Speaker 1: Her trains. I'm Joel Webber and I'm Eric. Eric. Today
Speaker 1: we have an unusual guest and active e t F manager. Yeah,
Speaker 1: I mean most of the money and the people in
Speaker 1: ETFs are passive in fact, summer you know cult like
Speaker 1: about their allegiance to passive. But here's an active manager
Speaker 1: that has has been founding success and she's something of
Speaker 1: a star. She We put her on the Bloomberg fifty
Speaker 1: last year because she was such a phenomenal uh entrance
Speaker 1: into finance and in a very unusual way. Yeah, and
Speaker 1: I'm very excited. Um. She is completely bucking like many
Speaker 1: trends at once. She is one of the hottest hands
Speaker 1: in active management, and there aren't many hot hands. As
Speaker 1: you know, active is struggling in all facets. It's under performing,
Speaker 1: largely just eating everything. Stock pickers are just they're in essence,
Speaker 1: they're facing an existential cry if you think about it.
Speaker 1: But Cathy Wood came along a couple of years ago
Speaker 1: and just really shocked the world by coming in and
Speaker 1: getting a ton of inflows for being active, discretionary, high cost,
Speaker 1: and she's an independent, no big distribution to help her.
Speaker 1: She had different about t f s like talk like
Speaker 1: it's like five hurdles stacked on on one another. And
Speaker 1: she overcame that largely on great performance. That was part
Speaker 1: of it. But what she does which is interesting, is
Speaker 1: she just focuses on disruptive innovation. That's her main thing.
Speaker 1: So she's active because, um, she don't get stuck in
Speaker 1: one sector or one theme. She wanted a room to
Speaker 1: move and she's a formerly an active manager. Um. And
Speaker 1: in retrospect, I gotta say, it makes sense if you
Speaker 1: are going after things that are moving quickly and you
Speaker 1: have a strategy, Uh, it kind of makes sense to
Speaker 1: be active in this space. She's also very thematic. What
Speaker 1: are her et f s. The Arc Innovation e t
Speaker 1: F which is a r k K that's the main
Speaker 1: one that goes across all sectors. That's sort of like
Speaker 1: the flagship product. But then she's got one called the
Speaker 1: Genomic Revolution, web X point oh um, the Industrial Innovation,
Speaker 1: Fintech Innovation, three D printing, and Israel Tech ETF. So
Speaker 1: you can say that a common thread here, which is
Speaker 1: she's in a way she is living and investing in
Speaker 1: the future that's five years out. Yeah, when every time
Speaker 1: I talked to her, I feel like I'm just a
Speaker 1: little like um slow, like I'm not I need to
Speaker 1: learn more about what's happening. She's really dynamic. She also
Speaker 1: makes some big bets, one being the one that she's
Speaker 1: probably most famous for. If you on the Twitter tes, yeah,
Speaker 1: she she said Testa is going to four thousand dollars
Speaker 1: in five years. That just riled up all of the
Speaker 1: haters on social media and sopecially the year when the
Speaker 1: stocks down or something. Yeah. I mean she's one of
Speaker 1: the rare bulls out there, but she just and she's
Speaker 1: been with it for a long thing. She owns the stock.
Speaker 1: It's the top waiting in her fun I'm not sure
Speaker 1: why people get so piste off when she's actually owning it.
Speaker 1: I mean, it's not like she's just saying something she
Speaker 1: hasn't known and she trades. It's not like it's not
Speaker 1: like a buy and hole position. Yeah. And so she's
Speaker 1: actually had Elon Musti has a podcast. She had Elon
Speaker 1: Musk on her podcast. So I think he was happy
Speaker 1: to find some people out there who were, you know,
Speaker 1: with him, because there's a lot of haters of that stock.
Speaker 1: But really with Kathy, one of the thing I want
Speaker 1: to say is as we find that active is looking to,
Speaker 1: you know, how to move forward in this passive world.
Speaker 1: I think Kathy has developed one way forward, a blueprint,
Speaker 1: which is to be high active share. Really you just
Speaker 1: very concentrated going for the gold, so to speak, with
Speaker 1: only like thirty stocks, a lot of bold bets, bold
Speaker 1: calls like Tesla, high conviction, not wavering if the stock
Speaker 1: goes down, and transparency shows her holdings every day, shows
Speaker 1: her trades every day, She crowdsources research, and she got
Speaker 1: a big social media presence pretty much all those things
Speaker 1: traditional active funds do not do. Oh and by the way,
Speaker 1: we recorded this while I was on vacation, which is
Speaker 1: why you'll have to understand that I was calling from
Speaker 1: the phone this time on Trilliance. Kathy would of our convestments. Kathy,
Speaker 1: thanks for joining us on Trilliance. Happy to be here, Joel.
Speaker 1: So when you think about what you do, how do
Speaker 1: you describe it to your friends and family. Yes, we
Speaker 1: are investors, asset managers focused exclusively on disruptive innovation, nothing else.
Speaker 1: And these disruptive innovations are technologically enabled. They're going to
Speaker 1: transform the way the world works and really make it
Speaker 1: a better place. And why do you use E t F. Well,
Speaker 1: I started with E t f s because as we
Speaker 1: were studying thematically UH, the aftermath of the O eight
Speaker 1: oh night meltdown, we were trying to discern trends, and
Speaker 1: what we were seeing was an accelerated trend towards E
Speaker 1: t f s taking market share. This usually happens, UH
Speaker 1: in any disruptive innovation. The cheaper, better, faster winds and
Speaker 1: gains increased traction throughout a very turbulent period. This was
Speaker 1: holding true with E t S and I thought, well,
Speaker 1: while the rappers terrific, it solves so many problems for
Speaker 1: the end investor, why can't we do active in in
Speaker 1: an E t F uh? And the answer was there's
Speaker 1: no reason you cannot if you're willing to disclose your
Speaker 1: holdings at the end of every day. UM, I want
Speaker 1: to go back to the innovation and these broader themes.
Speaker 1: Black Rock just had a press conference talking about mega
Speaker 1: trends and it kind of sounded like what you've been
Speaker 1: talking about for a while. And I want to bring
Speaker 1: in Rachel because Rachel has been covering thematic investing heavily
Speaker 1: and she met you a while ago and just set
Speaker 1: us up on this whole idea of thematic investing in
Speaker 1: your experience with Kathy. Yeah, so I first met Kathy
Speaker 1: back in I think it was October, so it's been
Speaker 1: a while now. She set up her funds back in fourteen,
Speaker 1: so they've been running for about a year at that stage.
Speaker 1: And my interest was piqued because I heard down the
Speaker 1: grape vine that Kathy was using these e t f
Speaker 1: s to actually invest in disruptive industries, but also bitcoin,
Speaker 1: which got my attention at the time because I was
Speaker 1: writing about orencies and I thought, hang on a second,
Speaker 1: here's a way we can write about something really interesting
Speaker 1: without staying too far from my beat. And I went
Speaker 1: in to meet Kathy and learn a bit more about it,
Speaker 1: and I was really blown away, really but how kind
Speaker 1: of sort of sophisticated that the strategy was at the time.
Speaker 1: Not only was it kind of bitcoin, it wasn't just
Speaker 1: crypto focused. It was actually kind of looking at anything
Speaker 1: that was disrupting things that were different kind of threads
Speaker 1: of investment, looking at blockchain, different threads, looking at genomics.
Speaker 1: It all seemed very kind of like futuristic and new wave,
Speaker 1: and I found it was so interesting that I kept
Speaker 1: kind of like following the progression of these funds and
Speaker 1: then actually ended up writing a story all about kind
Speaker 1: of Kathy and that the success of her her business
Speaker 1: last year until Kathy, take us back. You started the et,
Speaker 1: but you were doing themes back at your previous job.
Speaker 1: What turned you onto themes and and why do you
Speaker 1: ultimately go out in your own well A couple of reasons.
Speaker 1: I was turned onto themes, specifically technologically enabled innovation, which
Speaker 1: is which which impacts every sector of these days. When
Speaker 1: I was started in the business, I started in economics,
Speaker 1: but I knew very quickly I wanted to become an
Speaker 1: analyst and then ultimately a portfolio manager. And at Jennison Associates,
Speaker 1: great firm, wonderful mentors, six Agallis. He said, fine, you
Speaker 1: can do that here, but you're gonna have to find
Speaker 1: your own universe. And the analysts there were lifers. They
Speaker 1: weren't going anywhere, so I had to just wait around for,
Speaker 1: you know, new names to show up that kind of
Speaker 1: fell through the cracks, like database publishing, Reuter's tele rate.
Speaker 1: We called it database publishing at the time. Nobody wanted
Speaker 1: to follow that. It didn't belong in either publishing or technology.
Speaker 1: It was a fall through the crack stock, and so
Speaker 1: I said, I want to follow that. This sounds really interesting.
Speaker 1: And of course it was the precursor to the Internet.
Speaker 1: So very often when ideas are discarded or you know,
Speaker 1: dismissed uh leetly as ridiculous. Uh, there there can be
Speaker 1: often something very interesting lurking there. It may not show
Speaker 1: up right away, but sometimes the ideas that are dismissed
Speaker 1: out of hand become the most important investment opportunities. We're
Speaker 1: going to see internet being one of them. I'm thinking
Speaker 1: of Xerox and the PC. Yes, that was another one.
Speaker 1: But yeah, and so you started getting into these and
Speaker 1: then you were a portfolio manager. Yes, and our Lions
Speaker 1: Bernstein I headed up. I was c i O of
Speaker 1: the Global Thematic Strategies and I joined during the tech
Speaker 1: and telecom bust. Uh so uh it was at that
Speaker 1: time we were just focused on disruption. Uh. And in
Speaker 1: that case, it was the bust, and we were trying
Speaker 1: to figure out, okay, what are the ramifications of the
Speaker 1: bust and how is this going to change technology? And
Speaker 1: one of the one of the articles that came out
Speaker 1: at the time was I t it doesn't matter. It
Speaker 1: was a Harvard Business Review. We were trying to get
Speaker 1: our head around this. Remember we had the market had
Speaker 1: gone wild on technology, and here was here was an
Speaker 1: article in HBr saying it doesn't matter. And that was
Speaker 1: that was, uh, you know, a precursor or a foreshadowing
Speaker 1: of Amazon Web Services, the cloud. And so again, most
Speaker 1: people were buying the dip even in oh one when
Speaker 1: I was when I started, and we already were onto
Speaker 1: the next thing. Wait a minute, there's a disruption here,
Speaker 1: what could this possibly mean? So um, we did everything
Speaker 1: we did was around disruption. But because a lot of
Speaker 1: technologies were not ready, you know they were they were
Speaker 1: birthed too many of them during the Internet bubble or
Speaker 1: even way before, but they needed time to just hate.
Speaker 1: So we we were focused on other disruptions, and one
Speaker 1: of them was, Okay, investors have been disrupted. The tech
Speaker 1: and telecom bust has turned people off. Stock interest rates
Speaker 1: are only six percent long rates, so nobody's going to
Speaker 1: want bonds. That of course was wrong. Uh, where else
Speaker 1: are they going? And then we moved into housing as
Speaker 1: a new asset class. Just to give you a sense
Speaker 1: of how we were looking at disruption at the time now,
Speaker 1: the technologies are ready for prime time. They were they've
Speaker 1: been jest stating these last twenty years, and we are
Speaker 1: hitting tipping points now where demand demand for electric vehicles
Speaker 1: we think will go up twenty fold during the next
Speaker 1: UH during the next five six years, demand for DNA
Speaker 1: sequencing is going to go up fortyfold. These are unit
Speaker 1: growth numbers because costs are moving down so rapidly, and
Speaker 1: I don't think economists or analysts or portfolio managers are
Speaker 1: ready for this right now. I don't think research departments
Speaker 1: are ready for this. They have to restructure because every
Speaker 1: analyst is going to have to become very conversant and
Speaker 1: comfortable with technology. And we're focused on five technology platforms
Speaker 1: or innovation platforms. Not only is technology seeping into every sector,
Speaker 1: blurring sector lines, which I know is important in ETFs,
Speaker 1: but these three innovation platforms, they are converging. So analysts
Speaker 1: broke their responsibilities broken out by very specialized segments of
Speaker 1: sectors are not going to be able to analyze these
Speaker 1: innovations correctly without again a restructuring of their responsibilities. So
Speaker 1: what are these five platforms that you've divided and are
Speaker 1: using to sort of organize your university. Yes, and these
Speaker 1: would be in Silicon Valley. They would be considered general
Speaker 1: purpose technology platforms. Uh there there there. We didn't choose these, um,
Speaker 1: but they're at All of these are at tipping points
Speaker 1: in terms of adoption. And I can tell you how
Speaker 1: we get to tipping points, but they are DNA sequencing.
Speaker 1: The tipping points always happen because costs are collapsing, and
Speaker 1: they're collapsing there so that we believe that the number
Speaker 1: of whole human genomes sequenced, which was two point four
Speaker 1: million last year, that's half of all the genomes ever
Speaker 1: sequenced in the world ever that happened just last year.
Speaker 1: We think that's going to a hundred million in five years.
Speaker 1: Uh and we're and we think it's going ultimately into billions.
Speaker 1: And it's because costs are collapsing here. And we will
Speaker 1: get our genome sequenced every every every year, every other
Speaker 1: year to figure out what's mutating in our bodies so
Speaker 1: we can catch cancer in stage one and then we
Speaker 1: can edit it out with gene editing. So that's one
Speaker 1: huge platform that's an e t F A r KG right,
Speaker 1: the genomic revolution on that one that does and it's
Speaker 1: unusual for US to have a fund that looks like
Speaker 1: a healthcare sector fund, but it is a slice of healthcare.
Speaker 1: It is futuristic healthcare if you look at it. Uh,
Speaker 1: it includes DNA sequencing, molecular diagnostic testing companies, cart technology companies,
Speaker 1: so with immunotherapy, crisper, gene editing, other kinds of gene therapy.
Speaker 1: So again, our funds are very forward looking. You'll find
Speaker 1: many sector funds are where they are because of what
Speaker 1: has happened historically. That's true of any index. Our funds
Speaker 1: tend to be very active relative to you know, their counterparts,
Speaker 1: if there are any in the market, because most counterparts,
Speaker 1: even if they call themselves innovation, are based on some index.
Speaker 1: That's the screen. Our screen is not an index. Our
Speaker 1: screen is our research. So very different. So DNA sequencing, UH,
Speaker 1: robotics with collaborative robots, the cost or collapsing here, energy storage,
Speaker 1: so electric vehicles, UH, elon musk leading the charge, so
Speaker 1: to speak. Artificial intelligence is really part of the next
Speaker 1: generation Internet. It's it's going to turbocharge the Internet, the
Speaker 1: cloud if you'd like. UH, and it's it's ready for
Speaker 1: prime time because uh, we've pulled human programmers largely out
Speaker 1: of the equation, and then finally blockchain technology, which is
Speaker 1: also part of the next generation Internet. Yeah, and I
Speaker 1: find this really kind of fascinating because when you look
Speaker 1: at what's happened since Kathy set up her funds back
Speaker 1: in you've really seen a proliferation of these types of
Speaker 1: strategies coming through in the E T F industry, But
Speaker 1: most of these are passive. If you look at kind
Speaker 1: of the proportion of passive to active around the numbers,
Speaker 1: and I think it's only eleven percent that are actively managed,
Speaker 1: and significant number of those are run by Kathy. So
Speaker 1: it's quite interesting to me that this is a very
Speaker 1: different approach because inherently it makes quite a lot of
Speaker 1: sense when you're thinking about sort of you know, futuristic
Speaker 1: looking industries to try and think about something where you're
Speaker 1: not necessarily pinned down to indexes that that can only
Speaker 1: really rebalance on a twice annual or annual kind of basis.
Speaker 1: So I find that kind of like, sort of very
Speaker 1: interesting about this this approach that a lot of our
Speaker 1: people have kind of followed it, but they've chosen to
Speaker 1: go to the passive, whereas Kathy has has has the
Speaker 1: active kind of DNA as well. Thank you. Can I
Speaker 1: just add one thing to that, and thank you Rachel
Speaker 1: for saying that. Um. One of the other things. The
Speaker 1: other benefits of active management is we trade around our
Speaker 1: names aggressively because disruptive innovation is inherently controversial and I
Speaker 1: we just lie there and wait. We know that Tesla
Speaker 1: when it was in the three eighties, we knew it
Speaker 1: was going to come down. We sold up there. Even
Speaker 1: though our price target is as high as it is.
Speaker 1: We knew we were going to get opportunities. It never
Speaker 1: left the top position in the fund, but instead of
Speaker 1: being at twelve or thirteen percent, we took it down
Speaker 1: to eight percent. If you just isolate the trading activity
Speaker 1: in Tesla alone, and we do this with all of
Speaker 1: our names last year, and we had a number of
Speaker 1: round trips. If you just isolate that trading alone, the
Speaker 1: stock itself off was up six and a half percent
Speaker 1: last year, but the our trading activity alone added another
Speaker 1: hundred and seventy five basis points to our performance last year,
Speaker 1: just that one stock, and we do that with every
Speaker 1: stock now. It is true Tesla is probably one of
Speaker 1: the most volatile and most controversial, so we have a
Speaker 1: lot of opportunities, but that is one of the benefits
Speaker 1: of active management. And I think before you though, when
Speaker 1: when I met you, I was I met you at
Speaker 1: a conference somewhere downtown, like the Millennial Hotel or something,
Speaker 1: and when you talked about these, I said, I don't
Speaker 1: think it's going to go that well. I said, you know,
Speaker 1: I don't know why she doesn't do him passive, because
Speaker 1: that's just what everybody wants right now. The fact that
Speaker 1: you made him active at the time, I thought, man,
Speaker 1: that that could sink these just because people want stuff
Speaker 1: cheap and passive. Yours are a little on the price
Speaker 1: your side and they're active. Um, but you've defied the
Speaker 1: odds active equity mutual funds have seen. I don't know
Speaker 1: what the number is, it's probably close to a trillion
Speaker 1: dollars and outflows since you launched. You've taken in two
Speaker 1: point five billion in the past three years, so you've
Speaker 1: completely bucked the trend. Talk about that why you had
Speaker 1: to go active. Was it just because you couldn't be
Speaker 1: locked into anything, You had to have that freedom. Yes,
Speaker 1: So the number you quoted there are e t f s,
Speaker 1: they're they're close to three billion now, but we we
Speaker 1: had to do something else. And I'll explain why we
Speaker 1: had to pivot, because I funded the company for the
Speaker 1: first three years and what you said that Eric was
Speaker 1: actually happening. I the network I had in the financial community.
Speaker 1: And remember I've been around a long time in this
Speaker 1: business and I do have a very wonderful network. My
Speaker 1: network was nowhere to be found on the passive. On
Speaker 1: the passive side, on the e t F side, I
Speaker 1: was shocked that most people I was talking to did
Speaker 1: not understand what active management was. They just didn't understand it.
Speaker 1: And so we had to We had to start um
Speaker 1: using other rappers because while we were being asked, would
Speaker 1: we do it? And that's what you do as a
Speaker 1: small business. We are now up to nine and a
Speaker 1: half billion dollars all active, but any rapper. We've got
Speaker 1: two distributors. You know. We subadvised for mutual funds throughout Asia,
Speaker 1: pack UH and e t f s of course here
Speaker 1: mostly in the United States, but interestingly, sovereign wealth funds
Speaker 1: in other parts other parts of the world have been
Speaker 1: buying some of our et f s because they don't
Speaker 1: have to go through all of the due diligence that
Speaker 1: you know, a traditional separately managed account would go through.
Speaker 1: We also have separately managed accounts. I went to the
Speaker 1: Morning Star conference in October of thirteen, and this was
Speaker 1: right before we started the company, and on stage was
Speaker 1: Eugene Fama being interviewed a fireside chat, and he said
Speaker 1: at that conference, he said, active management is dead, it
Speaker 1: is disappearing. And you know this was there might have
Speaker 1: been two thousand people in the room, and everybody was cheering,
Speaker 1: and and I looked around. I really understood at that moment,
Speaker 1: Oh my goodness, I'm the only active manager here. This
Speaker 1: is crazy. I would have thought, you know, doesn't everybody
Speaker 1: want to know about this wrapper, which is so good
Speaker 1: and so interesting. Um, So we went to active when
Speaker 1: it comes to innovation, it's the only way to manage money. Um.
Speaker 1: To me, the idea of passive and innovation, well, that's
Speaker 1: an oxymoron, right. And the screen for our research is
Speaker 1: the screen for our portfolios is our research. We are
Speaker 1: constructing autonomous vehicles. What is it? What goes into it?
Speaker 1: We're doing first principles research and we're using something called
Speaker 1: rights law in order to understand the learning curves which
Speaker 1: caused cost declines in these new technologies, and then we
Speaker 1: use price elasticity of demands, so there's a lot of
Speaker 1: top down you know, how big is this market going
Speaker 1: to be? If you don't have perspective when you're investing
Speaker 1: in innovation, you don't have the courage of conviction. Um,
Speaker 1: now you came out and you just basically hit a
Speaker 1: home run right out of the gate. Your fund went
Speaker 1: up like two or three times. The SMP five undered
Speaker 1: I called the shiny object moment. I'm sure you've got
Speaker 1: a lot of people just giving you looks because of that.
Speaker 1: How much of the flows that have come in do
Speaker 1: you think are just people who just saw this and
Speaker 1: crazy performance and bought in versus you know, talk to
Speaker 1: you believe in Cathy and are there for the long haul? Uh.
Speaker 1: In the beginning, it's interesting Rachel mentioned bitcoin. Most people
Speaker 1: dismissed us because it was bitcoin. So in in in
Speaker 1: eighty seven alone we were up eighty seven and a
Speaker 1: half percent. But if you had put if you had
Speaker 1: just left our bitcoin in cash, which we wouldn't do
Speaker 1: of course, so a conservative way of calculating non bit
Speaker 1: poorn bitcoin performance, we would have been up a low
Speaker 1: sixties percent, so I was more than double the market.
Speaker 1: Uh No. In the beginning, we got oh, they're using
Speaker 1: bitcoin as a as a gimmick for from from from
Speaker 1: some journalists in the et F space that I respect
Speaker 1: and like not a lot. I thought, Wow, they didn't
Speaker 1: read our white papers. We've done so much work on this,
Speaker 1: so there was an automatic dismissal as this is a gimmick.
Speaker 1: And we also have had that. We've had that a
Speaker 1: little bit with Tesla as well. You know, you're just
Speaker 1: you just want to get out there, and and and
Speaker 1: and if they only saw the research that we put
Speaker 1: into this. So we've had a great social media and
Speaker 1: marketing presence and this has been building slowly. But I
Speaker 1: think the main thing has been slowly it's demand pull.
Speaker 1: The wirehouses were slow to put us on where we're
Speaker 1: on a few now, we have a few more to go.
Speaker 1: But it's been demand pulled because investors, whether they see
Speaker 1: us on social media or on other media, they know
Speaker 1: we are right. They know because they feel technology changing
Speaker 1: their own line lives so quickly, or their children's lives
Speaker 1: or their grandchildren's lives, and they know they're missing it
Speaker 1: in their portfolios. They they do not have a piece
Speaker 1: of the action, and they want to you know, they
Speaker 1: would like to ride, whether it's five of their portfolio.
Speaker 1: The other thing that I think we've done pretty well
Speaker 1: is helped people understand that traditional indexes are filling up
Speaker 1: with value traps because of this innovation, So why not
Speaker 1: use us as a hedge. Even if you're completely passive,
Speaker 1: you're you're you have value traps building up in your
Speaker 1: value portfolios and in your growth portfolios. That's how fast
Speaker 1: innovation is evolving. Who would you say, are are you
Speaker 1: bias for for the E T s? Is it primarily
Speaker 1: an institutional marketplace, or are you getting your funds into
Speaker 1: financial advisors or even direct to retail? Uh it's financial
Speaker 1: advisors direct to retail. For sure. We're seeing increasing institutional interest,
Speaker 1: but that's more funds outside the rest of the world.
Speaker 1: Who will you know, get a taste of innovation through
Speaker 1: our E t f s and then perhaps invite us
Speaker 1: into pitch for an s m A a separately managed account. Uh.
Speaker 1: But what happened in March of two thousand sixteen, UH
Speaker 1: is we got our first institutional account, a large state
Speaker 1: employee retirement system in the Midwest who was my client
Speaker 1: at my former firm, and uh, they found us. We
Speaker 1: had tried to find them, but their gatekeepers wouldn't let
Speaker 1: us in. And then they had a young analyst who
Speaker 1: was charged with finding out what's going on in innovation.
Speaker 1: He contacted us and after five months we realized, oh,
Speaker 1: I know your boss, I know you know. And so anyway,
Speaker 1: they gave us two hundred million dollars when we only
Speaker 1: had twenty million dollars. And so in March nineteen we
Speaker 1: have our three year record. Now we're making a big
Speaker 1: institutional push. And so whether again we're rapper agnostic. Now,
Speaker 1: if an institution wants to use et F s, fantastic,
Speaker 1: If separately managed accounts, whatever the reason, fine, uh sub
Speaker 1: advising for mutual funds. So I think like have these experience,
Speaker 1: like illustrate something that's very common for new issues in
Speaker 1: the et F space as well. Though, it's just it's
Speaker 1: very hard to get that institutional money, which is obviously
Speaker 1: where the big bucks lie when you are small, and
Speaker 1: you have to kind of like have the longevity to
Speaker 1: get past that three year track record before you can
Speaker 1: really pitch the decision makers that have those millions to spend.
Speaker 1: Yes and it's been very interesting. Yeah, performance has been
Speaker 1: very helpful. Thanks be to God. I always add that,
Speaker 1: but I I will say, uh, you know, we for
Speaker 1: a US based manager, more than half of our assets
Speaker 1: are in the rest of the world. I think the
Speaker 1: most important strategic decisions we made were to outsource distribution.
Speaker 1: So Nico Asset Management our partner in the rest of
Speaker 1: the world. They are scaling us through quickly because Asia
Speaker 1: is hungry for innovation, particularly the kind of innovation we're researching.
Speaker 1: They're hungry for our research. And uh, of course Resolute
Speaker 1: Investment Managers in the United States is scaling us here.
Speaker 1: So Kathy, one of the things that I'm really interested
Speaker 1: in is this idea of your research. So walk us
Speaker 1: through how you go about finding companies and then from
Speaker 1: identifying them to allocating to them. Sure, well, it starts
Speaker 1: with our research. So since I started on the autonomous
Speaker 1: vehicle example, I'll keep going there. Uh. We charged our
Speaker 1: analysts to figure out what was going to make an
Speaker 1: autonomous vehicle work. And so our director of research, Brett
Speaker 1: uh Intin is an M I T engineer by by training,
Speaker 1: and he needs to break everything down and then build
Speaker 1: it up and and has really guided our analysts to
Speaker 1: do the same. So to give you an example, uh,
Speaker 1: Tasha Kini comes into our brainstorming on a Friday. She's
Speaker 1: been working on the autonomous model and and and our brainstorm.
Speaker 1: You're welcome to it anytime you'd like to join. It's
Speaker 1: from one to three and it's research driven. Our analysts
Speaker 1: come in with the most interesting or controversial, provocative ideas
Speaker 1: they've heard or the biggest breakthrough they've had in their
Speaker 1: own research. This week, Tasha comes in and said, it
Speaker 1: appears that the brains of an autonomous vehicle are going
Speaker 1: to be GPUs. And I looked at her and I said,
Speaker 1: this was two thousand fourteen. I said what I said
Speaker 1: the Nvidia that that stock is being thrown out because
Speaker 1: it's a PC proxy. M PCs are dropping at a
Speaker 1: double digit rate. It was selling it, I think eleven
Speaker 1: times earnings. And then James piped it. He was at
Speaker 1: a video for nine years and he said, okay, well
Speaker 1: that makes a lot of sense because autonomous vehicles are
Speaker 1: artificial intelligence projects and GPUs have of of all of
Speaker 1: the doer, of all the training and artificial intelligence. And
Speaker 1: I said, James, nobody knows that no analyst out there
Speaker 1: knows that I've been around a while. I know what
Speaker 1: people think in video is. And so in video, which
Speaker 1: was already in our portfolios for gaming, it was just
Speaker 1: a small position, that was a one percent position. It
Speaker 1: started moving up pretty and and you know, the trading
Speaker 1: range that Tesla has been in for these last four
Speaker 1: years in video was in the same kind of trading range.
Speaker 1: While while computer PCs shipments were dropping. Every time it
Speaker 1: dropped to the low end sort of that fourteen dollars,
Speaker 1: we would pick it up, and when it got to
Speaker 1: twenty dollars, we would sell some and then fourteen and twenty.
Speaker 1: And what happens over time if you get a long
Speaker 1: enough base, which I believe we have now in Tesla
Speaker 1: and certainly did back then in in Vidia. UH, at
Speaker 1: one point it's going to break out of that base
Speaker 1: because a number of research analysts and then portfolio managers decide, hey,
Speaker 1: we need some exposure to artificial intelligence and autonomous vehicles.
Speaker 1: This became the go to. So it went from fourteen
Speaker 1: dollars in two thousand fifteen UH to three hundred dollars
Speaker 1: in two thousand eighteen. This is venture like in terms
Speaker 1: of its returns, and we consider ourselves the closest you'll
Speaker 1: find to a venture capital firm in the public equity market.
Speaker 1: So some fourteen to three hundred, uh, it went from
Speaker 1: one percent of our portfolios. While it was in that
Speaker 1: fourteen to twenty range, we got it into it would
Speaker 1: be in the top five, so that would have been
Speaker 1: in the five to ten percent range, depending on the portfolio.
Speaker 1: And as it got to that three hundred level, and
Speaker 1: it no longer met our minimum hurdle rate of return,
Speaker 1: which is a fifteen percent annualized rate of return over
Speaker 1: five years, so that means of doubling every five years.
Speaker 1: If we can't say to ourselves that this stock is
Speaker 1: going to do that in the next five years, then
Speaker 1: we say, even if it's a core position, we will
Speaker 1: take it down to the bottom five. So it started
Speaker 1: in the bottom five, got to the top five in
Speaker 1: two thousand seventeen, and then by the time October rolled
Speaker 1: around last year, when it was at three, was back
Speaker 1: in the bottom five. And then as you know, it
Speaker 1: dropped more than almost in one quarter and we and
Speaker 1: we put it back into the top five because it
Speaker 1: is going to be one of the biggest autonomous vehicle plays,
Speaker 1: so so much of that was just identifying sort of
Speaker 1: a special ingredient that was gonna you know that you
Speaker 1: guys are just gonna like double down on. And I
Speaker 1: guess what I'm wondering is like, you know that that
Speaker 1: makes sense for driving, and it makes sense for AI
Speaker 1: and clearly you know when you think about these five
Speaker 1: areas that you guys are combing through looking for some
Speaker 1: of those things. But the other thing that you brought
Speaker 1: up there was the fact that you're effectively a VC fund, right,
Speaker 1: And so I'm interested in also the fact that, like
Speaker 1: sometimes you might identify something that doesn't come to fruition.
Speaker 1: How often has that happened? Uh? The reason I use
Speaker 1: we are the closest you'll find to a VC fund
Speaker 1: is the time. It's because of our time horizon is
Speaker 1: five years. What what happens before that? Though? The reason
Speaker 1: we have so much of a better um shot at
Speaker 1: a big winner is there's a vetting process that our
Speaker 1: stocks have gone through. It's called the I p O.
Speaker 1: You've got regulators sell side by side bankers. We're not
Speaker 1: going to run into a THEOMS. That's for sure that
Speaker 1: these are products, they really exist. Uh, So I don't
Speaker 1: think we're venture firm in terms of any failures in
Speaker 1: the portfolio, but with time and what's great about having
Speaker 1: a five year time horizon and building autonomous vehicles from
Speaker 1: the bottom up electric vehicles, uh, you know, really understanding
Speaker 1: battery technology G is we can see because of our
Speaker 1: time horizon, we can see where the inefficiencies are in
Speaker 1: the market. One of the biggest is Tesla today. You
Speaker 1: know that we're associated with it UM and it's because
Speaker 1: we've done more work on batteries, artificial intelligence, and data
Speaker 1: big data collection than anyone out there when it when
Speaker 1: it comes to Tesla and and Tesla's competitors, uh, and
Speaker 1: so our confidence is very high. We can't understand why
Speaker 1: people can't see this. The reason they can't see it
Speaker 1: is because they haven't done that research. And the reason
Speaker 1: they haven't done that research is because auto analysts are
Speaker 1: following this, not robotics analysts, not artificial intelligence analysts, uh,
Speaker 1: not big data analysts. So you need a combination, and
Speaker 1: our analysts are our combination. UM. And let me tap
Speaker 1: into Tesla because to me, Tesla hits at many attributes
Speaker 1: that to me set you apart from a typical active
Speaker 1: equity manager for of all, you have bold calls saying
Speaker 1: four thousand is your price target in five years. Um,
Speaker 1: that's bold. Gunlock does the same thing. He's very good
Speaker 1: at bold calls. You know, you gotta breakthrough. A lot
Speaker 1: of people are a lot of competition for attention conviction.
Speaker 1: You bought Tesla even this year when it was down,
Speaker 1: you kept buying transparency, the transparency you show when you
Speaker 1: buy Tesla. You actually put your trades on the site
Speaker 1: every day. You can see the holdings every day. And
Speaker 1: then obviously, you know, the crowdsourcing, the research you put
Speaker 1: out what you think of Tesla. I think you had
Speaker 1: an error somewhere where someone pointed out that actually you
Speaker 1: got fixed. But either way, you're putting it out there.
Speaker 1: You're getting feedback instantly. And then finally, the strong social
Speaker 1: media presence, which you just said. Social media is good
Speaker 1: for you, but you take a lot of crap. I mean,
Speaker 1: I've looked we actually ransom analysis. You're you get more
Speaker 1: tweets than like Rock pretty much, I mean, and a
Speaker 1: lot of them are negative though, mostly because Tesla. You
Speaker 1: just piss people off with the Tesla thing. But anyway,
Speaker 1: an active equity manager at like a t roller leg Mason.
Speaker 1: I just don't see them doing any of those things,
Speaker 1: and it seems like it might be holding them back.
Speaker 1: Maybe they don't have to go all the way you've gone,
Speaker 1: But what do you think is going on there? Why
Speaker 1: do you do it? And yet you don't see many
Speaker 1: stock pickers doing the same. Well a couple of reasons.
Speaker 1: Uh One, their compliance departments will not allow it. Now,
Speaker 1: I think this is a huge competitive advantage for us.
Speaker 1: We are the only one public managers really out there,
Speaker 1: uh that are willing to share our research and talk
Speaker 1: about we can't hype that we have dues and don't
Speaker 1: believe me are chief compliance officer is an attorney who
Speaker 1: spent four years at the SEC when they were evolving
Speaker 1: standards and guidelines for social media and marketing. So he
Speaker 1: is maniacal about making sure we do not say something
Speaker 1: that puts us on the wrong side of regulation. But
Speaker 1: in terms of sharing our research, what has happened I
Speaker 1: believe we're the first sharing economy company in the asset
Speaker 1: management space when it comes to research. What has happened
Speaker 1: now is we're living in the communities were researching because uh,
Speaker 1: we have people who are who are connecting with us
Speaker 1: saying hey, that's our world and yes, you're getting this right,
Speaker 1: or you're not getting that right, and maybe you should
Speaker 1: think about this. Uh. So we are getting insights from
Speaker 1: the the innovators were researching that others cannot get because
Speaker 1: they're not living in those communities and they're not sharing
Speaker 1: what they're doing. I think it is a huge competitive
Speaker 1: advantage and um I think compliance departments will have to
Speaker 1: let up because I do believe Twitter and other social
Speaker 1: networks are going to be very important knowledge networks. And
Speaker 1: this is almost in like contrast to the other kind
Speaker 1: of big sort of theme that we're seeing uh this year,
Speaker 1: which is sort of about active managers looking to get
Speaker 1: in two et f s but not disclose their holdings.
Speaker 1: You know, obviously Presidian kind of coming through and getting
Speaker 1: that approval from the SEC to start these funds. The
Speaker 1: whole idea there is to help active managers into the
Speaker 1: space that previously were put off because they didn't want
Speaker 1: to share that secret source that they feel kind of
Speaker 1: sets them apart. So it's kind of really interesting that
Speaker 1: on the one hand, you have, you know, these funds
Speaker 1: that the Cathy's kind of brought out that have been
Speaker 1: able to deliver these returns and do rely on having
Speaker 1: this kind of crowdsource information. And yet you also have
Speaker 1: at the same time active managers that are trying to
Speaker 1: preserve that secret source and see that as very much
Speaker 1: their way that they can get equivalent returns and deliver
Speaker 1: for investors. And do you think active managers out there
Speaker 1: there's you know, there's six trillion inactive equity funds that
Speaker 1: are eyeing this Presidium model. It's a lot of money.
Speaker 1: Do you think they over estimate the front running issue
Speaker 1: or and or overestimate people even caring about their picks.
Speaker 1: I can tell when we are being played with, you know,
Speaker 1: by high frequency traders or so forth. But that's easy
Speaker 1: to deal with it. As an active manager. You just
Speaker 1: put a limit you don't buy if someone's playing this is.
Speaker 1: This has happened to me my entire career. You know,
Speaker 1: when I used to put give models to the wire
Speaker 1: houses for sam as someone out there knew what we
Speaker 1: were doing. This is. That's why I think it's overstated.
Speaker 1: They all put their portfolios out there every day to
Speaker 1: these wire houses to populate their separately managed account So
Speaker 1: I've never understood that really, uh, And they have control
Speaker 1: limit orders you can do that, so I've never bought that.
Speaker 1: I will say it's easier for us because we're liquidity providers.
Speaker 1: You'll notice what I said, We're quite contrarian in our trading.
Speaker 1: So when when we've got hedge funds dumping all over
Speaker 1: our some of our stocks, we're gonna be buyers that
Speaker 1: if there are high conviction stocks. Same on the other side, Uh,
Speaker 1: we we catch a lot of flaks sometimes when we
Speaker 1: sell as well, because they say, wait a minute, your
Speaker 1: price target is this, and the ideas there's going to
Speaker 1: be controversy around these ideas. You've got the old guard
Speaker 1: and the new guard, and you've got a lot of fear,
Speaker 1: uncertainty and doubt, and you've got new technologies that are
Speaker 1: going to blow away some of the old guards. So
Speaker 1: so there's a big tug of war there, and we
Speaker 1: can play that as a liquidity providers. Others are more
Speaker 1: momentum oriented. They're going to be stopped out if people
Speaker 1: start chasing them. But I just think it's great that active,
Speaker 1: you know, allocating capital to its highest and best use,
Speaker 1: meaning looking to the future, trying to make the world
Speaker 1: a better place. I think active is the next big
Speaker 1: way for e t F S. So you know, personally
Speaker 1: I prefer transparent. And you know why I prefer transparent,
Speaker 1: It is because our clients prefer transparent. They want to
Speaker 1: be a part of this process, they want to understand.
Speaker 1: And you know, we also on Friday's put out any
Speaker 1: stock that's moved up or down more than fifteen percent
Speaker 1: in any day, we put it out there and say, hey,
Speaker 1: this happened. We want you to know why, and you
Speaker 1: know how we feel about it. So I think oh
Speaker 1: eight oh nine caused so much distrust in the financial
Speaker 1: services industry that transparency became paramount. The one thing that
Speaker 1: these active managers who are planning to come over may
Speaker 1: the six trillion. The problem with many of them is
Speaker 1: they are benchmarks sensitive, and I don't believe there's nearly
Speaker 1: as much a market for that as there once was.
Speaker 1: When it comes to active, you've got the whole et
Speaker 1: F industry is fully fulfilling a lot more needs UH
Speaker 1: than than it did in the past. And is you know,
Speaker 1: stealing the march from active if if they're not if
Speaker 1: they're not bold and is speaking of that boldness now?
Speaker 1: I put out a tweet about you're known for tesla
Speaker 1: but some of your other stock picks have actually done
Speaker 1: well and offset some of the Tesla losses this year.
Speaker 1: You're up at a r k K since launching, and
Speaker 1: SMP is up. But that's a lot of beta names
Speaker 1: like this could reverse. Like let's say the fed Raises has,
Speaker 1: you know, like a two thous eight but on steroids.
Speaker 1: Somebody replied to me and said, won't end well, like
Speaker 1: we've seen this before the Janice twenty. What do you
Speaker 1: say to those skeptics that this high active share, high octane,
Speaker 1: high beta methodology has a downside. Well, I that is
Speaker 1: why I like to trade these names. We like to
Speaker 1: again lie in wait. But when it comes to disruptive innovation,
Speaker 1: if we get into a really turbulent period oh eight
Speaker 1: o nine perfect example, because our names are not big
Speaker 1: names in the indices, they are going to be hurt
Speaker 1: disproportionately in the beginning of that move down. But oh
Speaker 1: eight O nine was very instructive. Now I was at
Speaker 1: another firm at the time, but we started out and
Speaker 1: and we were had moved much more towards disruptive innovation
Speaker 1: technologically enabled. We started out performing November eight and in
Speaker 1: the first quarter oh nine, when the market was down
Speaker 1: ten percent. We were flat. Why it's because cooler heads prevailed.
Speaker 1: Analysts and portfolio managers started looking at the fundamentals, and
Speaker 1: they learned that Amazon's worst quarter worst remember Amazon was
Speaker 1: destroyed back then. Amazon's worst quarter as retail sales were
Speaker 1: down ten Amazon's worst quarter was up four Salesforce dot
Speaker 1: COM's worst quarter when tech spending was down up revenue growth,
Speaker 1: but even though it had been destroyed. So they started
Speaker 1: they started looking at the fundamentals. Our companies gain traction
Speaker 1: because they're better, cheaper, faster, more productive and gained tremendous
Speaker 1: share during downturns. So when we first met, we were
Speaker 1: talking about bitcoin, and I know that you kind of
Speaker 1: sold down Bitcoin and kind of reduced your positions in
Speaker 1: that as we came off those those incredibly meteorit chives. Obviously,
Speaker 1: bitcoin's back in the news again. It's been going back
Speaker 1: up again. Have you guys been increasing your holdings? Where
Speaker 1: do you see bitcoin at the moment? This is very important,
Speaker 1: UH Forum investors to understand what we learned in two
Speaker 1: thousands seventeen. And we had the wild Rider right and
Speaker 1: we cut it at a great time, But we almost
Speaker 1: had to because when it started for King, we learned
Speaker 1: that we had unqualified income, and when it hit ten
Speaker 1: percent of our funds, we had to sell it below
Speaker 1: that that created unqualified income. Only ten percent of gross
Speaker 1: profits can be in the form of unqualified income. The
Speaker 1: rest will be confiscated by the I r S. So
Speaker 1: we have taken it. This is simply because of we're
Speaker 1: a registered investment company and these are forty ACT funds,
Speaker 1: so we've taken it out of a r k K.
Speaker 1: We've minimized it in a rk W. It's about a
Speaker 1: two percent position in our discretionary accounts separately managed accounts.
Speaker 1: It's our number two position at an eight percent weight.
Speaker 1: Our conviction and bitcoin has only increased in the last
Speaker 1: two years. We think it is. It is being battled
Speaker 1: did as the global digital currency, and there will only
Speaker 1: be a few cryptocurrencies at the end of the day. Okay, So,
Speaker 1: so another but bold call. But I want you to
Speaker 1: be bold and look yourself in the mirror. You're We've
Speaker 1: talked a lot about the future. Five years from now, Cathy,
Speaker 1: what what does Cathy look like? What does our look like? Well,
Speaker 1: I I love the way our research ecosystem is evolving
Speaker 1: to embrace universities and venture capitalists are coming in because
Speaker 1: they know we're doing the first principles research that is
Speaker 1: not done enough out there. So I really want our
Speaker 1: research ecode system to flourish, partly because one of our
Speaker 1: missions and values is to educate and educate our investor
Speaker 1: base and really increase the efficiencies in uh an inefficiently
Speaker 1: price market right now, so so that, of course we'd
Speaker 1: love to scale globally. We're doing that right now. As
Speaker 1: I mentioned, more than half of our assets are outside
Speaker 1: the United States. UM, we'd like to do more in
Speaker 1: terms of education. UM, you know our capacity. We get
Speaker 1: asked about capacity a lot, and UH people say, well,
Speaker 1: this is niche capacity, you know. It's if we are
Speaker 1: right and these innovation platforms are are ready for prime
Speaker 1: time and are scaling exponentially, our capacities should be able
Speaker 1: to scale exponentially as well, so we do not have
Speaker 1: the capacity problem that a lot of other managers might have.
Speaker 1: And then just on a personal basis in terms of
Speaker 1: this innovation, I have found it so interesting since starting
Speaker 1: the firm in the early days, I had a lot
Speaker 1: of self selection women asking you know, to join. Now
Speaker 1: that we've been this successful. I'm getting fewer women much
Speaker 1: more men. And so one of my objectives, and I've
Speaker 1: already started this in my high school. I went to
Speaker 1: an all girl high school. Is I've started at an
Speaker 1: innovation center in my father's honor. He's the radar expert
Speaker 1: and my inspiration. Uh. And I want to inspire these
Speaker 1: girls with a curriculum around disruptive innovation so that they
Speaker 1: are inspired at a young enough age to really just
Speaker 1: want it and want to run hard with it. Uh.
Speaker 1: So that's just on a little personal note. But I
Speaker 1: think I think you know, if you compare what's happening today,
Speaker 1: uh with any other time in history, First you have
Speaker 1: to go back to the late eighteen hundreds, early nine hundreds, uh, telephone, electricity,
Speaker 1: internal combustion engine. If you look at the amount of
Speaker 1: innovation that's going to take place today, we have a
Speaker 1: paper on this on our site. UH. And if you
Speaker 1: use a Richter scale for your to try and understand
Speaker 1: how different this is going to be, you would measure
Speaker 1: the fifty years ended at uh maybe a six or
Speaker 1: six and a half. But in terms of what's about
Speaker 1: to happen, I think it's going to measure an eight
Speaker 1: or nine. Now, you never want to be in an
Speaker 1: earthquake like that. You want to you don't. In other words,
Speaker 1: you do not want to be disrupted. You want to
Speaker 1: embrace this change. And uh, you know this is not
Speaker 1: a linear you know six to eight or nine is
Speaker 1: not linear. This is an exponential change. So I really
Speaker 1: feel every portfolio needs exposure to it. And you know,
Speaker 1: we'd like we'd like to be a part of that. Okay,
Speaker 1: there you go, Cathy, Rachel, thanks for joining us a trillion,
Speaker 1: Thank you for having me, Thanks for having a fun,
Speaker 1: Thanks for listening to Trillions until next time. You can
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcast, Spotify,
Speaker 1: and wherever else you'd like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show.
Speaker 1: He's at Eric Fautunus. You can find Kathy at Kathy
Speaker 1: d Wood that's Kathy with the C and an i
Speaker 1: E as well as at ARC invest and Rachel is
Speaker 1: at Rachel Evans Underscore and Why. Trillions is produced by
Speaker 1: Magnus Hendrickson. Francesca Levy is the head of Bloomberg Podcast.
Speaker 1: Bye