Speaker 1: Welcome our trillance. I'm Joel Webber and I'm Eric bel
Speaker 1: Tunis Eric. We're coming out of summer. There's a topic
Speaker 1: that we've talked about a little bit before, uh, and
Speaker 1: it's one that's sort of parallel to the E t
Speaker 1: F world. And we've got a great, great guest today.
Speaker 1: Who's gonna I hope illuminate a little bit more about it,
Speaker 1: who's joining us and what are we gonna talk about? Yeah, so, uh,
Speaker 1: we got probably the perfect guest for this, Patrick O'Shaughnessy.
Speaker 1: A lot of people know him. He's got one of
Speaker 1: the most popular podcasts called invest like the Best, highly recommended,
Speaker 1: very interesting, great interviewer. I was on at once and
Speaker 1: my Twitter follower account jumped by like five immediately, which
Speaker 1: was like at the time ten percent pop. I had
Speaker 1: never appeared on anything where I got that immediate hit
Speaker 1: on Twitter. So just to give you some idea of
Speaker 1: how the Riachi has now, that's his side gig. His
Speaker 1: main gig is O'Shaughnessy U Asset Management, which is a
Speaker 1: asset manager that it's interesting. I met Patrick behind backstage
Speaker 1: at et f i Q, which is the TV show
Speaker 1: I do, and he had just filed for an e
Speaker 1: t F but then over time decided not to launch
Speaker 1: it and go into direct indexing instead. This is a
Speaker 1: little bit what Morgan Stanley did. A couple issuers started
Speaker 1: to prepare direct indexing platforms. Now for people out there,
Speaker 1: I'll just break it down like this. You know you
Speaker 1: can get music in vinyl, compact discs, cassette tapes, streaming, right,
Speaker 1: there's many ways to get your Bob Dylan's song right,
Speaker 1: same with investing. Right, you've got mutual funds, e t
Speaker 1: f s, and I would say direct indexing, or Patrick
Speaker 1: calls it custom indexing, is sort of one of the
Speaker 1: newer waves, although it's actually an older wave because it's
Speaker 1: it's a separately managed to count where you just own
Speaker 1: all the stocks yourself. And that used to be hard
Speaker 1: for retail because and so institutions did it. But now
Speaker 1: with trading getting cheaper, it's now more available to retail,
Speaker 1: so it's been democratized and it's been that is a
Speaker 1: sort of a wave of the future, and so I
Speaker 1: think it's important to go over this because it is
Speaker 1: an avenue investors have availed to the available to them,
Speaker 1: and it's also a topic we debate on our team
Speaker 1: a lot. How big will this get? And it's a
Speaker 1: it's like E S G in my opinion in terms
Speaker 1: of one of those uh things that isn't No one's
Speaker 1: totally on the same page about some people very bullish,
Speaker 1: some people less so. So I think we should dig
Speaker 1: into the pros and cons and sort of the future
Speaker 1: of this area. Alright, I think you did a pretty
Speaker 1: good uh summary there. We'll see if Patrick takes issue
Speaker 1: with that. So again Patrick O'Shaughnessy, CEO of OSAM, which
Speaker 1: is part of Franklin Templeton, this time on trillions invest
Speaker 1: Like Patrick O'Shaughnessy, Patrick, welcome joints, Joel and Eric. Thanks
Speaker 1: so much for having me. Okay, Patrick, um, I want
Speaker 1: to ask you first and foremost about direct indexing, which
Speaker 1: you call customer indexing. Why why does the world need that? Well,
Speaker 1: I think it's important to define the difference between direct
Speaker 1: and custom indexing. Direct indexing, as Eric points out, as
Speaker 1: is quite old. It's been around for decades. I think
Speaker 1: it is a very simple, uh product. You take whatever
Speaker 1: exposure you want, let's say it's the SP five. You
Speaker 1: own all or most of the stocks directly in a
Speaker 1: separate account for each investor, and you trade those stocks
Speaker 1: to generate tax losses, which become an asset to the investor,
Speaker 1: which is possible because of the separate accounts. So the
Speaker 1: separate account is the key sort of vehicle. But the
Speaker 1: strategy is really deliver the SMP five returns effectively, but
Speaker 1: give me this extra asset of tax losses that I
Speaker 1: can use to offset gains elsewhere. You might call this
Speaker 1: tax alpha. There's a lot of different terms for it,
Speaker 1: and that's the strategy. That's it, And you're not trying
Speaker 1: to do anything else, and you're not trying to outperform
Speaker 1: the index. You're not trying to do anything customer specialized. Uh,
Speaker 1: you just are getting exposure plus this tax boost. Custom
Speaker 1: indexing is something that I think has only been made
Speaker 1: possible and we were the first to do it. We
Speaker 1: came up with that term custom indexing in the last
Speaker 1: three or four years because of software and technology. So
Speaker 1: what custom indexing brings to the table is a million
Speaker 1: other considerations that each investor might have, preferences, circumstances, attack
Speaker 1: situation that's different than than others, which can be accommodated
Speaker 1: in the strategy itself. So whereas direct indexing is very
Speaker 1: much one size fits all, custom indexing is one size
Speaker 1: fits one, which is enabled by technology. And obviously we
Speaker 1: can go into it to see how people use this
Speaker 1: because we've got the data. We've got you know, nearly
Speaker 1: two thousand accounts that have been open a bit north
Speaker 1: of three billion dollars managed to the platform today, so
Speaker 1: we can tell you, you you know, how people use this
Speaker 1: to customize. But I do think that, like anything interesting,
Speaker 1: it's something enabled by relatively new technology and allows things
Speaker 1: to be much more tailored to the individual versus you know,
Speaker 1: just give me the SMP. Okay, so you're like a
Speaker 1: civilo tailor, but with with better scissors, uh for a
Speaker 1: terrible comparison technology, enhanced scissors maybe. UM. But I'm curious
Speaker 1: in part because we talked to a lot of people
Speaker 1: who are in the E t F world and look
Speaker 1: at E t F S as like a great technology,
Speaker 1: and you basically kind of like looked in the headlights
Speaker 1: of the E t S and we're like, I'm gonna
Speaker 1: do something different than that. Why and how do you
Speaker 1: feel about E t F. So I guess there's there's
Speaker 1: there's two angles on this, both of which matter. H
Speaker 1: One is the business angle from our perspective, and two
Speaker 1: is the investing angle from the customer's perspective, So I'll
Speaker 1: touch on both. When we filed for that e t F,
Speaker 1: it was because we wanted to do something more accessible
Speaker 1: than what we had done in the past, and e
Speaker 1: t f s were obviously big and growing and remain
Speaker 1: big and growing. But when we stared at this from
Speaker 1: a business competition standpoint, it kind of looked like the
Speaker 1: worst possible scenario you could imagine in business. There was
Speaker 1: effectively unlimited competition. You felt like we were entering a
Speaker 1: pure commodity game. You're entering a pure price war where
Speaker 1: you're just there's no there is no pricing power, you're
Speaker 1: a price taker. There's insane competition for mind share and
Speaker 1: pre exist sting, you know, guerrillas. It just sort of
Speaker 1: felt like, this is the worst This is actually the
Speaker 1: worst idea we've ever had. Um and hold Joel, Joel,
Speaker 1: that is exactly why I call it the terror Dome.
Speaker 1: It is brutal. It really is. Uh he just described it.
Speaker 1: I can I can understand that that take takes a
Speaker 1: tardom that feels like buying lottery tickets like some some
Speaker 1: payoff right. There are some et F franchises that come
Speaker 1: from nowhere, you know, ARC is the prime example, and
Speaker 1: become huge and great businesses. But the number of dead
Speaker 1: uh in that battlefield is insane. And so as we
Speaker 1: as I, as we and I got deeper into that consideration,
Speaker 1: we just thought, this is just a terrible idea, uh,
Speaker 1: but we still want to apply. We were technology experts.
Speaker 1: We had built all this technology for our own purposes
Speaker 1: as quantitative factor investors for years, for for a decade,
Speaker 1: and we started to ask the question, how could we
Speaker 1: take what we've built for our own purposes and effectively
Speaker 1: turn it over to others. Very inspired by the Amazon
Speaker 1: Web Services story. In fact, I spent a lot of
Speaker 1: personal time with executives. They're understanding how they did that,
Speaker 1: taking something they had built for the retail business and
Speaker 1: repurposing it as a general technology. And we came up
Speaker 1: with this idea of custom indexing, which was to say,
Speaker 1: take the tools we've built to build our own strategies
Speaker 1: and do whatever you want with them. You know, blend
Speaker 1: passive and active factor exposure in whatever ratios you want,
Speaker 1: add custom filters, add add overweights to certain things that
Speaker 1: you care more about. Incorporate you know, something like a
Speaker 1: low basis concentrated stock position into your portfolio and let
Speaker 1: us work around it in a tax advantaged way. Um.
Speaker 1: We found very quickly people care a lot about taxes,
Speaker 1: and they care about more than just tax alpha earned
Speaker 1: through loss harvesting. They care about managing their taxes overall
Speaker 1: with the use of their portfolio. And we saw all
Speaker 1: these use cases people just sort of clawing them out
Speaker 1: of us. UM. So really early on. I have this
Speaker 1: theory now that uh, in business, for a new product,
Speaker 1: something that's gonna work tends to work really fast. You
Speaker 1: tend to see a pool of demand that was unmet
Speaker 1: that people are ravenous for. And our early experiences with
Speaker 1: Canvas the platform was that basically everybody said yes like
Speaker 1: our our our hit rate on a demo of software
Speaker 1: was basically everyone buying it more or less on the spot.
Speaker 1: And most of those early partners have scaled, you know,
Speaker 1: tremendously with us with tons of assets on the platform.
Speaker 1: And so I think I think this latent demand for customization,
Speaker 1: especially around really two things deep customization of taxes beyond
Speaker 1: loss harvesting and back to your question of why people
Speaker 1: need this and UH, customization of the blend between passive
Speaker 1: and active factor exposures so that you don't have to
Speaker 1: choose the E t F that has you know, whatever
Speaker 1: values have any five percent passive you can you can
Speaker 1: build your own. UH. And we see tremendous variation on
Speaker 1: those two dimensions across the platform. UM, let's explore the
Speaker 1: tax ALFHA I think for people out there, we've said
Speaker 1: that word and tax less harvesting. Just explain this right,
Speaker 1: so UM I would I'll talk about how the mutual
Speaker 1: fund and et F works, and then you can do
Speaker 1: the custom indexing in a mutual fund. Unfortunately, you get
Speaker 1: a tax bill even if you're just sitting there. It's
Speaker 1: probably the worst case scenario of all the structures because
Speaker 1: the manager has to sell stocks to meet people leaving
Speaker 1: the fund. That generates a taxable event that people sitting
Speaker 1: there now have a capital gains distribution. The E t
Speaker 1: F kind of solved for that. You don't get those
Speaker 1: tax distributions. You you pay taxes when you sell it. UH,
Speaker 1: and that really is a big deal for taxable accounts.
Speaker 1: That's i'd say a top three advantage of the E
Speaker 1: t F custom index, saying tries to take this even further,
Speaker 1: and I'll I'll let Patrick describe it, but explain how
Speaker 1: that tax alpha works relative to maybe the E T
Speaker 1: F or selling. I think it's important to highlight limitations
Speaker 1: of this approach to which is you need fairly low
Speaker 1: turnover strategies for tax alpha to be a thing and
Speaker 1: to work. Like you're never if you want a momentum
Speaker 1: factor exposure, which is a strategy that turns out over
Speaker 1: a lot like you should just buy any TF like that,
Speaker 1: There's no way that turnover strategy is ever going to
Speaker 1: have a tax alpha advantage on top of the ALP
Speaker 1: the potential for excess return advantage from the factor. So
Speaker 1: what that crossover point is probably like annual turnover something
Speaker 1: like that. So we're really talking about low turnover strategies
Speaker 1: here when we're talking about the potential tax advantage of
Speaker 1: pure loss harvesting. I think there are other tax advantages
Speaker 1: we can talk about that are independent of turnover, but
Speaker 1: the famous one loss harvesting. You know, you need a
Speaker 1: low turnover strategy. So that's that's the first, I think
Speaker 1: key important point. But the concept itself is honestly pretty straightforward.
Speaker 1: Let's just imagine a you know, a pair of you know,
Speaker 1: all the car companies. Let's say they're all owned in
Speaker 1: the sp they have similar characteristics. They tend to have
Speaker 1: decently high correlation with one another. UM. One thing you
Speaker 1: can do is monitor of the portfolio. We do it
Speaker 1: on a daily basis and basically say, okay, what positions
Speaker 1: that we've bought for this investor are trading at some
Speaker 1: sort of loss where we can do a trade book
Speaker 1: that loss, which is a taxable loss, and reinvest the
Speaker 1: proceeds in a basket of securities which have conceptually similar
Speaker 1: profiles as the one that we sold, so that our
Speaker 1: overall exposure to the SMP five remains very constant. The
Speaker 1: technical term for this would be tracking er. So we
Speaker 1: have a tracking your budget. We can't get too different
Speaker 1: than the underlying benchmark as we do this. If the
Speaker 1: tracking your budget was really large, which is one of
Speaker 1: the things that we allow on the platform because sometimes
Speaker 1: people don't. Sometimes people say I have a huge gain,
Speaker 1: I want to offset it generate as much loss as
Speaker 1: humanly possible. I don't give a crap if I track
Speaker 1: the SMP five hundred this year. That's something that traditional
Speaker 1: direct indextors don't allow for but we see it happen. Um,
Speaker 1: if you tracking your budget was five, which is huge,
Speaker 1: we can generate a lot more losses. If it's one,
Speaker 1: which is sort of the standard tracking our budget of one,
Speaker 1: you're you're highly constrained. You can't do too much of
Speaker 1: it because you start to stray from the underlying index itself.
Speaker 1: So UM, that's the concept is you sell stuff that's
Speaker 1: had a lost reinvested in similar stuff so that your
Speaker 1: overall exposure remains fairly constant, and you you track pretty
Speaker 1: tightly with the with the underlying index that you've chosen,
Speaker 1: but you've generated this loss along the way. Um, And look,
Speaker 1: there are drawbacks to this. I think as you mature
Speaker 1: a single account, Let's say you know, you invest in
Speaker 1: million dollars into an s m A and do this
Speaker 1: loss harvesting over time, as markets tend to go up,
Speaker 1: your opportunity for lost harvesting is very dependent on the
Speaker 1: market environment that you're in. So markets straight up into
Speaker 1: the right this isn't going to be as good as
Speaker 1: a strategy. And one of the things that we found
Speaker 1: when we launched was that, frankly, we thought the benefits
Speaker 1: of tax less harvesting were somewhat overstated. You'd see, you know,
Speaker 1: benefits like two d basis points of excess return, which
Speaker 1: we just could We actually had a crisis of confidence.
Speaker 1: We couldn't replicate this. We thought we were going we
Speaker 1: were driving ourselves crazy, and then we when you dig
Speaker 1: into the methodology of others, you realize, oh, they picked
Speaker 1: like the absolute best ten year period. They haven't done
Speaker 1: a bunch of that. Um They've made the best possible
Speaker 1: assumptions on the tax law and what's usable and how
Speaker 1: much offsetting gain you'll have to to actually be able
Speaker 1: to capture that benefit. Um So, we saw very rosy
Speaker 1: assumptions behind that number. But even with our we think
Speaker 1: more conservative assumptions, we saw like seventy eight basis points
Speaker 1: of annual pick up over just the what we call
Speaker 1: the e t F equivalent, so buying s p y,
Speaker 1: holding it, selling it, paying the tax at the end
Speaker 1: versus doing it along the way as as you do
Speaker 1: in in custom indexing. UM. So, we just think there's
Speaker 1: a huge obvious long term benefit. It is is that
Speaker 1: seven year eighty basis points like an annualized number over
Speaker 1: ten years, or just how how much does it vary
Speaker 1: its annualized over ten year holding periods, and uh, it
Speaker 1: is the average of lots of vintages, So there's lots
Speaker 1: of senior periods in history that we can study this on.
Speaker 1: Like I said, most of the other studies pick one
Speaker 1: that starts in like oh nine or oh eight or
Speaker 1: oh seven when you have obvious, like huge upfront losses
Speaker 1: that you can be booking. So it looks really good.
Speaker 1: The range is pretty wide, Like there's ten year periods
Speaker 1: where there's effectively zero net benefit to doing this. UM,
Speaker 1: there's negative We didn't observe a negative one, so uh,
Speaker 1: zero was sort of the lower bound, and like two
Speaker 1: something was like the upper bound. So obviously we don't
Speaker 1: know we we don't control the market, so we don't
Speaker 1: know which of the which we're in that range it
Speaker 1: will fall. Seven year eighty was sort of the average UM.
Speaker 1: But we think that's a pretty darn good trade, especially
Speaker 1: when you layer on all the other customization benefits that
Speaker 1: basically everyone uses. So I mean, I'm curious, you're now
Speaker 1: part of Franklin Templeton and that merger happened almost a
Speaker 1: year ago, right, so yeah, so how did that? How
Speaker 1: did that come together and why did you decide to
Speaker 1: link up with someone? Ye, so uh to rewind time,
Speaker 1: this was called April of two thousand and twenty one
Speaker 1: of last year, we got a call from Franklin. We
Speaker 1: weren't trying to sell the business. We weren't running any
Speaker 1: sort of process or anything. We got a really memorable
Speaker 1: call I did from a guy named Roger Paradiso at
Speaker 1: Franklin Templeton who is now the executive chairman and sort
Speaker 1: of the person responsible for OSAM at Franklin Templeton's he's
Speaker 1: osam's executive chairman now. And UH, Roger basically said, we
Speaker 1: have been doing research on these platforms like yours for
Speaker 1: a long time. We think that the one you've built
Speaker 1: is the best, and we want to we want to
Speaker 1: partner with you. And he he actually knew more about
Speaker 1: Canvas on that first call, having never talked to us
Speaker 1: than probably anyone that I had ever talked to about
Speaker 1: the platform outside of our firm um. So it was
Speaker 1: clear they had done their homework and understood what we
Speaker 1: think of as this huge market opportunity and for a
Speaker 1: new category that we had created. And UH, it moved
Speaker 1: very quickly from there. I actually was in California. I
Speaker 1: flew back, I completely cut my trip off, flew back
Speaker 1: the next day, hiked with Roger for hours in the
Speaker 1: local woods, which is something I like to do, and
Speaker 1: got to know each other very quickly, and it unfolded
Speaker 1: from there. We didn't, you know, we run like a
Speaker 1: process like it just it was clear that they wanted
Speaker 1: us for very good reasons and that they brought to
Speaker 1: the table effectively all the things that we didn't have. So,
Speaker 1: you know, we we had been a relatively small boutique
Speaker 1: firm um for twelve years or so at that time,
Speaker 1: and uh, we had a two and a half person
Speaker 1: sales team, which is not big. And while while those
Speaker 1: two and a half, you know, I think we're the
Speaker 1: equivalent of like seven or ten normal sales people, they
Speaker 1: were incredible. There's only so much hours in the day.
Speaker 1: And we had hit upon this new thing that that
Speaker 1: you know, we had never been a big sales organization.
Speaker 1: We frankly didn't know how to scale a sales organization.
Speaker 1: And Franklin, with a trillion and a half of assets
Speaker 1: under management or whatever it is, had one of the
Speaker 1: you know, most scaled up distribution forces with relationships everywhere
Speaker 1: in our entire industry, and that to us felt like
Speaker 1: sort of a match made in heaven um. And indeed,
Speaker 1: that's you know, what we've seen so far is that
Speaker 1: they bring a bazooka to the knife fight that we
Speaker 1: were fighting. And we're only peter or nine months into this,
Speaker 1: so it's it's still fresh and new. But that's the
Speaker 1: story behind the partnership. I was at Franklin Templeton about
Speaker 1: three months ago. I took a trip to sand France,
Speaker 1: so a bunch of clients went went out there. Did
Speaker 1: you wasn't it interesting how they share a campus with roadblocks,
Speaker 1: So you've got these sort of like this asset manager
Speaker 1: guys walking around and then you've got these like roadblocks
Speaker 1: employees like mixed together. I thought it was interesting. It's
Speaker 1: a great obviously get the best weather out there as well,
Speaker 1: but it's I was I didn't realize. I'm a student
Speaker 1: of asset management as a as an industry and as
Speaker 1: a business. I find it sort of endlessly fascinating. It's
Speaker 1: where I spent my whole career, so both in the
Speaker 1: public and now for me on the private side too
Speaker 1: with a venture capital firm that I run. But but
Speaker 1: the the technology interest and actions of the big asset
Speaker 1: managers has always intrigued me. And what we saw with
Speaker 1: Franklin was a clear commitment. And it's a family owned
Speaker 1: and run firm in many ways, right the Johnson family
Speaker 1: is the controlling shareholder still frankly, even though it's a
Speaker 1: publicly traded stock with sort of a rich history of
Speaker 1: long term decision making. And I think good long term
Speaker 1: decision making often comes back to investments in technology, and
Speaker 1: and we felt that on the receiving end of that,
Speaker 1: really the attention and the focus, let's say, in the
Speaker 1: due diligence process, uh, Franklin onto Us was was crazy
Speaker 1: deep dives into what we had built, which we loved
Speaker 1: because we've been building it for twelve years. Real, I mean,
Speaker 1: Canvas in many ways is like a new layer on
Speaker 1: top of technology we've been working on for a long
Speaker 1: long time. We'd always had much bigger headcounts and technology
Speaker 1: than than our peers, and uh, I think the best
Speaker 1: firms are committed to that sort of thing. And so
Speaker 1: the headquarters being you know, on the same campus or
Speaker 1: right next to road Blocks and and many other firms
Speaker 1: lic ROA Blocks. I think it's fascinating and more than
Speaker 1: I could say for a lot of the more East
Speaker 1: Coast mindset set managers. One thing that's important to note
Speaker 1: here there has been a total trend of big asset
Speaker 1: managers buying direct indexing and customer indexing platforms, namely Morgan
Speaker 1: Stanley with Parametric. Just curious if your take on that
Speaker 1: deal or I believe black Rock bought on perio UM.
Speaker 1: I mean, I'm assuming you're out there kind of selling
Speaker 1: against those other shops. I mean, do you have any
Speaker 1: you know, comment on the other compos I think the
Speaker 1: most of the deals that you've seen that are huge,
Speaker 1: that are very big, Parametric and Imperio being big deals,
Speaker 1: big M and A deals in in that world. Those
Speaker 1: firms are excellent firms. They've been around a long time.
Speaker 1: They do more traditional direct indexing UM. Maybe with some
Speaker 1: templated customization you can pick a few colors, not just
Speaker 1: black and you know the model t joke. But more
Speaker 1: or less they're direct indexing firms. Uh. The interface between
Speaker 1: customer and firm is not a soft web based software
Speaker 1: a layer, and I'm sure that those firms will trend
Speaker 1: in that direction. UM. But it's one thing to build
Speaker 1: from scratch with that is your intention, and it's another
Speaker 1: to lay one on top of a you know, very
Speaker 1: mechanical turkey operations heavy business, which is I think I
Speaker 1: don't want to speak out of turn. I don't know
Speaker 1: those businesses intimately well, but I think the M and
Speaker 1: A you've seen there, and then you've also seen some
Speaker 1: of the younger technology companies that really didn't get distribution
Speaker 1: but built interesting technology have been brought up to by
Speaker 1: these asset managers. And I think the trend is kind
Speaker 1: of obvious, which is platform shifts matter. If you missed
Speaker 1: E T f S as a big asset management firm,
Speaker 1: you lost. I mean you could. You cannot miss major
Speaker 1: platform shifts as a big incumbent. Go study Facebook transition
Speaker 1: to mobile. That's kind of the best example of this,
Speaker 1: Like they ultimately got it right, but initially it was
Speaker 1: kind of a kind of a crap show, and it's
Speaker 1: just critical. You cannot miss a major change. And so
Speaker 1: if if s M a chassis custom and direct indexing
Speaker 1: is the next, you know, major winds changing category. I
Speaker 1: think all the big firms recognized this, and even if
Speaker 1: they're wrong, to be fair, they still have to make
Speaker 1: the bat they've got to have a player in the hunt.
Speaker 1: So I think that's what's driving it. Here's where I
Speaker 1: debate my team others in the industry on custom indexing
Speaker 1: and direct indexing. I agree. I know, especially advisors tell
Speaker 1: me some of their clients hate taxes and this really
Speaker 1: everyone held some tax run and I can see and
Speaker 1: everyone does. Yeah, ultra high net worth types. Um, you know,
Speaker 1: I get the use case. I see this more as
Speaker 1: not a game changer, but a sort of new pass
Speaker 1: option for people not like so it was positioned sometimes
Speaker 1: as the E T F killer, and I the reason
Speaker 1: I am slightly I'm not bearished embarrassed versus the hype
Speaker 1: that like that kind of hype. And here's why. And
Speaker 1: I want to get your take on this. Over the
Speaker 1: past twenty years thirty even, we've seen a trend towards
Speaker 1: three things, cheap, passive, and simple. This does kind of
Speaker 1: try to reverse all three of those, and I think
Speaker 1: that's why. Unless you're really into the tax part of it,
Speaker 1: or really a hardcore E s G person, I can
Speaker 1: see that use case. It doesn't seem like it's going
Speaker 1: to be able to dislodge a lot of the cheap
Speaker 1: beta E t f s and index funds that we've
Speaker 1: seen in the core of portfolios over the past thirty years. Um,
Speaker 1: am I wrong? Or do you see it like completely
Speaker 1: being coming the next thing and getting fifty market share
Speaker 1: of the funds? So maybe let's talk about cheap, passive
Speaker 1: and simple. The first thing is the beauty of technology
Speaker 1: is is cost savings that get usually passed on to
Speaker 1: the end uh the end user. If you take into
Speaker 1: account of taxes, which in my mind is just it's
Speaker 1: probably the biggest single costs that comes with investing right period.
Speaker 1: Like if you just do the math, the tax fee
Speaker 1: that you pay is the one you should care the
Speaker 1: most about, right especially because everything so I mean all
Speaker 1: beta is so cheap right now, Like you know, five
Speaker 1: versus four basis points is not going to matter. But
Speaker 1: a big difference in tax bill that compounds over time
Speaker 1: matters enormously. So I think you have to look at
Speaker 1: all that matters is after tax money in the investor's
Speaker 1: pocket at the end of whatever investing cycle it is
Speaker 1: we're talking about. So taxes matter a great deal. So
Speaker 1: when you talk about cheaper, that's seventy eight basis points
Speaker 1: that you're picking up relative to the spy equivalent you
Speaker 1: know et F strategy is ten x the you know
Speaker 1: your fee that you're paying annually for R S p
Speaker 1: Y E t F. So I think on the cheaper side.
Speaker 1: The reason that we're seeing this grow so quickly on
Speaker 1: our platform is mostly that right it's people are convinced
Speaker 1: that taxes are one of the costs and this is
Speaker 1: a great way to reduce those costs and cost compound
Speaker 1: over time. UM Passive is the second thing I think
Speaker 1: I have. I don't want the exact staff, but it's
Speaker 1: something like in the six low sixties, maybe mid sixties,
Speaker 1: per cent of the assets on the plot form are passive.
Speaker 1: So when we launched Canvas, you can do it. You
Speaker 1: can build whatever strategy you want on canvas. We don't
Speaker 1: We don't tell you what to do. So we were
Speaker 1: very curious to know, like, what would people do. The
Speaker 1: answer is that two thirds of their portfolio is passive
Speaker 1: and about you know, the remaining thirty or so is
Speaker 1: is active factor exposures. When you blend those together, the
Speaker 1: management fee is relatively low. It's not sp y low,
Speaker 1: but it's relatively low. Uh. The if factor in the
Speaker 1: next effective effective taxes you could argue it's even lower
Speaker 1: than sp y. Um it is fairly passive, like it's
Speaker 1: dominated by passive assets, and then simple is the last one.
Speaker 1: There's no doubt that buying spy and never doing anything
Speaker 1: is simpler than like, you know, pushing and pulling levers
Speaker 1: and customizing things. There's also no doubt that the people
Speaker 1: that benefit the most from this uh in an absolute sense,
Speaker 1: have more complicated portfolios. They've got these you know, concentrated
Speaker 1: stock positions, They've got other tax considerations that care about
Speaker 1: you know, individual issues that they want to through an
Speaker 1: E s G lens governed in the portfolio. It's it's
Speaker 1: a minority, but it's a very vocal minority for those
Speaker 1: that care, they care a lot. It's like of the
Speaker 1: assets that would that would be true for the E
Speaker 1: s G thing. So you're right, it is. It is
Speaker 1: more complicated in a general sense, but that doesn't mean
Speaker 1: there's not a massive pool of demands. So I don't
Speaker 1: think you're wrong. I don't think that E T S
Speaker 1: will be displaced as a huge, maybe even primary vehicle.
Speaker 1: But when you start to factor some of these things
Speaker 1: in and things will only get simpler. Providers will get
Speaker 1: simpler and simpler over time, Like it'll be a couple
Speaker 1: of clicks, it'll be a couple of things if the
Speaker 1: s m A and operations technology allow this to be
Speaker 1: as cheap as an s P Y E t F
Speaker 1: and everyone can get one with you know, ten thousand
Speaker 1: dollars or something are minimums two and fifty thou which
Speaker 1: probably will be that for a while, but that number
Speaker 1: will come down because of technology over time, because of
Speaker 1: fractional share trading over time, etcetera. So I guess I
Speaker 1: would challenge the the better passive I'm sorry, cheaper passive
Speaker 1: simple by saying this is kind of a lot of
Speaker 1: those same things. Actually, uh, and it will only get
Speaker 1: better over time. Okay, So, Patrick, another backstory question that
Speaker 1: I wanted to ask you about was your dad, who
Speaker 1: you inherited the firm from, and and I'm curious what
Speaker 1: you learned from him. Yeah, so, uh, the literal sequences
Speaker 1: he started. He was one of the pioneering quant researchers
Speaker 1: in the nineties actually late eighties, just when he started
Speaker 1: doing that research. So like some of the early dogs
Speaker 1: of the DOWD research that was empirical. A lot of
Speaker 1: the early factor research around quality and value and momentum.
Speaker 1: Uh he was doing that with you know, Cliff Assness
Speaker 1: and Joseph Connor Shock and some of the very famous
Speaker 1: kind of mid nineties quant researchers. He started the firm
Speaker 1: called Shaughnessy Capital Management in n that became part of
Speaker 1: bear Stearns in two thousand and one. Uh we then
Speaker 1: spun out of bear Sterns in two thousand seven, which
Speaker 1: is right when I graduated college. Like literally the like
Speaker 1: month or week that I graduated college was when OSAM
Speaker 1: was starting. So technically I was o Sam's first employee.
Speaker 1: I didn't know anything about finance or investing. I don't
Speaker 1: think I knew what an equity was, and I had
Speaker 1: studied philosophy in school, and uh so you know, I
Speaker 1: got a very unfair lucky you know, sliding into home
Speaker 1: head started my career because of timing, and I sort
Speaker 1: of fell in love with the quant research part of
Speaker 1: all this. But uh, you know, my my dad, my parents,
Speaker 1: I should say, they were very lazy, fair Like they
Speaker 1: didn't tell us what to do. They didn't tell us
Speaker 1: what to like or learn or study. And so I
Speaker 1: actually hadn't even read my dad's books until you know,
Speaker 1: fairly late in life, and it's always kind of been
Speaker 1: that way, you know. I guess the big thing my
Speaker 1: dad taught me is like, figure everything out for yourself.
Speaker 1: Don't come to me with questions. Like you figure it out.
Speaker 1: That's what That's what I did. That's what people I
Speaker 1: respect to. So, you know, there's a library card, here's
Speaker 1: a bunch of books in the living room, Like, you
Speaker 1: figure it out. You come up with your own solutions.
Speaker 1: And so well we've been you know, fun collaborators and
Speaker 1: and obviously deep partners for a long long time. His
Speaker 1: method was to, uh really hand off responsibility. So when
Speaker 1: I took the business over as CEO in two thousand
Speaker 1: and eighteen, at the start of two and eighteen, it
Speaker 1: wasn't here's the business, like, this is what you should
Speaker 1: do with it. It was here's the business, you tell
Speaker 1: me or we're going to do with it. And uh,
Speaker 1: you know, it took a year of searching before we
Speaker 1: alighted on canvas. So Canvas was literally on a whiteboard
Speaker 1: in my office at the end of prototype was ready
Speaker 1: in three months, and then we went to market with
Speaker 1: it November. So it happened fast. Uh, but I guess
Speaker 1: the thing I learned is like you have to figure
Speaker 1: things out for yourself. Like you cannot tell people what
Speaker 1: to do. You can support them in a lot of ways.
Speaker 1: You can give them a lot of space, you can
Speaker 1: give them a safety net, you can give them um
Speaker 1: peace of mind. But for anyone to figure anything really
Speaker 1: interesting out, they have to do with themselves. And uh,
Speaker 1: I think that's a pretty pretty good singular lesson. Did
Speaker 1: the philosophy Uh did help you at all in this role? Uh?
Speaker 1: Have you brought it? And who's your favorite philosopher? Uh?
Speaker 1: My favorite philosopher is a guy named Arthur Schopenhauer, who's
Speaker 1: a lesser, lesser known, you know, continental europe philosopher, kind
Speaker 1: of obscure, kind of a curmudgeon. But the reason I
Speaker 1: like him so much is that he was the person
Speaker 1: that introduced the West to a lot of the Eastern philosophy.
Speaker 1: So Eastern philosophy is popular or common now in the West.
Speaker 1: Before Chopinauer don't even knew it existed, And so he
Speaker 1: was my He was also an incredibly clear writer. I mean,
Speaker 1: there's a lot of these philosophersy read and it's like,
Speaker 1: I have no idea, what the hell these guys are
Speaker 1: saying it is all this lingo and terminology. It just
Speaker 1: feels like a ridiculous argument for insiders that is inaccessible.
Speaker 1: Whereas Chopinauer wrote very clean, simple language, talked about very basic,
Speaker 1: simple things in life health, wrote a lot about health.
Speaker 1: A lot of philosophers didn't write about health. Um, Schopenauer did.
Speaker 1: But but more than anything, he introduced me to the
Speaker 1: Eastern philosophers, which uh, I would say are my like
Speaker 1: operating system or way of thinking about life and work
Speaker 1: in the world and everything else. So yeah, it directly
Speaker 1: continues to I still read that stuff constantly. It influences
Speaker 1: my behavior every day. Um, there's even individual passages I
Speaker 1: can point to that that form a lot of my worldview.
Speaker 1: What cooler pursuit than trying to figure out, you know,
Speaker 1: what the hell is going on in life? Uh? I
Speaker 1: just think it's a really interesting exercise for anybody, and
Speaker 1: Chopinhum made it accessible. So he's probably my favorite. Love
Speaker 1: that your podcast invest like the best. What's your your
Speaker 1: number one takeaway or lesson that you've learned from someone
Speaker 1: and applied to your life to benefit from? Well, uh,
Speaker 1: to tie it to this conversation, I would say, almost
Speaker 1: all of Canvas. Everything we did with Canvas was us
Speaker 1: stealing outright lessons, specific lessons you could even I think
Speaker 1: almost as like business spells um that I learned from others.
Speaker 1: The way that we launched and built the product was
Speaker 1: wholesale taken from a guy named Chathan Putugunta. I'll never forget.
Speaker 1: I flew out there and showed Chathan, who's a partner
Speaker 1: at Benchmark Capital kind of one of probably the most
Speaker 1: famous VC firm with Sequoia, and uh said, look, here's
Speaker 1: here's the product that we've built. We think it's it's great. Uh,
Speaker 1: it's built on all this proprietary technology. Blah blah blah, um,
Speaker 1: what would you do with this? And he told me,
Speaker 1: And what he told me was was kind of the
Speaker 1: opposite of my own instinct. I think of him as
Speaker 1: the sort of you know, Obi Wan of of enterprise software.
Speaker 1: And so we just listened, like we just did what
Speaker 1: he said and it worked ridiculously well, uh and much
Speaker 1: better than the plan that I had for distributing Canvas.
Speaker 1: And it was counterintuitive. And and so I think the
Speaker 1: number one lesson I have is just like, there is
Speaker 1: so much to learn from so many people from literally
Speaker 1: every person across so many disciplines that can then be
Speaker 1: applied back to your thing. Um, I actually think you
Speaker 1: should spend more time spent away from your own industry
Speaker 1: when you're studying business or whatever. Study around it, like
Speaker 1: to study adjacencies, study other strategies and see if they
Speaker 1: apply to what what you can do, because I do
Speaker 1: think in many ways, like our story would not have
Speaker 1: been nearly as interesting had we not borrowed these ideas
Speaker 1: from lots of other different fields. And uh, I guess
Speaker 1: the second lesson is just like if you expose what
Speaker 1: you're learning as you go, it is a magical process.
Speaker 1: Like you you attract people that like the same stuff,
Speaker 1: that have similar motivations, that want to work on the
Speaker 1: same projects. Recruiting becomes easier, sales becomes easier, you get
Speaker 1: more ideas, you build a distribution channel yourself. You know,
Speaker 1: we reach millions of people a month with our podcasts,
Speaker 1: Like it's it's a it's a big platform, and it's
Speaker 1: all because of me talking to people asking them questions
Speaker 1: like that. That sounds so weird to me, and when
Speaker 1: I started it, I didn't intend any of this, but
Speaker 1: it's really a smart idea to chase curiosity and learn
Speaker 1: in public a bit. And uh, yeah, it's it's it's
Speaker 1: it's the reason for a lot of things I treasure most.
Speaker 1: I love. This audio is a weird platform. Uh there's
Speaker 1: this crazy idea called the Guttenberg parentheses, which is this
Speaker 1: notion that we may look back in time. I don't
Speaker 1: know if I agree, but it's an interesting idea. We
Speaker 1: may look back in time from the printing invention of
Speaker 1: the printing press to the dawn of the internet as
Speaker 1: like the era when the written word was dominant by
Speaker 1: far you know of any communication exchange or medium, and
Speaker 1: that the parentheses might be that this is the only
Speaker 1: period in history where the written word is is the
Speaker 1: dominant form of communication. And the reason that is at
Speaker 1: least interesting to consider, I think is, Uh, audio is
Speaker 1: way easier to create and it's way easier to consume
Speaker 1: than the written word. It doesn't need to be as perfect.
Speaker 1: You get a lot more there's a lot more room
Speaker 1: for error. The audience penetration is some orders of magnitude bigger,
Speaker 1: Like you know, I wrote a book and in the
Speaker 1: first you know, ten minutes of the release of a
Speaker 1: new episode of a podcast, like ten times as many
Speaker 1: people listen to a new podcast episode every single week
Speaker 1: has read the book that took me a year to write.
Speaker 1: I just think that's kind of staggering when you think
Speaker 1: about the leverage it represents. So if it's ten times
Speaker 1: easier to create, ten times easier to listen to, I
Speaker 1: just think you can do a lot more with audio.
Speaker 1: That's interesting. And if you look at our you know, corpus,
Speaker 1: it's like we've we've written hundreds of books. Uh, if
Speaker 1: you add up, the word counts. So I think audio
Speaker 1: is like a sneaky, interesting communication method. It's also the oldest,
Speaker 1: you know, like that that's this is how stuff was
Speaker 1: communicated down through most of history. Um. So I'm very
Speaker 1: intrigued by audio as a medium. And everyone always asked
Speaker 1: about write another book, and it's like, I guess I could.
Speaker 1: But in the time it would take to write one
Speaker 1: of those, I could do like a hundred of these.
Speaker 1: So uh, maybe I'll just do that. I agree with
Speaker 1: all that. I would make two comments. One The good
Speaker 1: thing about books, like you know, like your dad, you
Speaker 1: didn't care for twenty years, and then when you did,
Speaker 1: it was right there for you. Like books have a way,
Speaker 1: they have a way of lasting, like they're they're a
Speaker 1: little bit more permanent. I think, um, that would be
Speaker 1: my case for writing a book, because I agree with you,
Speaker 1: it's a it's a pain in the ass, and unless
Speaker 1: you like get real lucky you write the best book,
Speaker 1: you're probably gonna not, you know, sell a ton of copies.
Speaker 1: But at least it's always out there. I don't, I don't,
Speaker 1: I don't agree. You know. I look yesterday, Uh, I
Speaker 1: just had the numbers here. There's an episode we released
Speaker 1: a couple of years ago with John Collinson, who's the
Speaker 1: one of the co founders of Stripe, obviously a big,
Speaker 1: you know, very popular technology company, who was listening to
Speaker 1: thousands of times yesterday. Yesterday. It's two years old, and
Speaker 1: we don't even know, like this stuff has not been
Speaker 1: around for twenty years to know if there's going to
Speaker 1: be I would suspect that the very best episodes will
Speaker 1: live effectively forever just as long as a book would.
Speaker 1: And they're more accessible. They're easier. I can I can
Speaker 1: get one of my phone in seven seconds versus a
Speaker 1: book that I have to like seek out and go after. No,
Speaker 1: I'm not saying one's better than the other. I just
Speaker 1: think I think it's on the same level. And we
Speaker 1: see that in the data that very old episodes get
Speaker 1: crazy amounts of new listeners despite being years old. Yeah,
Speaker 1: you might be right. Um. Also would add the other
Speaker 1: comment I had was video I get I'm just blown
Speaker 1: away by the numbers TikTok puts up. And I find
Speaker 1: that younger people are just so into that, And I'm
Speaker 1: wondering because as analysts and pundits that which is what
Speaker 1: I am, we're constantly sort of trying to make sure
Speaker 1: we're not missing anything because, as you say, like writing
Speaker 1: a research note, can it starts to get feel a
Speaker 1: little old timey and a lot of information is now
Speaker 1: put out through audio now videos. Um. A lot of
Speaker 1: other pundits in different industries use video a lot, short videos,
Speaker 1: short form and polished videos. Um, what's your take on
Speaker 1: that kind of way of communicating to this sort of
Speaker 1: newer TikTok general on, my take is that you know,
Speaker 1: we should probably do it, but I don't care. I
Speaker 1: hate it. I don't want to be on video. I
Speaker 1: want long form discussions. I want to I want the
Speaker 1: lower pressure. I think I think video creates a sort
Speaker 1: of weird pressure on people, both on me and on
Speaker 1: the guest. Uh. I just don't like it, um and
Speaker 1: and life is too short to just optimize for the
Speaker 1: you know, the greatest reach, the greatest downloads, whatever. And
Speaker 1: maybe I'll change my tune on this, but I have
Speaker 1: said note to video a lot, and I don't really
Speaker 1: care if it means the audience is smaller. I think
Speaker 1: we reached the audience that we want to reach with
Speaker 1: pretty high penetration and saturation. And we're having these minor
Speaker 1: hour and a half long conversations in crazy detail about
Speaker 1: like esoteric business and investing topics. This is not people
Speaker 1: trying to get like a dopamine hit on TikTok um.
Speaker 1: I think TikTok could be a fantastic distribution strategy for us.
Speaker 1: I think we put the effort in, it would be
Speaker 1: worth it in a dollars and cents and you know,
Speaker 1: spock like way. Um. But it's just it's just not
Speaker 1: for me. I just hate it. Like when I think
Speaker 1: of communicating, when I look at TikTok it just doesn't
Speaker 1: match my brain wiring. Whereas Twitter, it's natural, it's Twitter
Speaker 1: feels native to me. Uh, you know, conversing with people,
Speaker 1: putting out charts, short form writing. Um TikTok feels totally
Speaker 1: undeath every time every time I've tried it. It feels
Speaker 1: like I'm like manufacturing something. And and to be clear,
Speaker 1: like I'm an investor. I'm interested in investing. I'm interested
Speaker 1: in taking capital and owning really good businesses with that capital,
Speaker 1: owning American the size of American business making. You know,
Speaker 1: I do a lot of early stage private investing, Like
Speaker 1: that is what interests me. I just happened to have
Speaker 1: this other thing that I use as a learning vehicle
Speaker 1: that creates a virtuous circle. Like I almost cringe at
Speaker 1: the word part whenever I hear the word podcast. I'm like, um,
Speaker 1: it's just I'm not like the media side for its
Speaker 1: own sake, it's just not that interesting to me. Like
Speaker 1: I'm interested in the content of it. And that's why
Speaker 1: I do it every week, and I have been for
Speaker 1: six years now, and we'll probably do it for you know,
Speaker 1: if I'm lucky to live another sixty years. And uh so,
Speaker 1: you know, I think it's I think I'm wrong, but
Speaker 1: I don't care. Okay, to bring it back to the
Speaker 1: E T F s at the end of this podcast,
Speaker 1: I want to ask you what your favorite E t
Speaker 1: F ticker is s p Y. Come on, man, I
Speaker 1: mean look, I think it's the answer. Uh. Well, you
Speaker 1: have mentioned SPY a lot in this interview. That seems
Speaker 1: to be your Is that your bogey? Is that your
Speaker 1: what you're selling against? Effective? I just think back to
Speaker 1: your point in simplicity, Uh, sp Y has beaten a
Speaker 1: staggering percentage of investors of every stripe of you know,
Speaker 1: pick your asset class, pick your uh, you know, public, private, credit, equity,
Speaker 1: US global. I don't care how you slice it. It's
Speaker 1: just shocking. It's the first question I ask in every context,
Speaker 1: like why not Spy? Like even if I'm making a
Speaker 1: personal early stage investment, like okay, I'm gonna put X
Speaker 1: dollars into this, why am I not putting that X
Speaker 1: dollars in Spy? To me? That is and maybe the
Speaker 1: perfect thing is v T I or whatever. The total
Speaker 1: market is not just the SPI. That's that's probably better,
Speaker 1: But the SMP has this amazing you know, mental availability
Speaker 1: and brand um and it's pretty close close enough. So
Speaker 1: to me, it is the opportunity cost, right, it's everyone's
Speaker 1: opportunity costs as an investor and should be taken very,
Speaker 1: very seriously. So that's probably why it's my favorite as
Speaker 1: a ticker. Maybe it's not the best. Eric's the master
Speaker 1: of clever tickers. I don't know them. I spent very
Speaker 1: little time like a d t f S, but the
Speaker 1: I don't I actually don't own ets. But the extent
Speaker 1: to which I would or uh would change to that
Speaker 1: strategy or recommend that someone else changed that strategy hard
Speaker 1: to beat. Spy Patrick was Johnesty. Thanks so much for
Speaker 1: joining us on trially. It's thanks guys, Thanks for listening
Speaker 1: to Trillions until next time. You can find us on
Speaker 1: the Bloomberg terminals, Bloomberg dot com, Apple Podcast, Spotify, and
Speaker 1: wherever else you like to listen. We'd love to hear
Speaker 1: from you. We're on Twitter. I'm at Joel Webber Show,
Speaker 1: He's at Eric Faltinus. This episode of Trillions was produced
Speaker 1: by Stacy Wongs bite O