate whether or not it's really been
1:09:32
Speaker 1: why you haven't been successful, and you could still close
1:09:34
Speaker 1: things down, then you wish you didn't close it down.
1:09:36
Speaker 1: That's interesting. Alright, we're down to our last few questions. UM,
1:09:40
Speaker 1: you're a relatively young guy, so I'm going to ask
1:09:43
Speaker 1: this differently. What do you do to relax outside of
1:09:47
Speaker 1: the office. Um? And my wife got into yoga, so
1:09:50
Speaker 1: she she got teacher trained as a yoga teacher. So
1:09:53
Speaker 1: this summer's she we go down the Jersey Shore by
1:09:56
Speaker 1: the beach there and that's where we do with the
1:09:59
Speaker 1: most yoga. Um is our We have a Jersey Shore
1:10:02
Speaker 1: yoga teacher. That's it's like our guru. UM In in
1:10:06
Speaker 1: in Philly where we live, we have a pool. And
1:10:08
Speaker 1: she says, if I ever finance doesn't work out, I
1:10:10
Speaker 1: should be a swim teacher. So lovelet's spending time in
1:10:13
Speaker 1: the water with the kids, and but a combination of
1:10:16
Speaker 1: yoga walking and we did the alf architect mark for
1:10:19
Speaker 1: the fall and which was that looks fascinating. It was
1:10:21
Speaker 1: a big New York Times article about that. West is great.
1:10:24
Speaker 1: I really like everything those guys do. Yeah, so it's
1:10:27
Speaker 1: a lot of walking as well. Um, you're a relatively
1:10:31
Speaker 1: young person who graduated school not too long ago. But
1:10:35
Speaker 1: if a millennial or a recent graduate came up to
1:10:38
Speaker 1: you and said, hey, I'm interested in the career of finance,
1:10:41
Speaker 1: what sort of advice would you give them? You know,
1:10:44
Speaker 1: when I think back to how I got hooked up
1:10:46
Speaker 1: with Segell, obviously can you find that mentor who can
1:10:48
Speaker 1: be useful for you? And the keywords I used there
1:10:52
Speaker 1: when I made my pitch was free work for free.
1:10:55
Speaker 1: And in reality you should pay people because it's really
1:10:58
Speaker 1: investment in their time. But I think out interns and
1:11:00
Speaker 1: even my cost to bring an intern on. If you're
1:11:03
Speaker 1: gonna have to spend time with things, they're not gonna
1:11:05
Speaker 1: add a lot of value upfront, and so they're actually
1:11:07
Speaker 1: a drag on you versus the time. And so you
1:11:10
Speaker 1: know that's true. Um, so you want to get find
1:11:14
Speaker 1: the right people who can mentor you and get the
1:11:15
Speaker 1: right opportunity, and and you got to put in a
1:11:17
Speaker 1: lot of time and effort early on don't come. You know,
1:11:20
Speaker 1: the millennials mentalities. They're entitled, So you've got to not
1:11:23
Speaker 1: feel entitled and work hard and and and a lot
1:11:26
Speaker 1: of good things will come. And our final question, what
1:11:30
Speaker 1: is it that you know about investing, indexing E t FS,
1:11:34
Speaker 1: dividends valuation today that you wish you knew seventeen years
1:11:38
Speaker 1: ago when you first started UH divid investing. When we
1:11:42
Speaker 1: looked at history going back fifty sixty years, I mean,
1:11:45
Speaker 1: dividends did very well during most down markets. Um, the
1:11:48
Speaker 1: O eight oh nine down market financials paid a lot
1:11:51
Speaker 1: of dividends, so it was not your typical down market
1:11:54
Speaker 1: in terms of how much down market protection you've got.
1:11:56
Speaker 1: So I think I learned more about sector concentration risk
1:12:00
Speaker 1: and just the risk of overly becoming concentrate in sectors
1:12:03
Speaker 1: despite what their value signals might say. So it's something
1:12:06
Speaker 1: on sector concentrations that you know, I've tried to think
1:12:11
Speaker 1: about more over time as we developed future products, is
1:12:13
Speaker 1: what what sort of the sector biases or how can
1:12:16
Speaker 1: you control for sectors in a way that you don't
1:12:18
Speaker 1: get overloaded in those times of crisis. We have been
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Speaker 1: speaking with Jeremy Schwartz. He is the director of research
1:12:26
Speaker 1: at Wisdom Tree Investments. Uh, thank you, Jeremy for doing this.
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Speaker 1: I really appreciate you being so generous with your time.
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Speaker 1: Thanks for having me. If you enjoy this conversation, be
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Speaker 1: I'm Barry Retults. You've been listening to Masters in Business
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