WEBVTT - Patrick O'Shaughnessy on the Next Big Thing in Passive Investing 0:00:10.840 --> 0:00:14.280 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:14.360 --> 0:00:19.560 I'm Tracy Allaway and I'm Joey. Isn't all so, Joe. 0:00:19.680 --> 0:00:23.840 It's been a while since we've talked about passive investing, 0:00:24.120 --> 0:00:27.320 and I can't decide if that's just because um, so 0:00:27.400 --> 0:00:30.280 much else has been going on in the world, including 0:00:30.320 --> 0:00:36.559 a global pandemic, or if it's because passive investing itself 0:00:36.800 --> 0:00:40.960 seems to have gotten a little boring, like it doesn't 0:00:41.000 --> 0:00:44.480 feel like there's that much happening in the space. Well, 0:00:44.560 --> 0:00:47.360 I know I've said it before, and I don't remember 0:00:47.360 --> 0:00:48.879 the last thing we talked about it, but I know 0:00:48.920 --> 0:00:51.880 I've said it before that in the post Great Financial 0:00:51.920 --> 0:00:55.280 Crisis period, it felt like there was just this overwhelming 0:00:55.360 --> 0:00:58.360 message and there's like through the media and marketing and 0:00:58.400 --> 0:01:02.480 academic research, it's like just go passive, just go you know, 0:01:02.560 --> 0:01:06.240 index whatever, forget about your investments. And it really feels 0:01:06.240 --> 0:01:09.480 like in the last couple of years, even before the pandemic, 0:01:09.480 --> 0:01:12.399 but now especially since the pandemic, it's like there's been 0:01:12.480 --> 0:01:16.640 the like revenge of active management and individual stock selection 0:01:16.680 --> 0:01:19.000 and robin hood and crypto and all that, and it's 0:01:19.040 --> 0:01:23.600 like this repressed desire to trade and invest in individual names. 0:01:23.600 --> 0:01:25.880 It just come like raging back. So I guess that 0:01:26.040 --> 0:01:27.759 sort of asked the question. It's like, okay, well then 0:01:27.800 --> 0:01:31.200 like where does where does the passive fit in? Now? Yeah, totally. 0:01:31.240 --> 0:01:33.120 And the other thing I've been thinking about, just on 0:01:33.160 --> 0:01:37.600 that point, about the message about investing in passive like 0:01:37.680 --> 0:01:39.800 when you start to break it down, this idea of 0:01:40.000 --> 0:01:43.560 just pour all your money into an SMP E t 0:01:43.720 --> 0:01:46.880 F like spy, you know, something like that. If you 0:01:46.959 --> 0:01:50.920 think about it, that's basically telling you to invest your 0:01:50.920 --> 0:01:55.200 money in a technology, like a fun technology that can 0:01:55.240 --> 0:01:59.560 trace its origins back to the early And it's kind 0:01:59.560 --> 0:02:02.720 of crazy with all the technological advances that we've seen 0:02:02.760 --> 0:02:07.240 since then, that the biggest um or the most prominent 0:02:07.280 --> 0:02:11.800 advice is to just dump everything in an E t F. Yeah. 0:02:11.840 --> 0:02:14.799 I like your characterizatione that as a technology, and this 0:02:14.880 --> 0:02:17.120 is something that I think about a lot. Like, Okay, 0:02:17.160 --> 0:02:22.200 we call say index investing passive investing, and it's pretty passive. 0:02:22.720 --> 0:02:25.560 But prior to the advent of the index fund and 0:02:25.639 --> 0:02:28.000 especially like E t F, it was not like a 0:02:28.040 --> 0:02:31.240 trivial thing to do. So the academic research might say, 0:02:31.360 --> 0:02:33.560 by the SNP or by some big basket and forget 0:02:33.600 --> 0:02:37.040 about it. But prior to like some easy way to 0:02:37.160 --> 0:02:39.440 just sort of automatic that like that was not actually 0:02:39.440 --> 0:02:42.720 like a strategy an individual could do. No individual is 0:02:42.800 --> 0:02:46.520 going to like buy all stocks in the SPI and 0:02:46.560 --> 0:02:49.359 re waste com early day and you know, so it's 0:02:49.400 --> 0:02:52.760 like there, it is kind of like a technological breakthrough 0:02:53.200 --> 0:02:56.079 that that happened that we sort of take for granted totally. 0:02:56.280 --> 0:02:58.760 So on that note, today we're going to be talking 0:02:58.800 --> 0:03:00.880 about what a lot of people are saying, is the 0:03:00.919 --> 0:03:04.880 next technological breakthrough in fund management or the next big 0:03:04.919 --> 0:03:09.359 advancement um something that is definitely not boring but does 0:03:09.480 --> 0:03:12.440 count as passive investing sort of as we'll get into 0:03:12.880 --> 0:03:16.040 we're gonna be talking about custom indexing, and there's been 0:03:16.080 --> 0:03:20.320 a lot of action and deals in that space recently, right, 0:03:20.360 --> 0:03:22.680 And of course this gets to the question of like 0:03:23.320 --> 0:03:25.680 you knows again, I think this is something you've pointed 0:03:25.720 --> 0:03:29.600 out a lot. You could buy the sp it's passive ish, 0:03:29.680 --> 0:03:32.880 but you're sort of outsourcing the indexing question or the 0:03:32.880 --> 0:03:36.080 management question to whoever you know in that case, the 0:03:36.080 --> 0:03:38.160 Committee of S and P or if you buy an 0:03:38.240 --> 0:03:41.920 MSc I index, the you're outsourcing investment decisions to mbs 0:03:41.920 --> 0:03:44.760 C I, so what is the future of like essentially 0:03:45.160 --> 0:03:49.520 designing the index exactly? So we have the best guests 0:03:49.520 --> 0:03:51.280 to talk about it, We're going to be speaking with 0:03:51.320 --> 0:03:55.840 Patrick O'Shaughnessy. He's the CEO over at A Shaughnessy Asset Management, 0:03:55.880 --> 0:04:00.000 of course, also the chairman at Colossus and general partner 0:04:00.080 --> 0:04:03.960 or n CEO at Positive Some And in addition to that, 0:04:04.080 --> 0:04:07.040 he is also the host of the invest Like the 0:04:07.080 --> 0:04:10.880 Best podcast. So a fellow podcaster, Patrick, thank you so 0:04:10.960 --> 0:04:13.520 much for coming on. I'm really delighted to be here. 0:04:13.520 --> 0:04:15.480 I love love this show, so thank you for having me. 0:04:16.560 --> 0:04:19.480 Thank you. So maybe just to begin with, we should 0:04:19.520 --> 0:04:23.200 start with the obvious question, uh, and I should mention 0:04:23.320 --> 0:04:26.880 here that your company, oh Sam, it has its own 0:04:27.040 --> 0:04:32.080 custom indexing platform called Canvas. What exactly is a custom 0:04:32.160 --> 0:04:36.880 index and what does your platform do? Sure? Thank you 0:04:36.920 --> 0:04:40.040 for having me. I love where you started the conversation 0:04:40.080 --> 0:04:43.080 around technology and innovation and that's how I think about 0:04:43.240 --> 0:04:46.640 this entire story. And custom indexing is just one point 0:04:46.880 --> 0:04:49.320 in in the timeline. And I think you raised the 0:04:49.360 --> 0:04:51.240 right ones. Which are I think of as a code? 0:04:51.240 --> 0:04:54.040 I think of code mingled funds as a technology or innovation. 0:04:54.120 --> 0:04:57.200 I think of Vanguard's mutual structure that allowed for much 0:04:57.200 --> 0:05:00.719 lower cost for investors as a great innovation in this timeline. 0:05:00.880 --> 0:05:03.279 Ditto for E t F s. I think custom indexing 0:05:03.400 --> 0:05:06.960 is just the next natural uh stop in that journey. 0:05:07.040 --> 0:05:10.159 And when I say journey, I mean better, cheaper, more 0:05:10.200 --> 0:05:15.120 convenient investing, more tailored investing for each individual investor. So 0:05:15.320 --> 0:05:17.680 in the past, it's E t f s in general 0:05:17.680 --> 0:05:19.839 and just index funds in general have been sort of 0:05:19.880 --> 0:05:21.520 like the model T You can have any color you 0:05:21.520 --> 0:05:23.919 want as long as it's black. And I think that 0:05:24.080 --> 0:05:26.359 is obviously going to change, and the reason it's going 0:05:26.400 --> 0:05:29.280 to change is because of technology. So I always like 0:05:29.360 --> 0:05:32.040 to look at what I call directional arrows of progress, 0:05:32.040 --> 0:05:34.680 the term I learned from my friend Josh Wolfe, and 0:05:34.880 --> 0:05:37.360 see where the world's going. So we already know that 0:05:37.520 --> 0:05:40.120 trading is now free thanks to Robin Hood and all 0:05:40.120 --> 0:05:42.760 the other brokerages that have followed suit. We know that 0:05:42.800 --> 0:05:45.640 the cost of operating your own separate account in at 0:05:45.640 --> 0:05:49.080 a brokerage like a Schwab or wherever is falling in 0:05:49.200 --> 0:05:51.920 cost every single year for asset managers like us that 0:05:51.920 --> 0:05:54.120 that work with those firms, and we know that in 0:05:54.160 --> 0:05:57.400 the future we're gonna have fully fractionalized shares. So the 0:05:57.640 --> 0:06:00.920 all three of those were huge impediments to owning your 0:06:00.960 --> 0:06:04.280 own basket of stocks directly, not through a fond or 0:06:04.279 --> 0:06:07.560 any t f but directly, and all those cost curves 0:06:07.640 --> 0:06:10.160 are either at zero or going towards zero, or going 0:06:10.160 --> 0:06:12.760 to be very possible. And in a world where it 0:06:12.800 --> 0:06:15.000 doesn't cost anything to trade, it costs very little to 0:06:15.040 --> 0:06:17.440 have a brokerage account and have an asset manager like 0:06:17.640 --> 0:06:20.760 us or a black Rock or a Vanguard whoever, trade 0:06:20.760 --> 0:06:23.600 on your behalf, and you can own fractional shares. What 0:06:23.760 --> 0:06:26.800 seems really obvious to me in that world is this 0:06:26.880 --> 0:06:29.480 idea of custom indexing, a term that that I'm proud 0:06:29.520 --> 0:06:32.440 that we we coined a couple of years back. And 0:06:32.800 --> 0:06:34.960 this the idea is very simple, which is that why 0:06:35.040 --> 0:06:37.919 why should everybody own the same five stocks in the 0:06:38.000 --> 0:06:40.960 SMP five hundred. Why wouldn't it be easy to adjust 0:06:41.040 --> 0:06:43.960 for little things and big things such as I don't 0:06:44.000 --> 0:06:46.520 want to own stocks with certain characteristics. For me, I 0:06:46.560 --> 0:06:49.239 work in capital markets, as you just mentioned my my CV, 0:06:49.680 --> 0:06:52.320 I don't really want to own more capital markets exposure. 0:06:52.320 --> 0:06:54.320 I've got plenty of that in my human capital in 0:06:54.360 --> 0:06:56.520 my day to day job. I don't want to own 0:06:56.520 --> 0:06:59.040 tobacco stocks. That's just a personal thing for me. It's 0:06:59.040 --> 0:07:00.600 a very small part of market cap, but I don't 0:07:00.640 --> 0:07:03.320 want them. Very easy to adjust for in something like 0:07:03.360 --> 0:07:07.359 a custom index. Perhaps the most important thing that custom 0:07:07.400 --> 0:07:10.560 and also direct indexing unlocks is the ability to do 0:07:10.600 --> 0:07:13.720 better after taxes as well. What we've learned is that 0:07:14.160 --> 0:07:17.960 everybody has a very specific and personal tax situation. No 0:07:18.000 --> 0:07:21.160 one likes paying taxes. Everyone wants a better after tax return. 0:07:21.240 --> 0:07:22.960 That's the if you ask me. That's one of the 0:07:23.000 --> 0:07:25.640 key geniuses of the index fund is that it's low turnover, 0:07:25.720 --> 0:07:28.040 so you don't have a huge tax bill when you 0:07:28.080 --> 0:07:30.960 own SPY or own Vanguards Total Market d t F 0:07:31.320 --> 0:07:33.480 or fund or something like this. What you can do 0:07:33.520 --> 0:07:35.840 when you own each of the underlying securities let's just 0:07:35.840 --> 0:07:39.160 stick with the SMP five, is you can sell positions 0:07:39.200 --> 0:07:41.120 that are at a loss and you can use that 0:07:41.200 --> 0:07:44.200 loss to offset gains elsewhere in your portfolio and actually 0:07:44.200 --> 0:07:47.040 come out ahead on an after tax basis. We call 0:07:47.120 --> 0:07:49.520 this tax loss harvesting. It's been around for a while, 0:07:49.600 --> 0:07:51.720 typically for just the very very wealthy because you need 0:07:51.800 --> 0:07:55.280 very big accounts. But again, as the costs fall, this 0:07:55.640 --> 0:07:59.360 opportunity to create losses and create better after tax returns 0:07:59.600 --> 0:08:03.679 will to you know, more mass market uh individuals as well. 0:08:03.960 --> 0:08:07.040 So custom indexing is the prospect of why would I 0:08:07.160 --> 0:08:10.280 have the same strategy as everybody else when my circumstances, 0:08:10.360 --> 0:08:13.560 my preferences are different, They're unique to me. And I 0:08:13.560 --> 0:08:17.080 think personalization is a big trend, not just in in investing, 0:08:17.080 --> 0:08:19.640 but in everywhere writing, whether it's in clothing or other 0:08:19.680 --> 0:08:22.560 areas of technology, and that that will come to investing. 0:08:22.560 --> 0:08:24.400 Two and and you know, we're proud to be at 0:08:24.440 --> 0:08:27.320 sort of the vanguard of pun intended of the custom 0:08:27.360 --> 0:08:29.920 indexing trend. So I sort of hinted at this in 0:08:29.960 --> 0:08:31.960 the beginning, and there's always this debate and you see 0:08:31.960 --> 0:08:36.480 it on Twitter elsewhere. It's like this passive investing actually exist. 0:08:37.040 --> 0:08:39.960 And by that it's like, Okay, uh, is the S 0:08:40.000 --> 0:08:42.040 and P If you buy S P Y, is that 0:08:42.120 --> 0:08:44.880 truly passive? Because Okay, that's only five stocks and there 0:08:44.880 --> 0:08:48.240 are thousands of stocks. Committee had to select them. And 0:08:48.280 --> 0:08:50.480 the way I think about this question is that it's 0:08:50.520 --> 0:08:53.000 sort of a false binary, and that there's like basically 0:08:53.040 --> 0:08:56.480 a spectrum, and that buying the SMP five or buying 0:08:56.559 --> 0:08:59.480 spy is you know, just like buying a little bit 0:08:59.520 --> 0:09:01.679 every month or never, say, more passive than some other 0:09:01.720 --> 0:09:04.280 strategy where you try to like pick twenty stocks or whatever. 0:09:04.360 --> 0:09:08.439 And it sounds like to me that with customer indexing, 0:09:09.080 --> 0:09:12.880 it's basically just adjusting where you are on the spectrum 0:09:12.920 --> 0:09:15.360 a little bit. And so rather than going hole hog 0:09:15.400 --> 0:09:17.800 into some sort of like or trying to beat the market, 0:09:17.880 --> 0:09:20.319 it's okay, let's take the premise that for the most 0:09:20.400 --> 0:09:23.439 part we want to just sort of buy something general 0:09:23.559 --> 0:09:27.080 and stable and diversified, but it can be tweaked a 0:09:27.120 --> 0:09:30.360 little bit to get some sort of different returns while 0:09:30.440 --> 0:09:34.640 still maintaining the gist of the benefits of wide diversification 0:09:34.840 --> 0:09:38.360 and avoiding some market timing. Yeah. I think this. I 0:09:38.400 --> 0:09:41.760 think this whole committee thing whenever I hear the committee 0:09:41.760 --> 0:09:43.720 at SMP brought up, I sort of laugh. It's just 0:09:43.840 --> 0:09:46.760 it's it's I think it's a very strange argument for 0:09:46.760 --> 0:09:49.480 people to spend any of their time on because if 0:09:49.520 --> 0:09:52.319 instead of uh, using the quote unquote committee, you just 0:09:52.360 --> 0:09:55.360 bought the top five stocks by market cap, it's the 0:09:55.400 --> 0:09:59.400 exact same return. It's the exact same return, and and 0:09:59.400 --> 0:10:01.520 and so I think the key thing here is you 0:10:01.559 --> 0:10:04.600 want to own roughly the market in its market cap 0:10:04.600 --> 0:10:08.400 weights roughly to get the market return, and even if 0:10:08.440 --> 0:10:11.440 you deviate that from that, whether it's via committee or 0:10:11.520 --> 0:10:14.160 via a fancy term stratified sampling, which is what a 0:10:14.160 --> 0:10:16.320 lot of firms like us do, where you own most 0:10:16.320 --> 0:10:18.000 of the securities in the market, but you don't need 0:10:18.040 --> 0:10:20.280 to own them all. You know, the the last ten 0:10:20.320 --> 0:10:23.560 stocks in the SMP make up a tiny miniscule weight 0:10:23.720 --> 0:10:27.000 even combined, and not owning them will not materially change 0:10:27.280 --> 0:10:30.000 your overall return. So I think the key here is 0:10:30.080 --> 0:10:32.160 you want to be broadly diversified. You want to roughly 0:10:32.200 --> 0:10:35.120 look like the market. But with customer indexing you can 0:10:35.160 --> 0:10:38.560 then also make these adjustments and and you'll, yeah, you'll 0:10:38.559 --> 0:10:40.199 perform a little bit differently, but that's sort of the 0:10:40.240 --> 0:10:43.120 trade you're willing to make to customize something to your 0:10:43.160 --> 0:10:46.760 specific circumstances and preferences. Again, so in my view this 0:10:46.880 --> 0:10:49.960 all these arguments about like what is passive are just silly. 0:10:49.960 --> 0:10:52.600 I mean, technically passive would just be a market cap 0:10:52.640 --> 0:10:55.320 weighted total market every stock in the market um for 0:10:55.360 --> 0:10:58.320 equities globally, but most of the things that people argue 0:10:58.360 --> 0:11:01.720 about look very very close to that. So this feeds 0:11:01.760 --> 0:11:04.880 into something I wanted to ask you. But with custom indexing, 0:11:05.440 --> 0:11:09.880 what do people actually benchmark themselves against? Or does it 0:11:10.000 --> 0:11:14.800 not really matter anymore? Like does your performance compared to 0:11:15.200 --> 0:11:18.200 a broader index or a specific index like just not 0:11:18.320 --> 0:11:22.280 come into the equation as much. So there's two ways 0:11:22.280 --> 0:11:24.440 to do it, and they're both very very simple. One 0:11:24.520 --> 0:11:26.520 is just to use a broad market index. It could 0:11:26.520 --> 0:11:28.680 be the Russell three thousand, and it could be you know, 0:11:28.720 --> 0:11:32.760 pick your pick your broad benchmark that's market cap weighted 0:11:32.800 --> 0:11:35.559 and very simple to understand. The second would be sort 0:11:35.600 --> 0:11:38.040 of a custom benchmark, and this would be used by 0:11:38.200 --> 0:11:41.240 people who have a very clear deviation from something like 0:11:41.280 --> 0:11:43.280 the Russell three thousand. I'm gonna make up an example. 0:11:43.600 --> 0:11:49.560 Let's say someone's custom index is large cap sixty small cap, 0:11:49.720 --> 0:11:52.040 which that's not what the market looks like at all. 0:11:52.080 --> 0:11:55.120 The markets like large cap five percent small cap by 0:11:55.160 --> 0:11:58.120 market cap. In that scenario, it really wouldn't make sense 0:11:58.120 --> 0:12:00.520 to compare your performance because in this case, you are 0:12:00.559 --> 0:12:04.120 making a very active allocation decision to be way overweight 0:12:04.160 --> 0:12:06.480 small cap. So in that case you might just blend 0:12:06.480 --> 0:12:09.240 a benchmark and say, my benchmark is going to you know, 0:12:09.400 --> 0:12:13.840 sp Russell two thousand or some other small cap benchmark. 0:12:14.120 --> 0:12:18.240 But in every case you're you're using simple, easy to understand, 0:12:18.400 --> 0:12:21.960 broad market benchmarks in some combination or or alone to 0:12:22.120 --> 0:12:41.600 use as your reference for how you're performing. I'm really 0:12:41.679 --> 0:12:44.960 interested in what you said about, you know, if you 0:12:45.040 --> 0:12:46.880 work in capital markets, or if you work in a 0:12:46.920 --> 0:12:49.840 bank in some sort and you own bank stock to 0:12:49.840 --> 0:12:52.200 your kind of like you know, you're kind of doing 0:12:52.240 --> 0:12:55.320 the Texas hedge of betting on a sector that is 0:12:55.360 --> 0:12:58.560 already probably responsible for a lot of your annual income, 0:12:59.480 --> 0:13:02.440 and and so it maybe it may not make sense. 0:13:02.440 --> 0:13:04.280 Can you talk a little bit more. I've always wondered 0:13:04.320 --> 0:13:08.959 about this whether financial advisors think about this question and 0:13:09.000 --> 0:13:10.760 when you and it's because i'd something I just like 0:13:10.800 --> 0:13:12.760 popped into my head before, and that's the first time 0:13:12.760 --> 0:13:15.800 I've heard someone talk about this and tailoring a portfolio 0:13:15.920 --> 0:13:19.120 around someone's um, you know, normal income. Can you talk 0:13:19.160 --> 0:13:21.560 a little bit more about how that's being used in 0:13:21.600 --> 0:13:25.440 some of the ways you see that uh, potentially being used. Sure, so, 0:13:25.440 --> 0:13:28.319 so what is the market but a collection of discounted 0:13:28.480 --> 0:13:30.920 cash flows? You know, theoretically, and maybe there's some problems 0:13:30.960 --> 0:13:32.880 with that conception, but if you look at the SMP five, 0:13:33.720 --> 0:13:35.560 the value of each of those stocks and therefore of 0:13:35.600 --> 0:13:38.560 your portfolio is the market's estimation of how all those 0:13:38.559 --> 0:13:40.679 companies will do in the future, discounted at some rate 0:13:40.720 --> 0:13:43.040 back to today, and that's that's the value of your portfolio. 0:13:43.400 --> 0:13:45.839 Well why why should my human capital be any different 0:13:45.880 --> 0:13:48.640 than that I've got, you know, fifty years or hopefully 0:13:48.640 --> 0:13:50.959 more left to live and work, and there's going to 0:13:51.040 --> 0:13:53.560 be cash flows that I generate from that. And when 0:13:53.559 --> 0:13:55.559 I dig into where those cash flows are going to 0:13:55.640 --> 0:13:58.400 come from, I couldn't be talking about what's one step 0:13:58.440 --> 0:14:01.040 beyond the Texas hedge, like, wouldn't be more all in 0:14:01.760 --> 0:14:06.000 on on capital markets, like the equity market specifically is 0:14:06.000 --> 0:14:09.240 going to be a large determinant of how I do 0:14:09.559 --> 0:14:11.720 in my human capital. So if I think of my 0:14:11.800 --> 0:14:14.560 human capital as discounting my future cash flows into some 0:14:14.640 --> 0:14:17.319 value today, often that is worth a lot more to 0:14:17.440 --> 0:14:20.920 people than they're they're brokerage portfolio is if you actually 0:14:20.920 --> 0:14:23.520 did the math and I certainly think it is in 0:14:23.520 --> 0:14:26.680 my case, So why would I have more exposure to 0:14:26.920 --> 0:14:29.720 the same risk profile that determines you know, a large 0:14:29.800 --> 0:14:32.720 chunk of my human capital portfolio, let's call it. And 0:14:32.840 --> 0:14:36.120 I think simple adjustments like that are just intuitive. It 0:14:36.200 --> 0:14:38.960 just makes sense to me. Um. And you can certainly 0:14:38.960 --> 0:14:40.760 demonstrate it, you know, if you if you do some 0:14:40.960 --> 0:14:43.720 napkin math, you can say, yeah, like, I don't really like, 0:14:43.800 --> 0:14:45.680 let's go back to oh eight, if I if I'm 0:14:45.720 --> 0:14:48.440 working at Lehman. Uh, And it's a ridiculous example, of 0:14:48.480 --> 0:14:51.120 course in hindsight. But if I'm working at Lehman, like, 0:14:51.160 --> 0:14:53.560 it's pretty obvious where my risk is bundled up and 0:14:53.680 --> 0:14:55.760 I don't want more of that same risk. So if 0:14:55.960 --> 0:14:59.040 if indexing in part is great because of diversification, I 0:14:59.080 --> 0:15:01.280 think this is just one way to add another asset 0:15:01.320 --> 0:15:04.200 to the mix, which is your own, your own learnings. Yeah, 0:15:04.280 --> 0:15:06.040 so Joe and I are going to have to steal 0:15:06.280 --> 0:15:11.080 steer clear of financial data stocks. And actually that reminds 0:15:11.120 --> 0:15:14.040 me no facts set for you. I should just mention 0:15:14.280 --> 0:15:18.120 um that Bloomberg does have its own indexing business. In 0:15:18.160 --> 0:15:21.480 the interests of transparency. Um. So now that I've got 0:15:21.480 --> 0:15:23.520 that disclaimer out of the way. Um, one thing I 0:15:23.560 --> 0:15:26.320 wanted to ask was, can you give us an example 0:15:26.480 --> 0:15:30.720 of like the most interesting or unusual custom index that 0:15:31.040 --> 0:15:35.040 you've seen in your time in the space. Sure, so, well, 0:15:35.200 --> 0:15:37.320 I guess the first thing I would say, at an 0:15:37.320 --> 0:15:41.000 even higher level is how popular customization is. So we 0:15:41.080 --> 0:15:43.160 built this platform. It's a web it's software. It's a 0:15:43.200 --> 0:15:45.720 web based platform. So you think about it like building 0:15:45.760 --> 0:15:47.440 a car. So go to like Tesla dot com and 0:15:47.480 --> 0:15:49.880 go through the experience of building a car. There's an 0:15:49.920 --> 0:15:52.400 interior next year, you can you know, tune all these 0:15:52.440 --> 0:15:55.240 old dials or choose options. It feels like that to 0:15:55.240 --> 0:15:58.320 build a customer index with with a bit more options. 0:15:58.360 --> 0:16:01.480 So we don't we don't anyone to do anything, you know, 0:16:01.560 --> 0:16:03.960 the default, Our default would be that you buy the 0:16:04.000 --> 0:16:06.640 broad market, right, that you don't do any customization, that 0:16:06.720 --> 0:16:08.800 you just do low cost indexing, maybe with some tax 0:16:08.880 --> 0:16:12.080 loss harvesting. And we went into this not knowing what 0:16:12.120 --> 0:16:14.720 people would do with this platform. That's the beauty of platforms, 0:16:14.720 --> 0:16:16.680 I think, is to be surprised by how they're used. 0:16:17.240 --> 0:16:18.920 And now we're you know, a year and a half 0:16:19.240 --> 0:16:21.160 click getting in on two years in, we're about two 0:16:21.160 --> 0:16:25.280 billion in assets or approaching that number today on the platform, 0:16:25.520 --> 0:16:29.280 and fully eight or so of the of the indexes 0:16:29.320 --> 0:16:31.960 that are designed are completely unique, meaning they're not they 0:16:32.000 --> 0:16:35.200 have they have different settings than any other custom index 0:16:35.240 --> 0:16:37.680 that's been built to date on the platform. And I 0:16:37.680 --> 0:16:39.640 would definitely I would have taken the under on that. 0:16:39.680 --> 0:16:42.400 Had you set the line at will be fully customed, 0:16:42.760 --> 0:16:44.520 I definitely would have said it's going to be way 0:16:44.560 --> 0:16:46.360 less than that. There's going to be more you know, 0:16:46.440 --> 0:16:49.920 clumpiness around what people do. So I guess the first 0:16:49.920 --> 0:16:53.040 big point is like people really use the customization features, 0:16:53.440 --> 0:16:55.440 and we we've been blown away by some of the 0:16:55.440 --> 0:16:58.760 stuff that people ask us if they can adjust for UM. 0:16:58.880 --> 0:17:01.840 So some thing's are in taxes, So they might say, 0:17:02.000 --> 0:17:05.560 I want to pay zero dollars in capital gains gross. 0:17:06.000 --> 0:17:08.199 I want you to generate a single gain for me. 0:17:08.240 --> 0:17:12.040 I refused to pay taxes. Others might. Others have said, look, 0:17:12.080 --> 0:17:14.320 we're willing to We're willing to spend a hundred thousand 0:17:14.359 --> 0:17:16.960 dollars on capital gains taxes, so do everything you can 0:17:17.359 --> 0:17:20.520 inside that absolute dollar budget. UM. One person came to 0:17:20.560 --> 0:17:22.919 us and said, we don't want to own companies that 0:17:23.040 --> 0:17:26.879 produce sugary drinks because one of our key focuses as 0:17:26.920 --> 0:17:31.640 a family is to avoid or help ameliorate the obesity epidemic, 0:17:31.720 --> 0:17:34.000 and we think sugary drinks are the prime culprit. So 0:17:34.040 --> 0:17:36.600 we had to build a custom quantitative screen for that. 0:17:36.880 --> 0:17:39.399 We've had people say, look, I've got all these and 0:17:39.400 --> 0:17:41.480 this is a more advanced feature that wouldn't be broadly 0:17:41.480 --> 0:17:44.040 available right now, but what we can do. We we've 0:17:44.080 --> 0:17:47.560 got this huge private equity portfolio and clearly kind of 0:17:47.600 --> 0:17:49.639 like the human capital example, I gave like, we've got 0:17:49.640 --> 0:17:52.720 a lot of risk in these fifty portfolio companies, but 0:17:52.760 --> 0:17:55.080 we don't really know how to map them onto public equities. 0:17:55.119 --> 0:17:56.879 Can you do that? And that's where you know, the 0:17:56.920 --> 0:17:59.919 fancier like machine learning modeling type stuff can come in 0:18:00.040 --> 0:18:02.600 and create something really cool so that we can avoid 0:18:02.640 --> 0:18:05.640 public equities that look very very similar when we model 0:18:05.720 --> 0:18:08.199 them to the private equity portfolio. You know, that's just 0:18:08.240 --> 0:18:11.359 four examples, but it's kind of constant, like every everyone 0:18:11.400 --> 0:18:13.880 that we meet, every new client that we bring on, 0:18:14.359 --> 0:18:16.960 has some new question in the form of you know, 0:18:17.000 --> 0:18:19.840 can it also do X? And so I just think 0:18:19.840 --> 0:18:23.359 what we're what we're seeing live is a huge latent 0:18:23.400 --> 0:18:27.040 demand for customization that has gone unfulfilled for a long time, 0:18:27.080 --> 0:18:28.480 so no one talks about it. But I think you'll 0:18:28.480 --> 0:18:30.920 see an explosion of these platforms in the next couple 0:18:30.960 --> 0:18:34.520 of years. Can you talk a little bit more about 0:18:34.640 --> 0:18:37.120 the sort of I don't know, maybe it's trading tech 0:18:37.320 --> 0:18:39.880 or the sort of like other platforms necessary to make 0:18:39.880 --> 0:18:43.520 this work, because, as I mentioned in the introduction, you know, 0:18:43.680 --> 0:18:47.080 even if you go back long enough, by even buying 0:18:47.160 --> 0:18:50.000 just the straight up S ANDP five would would not 0:18:50.040 --> 0:18:52.879 have been a trivial exercise at all for an individual. 0:18:52.920 --> 0:18:56.560 No one can sort of like buys and rebalance them, etcetera. 0:18:56.760 --> 0:18:59.800 And of course that got productized and now it's easy. 0:19:00.160 --> 0:19:01.800 But like, okay, let's say I want to buy I 0:19:01.840 --> 0:19:05.480 don't know how many financials are in the SMP five hundred, 0:19:05.560 --> 0:19:06.920 but let's say I want to buy you know, four 0:19:07.000 --> 0:19:11.080 hundred and sixty of the spire excluding all the financials. 0:19:11.480 --> 0:19:13.600 Could you talk a little bit about the text act 0:19:13.720 --> 0:19:16.680 that makes it possible for someone to set that index 0:19:17.119 --> 0:19:20.679 using your software or any software, and then how that 0:19:20.880 --> 0:19:24.080 how it can after that decision has made get the 0:19:24.119 --> 0:19:27.480 sort of like you know, cheap trading and replication of 0:19:27.840 --> 0:19:30.960 that part of the index. Sure, and it brings to 0:19:31.040 --> 0:19:34.399 mind a really cool idea from a gentleman named Eric Bistria, 0:19:34.480 --> 0:19:38.159 who's an early stage technology investator from called Benchmark. He 0:19:38.280 --> 0:19:41.520 uses this term competitive frontier, which is the sort of 0:19:41.560 --> 0:19:45.000 the battlegrounds if you will, that an industry will fight 0:19:45.119 --> 0:19:47.719 on and where things will be lost or one. So 0:19:47.760 --> 0:19:50.160 you have to be good in these competitive frontiers to 0:19:50.160 --> 0:19:53.320 to compete in a changing era. I think those two 0:19:53.359 --> 0:19:55.960 competitive frontiers for for this segment of the market for 0:19:56.000 --> 0:20:00.160 indexing and and of course custom indexing are quantitative research 0:20:00.200 --> 0:20:03.840 and software development, and those are very different probably than 0:20:04.000 --> 0:20:07.880 what has won or determined the winners in indexing at 0:20:07.960 --> 0:20:11.160 large for a very long time. And it's the answer 0:20:11.200 --> 0:20:13.520 to your question, which is that it requires a lot 0:20:13.760 --> 0:20:18.600 of technology. We honestly sort of fell backwards into this 0:20:18.680 --> 0:20:22.920 opportunity because we just by luck, had built so much 0:20:23.240 --> 0:20:26.399 trading software for our our core firm, which is a quantitative, 0:20:26.680 --> 0:20:30.440 quantitative investing firm over the last you know, ten plus years. 0:20:30.800 --> 0:20:33.480 So we were a quant firm that was managing active 0:20:33.520 --> 0:20:37.159 strategies that managed thousands and thousands of separate accounts. To 0:20:37.200 --> 0:20:39.800 be able to do that at scale across brokerages and 0:20:39.840 --> 0:20:43.520 across custodians, etcetera, you have to build software that you 0:20:43.520 --> 0:20:46.239 can't do it manually with a database. So we had 0:20:46.240 --> 0:20:49.959 built we had built an entirely custom piece of trading software, 0:20:49.960 --> 0:20:52.960 an entirely custom piece of something called workbenches is like 0:20:53.000 --> 0:20:55.960