WEBVTT - The Case for Custom Indexing 0:00:06.160 --> 0:00:08.800 Welcome our trillance. I'm Joel Webber and I'm Eric bel 0:00:08.840 --> 0:00:14.840 Tunis Eric. We're coming out of summer. There's a topic 0:00:15.160 --> 0:00:19.759 that we've talked about a little bit before, uh, and 0:00:19.840 --> 0:00:22.000 it's one that's sort of parallel to the E t 0:00:22.160 --> 0:00:24.919 F world. And we've got a great, great guest today. 0:00:24.920 --> 0:00:28.400 Who's gonna I hope illuminate a little bit more about it, 0:00:28.400 --> 0:00:31.760 who's joining us and what are we gonna talk about? Yeah, so, uh, 0:00:31.920 --> 0:00:34.600 we got probably the perfect guest for this, Patrick O'Shaughnessy. 0:00:35.000 --> 0:00:36.519 A lot of people know him. He's got one of 0:00:36.560 --> 0:00:39.919 the most popular podcasts called invest like the Best, highly recommended, 0:00:40.159 --> 0:00:43.839 very interesting, great interviewer. I was on at once and 0:00:44.040 --> 0:00:47.960 my Twitter follower account jumped by like five immediately, which 0:00:47.960 --> 0:00:50.720 was like at the time ten percent pop. I had 0:00:50.760 --> 0:00:53.760 never appeared on anything where I got that immediate hit 0:00:53.840 --> 0:00:56.960 on Twitter. So just to give you some idea of 0:00:56.960 --> 0:01:00.200 how the Riachi has now, that's his side gig. His 0:01:00.320 --> 0:01:03.720 main gig is O'Shaughnessy U Asset Management, which is a 0:01:03.720 --> 0:01:08.200 asset manager that it's interesting. I met Patrick behind backstage 0:01:08.200 --> 0:01:10.640 at et f i Q, which is the TV show 0:01:10.640 --> 0:01:12.520 I do, and he had just filed for an e 0:01:12.600 --> 0:01:16.080 t F but then over time decided not to launch 0:01:16.120 --> 0:01:18.679 it and go into direct indexing instead. This is a 0:01:18.680 --> 0:01:22.000 little bit what Morgan Stanley did. A couple issuers started 0:01:22.040 --> 0:01:25.640 to prepare direct indexing platforms. Now for people out there, 0:01:26.080 --> 0:01:27.640 I'll just break it down like this. You know you 0:01:27.640 --> 0:01:32.640 can get music in vinyl, compact discs, cassette tapes, streaming, right, 0:01:32.680 --> 0:01:35.040 there's many ways to get your Bob Dylan's song right, 0:01:35.680 --> 0:01:38.480 same with investing. Right, you've got mutual funds, e t 0:01:38.680 --> 0:01:41.039 f s, and I would say direct indexing, or Patrick 0:01:41.040 --> 0:01:43.520 calls it custom indexing, is sort of one of the 0:01:43.560 --> 0:01:46.720 newer waves, although it's actually an older wave because it's 0:01:46.760 --> 0:01:48.880 it's a separately managed to count where you just own 0:01:48.920 --> 0:01:51.280 all the stocks yourself. And that used to be hard 0:01:51.280 --> 0:01:54.160 for retail because and so institutions did it. But now 0:01:54.200 --> 0:01:57.640 with trading getting cheaper, it's now more available to retail, 0:01:57.720 --> 0:02:00.640 so it's been democratized and it's been that is a 0:02:00.720 --> 0:02:02.920 sort of a wave of the future, and so I 0:02:03.000 --> 0:02:05.440 think it's important to go over this because it is 0:02:05.480 --> 0:02:08.240 an avenue investors have availed to the available to them, 0:02:08.280 --> 0:02:10.560 and it's also a topic we debate on our team 0:02:10.560 --> 0:02:13.000 a lot. How big will this get? And it's a 0:02:13.280 --> 0:02:15.000 it's like E S G in my opinion in terms 0:02:15.000 --> 0:02:18.240 of one of those uh things that isn't No one's 0:02:18.280 --> 0:02:21.239 totally on the same page about some people very bullish, 0:02:21.280 --> 0:02:23.400 some people less so. So I think we should dig 0:02:23.400 --> 0:02:26.040 into the pros and cons and sort of the future 0:02:26.080 --> 0:02:29.200 of this area. Alright, I think you did a pretty 0:02:29.200 --> 0:02:32.400 good uh summary there. We'll see if Patrick takes issue 0:02:32.400 --> 0:02:36.760 with that. So again Patrick O'Shaughnessy, CEO of OSAM, which 0:02:36.760 --> 0:02:42.160 is part of Franklin Templeton, this time on trillions invest 0:02:42.280 --> 0:02:47.200 Like Patrick O'Shaughnessy, Patrick, welcome joints, Joel and Eric. Thanks 0:02:47.240 --> 0:02:50.239 so much for having me. Okay, Patrick, um, I want 0:02:50.280 --> 0:02:53.919 to ask you first and foremost about direct indexing, which 0:02:54.000 --> 0:02:58.239 you call customer indexing. Why why does the world need that? Well, 0:02:58.360 --> 0:03:01.480 I think it's important to define the difference between direct 0:03:01.520 --> 0:03:03.920 and custom indexing. Direct indexing, as Eric points out, as 0:03:04.000 --> 0:03:06.840 is quite old. It's been around for decades. I think 0:03:06.960 --> 0:03:11.440 it is a very simple, uh product. You take whatever 0:03:11.480 --> 0:03:14.000 exposure you want, let's say it's the SP five. You 0:03:14.080 --> 0:03:17.440 own all or most of the stocks directly in a 0:03:17.480 --> 0:03:21.000 separate account for each investor, and you trade those stocks 0:03:21.040 --> 0:03:23.880 to generate tax losses, which become an asset to the investor, 0:03:23.960 --> 0:03:25.840 which is possible because of the separate accounts. So the 0:03:25.840 --> 0:03:28.320 separate account is the key sort of vehicle. But the 0:03:28.360 --> 0:03:32.400 strategy is really deliver the SMP five returns effectively, but 0:03:32.520 --> 0:03:35.280 give me this extra asset of tax losses that I 0:03:35.280 --> 0:03:37.760 can use to offset gains elsewhere. You might call this 0:03:37.840 --> 0:03:40.040 tax alpha. There's a lot of different terms for it, 0:03:40.320 --> 0:03:42.520 and that's the strategy. That's it, And you're not trying 0:03:42.520 --> 0:03:44.360 to do anything else, and you're not trying to outperform 0:03:44.480 --> 0:03:47.600 the index. You're not trying to do anything customer specialized. Uh, 0:03:47.640 --> 0:03:50.800 you just are getting exposure plus this tax boost. Custom 0:03:50.840 --> 0:03:53.800 indexing is something that I think has only been made 0:03:53.800 --> 0:03:55.640 possible and we were the first to do it. We 0:03:55.920 --> 0:03:58.320 came up with that term custom indexing in the last 0:03:58.400 --> 0:04:01.320 three or four years because of software and technology. So 0:04:01.720 --> 0:04:04.800 what custom indexing brings to the table is a million 0:04:04.880 --> 0:04:10.520 other considerations that each investor might have, preferences, circumstances, attack 0:04:10.600 --> 0:04:14.320 situation that's different than than others, which can be accommodated 0:04:14.440 --> 0:04:17.440 in the strategy itself. So whereas direct indexing is very 0:04:17.480 --> 0:04:20.960 much one size fits all, custom indexing is one size 0:04:21.000 --> 0:04:24.240 fits one, which is enabled by technology. And obviously we 0:04:24.240 --> 0:04:26.479 can go into it to see how people use this 0:04:26.520 --> 0:04:28.239 because we've got the data. We've got you know, nearly 0:04:28.279 --> 0:04:30.960 two thousand accounts that have been open a bit north 0:04:30.960 --> 0:04:34.039 of three billion dollars managed to the platform today, so 0:04:34.320 --> 0:04:36.080 we can tell you, you you know, how people use this 0:04:36.160 --> 0:04:39.719 to customize. But I do think that, like anything interesting, 0:04:39.760 --> 0:04:43.760 it's something enabled by relatively new technology and allows things 0:04:43.800 --> 0:04:46.599 to be much more tailored to the individual versus you know, 0:04:46.640 --> 0:04:49.360 just give me the SMP. Okay, so you're like a 0:04:49.400 --> 0:04:54.320 civilo tailor, but with with better scissors, uh for a 0:04:54.400 --> 0:04:59.880 terrible comparison technology, enhanced scissors maybe. UM. But I'm curious 0:04:59.880 --> 0:05:01.440 in part because we talked to a lot of people 0:05:01.640 --> 0:05:04.960 who are in the E t F world and look 0:05:04.960 --> 0:05:06.720 at E t F S as like a great technology, 0:05:06.720 --> 0:05:09.320 and you basically kind of like looked in the headlights 0:05:09.360 --> 0:05:11.160 of the E t S and we're like, I'm gonna 0:05:11.160 --> 0:05:13.800 do something different than that. Why and how do you 0:05:13.800 --> 0:05:15.920 feel about E t F. So I guess there's there's 0:05:15.920 --> 0:05:18.600 there's two angles on this, both of which matter. H 0:05:18.760 --> 0:05:21.200 One is the business angle from our perspective, and two 0:05:21.240 --> 0:05:23.400 is the investing angle from the customer's perspective, So I'll 0:05:23.400 --> 0:05:26.360 touch on both. When we filed for that e t F, 0:05:26.920 --> 0:05:30.080 it was because we wanted to do something more accessible 0:05:30.080 --> 0:05:32.520 than what we had done in the past, and e 0:05:32.600 --> 0:05:34.680 t f s were obviously big and growing and remain 0:05:34.760 --> 0:05:37.600 big and growing. But when we stared at this from 0:05:37.600 --> 0:05:41.280 a business competition standpoint, it kind of looked like the 0:05:41.320 --> 0:05:44.760 worst possible scenario you could imagine in business. There was 0:05:44.880 --> 0:05:48.760 effectively unlimited competition. You felt like we were entering a 0:05:48.839 --> 0:05:52.760 pure commodity game. You're entering a pure price war where 0:05:52.760 --> 0:05:54.880 you're just there's no there is no pricing power, you're 0:05:54.880 --> 0:05:59.280 a price taker. There's insane competition for mind share and 0:05:59.480 --> 0:06:02.400 pre exist sting, you know, guerrillas. It just sort of 0:06:02.400 --> 0:06:04.080 felt like, this is the worst This is actually the 0:06:04.160 --> 0:06:08.200 worst idea we've ever had. Um and hold Joel, Joel, 0:06:08.240 --> 0:06:10.120 that is exactly why I call it the terror Dome. 0:06:11.120 --> 0:06:14.240 It is brutal. It really is. Uh he just described it. 0:06:14.320 --> 0:06:16.680 I can I can understand that that take takes a 0:06:16.760 --> 0:06:19.640 tardom that feels like buying lottery tickets like some some 0:06:19.760 --> 0:06:22.120 payoff right. There are some et F franchises that come 0:06:22.160 --> 0:06:24.919 from nowhere, you know, ARC is the prime example, and 0:06:24.960 --> 0:06:27.240 become huge and great businesses. But the number of dead 0:06:27.880 --> 0:06:30.960 uh in that battlefield is insane. And so as we 0:06:31.120 --> 0:06:33.920 as I, as we and I got deeper into that consideration, 0:06:34.000 --> 0:06:36.559 we just thought, this is just a terrible idea, uh, 0:06:36.760 --> 0:06:39.360 but we still want to apply. We were technology experts. 0:06:39.400 --> 0:06:41.719 We had built all this technology for our own purposes 0:06:42.040 --> 0:06:45.560 as quantitative factor investors for years, for for a decade, 0:06:46.040 --> 0:06:48.360 and we started to ask the question, how could we 0:06:48.800 --> 0:06:51.799 take what we've built for our own purposes and effectively 0:06:51.800 --> 0:06:54.240 turn it over to others. Very inspired by the Amazon 0:06:54.360 --> 0:06:56.640 Web Services story. In fact, I spent a lot of 0:06:56.640 --> 0:06:59.720 personal time with executives. They're understanding how they did that, 0:07:00.080 --> 0:07:02.080 taking something they had built for the retail business and 0:07:02.320 --> 0:07:05.960 repurposing it as a general technology. And we came up 0:07:06.000 --> 0:07:08.039 with this idea of custom indexing, which was to say, 0:07:08.080 --> 0:07:10.640 take the tools we've built to build our own strategies 0:07:10.640 --> 0:07:12.960 and do whatever you want with them. You know, blend 0:07:13.000 --> 0:07:15.800 passive and active factor exposure in whatever ratios you want, 0:07:16.400 --> 0:07:19.400 add custom filters, add add overweights to certain things that 0:07:19.440 --> 0:07:22.480 you care more about. Incorporate you know, something like a 0:07:22.520 --> 0:07:26.320 low basis concentrated stock position into your portfolio and let 0:07:26.400 --> 0:07:29.240 us work around it in a tax advantaged way. Um. 0:07:29.640 --> 0:07:32.000 We found very quickly people care a lot about taxes, 0:07:32.200 --> 0:07:34.640 and they care about more than just tax alpha earned 0:07:34.640 --> 0:07:37.840 through loss harvesting. They care about managing their taxes overall 0:07:38.280 --> 0:07:41.320 with the use of their portfolio. And we saw all 0:07:41.320 --> 0:07:43.760 these use cases people just sort of clawing them out 0:07:43.800 --> 0:07:46.520 of us. UM. So really early on. I have this 0:07:46.600 --> 0:07:50.160 theory now that uh, in business, for a new product, 0:07:50.880 --> 0:07:54.480 something that's gonna work tends to work really fast. You 0:07:54.520 --> 0:07:56.960 tend to see a pool of demand that was unmet 0:07:57.360 --> 0:08:00.320 that people are ravenous for. And our early experiences with 0:08:00.400 --> 0:08:03.920 Canvas the platform was that basically everybody said yes like 0:08:03.920 --> 0:08:07.160 our our our hit rate on a demo of software 0:08:07.520 --> 0:08:10.240 was basically everyone buying it more or less on the spot. 0:08:10.720 --> 0:08:13.560 And most of those early partners have scaled, you know, 0:08:13.720 --> 0:08:16.640 tremendously with us with tons of assets on the platform. 0:08:16.720 --> 0:08:19.760 And so I think I think this latent demand for customization, 0:08:20.360 --> 0:08:25.000 especially around really two things deep customization of taxes beyond 0:08:25.080 --> 0:08:28.320 loss harvesting and back to your question of why people 0:08:28.320 --> 0:08:32.960 need this and UH, customization of the blend between passive 0:08:33.080 --> 0:08:35.559 and active factor exposures so that you don't have to 0:08:35.640 --> 0:08:37.199 choose the E t F that has you know, whatever 0:08:37.960 --> 0:08:40.120 values have any five percent passive you can you can 0:08:40.120 --> 0:08:42.920 build your own. UH. And we see tremendous variation on 0:08:42.960 --> 0:08:47.280 those two dimensions across the platform. UM, let's explore the 0:08:47.280 --> 0:08:49.440 tax ALFHA I think for people out there, we've said 0:08:49.480 --> 0:08:52.960 that word and tax less harvesting. Just explain this right, 0:08:53.040 --> 0:08:56.480 so UM I would I'll talk about how the mutual 0:08:56.480 --> 0:08:58.560 fund and et F works, and then you can do 0:08:58.920 --> 0:09:02.800 the custom indexing in a mutual fund. Unfortunately, you get 0:09:02.800 --> 0:09:05.240 a tax bill even if you're just sitting there. It's 0:09:05.240 --> 0:09:08.800 probably the worst case scenario of all the structures because 0:09:08.840 --> 0:09:12.880 the manager has to sell stocks to meet people leaving 0:09:12.880 --> 0:09:17.120 the fund. That generates a taxable event that people sitting 0:09:17.120 --> 0:09:20.679 there now have a capital gains distribution. The E t 0:09:20.840 --> 0:09:23.440 F kind of solved for that. You don't get those 0:09:23.679 --> 0:09:29.280 tax distributions. You you pay taxes when you sell it. UH, 0:09:29.360 --> 0:09:32.360 and that really is a big deal for taxable accounts. 0:09:32.400 --> 0:09:34.360 That's i'd say a top three advantage of the E 0:09:34.480 --> 0:09:37.800 t F custom index, saying tries to take this even further, 0:09:37.840 --> 0:09:40.960 and I'll I'll let Patrick describe it, but explain how 0:09:41.520 --> 0:09:44.480 that tax alpha works relative to maybe the E T 0:09:44.640 --> 0:09:47.920 F or selling. I think it's important to highlight limitations 0:09:47.920 --> 0:09:51.680 of this approach to which is you need fairly low 0:09:51.760 --> 0:09:55.000 turnover strategies for tax alpha to be a thing and 0:09:55.040 --> 0:09:58.040 to work. Like you're never if you want a momentum 0:09:58.080 --> 0:10:00.160 factor exposure, which is a strategy that turns out over 0:10:00.200 --> 0:10:02.360 a lot like you should just buy any TF like that, 0:10:02.480 --> 0:10:05.880 There's no way that turnover strategy is ever going to 0:10:05.960 --> 0:10:08.440 have a tax alpha advantage on top of the ALP 0:10:08.640 --> 0:10:11.600 the potential for excess return advantage from the factor. So 0:10:11.960 --> 0:10:15.880 what that crossover point is probably like annual turnover something 0:10:15.960 --> 0:10:19.599 like that. So we're really talking about low turnover strategies 0:10:19.640 --> 0:10:23.400 here when we're talking about the potential tax advantage of 0:10:23.960 --> 0:10:26.199 pure loss harvesting. I think there are other tax advantages 0:10:26.280 --> 0:10:29.040 we can talk about that are independent of turnover, but 0:10:29.400 --> 0:10:31.920 the famous one loss harvesting. You know, you need a 0:10:31.920 --> 0:10:34.360 low turnover strategy. So that's that's the first, I think 0:10:34.400 --> 0:10:38.400 key important point. But the concept itself is honestly pretty straightforward. 0:10:38.679 --> 0:10:41.680 Let's just imagine a you know, a pair of you know, 0:10:41.720 --> 0:10:43.880 all the car companies. Let's say they're all owned in 0:10:43.960 --> 0:10:47.520 the sp they have similar characteristics. They tend to have 0:10:47.840 --> 0:10:51.080 decently high correlation with one another. UM. One thing you 0:10:51.080 --> 0:10:53.600 can do is monitor of the portfolio. We do it 0:10:53.640 --> 0:10:56.760 on a daily basis and basically say, okay, what positions 0:10:56.800 --> 0:10:59.600 that we've bought for this investor are trading at some 0:10:59.640 --> 0:11:03.000 sort of loss where we can do a trade book 0:11:03.120 --> 0:11:07.439 that loss, which is a taxable loss, and reinvest the 0:11:07.480 --> 0:11:12.280 proceeds in a basket of securities which have conceptually similar 0:11:12.320 --> 0:11:14.679 profiles as the one that we sold, so that our 0:11:14.760 --> 0:11:18.959 overall exposure to the SMP five remains very constant. The 0:11:19.000 --> 0:11:21.120 technical term for this would be tracking er. So we 0:11:21.160 --> 0:11:24.120 have a tracking your budget. We can't get too different 0:11:24.320 --> 0:11:27.080 than the underlying benchmark as we do this. If the 0:11:27.080 --> 0:11:29.640 tracking your budget was really large, which is one of 0:11:29.640 --> 0:11:32.280 the things that we allow on the platform because sometimes 0:11:32.280 --> 0:11:34.520 people don't. Sometimes people say I have a huge gain, 0:11:34.559 --> 0:11:36.720 I want to offset it generate as much loss as 0:11:36.800 --> 0:11:38.719 humanly possible. I don't give a crap if I track 0:11:38.760 --> 0:11:41.319 the SMP five hundred this year. That's something that traditional 0:11:41.640 --> 0:11:44.920 direct indextors don't allow for but we see it happen. Um, 0:11:44.960 --> 0:11:47.640 if you tracking your budget was five, which is huge, 0:11:48.280 --> 0:11:50.360 we can generate a lot more losses. If it's one, 0:11:50.440 --> 0:11:52.880 which is sort of the standard tracking our budget of one, 0:11:53.320 --> 0:11:55.560 you're you're highly constrained. You can't do too much of 0:11:55.559 --> 0:11:59.000 it because you start to stray from the underlying index itself. 0:11:59.120 --> 0:12:01.880 So UM, that's the concept is you sell stuff that's 0:12:01.880 --> 0:12:04.719 had a lost reinvested in similar stuff so that your 0:12:04.800 --> 0:12:09.000 overall exposure remains fairly constant, and you you track pretty 0:12:09.000 --> 0:12:11.240 tightly with the with the underlying index that you've chosen, 0:12:11.440 --> 0:12:14.719 but you've generated this loss along the way. Um, And look, 0:12:14.760 --> 0:12:17.680 there are drawbacks to this. I think as you mature 0:12:18.000 --> 0:12:21.120 a single account, Let's say you know, you invest in 0:12:22.600 --> 0:12:24.520 million dollars into an s m A and do this 0:12:24.559 --> 0:12:27.839 loss harvesting over time, as markets tend to go up, 0:12:28.120 --> 0:12:30.920 your opportunity for lost harvesting is very dependent on the 0:12:30.920 --> 0:12:33.440 market environment that you're in. So markets straight up into 0:12:33.480 --> 0:12:35.200 the right this isn't going to be as good as 0:12:35.200 --> 0:12:37.280 a strategy. And one of the things that we found 0:12:37.840 --> 0:12:40.600 when we launched was that, frankly, we thought the benefits 0:12:40.640 --> 0:12:43.880 of tax less harvesting were somewhat overstated. You'd see, you know, 0:12:43.920 --> 0:12:47.480 benefits like two d basis points of excess return, which 0:12:47.720 --> 0:12:49.800 we just could We actually had a crisis of confidence. 0:12:49.800 --> 0:12:51.960 We couldn't replicate this. We thought we were going we 0:12:51.960 --> 0:12:54.280 were driving ourselves crazy, and then we when you dig 0:12:54.280 --> 0:12:57.000 into the methodology of others, you realize, oh, they picked 0:12:57.000 --> 0:12:59.440 like the absolute best ten year period. They haven't done 0:12:59.440 --> 0:13:01.760 a bunch of that. Um They've made the best possible 0:13:01.800 --> 0:13:05.440 assumptions on the tax law and what's usable and how 0:13:05.480 --> 0:13:08.200 much offsetting gain you'll have to to actually be able 0:13:08.200 --> 0:13:11.599 to capture that benefit. Um So, we saw very rosy 0:13:11.640 --> 0:13:14.600 assumptions behind that number. But even with our we think 0:13:14.640 --> 0:13:17.920 more conservative assumptions, we saw like seventy eight basis points 0:13:17.920 --> 0:13:21.600 of annual pick up over just the what we call 0:13:21.640 --> 0:13:24.080 the e t F equivalent, so buying s p y, 0:13:24.200 --> 0:13:26.480 holding it, selling it, paying the tax at the end 0:13:27.000 --> 0:13:29.280 versus doing it along the way as as you do 0:13:29.320 --> 0:13:32.240 in in custom indexing. UM. So, we just think there's 0:13:32.240 --> 0:13:35.920 a huge obvious long term benefit. It is is that 0:13:36.040 --> 0:13:38.760 seven year eighty basis points like an annualized number over 0:13:38.840 --> 0:13:41.320 ten years, or just how how much does it vary 0:13:41.360 --> 0:13:45.880 its annualized over ten year holding periods, and uh, it 0:13:46.000 --> 0:13:49.080 is the average of lots of vintages, So there's lots 0:13:49.080 --> 0:13:51.120 of senior periods in history that we can study this on. 0:13:51.200 --> 0:13:52.840 Like I said, most of the other studies pick one 0:13:52.880 --> 0:13:55.280 that starts in like oh nine or oh eight or 0:13:55.280 --> 0:13:58.040 oh seven when you have obvious, like huge upfront losses 0:13:58.080 --> 0:14:00.400 that you can be booking. So it looks really good. 0:14:00.800 --> 0:14:03.640 The range is pretty wide, Like there's ten year periods 0:14:03.760 --> 0:14:07.280 where there's effectively zero net benefit to doing this. UM, 0:14:07.280 --> 0:14:11.160 there's negative We didn't observe a negative one, so uh, 0:14:11.360 --> 0:14:13.559 zero was sort of the lower bound, and like two 0:14:14.120 --> 0:14:17.120 something was like the upper bound. So obviously we don't 0:14:17.200 --> 0:14:19.320 know we we don't control the market, so we don't 0:14:19.320 --> 0:14:20.960 know which of the which we're in that range it 0:14:21.000 --> 0:14:24.120 will fall. Seven year eighty was sort of the average UM. 0:14:24.200 --> 0:14:26.560 But we think that's a pretty darn good trade, especially 0:14:26.560 --> 0:14:29.200 when you layer on all the other customization benefits that 0:14:29.520 --> 0:14:32.840 basically everyone uses. So I mean, I'm curious, you're now 0:14:32.960 --> 0:14:36.880 part of Franklin Templeton and that merger happened almost a 0:14:36.960 --> 0:14:40.720 year ago, right, so yeah, so how did that? How 0:14:40.760 --> 0:14:43.160 did that come together and why did you decide to 0:14:43.240 --> 0:14:45.800 link up with someone? Ye, so uh to rewind time, 0:14:46.000 --> 0:14:49.200 this was called April of two thousand and twenty one 0:14:49.760 --> 0:14:52.960 of last year, we got a call from Franklin. We 0:14:52.960 --> 0:14:55.440 weren't trying to sell the business. We weren't running any 0:14:55.440 --> 0:14:58.960 sort of process or anything. We got a really memorable 0:14:58.960 --> 0:15:01.640 call I did from a guy named Roger Paradiso at 0:15:01.640 --> 0:15:04.480 Franklin Templeton who is now the executive chairman and sort 0:15:04.480 --> 0:15:08.520 of the person responsible for OSAM at Franklin Templeton's he's 0:15:08.560 --> 0:15:13.240 osam's executive chairman now. And UH, Roger basically said, we 0:15:13.320 --> 0:15:16.920 have been doing research on these platforms like yours for 0:15:17.000 --> 0:15:19.760 a long time. We think that the one you've built 0:15:19.800 --> 0:15:21.800 is the best, and we want to we want to 0:15:21.840 --> 0:15:25.800 partner with you. And he he actually knew more about 0:15:26.040 --> 0:15:29.960 Canvas on that first call, having never talked to us 0:15:30.400 --> 0:15:33.240 than probably anyone that I had ever talked to about 0:15:33.280 --> 0:15:35.920 the platform outside of our firm um. So it was 0:15:35.920 --> 0:15:38.880 clear they had done their homework and understood what we 0:15:38.920 --> 0:15:42.160 think of as this huge market opportunity and for a 0:15:42.160 --> 0:15:45.040 new category that we had created. And UH, it moved 0:15:45.160 --> 0:15:47.480 very quickly from there. I actually was in California. I 0:15:47.520 --> 0:15:49.960 flew back, I completely cut my trip off, flew back 0:15:50.000 --> 0:15:53.440 the next day, hiked with Roger for hours in the 0:15:53.520 --> 0:15:55.800 local woods, which is something I like to do, and 0:15:56.040 --> 0:15:58.880 got to know each other very quickly, and it unfolded 0:15:58.920 --> 0:16:00.920 from there. We didn't, you know, we run like a 0:16:01.000 --> 0:16:03.960 process like it just it was clear that they wanted 0:16:04.080 --> 0:16:06.880 us for very good reasons and that they brought to 0:16:06.920 --> 0:16:10.240 the table effectively all the things that we didn't have. So, 0:16:10.360 --> 0:16:13.320 you know, we we had been a relatively small boutique 0:16:13.320 --> 0:16:17.040 firm um for twelve years or so at that time, 0:16:17.560 --> 0:16:20.560 and uh, we had a two and a half person 0:16:21.040 --> 0:16:24.960 sales team, which is not big. And while while those 0:16:24.960 --> 0:16:26.880 two and a half, you know, I think we're the 0:16:26.880 --> 0:16:29.440 equivalent of like seven or ten normal sales people, they 0:16:29.440 --> 0:16:32.440 were incredible. There's only so much hours in the day. 0:16:32.760 --> 0:16:34.920 And we had hit upon this new thing that that 0:16:35.440 --> 0:16:37.280 you know, we had never been a big sales organization. 0:16:37.400 --> 0:16:39.960 We frankly didn't know how to scale a sales organization. 0:16:40.400 --> 0:16:42.720 And Franklin, with a trillion and a half of assets 0:16:42.800 --> 0:16:45.680 under management or whatever it is, had one of the 0:16:45.800 --> 0:16:49.400 you know, most scaled up distribution forces with relationships everywhere 0:16:49.520 --> 0:16:52.480 in our entire industry, and that to us felt like 0:16:52.560 --> 0:16:55.120 sort of a match made in heaven um. And indeed, 0:16:55.120 --> 0:16:56.880 that's you know, what we've seen so far is that 0:16:57.200 --> 0:16:59.520 they bring a bazooka to the knife fight that we 0:16:59.520 --> 0:17:02.800 were fighting. And we're only peter or nine months into this, 0:17:02.840 --> 0:17:05.399 so it's it's still fresh and new. But that's the 0:17:05.440 --> 0:17:16.000 story behind the partnership. I was at Franklin Templeton about 0:17:16.040 --> 0:17:18.359 three months ago. I took a trip to sand France, 0:17:18.400 --> 0:17:20.440 so a bunch of clients went went out there. Did 0:17:20.440 --> 0:17:24.040 you wasn't it interesting how they share a campus with roadblocks, 0:17:25.160 --> 0:17:27.479 So you've got these sort of like this asset manager 0:17:27.520 --> 0:17:30.480 guys walking around and then you've got these like roadblocks 0:17:30.520 --> 0:17:34.440 employees like mixed together. I thought it was interesting. It's 0:17:34.440 --> 0:17:37.400 a great obviously get the best weather out there as well, 0:17:37.440 --> 0:17:39.920 but it's I was I didn't realize. I'm a student 0:17:39.960 --> 0:17:42.159 of asset management as a as an industry and as 0:17:42.160 --> 0:17:45.040 a business. I find it sort of endlessly fascinating. It's 0:17:45.080 --> 0:17:47.600 where I spent my whole career, so both in the 0:17:47.640 --> 0:17:49.520 public and now for me on the private side too 0:17:49.760 --> 0:17:53.080 with a venture capital firm that I run. But but 0:17:53.240 --> 0:17:59.119 the the technology interest and actions of the big asset 0:17:59.119 --> 0:18:02.639 managers has always intrigued me. And what we saw with 0:18:02.680 --> 0:18:06.440 Franklin was a clear commitment. And it's a family owned 0:18:06.440 --> 0:18:09.080 and run firm in many ways, right the Johnson family 0:18:09.440 --> 0:18:11.560 is the controlling shareholder still frankly, even though it's a 0:18:11.560 --> 0:18:14.439 publicly traded stock with sort of a rich history of 0:18:14.520 --> 0:18:17.800 long term decision making. And I think good long term 0:18:17.800 --> 0:18:21.600 decision making often comes back to investments in technology, and 0:18:21.600 --> 0:18:24.439 and we felt that on the receiving end of that, 0:18:24.560 --> 0:18:27.040 really the attention and the focus, let's say, in the 0:18:27.080 --> 0:18:31.720 due diligence process, uh, Franklin onto Us was was crazy 0:18:31.840 --> 0:18:34.480 deep dives into what we had built, which we loved 0:18:34.480 --> 0:18:36.400 because we've been building it for twelve years. Real, I mean, 0:18:36.520 --> 0:18:38.639 Canvas in many ways is like a new layer on 0:18:38.760 --> 0:18:40.880 top of technology we've been working on for a long 0:18:40.920 --> 0:18:44.159 long time. We'd always had much bigger headcounts and technology 0:18:44.160 --> 0:18:46.880 than than our peers, and uh, I think the best 0:18:46.880 --> 0:18:48.680 firms are committed to that sort of thing. And so 0:18:49.080 --> 0:18:52.000 the headquarters being you know, on the same campus or 0:18:52.080 --> 0:18:53.880 right next to road Blocks and and many other firms 0:18:53.960 --> 0:18:56.959 lic ROA Blocks. I think it's fascinating and more than 0:18:57.000 --> 0:18:58.720 I could say for a lot of the more East 0:18:58.720 --> 0:19:04.160 Coast mindset set managers. One thing that's important to note 0:19:04.160 --> 0:19:07.600 here there has been a total trend of big asset 0:19:07.640 --> 0:19:13.040 managers buying direct indexing and customer indexing platforms, namely Morgan 0:19:13.119 --> 0:19:16.239 Stanley with Parametric. Just curious if your take on that 0:19:16.320 --> 0:19:20.680 deal or I believe black Rock bought on perio UM. 0:19:20.840 --> 0:19:23.520 I mean, I'm assuming you're out there kind of selling 0:19:23.560 --> 0:19:26.520 against those other shops. I mean, do you have any 0:19:26.760 --> 0:19:30.520 you know, comment on the other compos I think the 0:19:31.080 --> 0:19:33.200 most of the deals that you've seen that are huge, 0:19:33.240 --> 0:19:36.280 that are very big, Parametric and Imperio being big deals, 0:19:36.280 --> 0:19:39.720 big M and A deals in in that world. Those 0:19:39.720 --> 0:19:42.200 firms are excellent firms. They've been around a long time. 0:19:42.680 --> 0:19:46.120 They do more traditional direct indexing UM. Maybe with some 0:19:46.240 --> 0:19:49.560 templated customization you can pick a few colors, not just 0:19:49.640 --> 0:19:52.639 black and you know the model t joke. But more 0:19:52.680 --> 0:19:56.639 or less they're direct indexing firms. Uh. The interface between 0:19:56.760 --> 0:20:00.000 customer and firm is not a soft web based software 0:20:00.000 --> 0:20:02.600 a layer, and I'm sure that those firms will trend 0:20:02.680 --> 0:20:05.480 in that direction. UM. But it's one thing to build 0:20:05.480 --> 0:20:07.840 from scratch with that is your intention, and it's another 0:20:07.880 --> 0:20:10.000 to lay one on top of a you know, very 0:20:10.080 --> 0:20:14.480 mechanical turkey operations heavy business, which is I think I 0:20:14.520 --> 0:20:16.080 don't want to speak out of turn. I don't know 0:20:16.080 --> 0:20:19.480 those businesses intimately well, but I think the M and 0:20:19.520 --> 0:20:21.720 A you've seen there, and then you've also seen some 0:20:21.760 --> 0:20:24.679 of the younger technology companies that really didn't get distribution 0:20:25.320 --> 0:20:27.520 but built interesting technology have been brought up to by 0:20:27.560 --> 0:20:30.560 these asset managers. And I think the trend is kind 0:20:30.560 --> 0:20:34.520 of obvious, which is platform shifts matter. If you missed 0:20:34.520 --> 0:20:36.960 E T f S as a big asset management firm, 0:20:37.119 --> 0:20:41.600 you lost. I mean you could. You cannot miss major 0:20:41.640 --> 0:20:45.040