WEBVTT - LaSalla on Adding Allocations to Alternatives (Audio)

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<v Speaker 1>And now we want to bring in somebody to talk

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<v Speaker 1>about our very special show today and a guy who's

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<v Speaker 1>probably got a thing or two to say about bonds

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<v Speaker 1>and what they're doing right now. We're very happy to

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<v Speaker 1>welcome Frank LaSala. Now he is here for our very

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<v Speaker 1>special show today at b M Y Melons et F

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<v Speaker 1>Exchange sixteen Conference Ideas, Innovation Interaction. Frank is CEO of

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<v Speaker 1>Global Structured Products and Alternative Investment Services at b M

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<v Speaker 1>Y Melon. Welcome. So, Uh, first of all, let's because

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<v Speaker 1>we were talking about the bond market. You tell me

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<v Speaker 1>you're the expert. Uh, Have we seen a correction in

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<v Speaker 1>yields and prices or is just a little reversal and

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<v Speaker 1>yells are gonna keep rising again? You know, Kathleen, it's

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<v Speaker 1>hard to tell, only because my senses. Every time we

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<v Speaker 1>see new loads on the yield um, it feels like

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<v Speaker 1>we've really bottomed. But when you look at this enormous

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<v Speaker 1>amount of liquidity coming in from him just mentioned several

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<v Speaker 1>central banks, Clearly Europe is going to be in continued

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<v Speaker 1>ease mode. Bank of Japan is going to be very

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<v Speaker 1>very accommodative. It's very hard to see how rates can

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<v Speaker 1>really move with any sort of Even even if the

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<v Speaker 1>FED raises rates before the end of the year, it's

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<v Speaker 1>hard to see with all the liquidity, where else is

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<v Speaker 1>it going to go. So I think it's really hard

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<v Speaker 1>to make a case for higher interest rates. UM. I

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<v Speaker 1>think they're just gonna stay in this very tight range.

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<v Speaker 1>What's the theme this year? Because you're talking about a

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<v Speaker 1>low interest rate environment, many people missed the bond market rally.

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<v Speaker 1>They thought that rates were gonna go higher. They haven't yet,

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<v Speaker 1>as you just described. So what's the big theme? What's

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<v Speaker 1>the big concern? Because we're here with I don't tell

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<v Speaker 1>us how many we've got pro shares, we've got reality shares,

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<v Speaker 1>We've got a whole group of et F sponsors here.

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<v Speaker 1>What's the theme? Well, well, the theme is real. Well

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<v Speaker 1>there's a couple of things for the three hundred participants

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<v Speaker 1>that are here with us for this conference. It really

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<v Speaker 1>is around where do we t f s play a

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<v Speaker 1>part in the portfolio? But do you have brought a

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<v Speaker 1>question about what is the theme in the markets? To me,

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<v Speaker 1>it's still uncertainty. It's not knowing UM the Fed. The

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<v Speaker 1>thinking about the FED and what the Fed's next action

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<v Speaker 1>just seems to take all the oxygen out of out

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<v Speaker 1>of everything else, UM fundamentals seem to be okay. I

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<v Speaker 1>think the story is in earnings that we've gotten mixed

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<v Speaker 1>messages type of economic growth. So until we get the

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<v Speaker 1>Feds speak, if you will, out of the way, it's

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<v Speaker 1>hard to see the markets really react with any sort

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<v Speaker 1>of connection. So it's been volatility but really not going

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<v Speaker 1>anywhere fast. What we see, what we're hearing at the

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<v Speaker 1>conference today is around There's there's two big themes for

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<v Speaker 1>ETF issues and for investors and e t f s.

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<v Speaker 1>One is the d O L. White Deal of Fiduciary

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<v Speaker 1>Standard Department of Labor, the new fiduciary standards for registered

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<v Speaker 1>investment advisors. Yes, and and basically advisors and wealth managers

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<v Speaker 1>now have to really act in the client's best interest,

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<v Speaker 1>which I think a lot have done in the past,

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<v Speaker 1>but it's now been codified. But what that means is

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<v Speaker 1>UM they really have to look at not only put

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<v Speaker 1>portfolio performance risk, but also cost for continuing our very

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<v Speaker 1>special live broadcast here in Data Point, California or at

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<v Speaker 1>the Monarch Beach Resource for B and Y Melons et

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<v Speaker 1>F Exchange sixteen looking at ideas innovation interaction in this

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<v Speaker 1>growing doesn't the right word. I think it's kind of

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<v Speaker 1>an exploding industry. Our guest is Frank las Sala. Frank,

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<v Speaker 1>of course, is CEO of Global Structured Products and Alternative

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<v Speaker 1>Investment Services at b n Y Melon So Frank regarding

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<v Speaker 1>UH the markets, uncertainty, volatility, central banks, you know, speak,

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<v Speaker 1>don't speak, move, don't move. It's really it's it's a

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<v Speaker 1>it's a tough environment for a lot of people trying

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<v Speaker 1>to make money. So what are people What do you think?

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<v Speaker 1>Was one of the some of the important important questions

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<v Speaker 1>here at this conference about the kinds of e T

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<v Speaker 1>s that are out there, how they can be used

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<v Speaker 1>to make money to protect money at a time like this. Well, Kathleen,

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<v Speaker 1>I mean, fundamentals still count right, and we are now

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<v Speaker 1>in this seven or eight year of this almost zero

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<v Speaker 1>interest rate environment, and as we've talked about many times,

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<v Speaker 1>investors need to get returned, and so they're looking at

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<v Speaker 1>different alternatives. And one of the things we've talked about

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<v Speaker 1>here and at the conferences, what do ETFs provide investors

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<v Speaker 1>as an alternative to straight equity purchase debt debt instruments

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<v Speaker 1>which are really not giving them a return. And what

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<v Speaker 1>the industry is trying to do with the e t

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<v Speaker 1>F industry is trying to do is developed products, capability

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<v Speaker 1>solutions that investors can go into and get a better

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<v Speaker 1>UH risk adjusted return. And e t f s, by

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<v Speaker 1>their inherent nature do provide some benefits. Ay, you get

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<v Speaker 1>daily liquidity, which is very very important for many investors.

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<v Speaker 1>They just want that ability to get in and out

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<v Speaker 1>when they need to. It is relatively more tax efficient

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<v Speaker 1>because of the way e t f s create and redeem,

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<v Speaker 1>So most investors don't even realize that, but there is

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<v Speaker 1>a tax benefit to being in an e t F.

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<v Speaker 1>Two other assets quite futral fund, right, I mean, like

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<v Speaker 1>of a mutual fund. Even if you're still invested in

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<v Speaker 1>the mutual fund and you've selld you've sold no shares,

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<v Speaker 1>you're gonna end up with a tax liability. If the

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<v Speaker 1>mutual fund has a tax liability, that's that's not the

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<v Speaker 1>same with the t F. You're in control of when

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<v Speaker 1>that tax event happens. And that helps investors, you know,

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<v Speaker 1>on an after tax return, which is obviously important. Um

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<v Speaker 1>And and the other thing is, as we said, what

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<v Speaker 1>the big theme that we're really talking about is this

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<v Speaker 1>whole department of labor him as you mentioned earlier, this

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<v Speaker 1>department of labor fiduciary rule, where we think more advisors

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<v Speaker 1>will look into e t F as an alternative for

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<v Speaker 1>their end investor. The way we see the e t

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<v Speaker 1>F market right now, it's roughly a three point one

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<v Speaker 1>trillion a global market. Most of that two thirds of

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<v Speaker 1>it is here in the United States, about five billions

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<v Speaker 1>in Europe, and there's in Canada and Japan makeup the

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<v Speaker 1>majority of the rest. We think that will grow, and

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<v Speaker 1>our current data is suggesting that that could grow as

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<v Speaker 1>much as to ten trillion dollars in the next five years.

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<v Speaker 1>So in terms of asset class growth, e t f

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<v Speaker 1>s will certainly become a bigger part of the overall

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<v Speaker 1>investor portfolio. And what that will do is probably induce

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<v Speaker 1>many of the issues that are here to think about

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<v Speaker 1>more creative ways how they can issue ETFs that are

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<v Speaker 1>contoured tour investor interest. So uh speaking to investor interest

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<v Speaker 1>in this this market, I mean that if we had

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<v Speaker 1>if this for TV we get to occur, the growth

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<v Speaker 1>is just so almost straight up right for a lot

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<v Speaker 1>of e t s and spreading around the world as

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<v Speaker 1>you said, where where are the mark what kind of

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<v Speaker 1>e t F concentrations exists? What are the we're just

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<v Speaker 1>saying like or how do you break it down for

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<v Speaker 1>is like we're the majority of money as in e

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<v Speaker 1>t F s and what are some of the new

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<v Speaker 1>ones that are small now where you see possible growth. Well,

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<v Speaker 1>as we talked about this morning, um, the biggest concentration

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<v Speaker 1>of e t F investment is in the passive low

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<v Speaker 1>cost indexes. So you buy an SMPI index at Dow

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<v Speaker 1>thirty index to q q Q is one. As you

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<v Speaker 1>looking at nastack get the attack of a lot of

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<v Speaker 1>investors are going for a very low cost, safe play,

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<v Speaker 1>and that's been like that for a while. What we

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<v Speaker 1>many of the issues that I hear at all at

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<v Speaker 1>our conference are really more in you know, the hybrid ETF.

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<v Speaker 1>So it's more like smart beta. It's not exactly linked,

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<v Speaker 1>although it's correlated to indexes, it's actively managed in the

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<v Speaker 1>in the to anticipate better returns for investors. So we

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<v Speaker 1>think that although right now, particularly just after the Department

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<v Speaker 1>of Labors fiduciary standards have changed, we've seen a lot

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<v Speaker 1>of flow into passive, passive low cost we think as

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<v Speaker 1>investors and advisors get more comfortable with the array of

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<v Speaker 1>et F products, we will begin to see a shift

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<v Speaker 1>more toward the hybrid or smart beta type ETF products.

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<v Speaker 1>I just want to challenge a little bit on this

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<v Speaker 1>idea that you know, when you talk about let's say

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<v Speaker 1>a plain vanilla exchange traded fund like the Triple Q

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<v Speaker 1>or you know that is long equities that may be

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<v Speaker 1>diversive hide within equities, But if that's all you've got

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<v Speaker 1>in your portfolio, you're not diversified. Your exposed to the

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<v Speaker 1>volatility in stocks. Yes, that's exactly right, I mean, and

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<v Speaker 1>so that's what you're trying to deal with. But a

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<v Speaker 1>good advisor knows that and construct an overall portfolio of

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<v Speaker 1>which that particular et F like you've mentioned UH is

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<v Speaker 1>part of it. But you've got to look at the

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<v Speaker 1>whole portfolio. And that doesn't mean you get out of

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<v Speaker 1>government bonds. It doesn't mean you maybe get out of equities,

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<v Speaker 1>you know, straight equity purchases. But it's got to be

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<v Speaker 1>constructed holistically, and you have to be educated, right because

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<v Speaker 1>if you may end up with an e t F

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<v Speaker 1>that all it really does is mitigate the risk that

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<v Speaker 1>you have in something else but doesn't produce great returns,

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<v Speaker 1>but that's not what it's designed to do in the portfolio.

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<v Speaker 1>That's exactly right. And and and we see more interest

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<v Speaker 1>in the advisor community to really look into e t

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<v Speaker 1>F s and to get educated, as you say, because

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<v Speaker 1>the end investor needs to be educated, and until he

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<v Speaker 1>or she is, it's hard for them to comfortable to

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<v Speaker 1>see it in their portfolio. But the general attributes of

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<v Speaker 1>the of e t F s um I think are

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<v Speaker 1>enough and in many cases superior, so that investors should

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<v Speaker 1>really consider them well done. All right, Well, we've got

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<v Speaker 1>a lot to learn here at the e t F Symposium,

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<v Speaker 1>the b n Y Melan et F Symposium. I want

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<v Speaker 1>to thank you very much. Frankly sala He is the

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<v Speaker 1>chief executive of Global Structured Products Alternative Investment Services at

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<v Speaker 1>b n Y Melon. I'm PIM Fox, my co host

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<v Speaker 1>Kathleen Hayes coming up more on the world of exchange

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<v Speaker 1>traded funds. And you know what we'll define smart beta.

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<v Speaker 1>This is Bloomberg