Speaker 1: Welcome to Inside Active, a podcast about active managers that
Speaker 1: goes beyond sound bites and headlines and looks deeper into
Speaker 1: the processes, challenges, and philosophies insecurity selection. I'm David cone, I,
Speaker 1: lead Mutual fund and active Research at Bloomberg Intelligence. So
Speaker 1: we all know active ETFs are now one of the
Speaker 1: fastest growing segments in asset management, and with fixed income
Speaker 1: ETFs being a large part of that. In addition, ten
Speaker 1: thousand Americans are reaching retirement daily while trillions sit in
Speaker 1: retirement accounts, and we're also seeing growing demand for predictable
Speaker 1: income and outcome oriented solutions as retirement accelerates. So to
Speaker 1: help us unpack what this means for active management inside
Speaker 1: the ETF rapper, we're joined by Dave Abner, who's head
Speaker 1: of Global ETFs and Funds at Northern Trust Asset Management.
Speaker 2: Dave, thank you for joining us. Thank you so much
Speaker 2: for having me on. David, it's great to be here.
Speaker 1: Let's start with you know, so two years ago you
Speaker 1: stepped into a role that spans both mutual funds and
Speaker 1: active ETFs. How do you think about where active belongs
Speaker 1: in each rapper, especially given Northern Trust heritage as an
Speaker 1: institutional manager.
Speaker 2: Yeah, thanks, it's a great question. Actually, the role is
Speaker 2: very unique in the industry too. I think I'm one
Speaker 2: of the few ETF sort of legacy ETF people. I
Speaker 2: would say I was here from the very beginning or
Speaker 2: very early on, to be overseeing a mutual fund business
Speaker 2: as well right now. So it's in a way I've
Speaker 2: kind of gone back, Like I learned about mutual funds
Speaker 2: as an investor early on, but then I got very
Speaker 2: into ETFs, and everything I learned about mutual funds over
Speaker 2: the last few years was really through the lens of ETFs,
Speaker 2: and now I oversee both businesses. So it's really been
Speaker 2: it's been a great learning experience, and it's given me,
Speaker 2: you know, a lot of ability to think about where
Speaker 2: active belongs in each wrapper. And I really don't I'm
Speaker 2: sort of I'm kind of product or wrap. I like
Speaker 2: to say, I'm rapper agnostic. Right. When investors come to
Speaker 2: our set Northern, we first start and we think about
Speaker 2: like what are they trying to achieve? What outcome are
Speaker 2: they trying to you know, generate, and then we think
Speaker 2: about what is the most appropriate wrapper to achieve that outcome? Right,
Speaker 2: So that's that's so you know from my seat whether
Speaker 2: you want to buy a mutual funder a ETF. If
Speaker 2: we think it's the right investment vehicle for you to
Speaker 2: get that outcome in, we're happy to you know, deliver it.
Speaker 2: Right Then, when I go beyond that, if I do
Speaker 2: I think active belongs more appropriately in one wrapper or another. No,
Speaker 2: I don't, I really don't. I think I think you
Speaker 2: have to. It's less about the rapper and it's more
Speaker 2: about the requirements of the strategy itself, right, Like, you
Speaker 2: don't want the rapper to be a constraint if I
Speaker 2: think about ETFs, and most CTFs have a need for
Speaker 2: daily transparency, if that will constrain the strategy, we may
Speaker 2: be better off launching the strategy in a mutual fund.
Speaker 2: So there's sort of a list of things that I
Speaker 2: think about regarding rappers when we're thinking about which way
Speaker 2: to wrap people rap rap strategies. For the most part, nowadays,
Speaker 2: I mean people are coming to us and really asking
Speaker 2: for the ETF rapper investors, right advisors in particular, they
Speaker 2: just you know, ETFs have I think we're sort of
Speaker 2: hitting that hockey stick moment. I'm sure we'll talk about
Speaker 2: it and demand is like they're you know, they're they're
Speaker 2: sort of uh, they're the desired vehicle sometimes even if
Speaker 2: it's not the right rapper, but they still want an ETF.
Speaker 1: Now that makes sense. I was you know, you know,
Speaker 1: I've been covering ETFs forever too, and you know, with
Speaker 1: my role as a mutual fund analyst, you know, I
Speaker 1: have to cover active ETFs too, because I mean, that's
Speaker 1: where the future is when you look at kind of
Speaker 1: the core active products Northern Trust has historically offered. Yeah,
Speaker 1: I noticed you got the flex shares on the vest
Speaker 1: on and you know, the legacy funds like DU and
Speaker 1: R you know, what the lessons from their performance and
Speaker 1: you know, like investor reception kind of inform your active
Speaker 1: product roadmap today.
Speaker 2: Yeah, you know, it's it's a great question. So you're right,
Speaker 2: you meant so it's funny Northern Trust the ETF business
Speaker 2: actually going through a little bit of a transition. So
Speaker 2: we we were flex shares and we have been flex shares,
Speaker 2: and we have the Flexure suite of ETFs, and we
Speaker 2: also recently launched the Northern Trust ETFs and we've announced
Speaker 2: that this year, at some point later in the year,
Speaker 2: we'll be merging the Flexhair's brand into Northern Trust. We'll
Speaker 2: change any of the ETFs, but it'll be easier for
Speaker 2: us to have conversations like this because it'll be one brand.
Speaker 2: It will be the Northern Their Trust ETFs. I think
Speaker 2: we've changed the business has changed its view, partially because
Speaker 2: there's new new leadership meet coming in, but also partially
Speaker 2: because the industry changed dramatically, right, Like sixty eleven really
Speaker 2: changed everything for active ETFs. You really they really were
Speaker 2: not uh easy to do. We actually we actually have
Speaker 2: two active ETFs, R A v I and B n
Speaker 2: DC and those were launched under our flex Shares brand
Speaker 2: years ago. Those are the only active ETFs we have. Actually,
Speaker 2: Gunner is an index based ETF. But when we launched those,
Speaker 2: we were we were thinking the only way to bring
Speaker 2: these strategies to market in an ETF rapper was active, right.
Speaker 2: There was no way to really index size them. But
Speaker 2: now if you think about what sixty eleven did, it
Speaker 2: changed what you can really bring in the active rapper.
Speaker 2: So you see today and then we'll talk about some
Speaker 2: of our new funds and distributing ladders are active ETFs.
Speaker 2: In general, this this sort of renaissance of active. And
Speaker 2: you know this, like five or seven years ago, we
Speaker 2: were talking about the death of active, right, like active
Speaker 2: is dead, passive is growing, and now you're seeing and
Speaker 2: I think it's a result of sixty to eleven this
Speaker 2: sort of what people are calling the rebirth of the
Speaker 2: renaissance of active. And again it gets back to that
Speaker 2: sort of can you bring the strategy to market? And
Speaker 2: what are you trying to give to investors. I really
Speaker 2: think what you can do with active ETFs today is
Speaker 2: enabling this renaissance. But it's not the same active that
Speaker 2: we used to know. And to me, that's important, right,
Speaker 2: Like we used to talk about active and it was
Speaker 2: like Peter Lynch or you know, any of the legends
Speaker 2: of active investing. Today active means something very different. Like
Speaker 2: it's like, can we use the active rapper to bring
Speaker 2: a strategy to market for investors that maybe even sort
Speaker 2: of not active the way you think about it, but
Speaker 2: as not tracking an index, And that's that differentiating piece,
Speaker 2: Like it's it's really it's become complicated, I think for
Speaker 2: investors in a lot of ways.
Speaker 1: Yeah, that's a good segue into my next question. You know,
Speaker 1: you've highlighted obviously the big the biggest drivers of ets
Speaker 1: even going beyond before active kind of hit that renaissance
Speaker 1: was you know, the tax treatment, the structural advantages. But
Speaker 1: how do you think advisors should evaluate you know, true
Speaker 1: active value, you know beyond that, you know rapper efficiency.
Speaker 2: Do you want to actually evaluate true active value? Or
Speaker 2: are you really looking for what is providing you the
Speaker 2: best best risk adjusted post tax returns for the money
Speaker 2: that you're managing, right, and what are you trying to achieve?
Speaker 2: Like and I actually think that's that's a problem. Like
Speaker 2: I think today people still have buckets, right, they have
Speaker 2: their passive bucket and they have their active bucket. And
Speaker 2: even for you know, for Northern when we sell our
Speaker 2: quality low volatility strategy, for example, it's an index based product.
Speaker 2: But if we go to many of the gatekeepers on
Speaker 2: the street, even though it tracks an index, since it's
Speaker 2: not one of the poor indexes that they think of
Speaker 2: like an S and P or a Russell one, they
Speaker 2: think of it as active. Right, And there's been this
Speaker 2: debate going on forever and so, but you have advisors.
Speaker 2: So when you go to advisors and when you're trying
Speaker 2: to sell the product, some advisors say, oh, it's an
Speaker 2: index based product. I analyze it with my index funds,
Speaker 2: and it goes in bucket AY, and therefore it goes
Speaker 2: to this research aalysts and others will say, well, it's
Speaker 2: not it's not the rustle one. It's based on a
Speaker 2: proprietary index, quantitative index. It goes in bucket B and
Speaker 2: it goes to my active analyst. Right. I actually thinks
Speaker 2: that's sort of like creating confusion for no reason. Right.
Speaker 2: What we should be doing is, let's look at this strategy.
Speaker 2: Let's ignore this active passive because the lines have become
Speaker 2: so blurred, and let's see what the risk adjusted returns
Speaker 2: look like based on what we're trying to achieve, and
Speaker 2: what do they look like post tax, which is becoming
Speaker 2: more and more important and need to have structure. As
Speaker 2: you see sort of multiple strategies that look alike, they're
Speaker 2: doing the same things. The high income funds are important here,
Speaker 2: but they all have different you know, depending on how
Speaker 2: you trade the options or what you're doing, you're gonna
Speaker 2: have different tax treatment on the funds, so you need
Speaker 2: to think about that as well. So my view from
Speaker 2: here is like to get back to your question, like
Speaker 2: I think we should sort of decrease the value of
Speaker 2: this assessment of whether it's active and passive and elevate
Speaker 2: the importance of risk adjustion returns and post tax outcomes,
Speaker 2: like what's really being delivered. That's kind of the way
Speaker 2: I think about that.
Speaker 1: Yeah, you actually just answered my next question, you know,
Speaker 1: so good. You know, like obviously like that's an issue
Speaker 1: with advisors, but you know, my question was really like
Speaker 1: what mistakes you see managers making kind of you know,
Speaker 1: confusing beta with true active skill, and so you know,
Speaker 1: you just answered it.
Speaker 2: So it's really hard for them, right, Like, I mean,
Speaker 2: think about even the evolution of the last fifteen years
Speaker 2: or so I came into the industry, or when I
Speaker 2: started on the issuance side. Originally I was I was
Speaker 2: a trader and I was a market maker in details,
Speaker 2: and then I switched over to the issuance side and
Speaker 2: we were selling what we called smart beta. And I mean,
Speaker 2: what is smart beta. There's beta, and then there's now
Speaker 2: smart beta. It's better beta, right, Like it's a different
Speaker 2: way of indexing. It's really like many people think of
Speaker 2: it as an active overlay on a traditional index, right,
Speaker 2: And then we decided that smart beta was getting crowded,
Speaker 2: and we started calling it modern alpha, right, which which
Speaker 2: harkened back to the days of active managers generating real,
Speaker 2: true alpha, and we called it modern alpha because that's
Speaker 2: what systems are doing today. Like, it is really hard
Speaker 2: for advisors, you know, you want to try and sort
Speaker 2: of get past the marketing, right, That's that's where I
Speaker 2: go with that answer that I was giving you, is
Speaker 2: like you got to get past all the marketing, and
Speaker 2: even today like financial services, there are some some like
Speaker 2: leaders of marketing that have become big providers of money
Speaker 2: management services in financial services, right, and it is hard
Speaker 2: for advisors. Look, advisors are on board, they love it,
Speaker 2: but it's hard for them to really distinguish what's going
Speaker 2: on in the strategies that are underneath all this marketing.
Speaker 2: You know.
Speaker 1: Yeah, it's a lot. I you know, I come from
Speaker 1: a background starting in an RAA and so I get it,
Speaker 1: and so there's a lot to deal with. But I
Speaker 1: do want to kind of get into you know, what's
Speaker 1: what's especially new with Northern Trust. You kind of leaned
Speaker 1: into fixed income innovation, you know, with the distributing ladder strategies.
Speaker 1: What research or insight led you to believe the market
Speaker 1: needed this versus you know, say, traditional fixed income active products.
Speaker 2: Yeah, it's a great question. So what we're doing and
Speaker 2: what I believe. So there are always lots of questions like,
Speaker 2: aren't there so there's four thousand plus et apps, isn't
Speaker 2: it enough? Like we've been answering that same question for
Speaker 2: twenty years already. Right when there were one hundred and
Speaker 2: fifty et apps, people were like, was it one hundred enough?
Speaker 2: Why do we need one hundred and fifty? You know?
Speaker 2: And then all of these new things keep coming out,
Speaker 2: new ways to provide I think of ETFs as being
Speaker 2: able to even provide bespoke solutions forstors in all of
Speaker 2: these different ways that we couldn't do before. So when
Speaker 2: we think about distributing ladders to me, it goes a
Speaker 2: little bit back to my roots. Have you ever heard
Speaker 2: of the fire movement?
Speaker 3: I don't know if you, Oh, no, no, you know
Speaker 3: it's called financial independence retire early, right, So I've been
Speaker 3: a I am not retiring early by any means, but
Speaker 3: I've been a financial independence disciple for many years, right,
Speaker 3: And this community has been growing.
Speaker 2: And growing, and it coincides with what I think of
Speaker 2: as even the growth of individual investors, right, like the
Speaker 2: ability to almost replicate a Bloomberg or or you know,
Speaker 2: on your your own desktop and and get that information
Speaker 2: and get all the information and make your own investment
Speaker 2: decisions has grown rapidly. Right the markets have changed, so
Speaker 2: individual investors and all investors, even advisors, have so much
Speaker 2: more power around investing. So when you think about this
Speaker 2: concept of what I noticed with fire investors is one
Speaker 2: of the things they do is they use websites like
Speaker 2: tips ladders, for example, and they go out and they
Speaker 2: plug in what they want to achieve, and tips ladders
Speaker 2: spits out a list of say they want to twenty
Speaker 2: you know, they have a thirty year time horizon. They
Speaker 2: want a thirty year ladder. Tips ladders tip kicks out
Speaker 2: like a thirty different bonds or forty five different bonds
Speaker 2: that you'd have to buy to build this ladder. And
Speaker 2: there are some investors that are actually going out there
Speaker 2: and slogging through it. And I always thought, wow, this
Speaker 2: is a complicated way to manage money. And then I
Speaker 2: got to Northern and I learned about our wealth business
Speaker 2: and our wealth businesses something that I think of as
Speaker 2: unique in the industry, we practice something called goals based
Speaker 2: investing right where we take an investor and we don't
Speaker 2: start with Okay, you've got all this money, here's how
Speaker 2: we're going to invest it. We start with this concept
Speaker 2: of Okay, you've got all this money. Why did you
Speaker 2: go out and why did you get all this Why
Speaker 2: don'd you work so hard and generate all this money?
Speaker 2: What do you want to do with it? Right? What
Speaker 2: are your goals? And when you start to think about
Speaker 2: money in those terms, then you realize, well, I want
Speaker 2: to send my kids to college, and I have always
Speaker 2: wanted to give back, So I want to spend one
Speaker 2: hundred thousand dollars a year and give back to my
Speaker 2: favorite charity, you know, over the next ten years or
Speaker 2: something like that. And I looked at it, and we
Speaker 2: looked at that that sort of concept, and we married
Speaker 2: it to this idea that you can do lots of
Speaker 2: different things in active ETFs. Can't we bring it together
Speaker 2: and make it easier for investor to manage their money
Speaker 2: towards goals. That's exactly what distributing ladders are. So if
Speaker 2: you think about a traditional ladder, either when you build
Speaker 2: it on your own or when you build it in
Speaker 2: an ETF, it's perpetual. Generally, when you buy it in
Speaker 2: an ETF, it's perpetual. So you buy the ladder, the
Speaker 2: first year matures, and then they buy the next farthest
Speaker 2: out year, right, and the ladder just goes on forever.
Speaker 2: And if you want to use that money for something,
Speaker 2: you have to go make a sale, and that sale,
Speaker 2: depending on what's underneath and what's happening, you could generate
Speaker 2: a gain. It's complicated, you have to remember when to
Speaker 2: do it, you have to figure out what to do.
Speaker 2: And we looked at this and we were like, well,
Speaker 2: we can marry the flexibility of an active ETF structure
Speaker 2: with this concept that people don't just want their money
Speaker 2: invested forever. Sometimes they want to use it for their goals,
Speaker 2: and we could give it back to them in a
Speaker 2: tax efficient way. And this is not easy, right, Like,
Speaker 2: this is sort of blasphemy in the fund world that
Speaker 2: you want to launch a fund that actually wind up
Speaker 2: at some point in time. Right, our five year distributing
Speaker 2: ladder product will wind up in five years because we'll
Speaker 2: have given you all your money back, right, And that
Speaker 2: was that's a hard concept for some people to get around.
Speaker 2: But for investors, they're like, hey, wait a minute, that's
Speaker 2: exactly what I need. Hypothetically, if I have like a
Speaker 2: million dollars and I want to give away one hundred
Speaker 2: every year, you'll just give me my one hundred back,
Speaker 2: you know, and I invest a million over next ten years,
Speaker 2: You'll give me one hundred back each year. I don't
Speaker 2: have to do anything. I don't have to potentially create gains,
Speaker 2: I don't have to pay commissions on sales. Whatever it is.
Speaker 2: You give it back to me and as a return
Speaker 2: of capital, and I can use it for my goal.
Speaker 2: I can give it to my charity things like that.
Speaker 2: This was just sort of it just struck right, and
Speaker 2: it's actually it struck us as like why doesn't this exist?
Speaker 2: Why don't investors have this yet. It's it's been a
Speaker 2: little slower for investors to understand that, and they're really
Speaker 2: the pickup is the interest is really interesting, but it's
Speaker 2: hard for people to understand, you know, they have to
Speaker 2: get their heads around how it works. Sorry, that was
Speaker 2: a long answer, David, I apologize that.
Speaker 1: No, No, it's great. It's certainly a unique idea for
Speaker 1: retirement income and cash flow management. How do you think
Speaker 1: it balances with traditional active bond funds in a portfolio.
Speaker 2: Yeah, so let's go back to that sort of the
Speaker 2: concept of active and what are we trying to do
Speaker 2: in this case, right with the distributing ladder. What is
Speaker 2: our primary goal and what is the goal of the investor? Well,
Speaker 2: they want to use their capital for something, so first
Speaker 2: and foremost our primary goal is preserve their capital. Make
Speaker 2: sure that if you've invested a million dollars over for
Speaker 2: a ten year product or a twenty year product or
Speaker 2: thirty year product, you're getting a million dollars back, right.
Speaker 2: Is that is like our unwritten code of what the
Speaker 2: investor wants and what we want to deliver, and that's
Speaker 2: where we start. Then we use the active piece only
Speaker 2: in as much as we're trying to generate as much
Speaker 2: yield in each of the rungs that we can, again
Speaker 2: while not sacrificing at all that concept that our primary
Speaker 2: stewardship goal is returning a piece of the capital to investors,
Speaker 2: whatever ten are they are on each year. So for us,
Speaker 2: it's like the strategy is active because within each of
Speaker 2: the rungs, within the parameters that we set out of
Speaker 2: the bonds that we will invest in We have some flexibility,
Speaker 2: but our primary goal is maintaining and ensuring that when
Speaker 2: you invest in these products, you get your capital back
Speaker 2: first and foremost. You may give up ten basis points
Speaker 2: for that because capital return is our priority, but it's
Speaker 2: we think it's worthwhile and at the same time, we're
Speaker 2: trying to get you as much yield as we possibly can.
Speaker 1: So do you think there's a tradeoff between the alpha
Speaker 1: versus the predictable cash flows?
Speaker 2: I always do, And I mean, look, I think that's
Speaker 2: the industry, right Like, there's every time you go up
Speaker 2: a notch in potential alpha, you go down a notch
Speaker 2: in We call it increased risk, but you really go
Speaker 2: down a notch in predictability of that return, right Like,
Speaker 2: volatility increases with increases in alpha. So what's happening here
Speaker 2: is like you again, it gets back to where I
Speaker 2: think advisors and you know, for Northern Advisors, if somebody
Speaker 2: comes to us and says, I've got you know, I'm
Speaker 2: sixty two, I'm retiring at seventy two. I need an
Speaker 2: income over the next ten years until I can start
Speaker 2: taking Social Security. I've got this million dollars. If I
Speaker 2: spend one hundred grand a year. So we give them
Speaker 2: a ten year product. You think about a ten year
Speaker 2: distributing ladder, It'll give them one hundred grand each year
Speaker 2: to spend. That's more important, right If we showed up
Speaker 2: in year ten and said, you know, we're only we've
Speaker 2: only got sixty thousand dollars left. So this year that
Speaker 2: Alaska cruise you were thinking about. Sorry, you got to
Speaker 2: mix that, right, Like, if you want us to have
Speaker 2: that conversation with your wife, we can, but you know
Speaker 2: it's I know it's going to be a hard one, right.
Speaker 2: We never want to be in that position. Right, So
Speaker 2: they're not asking us, they're not at the end of
Speaker 2: that year saying, oh, how come I only generated ten
Speaker 2: BIPs versus fifteen dips in my interest. What they're thanking
Speaker 2: us for is the fact that we securely stewarded their
Speaker 2: capital through the process and help them achieve their goals.
Speaker 2: That's way more important, right, That's you know, that's what
Speaker 2: goals based investing is all about. I actually think it's like,
Speaker 2: you know, it's something out you can go back to it.
Speaker 2: It's something I had internalized as a person for years.
Speaker 2: Like when I got back to when I got into
Speaker 2: the ETF industry many, you know, nineteen ninety eight, and
Speaker 2: when I really got my head around ETFs, it was
Speaker 2: roughly two thousand and I was like, yeah, like these
Speaker 2: makes sense when I leave the office. I was working
Speaker 2: at bear Stearns at the time. I'm an investor, and
Speaker 2: investors deserve you know, fair deals, transparency, lower fees. And
Speaker 2: that was really what got me hooked on ets back then.
Speaker 2: And we're still on this and now we're just using
Speaker 2: the structure to give people better and better products to
Speaker 2: help them manage their financial lives. That's the way I
Speaker 2: think of these.
Speaker 1: That definitely makes sense if we take a step back
Speaker 1: and just think of fixed income active strategies in general,
Speaker 1: and you know, the current macro environment. I do a
Speaker 1: quarterly report called Beat the Beat Report by Bloomberg where
Speaker 1: I look at the percentage of managers upperforming. And one
Speaker 1: of the things I noticed last quarter, and you know,
Speaker 1: just last year in general, active bond managers really struggled
Speaker 1: than in past, and so you know, there's some debate
Speaker 1: of whether alpha opportunities are as available as they were
Speaker 1: you know, years ago. How do you adjust risk appetite
Speaker 1: versus I guess income adjectives. How do you think about that?
Speaker 2: Can I ask you question first on that? Regarding the
Speaker 2: question the do you have the stats on non fixed
Speaker 2: income managers on how many active managers outperform their bench?
Speaker 2: I don't remember what the current thinking is. Is it
Speaker 2: like fifteen equity managers? Yeah? Yeah, for equity managers.
Speaker 1: It's around thirty percent. When I look at it, it
Speaker 1: kind of makes but it's it's always down. It's you know,
Speaker 1: much lower than income.
Speaker 2: Much lower than it was always, right, like it used
Speaker 2: to be happy. It's been dropping annually, right, and.
Speaker 1: It's been drunking steadily. I mean, if you go back
Speaker 1: to the nineties, it was obviously much higher, you know,
Speaker 1: the last ten years or so it's been kind of
Speaker 1: steady lowish.
Speaker 2: In the fixed income space. Let's let's apply that thinking
Speaker 2: to what we're seeing happening in the markets, and let's
Speaker 2: talk about the ETF industry as a whole. From minute,
Speaker 2: ETF fixed income markets much much bigger than the equity markets,
Speaker 2: except if you look at the ETF world, equity ETFs
Speaker 2: much more prevalent than many more assets in equity ETF
Speaker 2: than fix ETFs. Right. Part of it is structural, right,
Speaker 2: like the fixed income markets were I guess I would
Speaker 2: say outdated technologically for many years. And I actually think
Speaker 2: that fixing co ETFs are driving automation in the fix
Speaker 2: income space. And it's still the fix income space is complicated, right,
Speaker 2: But every day that automation becomes more prevalent, the systems
Speaker 2: can do more of the work and it becomes harder
Speaker 2: and harder for active managers those those real you know,
Speaker 2: a bond selector to add anything over what the systems
Speaker 2: can do. I saw I read an interesting article this
Speaker 2: past week. It was talking about how AI can replicate
Speaker 2: almost seventy percent of what active managers can do, and yeah,
Speaker 2: so it's pretty crazy. I was thinking about it this way,
Speaker 2: and this is like a very simple example in my
Speaker 2: head of like how do I think about that? So
Speaker 2: you have five stocks, and you have an active manager,
Speaker 2: and you have an AI, and the AI and the
Speaker 2: active manager on four of those stocks, they basically will
Speaker 2: pick the same four stocks because the whatever the active
Speaker 2: manager is using, whatever system it was, it can be
Speaker 2: replicated by AI. Whatever numbers that active manager was doing,
Speaker 2: it can be figured out by AI, and therefore it
Speaker 2: can replicate roughly eighty percent seventy or eighty percent of
Speaker 2: that fifth stock. This is really I was trying. I
Speaker 2: was like, what is it about that fifth stock and
Speaker 2: what it is about that fifth selection? That piece of
Speaker 2: active management in my mind, and a lot of people
Speaker 2: are gonna hate me for this is I think the
Speaker 2: active manager gets up, it's a sunny, warm day and
Speaker 2: that fifth stock that was close to being included in
Speaker 2: the system and that the AI would never include because
Speaker 2: it's only a computer. The active manager feels generous that
Speaker 2: day and they're like, you know what, we're gonna put
Speaker 2: this fifth stock in or it's been sixteen inches of
Speaker 2: snow like we're more used to nowadays, and they're like,
Speaker 2: there is no way that stock is almost there. But
Speaker 2: I'm not doing it. They're not getting it right, Like,
Speaker 2: that component of active management is something that will never
Speaker 2: be replicated exactly by the machines by AI. I think.
Speaker 2: So there's always a piece, but it gets smaller and
Speaker 2: smaller every year, right like, And that's what's happening here.
Speaker 2: And I think that even as the as we continue
Speaker 2: to automate the fix inc of markets and we have
Speaker 2: better analysis and we have you know, it's going to
Speaker 2: be tougher and tougher to do that, and in order
Speaker 2: to generate sort of what you think of as alpha returns,
Speaker 2: you're gonna have to increase your risk appetite to try
Speaker 2: and take those risks. And I think that's a for
Speaker 2: the most part, what you're seeing is it's not a
Speaker 2: good trade off for investors. Really.
Speaker 1: Yeah, makes sense.
Speaker 2: Yep. That's my simpletons explanation of what I think is
Speaker 2: happening in the world. And we saw like it's like
Speaker 2: we kind of saw it with equities, and I you know,
Speaker 2: I think it rhymes.
Speaker 1: No, definitely, And so I do want to ask you
Speaker 1: just from like a product design standpoint, you know, when
Speaker 1: you're looking at advisor adoption of active ETFs, because I
Speaker 1: mean that's where a lot of firms are looking for,
Speaker 1: is you know the advisor world, because then you get
Speaker 1: the you know, the retail clients. What type of feedback
Speaker 1: have you kind of gotten from them and kind of
Speaker 1: incorporated into new products, you know, especially around distribution, you know,
Speaker 1: or even transparency preferences.
Speaker 2: Yeah, well, you know, look, advisors have been voting with
Speaker 2: their dollars for years that transparency matters. And I still
Speaker 2: think it's a it's a core tenet of investing. I
Speaker 2: used to laugh. So I really sort of laughed at
Speaker 2: this concept that, you know, before sixty eleven and before
Speaker 2: active ETF started really growing fast, a lot of the
Speaker 2: active management space would say, we do not want to
Speaker 2: make our portfolios transparent to investors because they will just
Speaker 2: run out and go replicate them themselves. I mean, don't
Speaker 2: they realize people have jobs to do. They have to
Speaker 2: go be teachers, and they have to build buildings, and
Speaker 2: they don't have time to go doing replicating portfolios. All
Speaker 2: they want is a fair trade, right, Like they want
Speaker 2: a fair shot. So I thought that was a sort
Speaker 2: of a red herring, right, And I think advisors are
Speaker 2: saying that with their dollars that they investor right now,
Speaker 2: transparency is key, right, Like that's what's driving And I
Speaker 2: think if you go back to eight or you sort
Speaker 2: of look at what's happening now with private equity valuations, right,
Speaker 2: transparency is always key. I never believed in non transparent
Speaker 2: active ETFs. I don't think there was a I didn't
Speaker 2: think there was a solution for them. There's a you know,
Speaker 2: there's a diminism dominimous amount of capital invested in them
Speaker 2: because there's always somebody somewhere that wants to invest that way.
Speaker 2: But really it's deminimous in terms of the whole ETF boom.
Speaker 2: And I think the future is all about this sort
Speaker 2: of transparency and the sort of investors just like I say,
Speaker 2: they're smarter or they have more access and they just
Speaker 2: want to know what they're getting. I think it's a
Speaker 2: key to investing today.
Speaker 1: No, I totally agree. I was actually on the team.
Speaker 1: I'm not sure if you remember Next Years of course,
Speaker 1: you know it was the first one that was trying
Speaker 1: to launch with the non transparent and just I think
Speaker 1: across the board, non transparent just it's not getting the assets.
Speaker 1: And I think a lot of of firms are are
Speaker 1: realizing that. And so I think it's mainly going to
Speaker 1: be transparency. And you know, we talked about the distribution
Speaker 1: ladder ETFs. Yeah, but you know, are there anything else?
Speaker 1: You know, what other are you seeing is kind of
Speaker 1: like active adoption gaps that your team is looking to address.
Speaker 2: Well, look, let me just say, like I love the
Speaker 2: fact that they were innovating on non transparent, right, like
Speaker 2: the innovation that we've seen over twenty years in financial
Speaker 2: instruments due to the ETF industry is astounding, Like if
Speaker 2: you really, if you really look at it, it's amazing.
Speaker 2: And I you know, without somebody trying to launch non
Speaker 2: transparent active ETFs, we might not be here today where
Speaker 2: we are with the growth of active ETFs, right, Like,
Speaker 2: all these things push us forward, right like we are,
Speaker 2: you know, we're building the bedrock of the investment products
Speaker 2: of the future. I think we actually launched a set
Speaker 2: of index products at the same time as disturbing lads
Speaker 2: focused on the muni market. And the muni market is
Speaker 2: like those indexes are so complicated and big, right Like,
Speaker 2: this is a market where you could potentially like it
Speaker 2: seemed right that there should be a set of core indexes,
Speaker 2: right like your go to indexes in the muni market
Speaker 2: that are priced extremely reasonable and things like that. And
Speaker 2: then the next step is that for those that want
Speaker 2: to go out there and really pursue a higher yield
Speaker 2: in that space. I could see some more active strategies
Speaker 2: even in that space coming online in the future, right Like,
Speaker 2: I think the tax advantages of those funds are critical
Speaker 2: for you know, probably the most important thing for investors
Speaker 2: are after tax returns, like I say, so, taxes are
Speaker 2: becoming a bigger and bigger bite out of your portfolio
Speaker 2: all the time. So I think the community space is
Speaker 2: actually ripe for a lot more sort of in the
Speaker 2: in the area of active even beyond what we've built
Speaker 2: with the with the indexes as your core portfolios be
Speaker 2: interesting to watch.
Speaker 1: Yeah. So my last question is I guess more backwards
Speaker 1: looking in. So you've led teams through structural shifts from
Speaker 1: wisdom Try to Crypto at Gemini and now you're at
Speaker 1: Northern Trust. How was that kind of cross market experience
Speaker 1: changed how you think about innovation and active ETFs.
Speaker 2: Yeah, it's I've always loved technology, and I actually think
Speaker 2: of ETFs in general as a technological solution right for
Speaker 2: investors and the like. I feel like I have gone
Speaker 2: from one technology firm, you know, I was at bear
Speaker 2: Stearns and I was actually when I started at bear Stearns,
Speaker 2: I was I was in charge of their technology. I
Speaker 2: bought all their computers for their back office in the
Speaker 2: early days. Right when I went to wisdom Tree, wisdom
Speaker 2: Tree and more like a fintech than a financial services firm.
Speaker 2: We weren't, you know, we didn't have all of the
Speaker 2: complications of traditional asset managers. Right if you think about
Speaker 2: you know, big asset managers, they're selling direct indexing, they're
Speaker 2: selling SMAs, they're selling mutual funds and ETFs. There's so
Speaker 2: much internal conflict around what they have to do. I
Speaker 2: thought of wisdom try as like a technological solution to that.
Speaker 2: We do one thing, we do it well and it's
Speaker 2: a technology. I was blown away when I moved on
Speaker 2: to a firm like Gemini, Like they took like startup
Speaker 2: technology to a new degree that I hadn't experienced before.
Speaker 2: It was really a tech firm of the business arm
Speaker 2: and all of it was you know, one of the
Speaker 2: things I was focusing on even in the crypto space
Speaker 2: early on before before we got approval for the cryptoetfs,
Speaker 2: was bringing crypto ETFs to market, right, and it was
Speaker 2: marrying the technology that we had at Gemini to to
Speaker 2: custody and clear crypto to the ETF structure that I
Speaker 2: understood really well and we were held being you know,
Speaker 2: provide that back end to investors. And now today we
Speaker 2: see it as well. Like I think of what we're
Speaker 2: doing on the ETF side and what we're building at
Speaker 2: Northern Trust, we're like like building, it's almost like a
Speaker 2: small technology unit within the firm where we really push
Speaker 2: the limits. I mean, if you think about distribution, we
Speaker 2: use so much technology in our distribution on the building
Speaker 2: of products. When we think about when we thought about
Speaker 2: building the distributing ladders, right, like, how are we going
Speaker 2: to manage you know, if you think about like thirty
Speaker 2: year ladders of munis and tips, it is a technological
Speaker 2: sort of work of art that we can manage those
Speaker 2: funds in all sizes, providing inter day transparency and liquidity
Speaker 2: for investors. This is like it's complicated, and we're making
Speaker 2: it easier for investors. So yeah, it's like I feel
Speaker 2: like my career through these places has always been stepping
Speaker 2: stone and utilizing each piece, have sort of leaned on
Speaker 2: it to figure out where we're going to go next.
Speaker 2: I think that's what's been happening. That's been great. Look,
Speaker 2: I'm really I've been so lucky, right, thirty years in
Speaker 2: financial services, mostly in New York. It's been an amazing experience.
Speaker 2: I can't you know, I can't be thankful enough. Really,
Speaker 2: I appreciate it, thank you for sharing. Unfortunately we do
Speaker 2: have to end here, but Thank you, Dave. I really
Speaker 2: enjoyed this discussion.
Speaker 1: It was fun.
Speaker 2: Yeah, it was great. Thanks for having me on, David.
Speaker 2: It's a great show. I love it, so thank you.
Speaker 1: And I also want to thank our listeners. If you
Speaker 1: liked the episode, please share it, subscribe and leave a review.
Speaker 1: And if you'd like to see more of our research
Speaker 1: on the terminal, go to bifund go for fund and
Speaker 1: active research until our next episode. This is David Cohne
Speaker 1: with the inside Active