Speaker 1: Welcome you, trillions. I'm Joel Wearer in America Bell Truders. Eric.
Speaker 1: This was a busy week with some news, uh, some
Speaker 1: big news, and I want to talk a little bit
Speaker 1: about that. And joining us is also Rachel Evans from
Speaker 1: Bloomberg News. Rachel, what happened this week? Yeah, so we
Speaker 1: had a big new outbreak in the fee wall, the
Speaker 1: race towards zero on the commission side of things, this
Speaker 1: time from trading platforms. So Schwab came out and announced
Speaker 1: that it was going to cut to zero commissions that
Speaker 1: it used to charge on trading stocks E t f
Speaker 1: s and options. This prompted Schwab's share price to fall
Speaker 1: almost ten percent, but it didn't just take itself down there.
Speaker 1: It also took E trade t D a merry trade.
Speaker 1: And I think there's a lot of questions being asked
Speaker 1: about what this really means for commissions in trading platforms.
Speaker 1: So kind of a blood bath, but this is good
Speaker 1: for me as a consumer writer. Yeah, I think for
Speaker 1: the small investor is obviously saving what five six bucks
Speaker 1: on the trade helps you. If you're bigger, that means
Speaker 1: a lot less that that dollar amount. But per the
Speaker 1: company's falling, you know, Um, we had some numbers here
Speaker 1: that Schwab probably felt felt the least because they only
Speaker 1: get seven percent of their revenue from these commissions, but
Speaker 1: t D and E Trade are thirty sev so it's
Speaker 1: more heavy on them. But really, to me, this is
Speaker 1: just all part of the Vanguard effect because one year
Speaker 1: ago Vanguard announced all E t F s could be
Speaker 1: traded for free, and so I think that just people
Speaker 1: you know, dealt with that for a while. And then
Speaker 1: you saw interactive brokers come out like a week ago,
Speaker 1: and then you had Um Schwab and then t D
Speaker 1: amor Trade and now the two left standing our Fidelity
Speaker 1: and E Trade, and everybody's wondering, you know, how quickly
Speaker 1: they will follow suit, and when they do, you're basically
Speaker 1: all the dominoes have fallen. Um. But I look, I
Speaker 1: think it's good news. I think there's one concern is
Speaker 1: there anything really free? I think if they're going to sell,
Speaker 1: your order flow could have been a slightly wider spread,
Speaker 1: and if to one bib extra in your spread that
Speaker 1: could be three to six bucks anyway, so it might
Speaker 1: be a wash. And also would this encourage bad behavior
Speaker 1: if you trade um, you know, out of your mind. Um,
Speaker 1: you're probably gonna lose money. So there's some car you know,
Speaker 1: concerns and dangerous here, but arguably probably a win for investors.
Speaker 1: So this wasn't the only news this week though, because
Speaker 1: the SEC had a lot of bit of other news. Rachel,
Speaker 1: what was that? Yeah, So the SEC finally approved more
Speaker 1: than decade in the making rule about exchange trade of funds.
Speaker 1: This basically allows e t F s to come to
Speaker 1: market without going through an onerus and sometimes expensive process
Speaker 1: of getting what used to be called exemptive relief. They
Speaker 1: can now come to market under the e t F rule,
Speaker 1: which should kind of streamline that process. They also made
Speaker 1: a few kind of tweaks around the edges, allowing fixed
Speaker 1: income to kind of have more of a hope because
Speaker 1: it now is allowed to use custom baskets. Custom baskets,
Speaker 1: very very technical term, basically means you don't necessarily have
Speaker 1: to do a pro rata slice of the fun that's
Speaker 1: coming in or out of the e t F. Gives
Speaker 1: a bit more flexibility, allows the managers of these products
Speaker 1: to actually and make a few more kind of decisions
Speaker 1: and relating to their fund rather than just to the investor. Eric.
Speaker 1: How many more ets do you think we'll see because
Speaker 1: of this rule? So this is interesting. If this rule
Speaker 1: would come out five ten years ago, I think it
Speaker 1: would have immediately you see to pop in new launches.
Speaker 1: I don't think we'll see that. I think that the
Speaker 1: market has matured and everybody wants you know of the
Speaker 1: flows this year are going to products that are twenty
Speaker 1: basis points or less. That is, I think that's UM
Speaker 1: made a lot of people who have products in the
Speaker 1: pipeline more conservative and cautious about launching. I don't think
Speaker 1: saving whatever UM looks like it might save you a
Speaker 1: little money on the launch. Probably it probably helps some
Speaker 1: people who are outsiders who might have been waiting, But UM,
Speaker 1: I don't know if it's going to help it. I
Speaker 1: maybe I'll be wrong, we'll say, but I'm I don't.
Speaker 1: I just think the market's brutality is what's gonna trump
Speaker 1: the fact that it's now easier. And what do you
Speaker 1: think of this does for fixed income ETFs? Like Racil mentioned,
Speaker 1: I think it's good for them. I think the big
Speaker 1: winner here is active ETF though because previously only passive
Speaker 1: and only some of them could do these flexible baskets.
Speaker 1: UM Here's the stat that um my colleague in London,
Speaker 1: Tom came out with, which is that only six percent
Speaker 1: of all e t f s pay capital gains um.
Speaker 1: But if you look, active ETF pay capital gains. So
Speaker 1: this is probably going to help them lower that number.
Speaker 1: And especially a lot of them are small, and I
Speaker 1: think this is a big advantage for them. You know, again,
Speaker 1: active has its own issues, but this certainly should help them,
Speaker 1: so to me, I think that the bigger takeaway here
Speaker 1: from this rule is that it probably helps little areas
Speaker 1: on the fringe, you know, certain little and it probably
Speaker 1: is democratic because it seems like the winners overall are
Speaker 1: the smaller firms. So that's not all that we're gonna
Speaker 1: talk about on this week's episode, Rachel. You also recently
Speaker 1: wrote an article for Bloomberg Markets magazine about Dan McCabe,
Speaker 1: CEO of Presidian Investments. Who's Dan. He's actually right here
Speaker 1: next to us, but we'll hear from it in a second. Yeah,
Speaker 1: but as you said, it has been a busy way. Yeah,
Speaker 1: this was the other thing that we were kind of
Speaker 1: working on this week. Basically, there's been a whole kind
Speaker 1: of structure that's been in the making for for more
Speaker 1: than a decade or you thought the e t F
Speaker 1: rull took a long time, Well, so has this. This
Speaker 1: is something that the SEC has been considering since I
Speaker 1: believe about two thousand and nine when Dan set up
Speaker 1: his company Presidian, And basically this structure is designed to
Speaker 1: allow active funds to come to market in an e
Speaker 1: t F wrapper without necessarily disclosing their holdings every day.
Speaker 1: That's something that's obviously, you know, something that's very common
Speaker 1: for um, you know, active managers, this kind of concern
Speaker 1: that they're going to have to disclose their holdings and
Speaker 1: they don't necessarily exactly, Yeah, you've got your intellectual property,
Speaker 1: you want to keep that hidden. But for the e
Speaker 1: t F structure, that is typically been the way you
Speaker 1: do it. You put your holdings out every night. So
Speaker 1: this is kind of a structure that that has gone
Speaker 1: through the SEC process and seeks to give active managers
Speaker 1: away to get into the market without necessarily giving away
Speaker 1: those goods. I want to job out the SEC. It
Speaker 1: seems like everything take takes a decade there. The financial
Speaker 1: crisis happened in the middle to this is probably the
Speaker 1: biggest issue, especially for people in the E t F bubble.
Speaker 1: I think it's something we debate constantly because you have
Speaker 1: twelve trillion dollars in active mutual funds and a good
Speaker 1: portion of it is wondering how can I take part
Speaker 1: in this quote new world of e t f s
Speaker 1: and index funds where all the money is going, which
Speaker 1: for context is four trillion dollars, which well, no, seven
Speaker 1: seven and a half. Yeah, so you have twelve over here,
Speaker 1: seven and a half here, But the seven and a
Speaker 1: half has come out of nowhere over the past ten years. Um,
Speaker 1: And I thought of it actually came out of the
Speaker 1: active side. Yeah, exactly, Yeah, that this is stolen from
Speaker 1: the active side. All the active side is grown because
Speaker 1: of the market returns, but long story short, the organic
Speaker 1: growth is going towards passive. This to me, I always
Speaker 1: picture this is like a bridge. Is this the bridge
Speaker 1: that will get us from one side to the other?
Speaker 1: And I think There's been a couple attempts, but I'm
Speaker 1: excited to go into them here on this episode of
Speaker 1: Joints making Sense of non Transparent actives. Dan, welcome to trillions. Hey,
Speaker 1: thank you very much. So, Dan, where did this idea
Speaker 1: come from? This idea generated actually from meeting I had
Speaker 1: with the company out in California back in two thousand
Speaker 1: and seven. They had asked us to see if we
Speaker 1: could figure out a way to work embedded capital gains
Speaker 1: out of the fund that had a small cap fund
Speaker 1: that frankly got to a point where they were not
Speaker 1: able to rebalance it because they were triggering so many
Speaker 1: capital gains. I went to a whiteboard with my partners.
Speaker 1: We spent in that it was actually on a weekend,
Speaker 1: so we actually took time away on the weekend, went
Speaker 1: to a whiteboard and drew this up. Um Interestingly enough,
Speaker 1: once we saw, you know, what we had created, we
Speaker 1: knew what it was useful for. But to Rachel's point,
Speaker 1: it took us a decade uh in order to be
Speaker 1: able to get the necessary approvals from the SEC to
Speaker 1: bring this. So this sounds like a big deal because
Speaker 1: the thing that an ETF is known for is its transparency.
Speaker 1: Right like, at any moment in time, I can see
Speaker 1: what's happening here and what's inside of ye about what
Speaker 1: I would disagree with that. I think that what e
Speaker 1: t f s are really known for primarily very few
Speaker 1: people know what to do with the transparency other than
Speaker 1: the professional audience E t F to know for real
Speaker 1: time pricing and access, and I think that's what we've
Speaker 1: we've allowed here. So we're giving actual pricing of the
Speaker 1: value of the securities in real time per second, updated
Speaker 1: on the midpoint of their worth, and then we're giving
Speaker 1: access through what entity we call an AP representative to
Speaker 1: create a redeem shares the actual shares on a pro
Speaker 1: roded basis. So very similar to how the spider operates today.
Speaker 1: But what's inside? How do I know what I've got? Well?
Speaker 1: What you what you know is you have the corpus
Speaker 1: of the trust right. You know exactly who the manager is,
Speaker 1: you know what he's trying to accomplish for you. And
Speaker 1: just like a mutual fund, you're going to get the
Speaker 1: same disclosures on a quarterly basis of what the actual
Speaker 1: holdings are um. But most importantly, you have full price
Speaker 1: transparency every day. How was it dealing with the SEC
Speaker 1: for a decade? Uh? You know, to be fair to
Speaker 1: the SEC, there was a lot of turnover. We'd start,
Speaker 1: we we'd have great, what we thought were really good meetings,
Speaker 1: We get things moving along and then uh, people may
Speaker 1: leave or you know, the shoe may drop on on
Speaker 1: a flash crash or something like that, and everything goes
Speaker 1: in a drawer for a number of years. So it
Speaker 1: was it was a little difficult. So before we get
Speaker 1: to some of the headwinds that I think this structure
Speaker 1: is going to face that are bigger, just real quick,
Speaker 1: let's go into the price and the NAV which I
Speaker 1: think it's some of the technical issues without getting two
Speaker 1: technical actions. But the reason et F S works so
Speaker 1: well is the price you pay for it on the
Speaker 1: exchange usually is very close to the navy So it's
Speaker 1: almost like the you know, that blue book value of
Speaker 1: a car being close to what you pay. It's a
Speaker 1: great thing, right, Nobody wants to pay something more than
Speaker 1: what it's don't know, net asset value. It's basically the
Speaker 1: value of the stocks or bonds in the e t
Speaker 1: F So it's like the fair value, right, so you
Speaker 1: want to pay something close to the fair value. How
Speaker 1: can we ensure that in when something's hidden, because how
Speaker 1: can you arbitrage it if you don't If the people
Speaker 1: who are arbitraging don't know the underlying components every day,
Speaker 1: and that's what arbitrage essentially is a dirty sounding wall
Speaker 1: street where but it's actually very effective in keeping the
Speaker 1: price in the navy clothes. I would agree with exactly
Speaker 1: what you're saying. And what we've done is to update
Speaker 1: what you're calling the nav or in an E t
Speaker 1: F terms, an indicative value. We've created a methodologies it's
Speaker 1: called a verified indicative value. So we're actually updating what
Speaker 1: I think is UM. Something that is you know, ancient
Speaker 1: developed in nineteen has not updated so that today's ETFs
Speaker 1: rely on a fifteen second indicative value based on last cell.
Speaker 1: You know that's not enough information to your point, So
Speaker 1: what we've done is taken next next generation. We've taken
Speaker 1: it to a per second indicative value on the actual
Speaker 1: holdings of the component securities priced at midpoints, So you
Speaker 1: are eliminating stale stale prices in that in that process. UM.
Speaker 1: The other thing that is critical again and to your point,
Speaker 1: you need to have access to the underlying component securities
Speaker 1: in order to be able to to execute that arbitrage um.
Speaker 1: Through the ap representative role that we've created here, you
Speaker 1: have the ability not only to know the value of
Speaker 1: the component securities, but to access the component's securities, not
Speaker 1: a proxy, not something that may correlate, but the actual
Speaker 1: fund itself. Rachel, what do you think this means for
Speaker 1: the industry. I think it means that there's a lot
Speaker 1: of mutual fund managers out there that are looking at
Speaker 1: this very closely and wondering whether this is the kind
Speaker 1: of salvation that they've been waiting for. The thing. Yeah,
Speaker 1: I mean, like you've been seeing, to to Eric's point earlier,
Speaker 1: this huge amount of money coming out of active mutual
Speaker 1: funds and going into predominantly passive e t f s.
Speaker 1: But there's nothing really about the et F structure per
Speaker 1: se that stops it from being used by active managers.
Speaker 1: It's just at that point about kind of not wanting
Speaker 1: to give up their secret source. So I think there's
Speaker 1: a lot of kind of like interest in how these
Speaker 1: structures kind of like do when they hit the market.
Speaker 1: I think the challenge is going to be sort of
Speaker 1: standing out because DAN is sort of the only active,
Speaker 1: non transparent et F to to get approval at the moment,
Speaker 1: but there are a number of others that are seeking
Speaker 1: approval and that the SEC is kind of currently evaluating.
Speaker 1: Let's just go over those real quick, just for anyone curious.
Speaker 1: So who is sides PRESIDI and what are the structures
Speaker 1: are in the running. Yeah, So at the SEC at
Speaker 1: the moment, there are I think about six proposals that
Speaker 1: are currently seeking approval. So you've got one from tro
Speaker 1: Price Fidelity Investments, nice Ease in their company called Blue
Speaker 1: Tractor Investco. Just filed, and there's a bunch of me
Speaker 1: I'm missing one there, but there's a bunch of people
Speaker 1: out there that are kind of looking to to get
Speaker 1: into the the market. They are primarily proposing something a
Speaker 1: little bit different to what Dan's looking at. He mentioned
Speaker 1: they're the ap representative kind of having sort of this
Speaker 1: kind of blind trust element kind of standing in the
Speaker 1: middle that helps facilitate money going into the fund and
Speaker 1: coming out from the fund. These are other structures are
Speaker 1: primarily looking at what we call a proxy basket, which
Speaker 1: is basically kind of putting out some kind of maybe
Speaker 1: representative maybe substitute, some kind of version of the holdings
Speaker 1: within that fund and allowing kind of market makers to
Speaker 1: see that and use that to make markets. So there
Speaker 1: is a slightly different approach going on. What's your pattern
Speaker 1: for though, Dan, Well, we have about sevenary issued patterns
Speaker 1: are around this around the ap representative role, uh, which
Speaker 1: we call trusted agent. Given our conversations with the sec A, UH,
Speaker 1: the the and then on the indicative value processes as well,
Speaker 1: we have a bunch of issued intellectual property. Let's let's
Speaker 1: go into the real I think what I have the
Speaker 1: real motivation here is the tax efficiency of ets which
Speaker 1: was honestly a happy accident. They did not really mean
Speaker 1: for that to be such a big benefit. But if
Speaker 1: you're in a taxable count and et F will it
Speaker 1: defers the taxes, let's say, but it it doesn't spit
Speaker 1: out capital gains. As the number I mentioned earlier, six
Speaker 1: percent of e t f s paid taxes last year.
Speaker 1: I think for mutual funds is more like and that's
Speaker 1: got to be very frustrating for the fund itself because
Speaker 1: et f s get this quote maybe unfair treatment or
Speaker 1: different treatment, and for the investors in the mutual fund
Speaker 1: who did nothing but sit there and they got to
Speaker 1: gain on their hands. So how confident are you that
Speaker 1: this structure will really um minimize those capital gain distributions? Well,
Speaker 1: I think yea. To your point, I would agree with
Speaker 1: you that this is going to be a lot more
Speaker 1: efficient than any mutual fund out there. Mutual funds do
Speaker 1: have the ability to deliver our securities and cond It's
Speaker 1: just that the structure itself doesn't avail it self to
Speaker 1: that UM DTF structure. The t F rapper and this
Speaker 1: what we've created here with active shares is an e
Speaker 1: t F UM will will function again very similar to
Speaker 1: how the spider functions. We're going to hand out a
Speaker 1: provider slice of the basket to the trusted agent of
Speaker 1: the ap who have the ability to UH sell those
Speaker 1: securities and and therefore make that deliver out the low
Speaker 1: cost basis shares out of the fund to make it
Speaker 1: more tax efficient than today's mutual funds are. I would
Speaker 1: take umbradge with with one point. I don't think it's
Speaker 1: just taxes. I think taxes are very important component. I
Speaker 1: think that today's UM investors, younger investors, want access. They
Speaker 1: want to access from real time, and they want to
Speaker 1: know evaluations in real time. You know, we all have
Speaker 1: our phone sitting here. We're all what customed to we're
Speaker 1: on computers. You know, we don't want to weigh until
Speaker 1: four o'clock to find out what what our securities are worth.
Speaker 1: So I think E t F s are are do
Speaker 1: your point of bridge between you know the traditional fund
Speaker 1: today and the exchange based model and just to riff
Speaker 1: off that. Like on the on the cost side, it
Speaker 1: is interesting Corlo, when you look at sort of some
Speaker 1: of the costs inherent with an e t F and
Speaker 1: mutual funds. You do have that taxation issue, but also
Speaker 1: you have kind of issues about transfer agency. The e
Speaker 1: t F isn't necessarily kind of paying the same amount
Speaker 1: to kind of record that the holders of the fund
Speaker 1: that a mutual fund would be, so that gets rid
Speaker 1: of one cost by by doing an e t F structure.
Speaker 1: Then you also have what's technically called twelve B one fees,
Speaker 1: which which kind of like are the marketing fees that
Speaker 1: most mutual funds do charge and most ETFs do not.
Speaker 1: Now there's kind of a question mark about how much
Speaker 1: of that gets incorporated into an overall expense ratio on
Speaker 1: these e t F s. They are not likely to
Speaker 1: be as cheap as some of the cheapest passive funds
Speaker 1: because somebody is still out there picking stocks. But by
Speaker 1: removing some of those kind of inherent costs, you potentially
Speaker 1: have a way in which you know a mutual fund
Speaker 1: is able to run more efficiently, efficiently and cheaper and
Speaker 1: that should get posted onto the amvestor. Okay, this brings
Speaker 1: up a great point and one that I've yet to
Speaker 1: get an answer on what will these costs? Because you know,
Speaker 1: how do you price this thing so it's cheap enough
Speaker 1: to attract some of the cost obsessed advisors who are
Speaker 1: E t F users, but not too cheap where it
Speaker 1: upsets the existing mutual fund shareholders in the company's own fund.
Speaker 1: PIMCO did this thing where they priced it rate in
Speaker 1: between the EYE class and the A class, which is,
Speaker 1: you know, maybe five six bits away from each and
Speaker 1: that seemed to do the trick. But they were also
Speaker 1: doing a fund that was slightly different than the mothership
Speaker 1: mutual fund. But largely speaking, what's your plan of attack there?
Speaker 1: You have to step back and understand what we are
Speaker 1: Prosidian are right, We're we're we're really not going to
Speaker 1: be the sponsor of the product, right, We're the guys
Speaker 1: behind the scenes. They have developed a structure, so we
Speaker 1: have license and you're talking about the other competitors. The
Speaker 1: other compartiers are all one off models. We have licensed
Speaker 1: fourteen of the largest active active managers on the planet
Speaker 1: who are all coming to market with their own plans.
Speaker 1: So I think in first quarter of this coming year,
Speaker 1: you're gonna see a lot of new products come to market.
Speaker 1: And and from what I see from from these guys,
Speaker 1: and I'm not gonna put it any any names to this,
Speaker 1: is that if there are savings, they're gonna want to
Speaker 1: pass some of those savings along to the client to
Speaker 1: make it more efficient for that client. And that's away
Speaker 1: from just a taxation to to the point removing the
Speaker 1: twelve B one fees and removing transfer agency costs that
Speaker 1: automatically and yours to the benefit of the client. And
Speaker 1: then you're gonna pick up also the the efficiency and
Speaker 1: taxation that you don't have in the mutual fund. I'm
Speaker 1: not trying to side scept that I think that they're
Speaker 1: gonna be guys that are waiting for it, because I'm not.
Speaker 1: I'm not the guy who's gonna tell JP Morgan how
Speaker 1: they should charge, right, So, so you're gonna want these
Speaker 1: guys look this, we're in a competitive world here, and
Speaker 1: I think they know. But that said, this is a
Speaker 1: better mouse trap than anything they've ever had to avail
Speaker 1: themselves up before to compete with the passive industry. That's
Speaker 1: had an advantage for twenty five years. So now we're
Speaker 1: gonna be able to put them on a level playing
Speaker 1: field and and they'll be able to go head to
Speaker 1: head with the past. So here's a question for you, though,
Speaker 1: there are about Kirk if I'm wrong, two d and
Speaker 1: fifty transparent active e t f s the account for
Speaker 1: less than two percent of the assets. They've been on
Speaker 1: the market for ten years, and if you take fixed
Speaker 1: income out of there, you get two really more bleaku numbers,
Speaker 1: maybe like point four percent of the market. The equity
Speaker 1: side is pretty much unloved. What would make you think
Speaker 1: someone would pay for non trant that's acting. So you're saying,
Speaker 1: if transparent active equity doesn't sell currently, what would non
Speaker 1: transparent active equity do differently? Again, to be to be fair,
Speaker 1: if you look at the growth in active even transparent
Speaker 1: index ETFs over the last cup four years, it's so
Speaker 1: so it's not like they're not growing the but specifically
Speaker 1: numbers are small. Numbers are right, right, yeah, very small
Speaker 1: for a good reason. Because if I actually have intellectual property,
Speaker 1: I'm not going to bring my intellectual property to someplace
Speaker 1: that it can be copied and then mimicked by somebody
Speaker 1: else a lot cheaper than it cost me the out
Speaker 1: of it. Yeah, exactly. So. So so if you have
Speaker 1: your best fund managers out there, you're you were never
Speaker 1: going to come to market in a vehicle that where
Speaker 1: you were forced to give away your intellectual property. So
Speaker 1: so I think now that they have that vehicle, to
Speaker 1: your point, we're gonna see what happens well the next decade.
Speaker 1: Is it possible though, that the fund managers are overestimating
Speaker 1: how much people actually care what they hold, Like if
Speaker 1: they just put their holdings out there. I mean Bill
Speaker 1: Gross did it with bond he put you know, and
Speaker 1: PIMCO continues to do it. Sure, Um, you know, is
Speaker 1: it really doesn't really matters? Besides maybe a big gigantic
Speaker 1: fiddility contra frind Okay, that's so big you can front
Speaker 1: run it probably makes some money, But what about like
Speaker 1: the anything lower than that, Does it really matter? It does?
Speaker 1: You're talking not only front running, free riding, right, because
Speaker 1: I have the ability to free ride you now, Bond
Speaker 1: portfolios are unique because nobody's sitting at this table has
Speaker 1: the ability to trade baskets and bonds in real time. Right,
Speaker 1: It's about access. Equity is actually very easy to access
Speaker 1: on exchange. So if I show you what I'm going
Speaker 1: in my equity portfolio, I can mimic that. I can
Speaker 1: go home on a spreadsheet and mimic that in fifteen minutes.
Speaker 1: So I would say that again, it is there are
Speaker 1: other things that can happen in an e t F
Speaker 1: that do not happen in a mutual fund. E t
Speaker 1: F are two sided vehicles because you have the ability
Speaker 1: to both buy or sell these. If I can go
Speaker 1: out in an e t F and as your example,
Speaker 1: you're fully transparent, I have the ability to go out
Speaker 1: and borrow those securities, and you're charging fifty basis points
Speaker 1: for that fund and actually redeem the shares in your
Speaker 1: force to give me the underlying component securities. I'm now
Speaker 1: long the under underlying component securities short the e t
Speaker 1: F and I become the fund manager. So so there
Speaker 1: are a lot of things that you need as to
Speaker 1: protect when you're trying to protect that intellectual property for
Speaker 1: that manager. How does the mutual fund industry feel about
Speaker 1: you now? Frankly, most of the people were talking to uh,
Speaker 1: we have we're not really making my partners and I
Speaker 1: aren't making outgoing phone calls to people. The traffic is incoming,
Speaker 1: so I can tell you yesterday we just signed up
Speaker 1: another fifty billion dollar asset manager and right now, but
Speaker 1: I guess that can I list some that are that
Speaker 1: you have, go ahead, just let me know if any
Speaker 1: of these are wrong. There's some big boys on here, uh,
Speaker 1: JP Morgan, black Rock, Nationwide, Gamco, American Century, Good Belly, Columbia,
Speaker 1: Thread Needle, Movin, Goldman Sachs as Wellman Sachs. I've heard
Speaker 1: of them. Yeah, there's a comple there's names that aren't
Speaker 1: on there. But yes, uh, you know, those are all
Speaker 1: people that have license and and that should be telling
Speaker 1: to you. And these are incoming phone calls. These are
Speaker 1: not us going out and actively pushing this. They understand
Speaker 1: the value of exactly what we've created here. I would
Speaker 1: point out though, that there is a difference between licensing
Speaker 1: and launching, so I think that's kind of like worth
Speaker 1: bearing a mind. And there was kind of like an
Speaker 1: interesting sort of development on that last week where Investco,
Speaker 1: which I believe had licensed the model a long time ago,
Speaker 1: they kind of came out with their own model um
Speaker 1: that they're now filing with the sec to to try
Speaker 1: and get approval. So think it'll be very interesting to
Speaker 1: kind of see how many of these kind of like
Speaker 1: put their money where their mouth is. Like if they
Speaker 1: all want to sit back and see how these work,
Speaker 1: then no one's going to be the first mover. So
Speaker 1: American Century has some filings out there, Gamco has some
Speaker 1: filings out there. Be interesting to see kind of like
Speaker 1: when those come to market, whether others sort of follow
Speaker 1: and like let's let's just just quickly, uh, we never
Speaker 1: license to Invesco. So so did the point. Yes, there
Speaker 1: are comparative structures out there, but um, you know, we
Speaker 1: think that we have the right mouse trap, and I
Speaker 1: think it's pretty telling, you know, the people have chosen
Speaker 1: this structure. Here's the bigger, gigantic issue you're facing, in
Speaker 1: my opinion, which is that you know, if you look
Speaker 1: at the numbers right past couple of years, a trillion
Speaker 1: out of discretionary equity bond managers doing okay. But let's
Speaker 1: just look at stock pickers, A trillion out, a trillion
Speaker 1: has gone into et F and index funds passive and
Speaker 1: then maybe that smart data right which is we'll sell
Speaker 1: rules based index fund I guess my question is a
Speaker 1: lot of that is because they look at the reports
Speaker 1: of index versus active and they see that like two
Speaker 1: thirds of managers can't beat their benchmark on the equity side,
Speaker 1: and then if the ones that do can't persist, and
Speaker 1: that's really some rough sentiment that seems to be spreading.
Speaker 1: Can you overcome that or is that not a concern
Speaker 1: because you think there's enough fans out there are of
Speaker 1: active despite all that that really just wanted in a
Speaker 1: better structure. I think that your again to your point,
Speaker 1: there are certain managers out there performed very very well,
Speaker 1: and there are the other managers who do not perform
Speaker 1: very well. I think that the UM this vehicle is
Speaker 1: going to enhance all the managers, so they're going to
Speaker 1: pick up efficiency. So when you're trying to compare a
Speaker 1: guy to a benchmark and you say, hey, he's missing
Speaker 1: his benchmark, but he's gotten embedded. He's starting fifty basis
Speaker 1: points behind the behind the curve. So if I can
Speaker 1: move him up and let them start at the same point,
Speaker 1: let's see what happens going forward. UM. I personally think
Speaker 1: that there are a lot of managers out there, active
Speaker 1: managers that I would like to have access to UM.
Speaker 1: You know, we're mentioning some of these people today that
Speaker 1: the major already of UM the United States do not
Speaker 1: have access to a Goldman UH you know account right.
Speaker 1: So so if you have that on exchange, and you
Speaker 1: have UM their expertise UM offered an active shares et
Speaker 1: f rapper, it may be very interesting. And again I'm
Speaker 1: not buying you, Dan McCabe. I get to buy the
Speaker 1: Goldman and the Goldman product, that's what the would be.
Speaker 1: Let's unpack Goldman for a minute, because I think this
Speaker 1: gets to another question, which is that Goldman has you say,
Speaker 1: active active shares, right, they have something called active Beta,
Speaker 1: which is their Smart Beta line. G SLC is one
Speaker 1: of the best selling multi factory ETFs. It's nine basis
Speaker 1: points of a cost, it's UM looks like an active
Speaker 1: mutual fund, and that it's pretty close to the benchmark,
Speaker 1: doesn't take huge risks. It's the Goldman name, it's rules based,
Speaker 1: which is more popular. UM. Is it possible that smart
Speaker 1: Beta has just sucked up all the oxygen that discretionary
Speaker 1: thinks is there? I don't think so. I think that
Speaker 1: you're gonna find it. To your point to me, Smart
Speaker 1: Beta is just active indexing, right, They're going to be
Speaker 1: guys and it's rule based. You know, in an active
Speaker 1: shares product, you can actually make determinations in rule time
Speaker 1: and you're not constrained by any rules. So I think
Speaker 1: that there are going to be guys out there that
Speaker 1: have the ability to add value in real time because
Speaker 1: of news events or whatever else may be happening. Yeah,
Speaker 1: I mean, I think the the interesting thing when we
Speaker 1: do see a sort of some products start to launch,
Speaker 1: and particularly we see some of the structures that are
Speaker 1: currently with the SEC also get approved. It's kind of
Speaker 1: how that sort of dynamic a competition then kind of
Speaker 1: plays out. And when I talk to investors, they point
Speaker 1: out that what they're really interested in is not active
Speaker 1: shares per se, no offense, It's it's the strategies that
Speaker 1: could come through on on the active shares intellectual property.
Speaker 1: So I think it's gonna be interesting, you know, if
Speaker 1: we do have some of these other structures approved and
Speaker 1: if they are also licensed, some of them we believe
Speaker 1: are going to be more proprietary, some of them will
Speaker 1: be looking to license exactly kind of like what which
Speaker 1: kind of asset managers choose to go with? Which structure,
Speaker 1: because I think that more than that, the underlying structure
Speaker 1: will the term then uh, you know who is buying
Speaker 1: what and could ultimately determine the success of these structures.
Speaker 1: And you know, we had Ropes and Gray on E
Speaker 1: T F i Q every Wednesday at one pm, UM,
Speaker 1: and they had a report out saying that you could
Speaker 1: convert a mutual fund to this new structure. I knew
Speaker 1: you were gonna ask that question once you said Ropes
Speaker 1: and Gray. Um, you know, do you think we'll see
Speaker 1: some of that? Do you think because this idea of
Speaker 1: putting out something that's a little cheaper than your mutual fund?
Speaker 1: I can see it getting messy with your current base,
Speaker 1: Whereas if you just switch them all over to this
Speaker 1: better vehicle, Yeah, you're gonna have to self cannibalize a
Speaker 1: little bit, but you're probably gonna do that anyway. Um,
Speaker 1: I could see that being a logical move for them.
Speaker 1: It's happening in Canada, uh more consistently, and it's happened
Speaker 1: in the US. First trusted that a couple of times
Speaker 1: with the Clothes and Fund, so apparently it's legal. Do
Speaker 1: you think we'll see this? I absolutely do think we'll
Speaker 1: see this. UM. I don't know the time frame of that,
Speaker 1: but I can tell you that we've spoken to at
Speaker 1: least five or six clients that are looking at it,
Speaker 1: and I know of five or six different law firms
Speaker 1: other than Ropes and Gray they are also looking at
Speaker 1: at days on behalf of clients. UM. You know, to
Speaker 1: your point, it makes perfect sense. I mean, if I
Speaker 1: have a mutual fund that uh, you know, potentially um,
Speaker 1: it's been maybe even a little bit stale. UM, I
Speaker 1: can actually convert it over to an et F model,
Speaker 1: pick up more efficiencies, UM, you remove the transfer agency
Speaker 1: costs and other things, uh, and get to scale immediately
Speaker 1: on the platforms. So I think that there are a
Speaker 1: lot of reasons guys are looking to do that. To
Speaker 1: that point, I do think that's that's probably a great
Speaker 1: idea for them. I do wonder how many have the stomach.
Speaker 1: If you're not in the E T F Terror dome
Speaker 1: dealing with Vanguard every day, it's it's a rough place,
Speaker 1: and I'm not sure if you're used to just having
Speaker 1: this nice life, if you can do those kind of
Speaker 1: like it's like cutting off your own hand. UM. I
Speaker 1: don't know how many have the stomach to do that.
Speaker 1: I guess we'll see. So I want to go back
Speaker 1: to seven out of whiteboard, drawing a mouse trap, the
Speaker 1: better mouse trap? What changed from then to like actually
Speaker 1: what you've been able to get through at the SEC? Well,
Speaker 1: to be fair, I think the SEC wanted additional bells
Speaker 1: and whistles than we originally have put on it, and
Speaker 1: they also constrained the universe of securities that we could
Speaker 1: um use out of the gate um. But frankly, it
Speaker 1: was really very very similar to what we drew up
Speaker 1: over a decade ago. Um, frank if it works. You know,
Speaker 1: what we always try to do when when we're designing
Speaker 1: products is to make them as clean and simple as possible.
Speaker 1: But we're talking about here the all the proxy structures
Speaker 1: proxy is you know you um, I'm laughing because you
Speaker 1: know we recognize that just means it's not actually what
Speaker 1: the fund is. And if you're telling me I'm not
Speaker 1: going to have the right pricing, my pricing is gonna
Speaker 1: be incorrect. And I'm gonna tell you something that isn't
Speaker 1: the fund. But I want you to make an efficient market.
Speaker 1: You're you're gonna have a little bit of difficulty. We're
Speaker 1: giving you the actual price, and we're giving you access
Speaker 1: to the underlying fund for creation of redemption purposes. So
Speaker 1: um again, create something simple like we did with g
Speaker 1: LD or currency shares over the years, and it will work,
Speaker 1: and it'll work through every market environment. Again, McCabe Proceeding Investments,
Speaker 1: Thanks so much for joinings on Trillians. Thank you very much, Michel,
Speaker 1: Thank you as always, thanks for listening to Trilliance until
Speaker 1: next time. You can find us on the Bloomberg terminal,
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Speaker 1: on Twitter, I'm at Joel Webber Show, He's at Eric
Speaker 1: faul Tunis, and you can find Rachel at Rachel Evans.
Speaker 1: Underscore in y Trillions is produced by Magnus Hendrickson. Francesca
Speaker 1: Leedy is the head of Bloomberg podcast Fight