WEBVTT - Jennifer Grancio on Passive Index Funds and ETFs 0:00:00.080 --> 0:00:05.960 M. This is Mesters in Business with Very Results on 0:00:06.200 --> 0:00:11.160 Bloomberg Radio. This week on the podcast, I have an 0:00:11.200 --> 0:00:15.440 extra special guest. Jennifer Grancio was there at the beginning 0:00:15.920 --> 0:00:19.639 at Barclays when the beginning of E t F S 0:00:19.680 --> 0:00:24.080 and passive indexing really took off on an institutional basis. 0:00:24.760 --> 0:00:28.840 She was one of the founding members when Blackrock bought 0:00:29.200 --> 0:00:34.360 I shares from Barclays and and really helped drive broad 0:00:34.560 --> 0:00:38.800 adoption of passive and and E t F s UH 0:00:38.840 --> 0:00:42.400 in the financial community. Today, she is the CEO of 0:00:42.520 --> 0:00:47.479 Engine Number One, which focuses on the fascinating transitions that 0:00:47.520 --> 0:00:51.800 are taking place in broad strokes across the economy. There 0:00:51.800 --> 0:00:56.560 are numerous opportunities and energy and climate and robotics and automation, 0:00:57.160 --> 0:01:02.240 and her firm helps invest in those spaces. Not quite 0:01:02.240 --> 0:01:05.800 an activist investor, but she has worked with a number 0:01:05.840 --> 0:01:11.000 of companies like Exxon and General Motors and Occidental where 0:01:11.120 --> 0:01:15.000 the input of Engine Number One drove significant changes at 0:01:15.040 --> 0:01:18.360 those companies. They're a long time investor. They're not a 0:01:18.360 --> 0:01:21.880 black hat activist where they're looking to buy stock, force 0:01:21.959 --> 0:01:25.280 an exit of the CEO and sell once the stock pops. 0:01:25.680 --> 0:01:28.959 Really fascinating story. I found it quite fascinating and I 0:01:29.000 --> 0:01:31.640 think you will as well. So, with no further ado, 0:01:32.120 --> 0:01:37.800 my interview with engine number ones Jennifer Grencio. Let's start 0:01:37.880 --> 0:01:41.480 out talking about the early part of your career. I'm 0:01:41.520 --> 0:01:43.960 really curious how you ended up in black Rock, but 0:01:44.080 --> 0:01:47.680 before that, you're working as a consultant. Yes, I think 0:01:47.760 --> 0:01:50.040 like a lot of people on Underground actually ended up. 0:01:50.040 --> 0:01:51.640 I went to Stanford thinking I was going to do 0:01:51.720 --> 0:01:56.240 genetics and science. UM didn't interns to pivoted, ended up 0:01:56.240 --> 0:01:59.160 doing international relations. Then, as you had towards the end 0:01:59.160 --> 0:02:00.920 of college, you figure you're gonna save the world, and 0:02:00.920 --> 0:02:03.560 I'm gonna go work for the World Bank. World Bank 0:02:03.680 --> 0:02:05.520 wants you to take out more student debt and get 0:02:05.520 --> 0:02:09.520 a master's degree. So, like so many other bright eyed graduates, UM, 0:02:09.600 --> 0:02:12.320 I trooped off to, you know, one of the traditional 0:02:12.360 --> 0:02:15.240 professional services professions. UM. The thing it was kind of 0:02:15.280 --> 0:02:19.080 interesting for me about consulting was this idea that you 0:02:19.080 --> 0:02:22.320 you almost apprentice with somebody that's senior, and you run 0:02:22.320 --> 0:02:25.360 around and try to help companies with problems. So seems 0:02:25.400 --> 0:02:27.800 like a good idea at the time of the time, 0:02:28.120 --> 0:02:31.000 and that's what I went off to do. So how 0:02:31.000 --> 0:02:33.079 do you go from that? How do you end up 0:02:33.160 --> 0:02:36.560 at a place like black Rock? I share seems to 0:02:36.600 --> 0:02:40.600 have been almost an accidental business line from them. I'm 0:02:40.639 --> 0:02:45.280 remembering correctly. That was a post financial crisis Barclays purchase 0:02:45.360 --> 0:02:49.119 something along exactly, yes, exactly, yeah, So if you go back, 0:02:49.160 --> 0:02:52.680 So I management consulting, moved back to California, decided I 0:02:52.720 --> 0:02:54.880 was going to be a California person, not a New Yorker. 0:02:55.320 --> 0:02:59.840 No offense to New York. Spent a lot, and so 0:03:00.360 --> 0:03:02.760 I went looking for what I thought would be the 0:03:02.800 --> 0:03:06.120 best asset management business. I focused on asset management within 0:03:06.160 --> 0:03:09.239 the consulting space, like this idea that somehow if you 0:03:09.320 --> 0:03:13.560 got portfolio construction and savings right, you help people over time. Um, 0:03:13.600 --> 0:03:15.880 And so I joined what was Barclay's at the time. 0:03:16.200 --> 0:03:19.560 The asset management business of Barkley's bank was this little 0:03:19.600 --> 0:03:23.400 firm called Barkley's Global Investors based in San Francisco. And 0:03:23.440 --> 0:03:25.639 that was not such a little firm at the time. 0:03:25.760 --> 0:03:28.280 Was now it was growing very quickly, and that business 0:03:28.320 --> 0:03:30.920 was an institutional business. So as an institutional business, we 0:03:30.919 --> 0:03:34.520 did indexing. We thought indexing was cool. Um and the 0:03:34.720 --> 0:03:37.160 eye shares in the e t F idea came from 0:03:37.440 --> 0:03:39.520 we just had a fundamental belief it was a better 0:03:39.560 --> 0:03:41.640 mouse trap. So there's something about an e t F 0:03:41.920 --> 0:03:44.240 and we could go into that another time. There's something 0:03:44.240 --> 0:03:45.880 about an e t F that's a better mouse trap 0:03:45.920 --> 0:03:49.160 than a mutual fund. And so for Barkley's Bank, we pitched, 0:03:49.440 --> 0:03:51.760 here's a great idea, let's build this e t F 0:03:51.800 --> 0:03:53.800 business in the US. And it's a way for Barkley's 0:03:53.840 --> 0:03:56.480 to build in the United States. And so we launched 0:03:56.480 --> 0:03:58.840 the business in two thousands. So we launched it right 0:03:58.880 --> 0:04:02.200 into the dot com crisis. So from the dot com 0:04:02.280 --> 0:04:07.120 crisis to the global financial crisis, what were the circumstances 0:04:07.160 --> 0:04:12.240 surrounding black Rock Santa Barclay's, Well, we'll take that little 0:04:12.400 --> 0:04:15.160 worthless business off your hands for a couple of hours. Yeah, 0:04:15.200 --> 0:04:17.479 And the interesting thing about an e t F business 0:04:17.680 --> 0:04:19.760 is that it takes a long time to build. And 0:04:19.839 --> 0:04:24.080 so to your question, around that time, going into two 0:04:24.080 --> 0:04:27.440 thousand and eight, Barclay's need in cash and the index 0:04:27.480 --> 0:04:30.400 business was starting to take off in the form of ETFs, 0:04:30.440 --> 0:04:31.920 or at least we thought that, but it was still 0:04:31.920 --> 0:04:34.560 a relatively small business. Um and So who were the 0:04:34.600 --> 0:04:37.880 other people that probably looked at that acquisition included other 0:04:37.960 --> 0:04:42.919 big indexers, big asset managers who weren't sure was indexing 0:04:43.000 --> 0:04:44.680 going to be a thing or not, because remember at 0:04:44.720 --> 0:04:48.120 the time e T S and index were synonymous. But Larry, 0:04:48.240 --> 0:04:51.760 you know, it was more forward looking, Larry being Larry 0:04:51.760 --> 0:04:55.520 Fink of black Rock, who arguably, and I know who 0:04:55.560 --> 0:04:59.680 Larry is. I just want the audience to know, arguably, 0:05:00.760 --> 0:05:06.159 the purchase of I Shares by black Rock from Barclays 0:05:06.360 --> 0:05:11.640 could be one of the great opportunistic distress purchases in 0:05:11.640 --> 0:05:15.720 the middle of a crisis. Ever in financials, what is 0:05:15.760 --> 0:05:18.479 I shares up to now? Like four trillion dollars something 0:05:18.560 --> 0:05:21.760 insane enormous. Yeah, So and they picked it up for 0:05:22.120 --> 0:05:25.720 a teeny tiny fraction of that. So what was your 0:05:25.720 --> 0:05:29.320 experience like when black Rock took over I Shares. Yeah, 0:05:29.360 --> 0:05:31.600 So we we built the ICE Shares business first within 0:05:31.640 --> 0:05:34.240 Barclays UM and we were a you know, small but 0:05:34.400 --> 0:05:37.160 mighty team doing e T s and the whole idea 0:05:37.200 --> 0:05:40.000 remember of ets, is to go and to challenge mutual 0:05:40.040 --> 0:05:42.880 funds and challenge active management. So that's a big thing 0:05:42.920 --> 0:05:46.000 to take on. And so as black Rock worked through 0:05:46.000 --> 0:05:47.960 the acquisition of all of the v g I business, 0:05:48.000 --> 0:05:50.600 including I Shares. We spent a couple of years then 0:05:50.600 --> 0:05:52.880 getting to know black Rock as a little Eye Shares 0:05:52.960 --> 0:05:55.320 team UM and talking about e t F s and 0:05:55.440 --> 0:05:58.559 fee based advice and portfolio construction and all these things 0:05:58.560 --> 0:06:00.960 that we thought were trends could take advantage of and 0:06:01.040 --> 0:06:03.320 used to build the business. UM. But then the business 0:06:03.360 --> 0:06:07.000 really just got from strength to strength after that acquisition. 0:06:07.000 --> 0:06:09.640 We came out of the financial crisis a few rocky 0:06:09.760 --> 0:06:13.679 years in the e t F industry overall, Vanguard decided 0:06:13.720 --> 0:06:16.600 to get into e t s in a serious way. UM. 0:06:16.680 --> 0:06:19.600 Black Rock and I Shares launched that core series as 0:06:19.640 --> 0:06:23.599 a competitive business, so kind of responding to what was 0:06:23.640 --> 0:06:25.680 going on in the market. And the business continue to 0:06:25.680 --> 0:06:27.400 grow and grow. And then I think from an e 0:06:27.480 --> 0:06:31.359 t F industry perspective, UM, we did some important work 0:06:31.520 --> 0:06:34.480 on trying to protect the category of e t F. 0:06:34.600 --> 0:06:37.240 So we did a lot of work with US regulators, UM, 0:06:37.279 --> 0:06:39.480 European regulators. I ran the business in Europe for a 0:06:39.520 --> 0:06:43.200 while as well. UM. Talking about the differences between a 0:06:43.240 --> 0:06:46.200 passive index fund, for example, and e t F that's 0:06:46.240 --> 0:06:49.320 got commodity exposure and E t F that's leveraged or 0:06:49.360 --> 0:06:52.520 inverse in terms of trying to protect the vehicle and 0:06:52.560 --> 0:06:55.160 protect the category. And really since then there's just been 0:06:55.200 --> 0:06:59.760 continued explosive growth. In your wildest dreams, did you ever 0:07:00.000 --> 0:07:04.480 imagine back from the sleepy early days of passive and 0:07:04.680 --> 0:07:07.919 E t F at Barclay's that would grow up to 0:07:07.960 --> 0:07:12.880 be just the dominant intellectual force and investing and reach 0:07:13.000 --> 0:07:16.239 the size it's reached. What is even after this year 0:07:16.520 --> 0:07:19.480 black Rock is something like eight trillion, nine trillion and eight. Yeah, 0:07:19.480 --> 0:07:21.960 I mean the numbers are huge. I think we did 0:07:22.160 --> 0:07:25.000 but maybe that maybe we were naive, but our view 0:07:25.160 --> 0:07:27.200 was it just it was it was a trend that 0:07:27.280 --> 0:07:28.800 was going to happen, and if you could own the 0:07:28.800 --> 0:07:31.520 trend and if you could accelerate the trend, this was 0:07:31.520 --> 0:07:33.520 a better way to invest. A better way to invest 0:07:33.640 --> 0:07:35.800 is to have a low cost solution at the core 0:07:35.840 --> 0:07:38.480 of the portfolio and then hire people that are deeply 0:07:38.520 --> 0:07:41.200 capable to deliver alpha. So I would say we thought 0:07:41.240 --> 0:07:44.080 it could be big, but you know, it's pretty amazing. 0:07:44.440 --> 0:07:48.080 So you talk about accelerating the trend, what exactly do 0:07:48.160 --> 0:07:51.440 you do to help accelerate that trend. How do you 0:07:51.720 --> 0:07:55.040 drive acceptance of both e t f s as a 0:07:55.160 --> 0:07:58.400 rapper as opposed to the traditional forty act mutual funds 0:07:58.920 --> 0:08:03.360 and passive US is more traditional stock picking, market timing, 0:08:03.480 --> 0:08:08.280 active investment. Yeah, I think we when the industry first started, 0:08:08.320 --> 0:08:10.760 So going back, you know, twenty years now, the two 0:08:10.800 --> 0:08:13.440 things were synonymous. But you know, let's let's take those 0:08:13.440 --> 0:08:16.400 one at a time. So from a passive perspective, the 0:08:16.520 --> 0:08:20.400 argument we made as an industry selling passive ETFs was 0:08:20.880 --> 0:08:22.680 you really had to take a look at what the 0:08:22.720 --> 0:08:26.240 portfolio is doing over time, total cost, total risk exposure. 0:08:26.240 --> 0:08:28.360 And when you did that, you often found that there 0:08:28.440 --> 0:08:31.040 was a way to get better long term performance and 0:08:31.200 --> 0:08:34.360 cheaper by having some index in a portfolio. So that 0:08:34.440 --> 0:08:36.760 was the story on index saying, and then we kind 0:08:36.760 --> 0:08:39.760 of kept driving that into this idea of models. So 0:08:39.840 --> 0:08:41.720 now you know, we have there's a model a huge 0:08:41.800 --> 0:08:44.120 amount of money. You know, trillions of dollars sit in 0:08:44.200 --> 0:08:46.920 models in US wealth. What does that mean? It means 0:08:46.920 --> 0:08:49.520 a big wirehouse or brokerage puts a model together this 0:08:49.600 --> 0:08:52.360 much Europe, this much US, this much small cap, and 0:08:52.360 --> 0:08:55.800 then you can use index products to fill all those allocations. 0:08:56.160 --> 0:08:57.839 And so that was the kind of the twenty year 0:08:57.880 --> 0:09:01.320 build of how did passive get so big? UM, and 0:09:01.320 --> 0:09:03.760 then E t F is a rapper. It's just it's 0:09:03.800 --> 0:09:06.040 just a great way to get the price at the 0:09:06.080 --> 0:09:08.679 moment if you're buying into the public markets. Number one, 0:09:09.240 --> 0:09:11.120 UM and number two, it's a great way to manage 0:09:11.160 --> 0:09:13.800 tax where if you buy something now and you sell 0:09:13.840 --> 0:09:15.440 it in twenty years and the market has gone up, 0:09:15.440 --> 0:09:17.280 guess what we all have to pay tax on that. 0:09:17.800 --> 0:09:21.000 But the kind of annual capital gains gift you get 0:09:21.040 --> 0:09:23.120 from a lot of mutual funds, it can be managed 0:09:23.280 --> 0:09:25.640 very astutely in the E T F rapper And that's 0:09:25.679 --> 0:09:28.439 that's great, Like that's great for all investors. Meaning if 0:09:28.440 --> 0:09:31.160 you're a mutual fun owner who's not selling, but somebody 0:09:31.200 --> 0:09:33.800 else sells and generates a capital gain that gets spread 0:09:33.840 --> 0:09:38.199 around to the other it doesn't make I mean, as 0:09:38.200 --> 0:09:40.600 somebody that's been doing ETFs for a long time, I say, 0:09:40.600 --> 0:09:43.520 it doesn't make any sense whatsoever, because there's another way 0:09:43.559 --> 0:09:45.640 to do it, and we're fine, and we're finally seeing 0:09:45.640 --> 0:09:47.200 that now we're finally seeing a lot of the big 0:09:47.280 --> 0:09:50.520 mutual fund companies start converting into E T s the flows, 0:09:50.760 --> 0:09:54.520 even in a down year like the flows have all 0:09:54.600 --> 0:09:58.720 been towards passive, towards e t F, towards low cost. 0:09:59.200 --> 0:10:02.480 It seems like a much better mass trap. I think 0:10:02.520 --> 0:10:04.040 it is. I'm not going to get much of an 0:10:04.120 --> 0:10:08.080 argument from you on that. So you mentioned Vanguard, we're 0:10:08.080 --> 0:10:11.120 talking about black Rock. Let's talk a little bit about 0:10:11.160 --> 0:10:15.120 the role of branding in the industry. How important is 0:10:15.160 --> 0:10:20.240 that when you're putting out either a low cost, passive 0:10:20.440 --> 0:10:23.960 et F at three or four BIPs or something more 0:10:24.000 --> 0:10:28.000 active or thematic on the t F side. Yeah, I mean, 0:10:28.000 --> 0:10:29.760 the role of brand is pretty critical. And if you 0:10:29.800 --> 0:10:33.200 think about in the index business, if you're managing it, well, 0:10:33.280 --> 0:10:35.280 there's not a lot of performances. Are you a tracking 0:10:35.280 --> 0:10:37.520 the index? Yes or no? And so that power of 0:10:37.559 --> 0:10:40.959 the brand is massive. And my observation in the space 0:10:41.800 --> 0:10:44.720 is that the average investor, the average retail person that's 0:10:44.720 --> 0:10:47.679 going out and investing or talking to an advisor, they 0:10:47.679 --> 0:10:52.120 don't necessarily know one product provider or investor versus another, 0:10:52.360 --> 0:10:54.280 but they definitely know who they do business with or 0:10:54.280 --> 0:10:57.600 who they buy from. So that retail brokerage brand, their 0:10:57.640 --> 0:11:01.200 advisory brand, has a huge impact them. So do your 0:11:01.240 --> 0:11:03.839 question on Vanguard like Vanguards a brokerage firm, so you 0:11:03.920 --> 0:11:06.079 kind of know Vanguard Vanguards in your form one K 0:11:06.320 --> 0:11:08.480 you've heard of Vanguard, and so for other people that 0:11:08.679 --> 0:11:10.840 enter the industry, and this is certainly what we did 0:11:10.840 --> 0:11:12.640 in the eye shares business or what we do now 0:11:12.679 --> 0:11:14.840 at engine. Number one is you really have to be 0:11:14.880 --> 0:11:16.880 clear on who are you and what is your story 0:11:17.080 --> 0:11:21.160 because the brand matters a lot. So you mentioned brokerage firms, 0:11:21.240 --> 0:11:25.120 and Vanguard does for Owen k broke Ridge, they do 0:11:25.200 --> 0:11:27.880 all sorts of obviously mutual funds and e t f s. 0:11:28.520 --> 0:11:31.960 How do you see some of the bigger custodians and 0:11:32.200 --> 0:11:36.920 actual brokers like Schwab and Fidelity In terms of et 0:11:37.040 --> 0:11:40.840 F developments, we know it's black Rock, Vanguard and State 0:11:40.920 --> 0:11:44.320 Street at the top. These guys are no slouches either, 0:11:44.400 --> 0:11:46.560 are they now? I mean, I would say if we 0:11:46.640 --> 0:11:48.400 go back and we look at the history of e 0:11:48.520 --> 0:11:52.360 t s and how they've developed, we see State Street, Vanguard, 0:11:52.440 --> 0:11:55.360 black Rock, black Rock Eye Shares as very dominant and 0:11:55.400 --> 0:11:57.880 they're going to continue to be dominant in passive period. 0:11:58.000 --> 0:12:00.880 They're they're they're big, They're so big now, Um, and 0:12:00.920 --> 0:12:02.880 we'll come back to this later. I personally think there's 0:12:02.920 --> 0:12:05.719 some problems with how big they are, but from an 0:12:05.840 --> 0:12:08.880 ease of buying decision making perspective, they're big. They're dominant. 0:12:09.280 --> 0:12:11.240 The brokerages were late to get in the game, so 0:12:11.320 --> 0:12:14.720 Fidelity and Schwab got in much later. They didn't They 0:12:14.720 --> 0:12:17.120 don't charge fees for those products, and so it makes 0:12:17.160 --> 0:12:19.720 it harder for them as a kind of a corporate 0:12:19.840 --> 0:12:23.000 organism to you know, have that be a big part 0:12:23.040 --> 0:12:25.640 of their business. And then what we're very excited about 0:12:25.640 --> 0:12:28.240 it Engine number one and what you're seeing with the 0:12:28.320 --> 0:12:31.559 mutual fund conversions, the big ones at d f A, 0:12:31.559 --> 0:12:34.120 at Franklin, Templeton, the list goes on. There are many 0:12:34.640 --> 0:12:37.600 is that we're now ready to move back to funds 0:12:37.640 --> 0:12:39.839 into the E t F structure, and that I think 0:12:39.960 --> 0:12:42.640 is very exciting. But that's new. That's a very new development. 0:12:43.240 --> 0:12:46.400 So let's talk a little bit about Engine number one. First. 0:12:46.800 --> 0:12:49.600 How did you get there from black Rock? What led 0:12:49.640 --> 0:12:53.400 that transition? Yeah, so I left black Rocks very large. 0:12:53.200 --> 0:12:55.720 I wanted to do a little bit more innovation, and 0:12:55.840 --> 0:12:58.760 I think sometimes the biggest firms are great, but they 0:12:58.760 --> 0:13:01.880 can't always lead from an inner vation or change perspective UM. 0:13:01.920 --> 0:13:03.400 So I spent a couple of years, I built an 0:13:03.400 --> 0:13:06.720 advisory firm UM and took a couple of years. I decided, 0:13:06.800 --> 0:13:08.560 you know what what was the next move? And I 0:13:08.559 --> 0:13:10.800 had some great did some great work with a number 0:13:10.840 --> 0:13:13.400 of large wealth in r A firms that were going 0:13:13.440 --> 0:13:16.520 through an M and A or selling themselves process. UM 0:13:16.600 --> 0:13:19.559 did some work on impact investing. Actually led me to 0:13:19.640 --> 0:13:23.040 Ethic and joined the Mankind Board. But decided I was 0:13:23.160 --> 0:13:25.080 I I was definitely going to be a builder, that 0:13:25.160 --> 0:13:29.000 there was this opportunity to do something different than traditional 0:13:29.040 --> 0:13:31.840 mutual fund and passive e T f U, and so 0:13:31.880 --> 0:13:34.400 I started looking for what would be the thing I 0:13:34.440 --> 0:13:36.520 wanted to build with partners UM. And then I met 0:13:36.600 --> 0:13:40.240 Chris James and did you launch engine number one or 0:13:40.280 --> 0:13:42.880 did you join him when it was already existing? We 0:13:43.000 --> 0:13:45.440 launched it together. But Chris is going back, you know, 0:13:45.520 --> 0:13:48.240 before we started the firm. So Chris James is our 0:13:48.280 --> 0:13:50.439 founder at and TO number one. And Chris's background is 0:13:50.480 --> 0:13:53.120 hedge fund and private fund investments, and what he's really 0:13:53.120 --> 0:13:55.240 known for is he's known for taking an extremely long 0:13:55.320 --> 0:13:57.880 view on something and doing the work UNTI let's say, 0:13:57.880 --> 0:13:59.920 where's the opportunity as you go through a huge train, 0:14:00.000 --> 0:14:03.000 information or transition. So Chris was hard at work on 0:14:03.040 --> 0:14:06.120 this and wanted to reach into the wealth space. So 0:14:06.240 --> 0:14:08.920 rather than just doing products that were private and you 0:14:08.920 --> 0:14:12.000 could help institutions invest, um, what could we do that 0:14:12.080 --> 0:14:14.760 was broad and into the wealth space. UM? So I 0:14:15.080 --> 0:14:17.840 joined him to collaborate given my background on that side 0:14:17.840 --> 0:14:20.360 of the business, and the idea of Engine number one 0:14:20.480 --> 0:14:23.760 is just to help people benefit from these huge transitions 0:14:23.760 --> 0:14:28.200 and transformations that are very much not the backwards looking look. 0:14:28.280 --> 0:14:30.840 Google and Amazon got great. You know, our portfolios have 0:14:30.880 --> 0:14:32.880 a lot of growth in tech great. There's a lot 0:14:32.880 --> 0:14:37.760 of money to be made in the energy transition, transportation, agriculture, 0:14:37.840 --> 0:14:40.320 and so really the idea of the firm is to 0:14:40.800 --> 0:14:44.320 be able to look forward, find miss pricing, and make 0:14:44.400 --> 0:14:47.280 money as we go through these huge changes. The firm's 0:14:47.360 --> 0:14:51.239 name is intriguing. Where does Engine number one come from? 0:14:51.280 --> 0:14:53.720 The first firehouse in San Francisco is actually a couple 0:14:53.760 --> 0:14:56.520 of blocks from our office. UM. And in talking about 0:14:56.520 --> 0:14:59.440 what we were trying to do, which is maybe it's grandios, 0:14:59.480 --> 0:15:02.000 but if you think about it, like capitalism works, and 0:15:02.040 --> 0:15:04.560 what we were agitated about is we saw the market 0:15:05.040 --> 0:15:07.320 you have E s G over here very small. We 0:15:07.360 --> 0:15:09.640 think old school E s G is not does not work. 0:15:09.680 --> 0:15:11.120 We have a strong view on that. And come back 0:15:11.160 --> 0:15:14.680 to that indexing. Too many shares are locked up in indexes. 0:15:14.760 --> 0:15:17.840 Index don't vote their shares. And then maybe most important 0:15:17.840 --> 0:15:20.440 of all, we're going to need a general motors and 0:15:20.520 --> 0:15:23.600 afford to actually be able to do this huge transition 0:15:23.680 --> 0:15:27.360 from internal combustion to battery electric vehicles. And so you know, 0:15:27.440 --> 0:15:30.320 actually the firehouse is the center of the community, right 0:15:30.320 --> 0:15:32.400 and if you think about how a community survives, the 0:15:32.440 --> 0:15:35.760 firehouse is the center the community takes care of itself. 0:15:35.880 --> 0:15:39.360 A well run business really should be as simple as 0:15:39.360 --> 0:15:41.560 sort of taking care of the environment. It's in being 0:15:41.600 --> 0:15:44.880 aware of it. And in public markets that means you 0:15:44.880 --> 0:15:47.280 also have to be able to adapt and manage their change. 0:15:47.680 --> 0:15:50.160 So tell us a little bit about the strategies you 0:15:50.200 --> 0:15:53.240 guys employ. What are your key focuses? How do you 0:15:53.320 --> 0:15:56.840 deploy capital? Yeah, we as a business, we run an 0:15:56.840 --> 0:15:58.560 all its business and then we run the e t 0:15:58.760 --> 0:16:01.000 F platform. So that if you think about it, very simply, 0:16:01.480 --> 0:16:04.760 these huge ideas about transition and transformation and how to 0:16:04.800 --> 0:16:07.360 make money are very common across what we do, but 0:16:07.440 --> 0:16:11.200 we have two businesses and UM, the big ideas are 0:16:11.440 --> 0:16:14.440 these transitions and transformations and how do you take advantage. 0:16:14.800 --> 0:16:17.960 And so when we look at public companies, we look 0:16:18.000 --> 0:16:20.440 at every single company and we look at what their 0:16:20.440 --> 0:16:22.840 path is through time. So I think this is one 0:16:22.880 --> 0:16:25.160 of the problems with a lot of investment strategies right now, 0:16:25.200 --> 0:16:27.520 as they're looking too short term UM. And then we 0:16:27.600 --> 0:16:31.560 build the impact or externality data, we just build it 0:16:31.560 --> 0:16:34.000 into the financial model, right because the data is out there, 0:16:34.040 --> 0:16:38.640 particularly on governance, particularly on environmental issues. And when we 0:16:38.720 --> 0:16:41.720 do that in these sectors that are in transition. Let's 0:16:41.720 --> 0:16:44.400 take energy for example, if you're an oil and gas 0:16:44.400 --> 0:16:49.320 company and you don't account for the emissions that you're 0:16:49.320 --> 0:16:52.040 dealing with and you don't decrease them over time, you're 0:16:52.040 --> 0:16:54.160 gonna have a problem. And we saw this when we 0:16:54.160 --> 0:16:56.360 started building the business that a lot of these companies 0:16:56.400 --> 0:16:59.360 were heading towards zero terminal value. So let's take X 0:16:59.440 --> 0:17:02.720 on for sample, where if you take X on and 0:17:02.920 --> 0:17:06.240 X and keeps doing long dated fossil fuel projects and 0:17:06.480 --> 0:17:09.480 has no plan to reduce emissions at any point in time, 0:17:09.760 --> 0:17:12.280 and has no plans to develop a green business. Well, 0:17:12.280 --> 0:17:14.280 that's not very good for x on stock when we 0:17:14.320 --> 0:17:17.159 get to seven or ten years out, and so we 0:17:17.240 --> 0:17:19.720 see a lot of these opportunities where like it's just math. 0:17:19.880 --> 0:17:23.280 The capitalist system is supposed to have the company government 0:17:23.280 --> 0:17:25.719 itself so that it's making money through time, it has 0:17:25.760 --> 0:17:28.159 a longer duration of business, and it has a higher value. 0:17:28.440 --> 0:17:30.280 And that's the kind of the way that we work 0:17:30.320 --> 0:17:34.320 in everything that we do. So you mentioned environmental issues 0:17:34.400 --> 0:17:38.280 and impact, you mentioned governance. This sounds a lot like 0:17:38.400 --> 0:17:41.000 two thirds of E s G. Yeah, we think the 0:17:41.040 --> 0:17:44.000 way people use that label is a little bit problematic. 0:17:44.160 --> 0:17:48.359 So people often use that label looking backwards. Flesh that 0:17:48.400 --> 0:17:53.320 out a little more. When when I hear someone mentioned 0:17:53.320 --> 0:17:57.480 E s G, I typically think of an investor. And 0:17:57.600 --> 0:18:00.720 for the most part, as we go through this generational 0:18:00.760 --> 0:18:05.879 wealth TRANSFERM you do surveys of investors husband passed away, 0:18:05.880 --> 0:18:10.320 the wife tends to be much more empathetic with issues 0:18:10.560 --> 0:18:15.919 of equality and environmental concerns, and the next generation is 0:18:16.000 --> 0:18:19.960 much more concerned. So it seems like there is a 0:18:20.040 --> 0:18:25.320 desire to express those beliefs in their portfolios. Why does 0:18:25.400 --> 0:18:28.760 that not work with the s J. Yeah, I mean 0:18:28.760 --> 0:18:30.840 our I guess our view on that would be you 0:18:30.840 --> 0:18:33.159 can always express values in a portfolio. But if you're 0:18:33.160 --> 0:18:35.359 going to express values in a portfolio, say that I 0:18:35.359 --> 0:18:38.399 am expressing my values in the portfolio, which is different 0:18:38.440 --> 0:18:41.560 than the core concept of managing money over time is 0:18:41.640 --> 0:18:44.600 generally for the person that's doing the managing is to 0:18:44.640 --> 0:18:47.920 be a fiduciary and drive good outcomes and strong returns, 0:18:48.320 --> 0:18:51.720 and for in general for the investor is to drive 0:18:51.840 --> 0:18:54.320 returns over time um. And so the way we think 0:18:54.359 --> 0:18:58.359 about it is, really you can do that, and any 0:18:58.400 --> 0:19:00.560 business that is going to survive over time time has 0:19:00.640 --> 0:19:04.360 to be sustainable, has to address or basically cover their 0:19:04.359 --> 0:19:06.800 impacts right after the cost of capital so that they 0:19:06.800 --> 0:19:10.040 can be profitable over time. So instead of thinking E 0:19:10.240 --> 0:19:13.800 s G means its values based I don't like the company, 0:19:13.880 --> 0:19:16.080 they're bad, I'm going to screen amount of my portfolio. 0:19:16.200 --> 0:19:17.840 We don't think that's a great way to manage your 0:19:17.880 --> 0:19:20.960 core portfolio over time. We think the better way is 0:19:21.040 --> 0:19:24.240 you simply have to engage with the companies to make 0:19:24.240 --> 0:19:27.359 sure that their most material impacts. That's financial data, right, 0:19:27.400 --> 0:19:30.280 that's risk data. If you don't manage your emissions as 0:19:30.280 --> 0:19:32.879 an oil and gas company, and so let's build that 0:19:32.920 --> 0:19:36.720 into just investing to make returns as opposed to this 0:19:36.840 --> 0:19:39.960 special class which you know it values based in E 0:19:40.119 --> 0:19:44.360 s G. Tends to kind of infer value over performance, 0:19:45.080 --> 0:19:47.840 right or divesting from companies that you don't like, and 0:19:47.880 --> 0:19:49.760 that's we don't think that's a great way to invest. 0:19:49.840 --> 0:19:52.399 So let me push back a little bit on the 0:19:52.440 --> 0:19:57.159 low carbon strategy. It seems like it's uh half of 0:19:57.200 --> 0:20:01.560 the economic equation because p pool seem to be approaching 0:20:01.720 --> 0:20:06.399 entities like x on Mobile and others, the suppliers of 0:20:06.640 --> 0:20:10.280 the carbon based fuel. What is that doing if you're 0:20:10.280 --> 0:20:14.960 ignoring the other half, the consumers? So every other company 0:20:15.000 --> 0:20:20.040 that is not a carbon energy producer is likely to 0:20:20.040 --> 0:20:24.040 be a carbon energy consumer. They're running factories, they're shipping goods, 0:20:24.080 --> 0:20:28.159 they're having offices. Why focus on one half of the 0:20:28.200 --> 0:20:30.680 equation and not the other? Yeah, I mean, I think 0:20:30.720 --> 0:20:33.040 that's the right question, and we focus on both. And 0:20:33.080 --> 0:20:35.119 so let's take for a minute the energy industry and 0:20:35.160 --> 0:20:38.320 then the transportation or auto industry. That's an example of 0:20:38.320 --> 0:20:41.679 that kind of handshake or handlock. Right, So in the 0:20:41.720 --> 0:20:45.480 case of the car companies, that's consumption. So if we're 0:20:45.520 --> 0:20:48.640 consumers and we're driving cars, which we still do when 0:20:48.640 --> 0:20:51.040 people are planning to do in the future. The car 0:20:51.119 --> 0:20:56.160 company can switch from encouraging the behavior of driving internal 0:20:56.200 --> 0:20:59.240 combustion engines which have very high emissions, or the car 0:20:59.280 --> 0:21:01.720 company can know that the consumer demand is shifting a 0:21:01.720 --> 0:21:04.199