WEBVTT - The Man Who Hates ETFs Has Found a Way to Save Mutual Funds 0:00:05.559 --> 0:00:08.240 Look New Trillions. I'm Joel Webber and I'm Eric bell Chierness. 0:00:11.960 --> 0:00:13.880 So Eric on the show, most of the time we've 0:00:13.920 --> 0:00:16.840 talked to people in E t F advisors around E 0:00:16.960 --> 0:00:19.560 t F. We're gonna shake it up a little bit today. Yeah, 0:00:19.600 --> 0:00:21.880 we're going to talk to somebody who is somewhat of 0:00:21.880 --> 0:00:24.919 a legend from the mutual fund industry and somebody who's 0:00:24.960 --> 0:00:28.040 got a new venture and it's related to something a 0:00:28.120 --> 0:00:30.480 word that comes up probably on every single episode. Can 0:00:30.480 --> 0:00:37.080 you guess what that word is? Active? Close? Alright? Yes, 0:00:37.120 --> 0:00:39.479 I think all three? Yeah, you're right. His name is 0:00:39.479 --> 0:00:43.760 Peter Krauss. He's starting a venture called Aperture Investors. He's 0:00:43.800 --> 0:00:46.680 formerly of Goldman Sachs and most recently he was the 0:00:46.680 --> 0:00:50.239 CEO of Alliance princetein or Yeah. So I mean this 0:00:50.360 --> 0:00:52.960 is a major league person here who knows the mutual 0:00:52.960 --> 0:00:55.960 fund industry. He's very well aware of the rise of 0:00:56.000 --> 0:00:59.760 passive and the cost obsession going on now in the 0:00:59.840 --> 0:01:03.360 end history, and so he has a solution for the 0:01:03.440 --> 0:01:05.840 mutual fund side. So this is a little bit about 0:01:06.080 --> 0:01:08.720 can they get it back together, can they stop this 0:01:08.800 --> 0:01:11.800 sort of migration over to low cost passive and we'll 0:01:11.800 --> 0:01:14.000 try to break it down to how this would practically 0:01:14.000 --> 0:01:15.960 work for an investor as well. We're also joined by 0:01:16.120 --> 0:01:20.600 Shannai Basik, who covers finance or finance, depending on how 0:01:20.600 --> 0:01:25.920 you want to say, for Bloomberg News, this time on Trillians. 0:01:25.920 --> 0:01:30.240 The man who hates e t s. Okay, so, Peter, 0:01:30.560 --> 0:01:32.640 you're you've been called the man who hates e T s. 0:01:32.680 --> 0:01:34.800 Why do you hate et F so much? Well, I 0:01:35.120 --> 0:01:38.240 didn't really say I hated ets the New York New 0:01:38.319 --> 0:01:42.039 York Times. They're trying to get clicks. Yeah, exactly. I 0:01:42.080 --> 0:01:46.080 think e t s are a useful vehicle. But in 0:01:46.160 --> 0:01:48.880 all things, in the securities market, there's a lot more 0:01:48.960 --> 0:01:51.880 than what there appears on the front cover. E t 0:01:52.160 --> 0:01:56.720 s are actually rather sophisticated security. They are actually derivatives. 0:01:56.880 --> 0:02:00.600 They aren't really just a package of indie ugual stocks 0:02:00.680 --> 0:02:04.520 or bonds. They're actually a set of promises to buy 0:02:04.520 --> 0:02:06.880 and sell those securities, will hold those securities over time. 0:02:07.400 --> 0:02:10.240 There are major participants in the marketplace that support that. 0:02:11.200 --> 0:02:12.960 Some of the e t f s are quite liquid, 0:02:13.280 --> 0:02:15.360 Some of the e t f s are not very liquid. 0:02:15.600 --> 0:02:18.720 Some e t f s have trillions of dollars attached 0:02:18.760 --> 0:02:20.919 to them, and some ETFs have tens of millions of 0:02:21.000 --> 0:02:24.359 dollars attached to them, and there's thousands of eats if 0:02:24.440 --> 0:02:27.520 that exactly My concern with e t s at the 0:02:27.600 --> 0:02:31.480 time and still is that investors don't really understand their 0:02:31.520 --> 0:02:35.720 construct and they don't really understand the potential risks the 0:02:35.760 --> 0:02:38.240 e t F itself, the liquidity e t F itself 0:02:38.280 --> 0:02:42.400 relies on market participants who actually trade them. But the 0:02:42.440 --> 0:02:46.000 market participants get paid by having a spread between what 0:02:46.040 --> 0:02:48.120 they buy it at what they sell it at. If 0:02:48.160 --> 0:02:51.440 that spread collapses or that spreads not available, where the 0:02:51.480 --> 0:02:55.040 market participants somehow feels that they need a bigger spread 0:02:55.440 --> 0:02:58.480 while the investor is subject to that cost. And we've 0:02:58.520 --> 0:03:00.959 actually had some experience in the market about three years 0:03:00.960 --> 0:03:05.559 ago in August when the SPX or the or the 0:03:05.720 --> 0:03:08.760 standard and Poors ETF separated from the cash market for 0:03:08.800 --> 0:03:12.280 about thirty minutes by a significant amount, something that people 0:03:12.320 --> 0:03:14.799 did not think was going to happen. Having been in 0:03:14.840 --> 0:03:16.960 the markets for a long time, probably now going on 0:03:17.040 --> 0:03:20.280 forty years, things like that just don't happen out of 0:03:20.280 --> 0:03:22.840 thin air. They actually have a rationale, there's actually a 0:03:22.840 --> 0:03:26.040 reason for that, and it's hard to fix because at 0:03:26.080 --> 0:03:29.280 the end of the day, it again relies that liquidity 0:03:29.280 --> 0:03:33.880 relies on market participants, meaning institutional participants, actually having confidence 0:03:33.919 --> 0:03:36.800 to trade those markets at that point in time in 0:03:36.920 --> 0:03:39.960 a very tight bit as spread. If that spread extends 0:03:40.080 --> 0:03:43.400 or goes away, or it gets larger, the cost becomes 0:03:43.480 --> 0:03:48.000 very significant. I don't think investors actually understand that risk. Now, 0:03:48.080 --> 0:03:52.160 for the highly liquid large cap equity markets, that risk 0:03:52.280 --> 0:03:56.720 is less and it's actually reasonably modest. But for bond markets, 0:03:56.760 --> 0:03:59.640 it's actually quite significant, and there's lots and lots of 0:03:59.640 --> 0:04:02.920 money follow high yield e t s for example, and 0:04:02.960 --> 0:04:05.160 the high yield e t F S tracking error, which 0:04:05.200 --> 0:04:09.800 is a measure of the cost of that bit as spread, 0:04:09.800 --> 0:04:13.160 its actually quite large. It's sometimes seventy eight basis points, 0:04:13.160 --> 0:04:16.120 almost one percentage point. Well, you wouldn't give up one 0:04:16.120 --> 0:04:18.560 percentage point. That's a lot of money in a you know, 0:04:18.680 --> 0:04:22.160 yield environment of call it five percent for a high 0:04:22.240 --> 0:04:26.600 yield security, that's the yield. So I think investors need 0:04:26.640 --> 0:04:30.400 to understand that better. My whole point was understand the 0:04:30.440 --> 0:04:32.880 e t F better, understand the risks of the ETF better, 0:04:32.920 --> 0:04:34.080 which is a big part of the show, and I 0:04:34.080 --> 0:04:36.920 can literally I can feel Eric wanting to pounds right now. 0:04:37.320 --> 0:04:39.240 So let's just let him ask a question. Well, what 0:04:39.320 --> 0:04:42.360 you're saying about the reliance on the middleman is true. 0:04:42.680 --> 0:04:44.840 You are relying on a lot of these people connected 0:04:44.839 --> 0:04:47.760 to the system market makers to make markets. If they 0:04:47.800 --> 0:04:50.640 don't have all the inputs from the stocks and bonds. 0:04:50.680 --> 0:04:53.560 Like that day on August where some of the stocks 0:04:53.560 --> 0:04:56.400 were halted, they widen their spreads and that's what caused 0:04:56.400 --> 0:04:58.240 the dislocation of the e t F. Now since then 0:04:58.640 --> 0:05:00.120 they've tried to make it to the et F, the 0:05:00.120 --> 0:05:03.360 stocks are not going to have different halting times. So 0:05:03.400 --> 0:05:05.040 I think the e t f s are just downstream 0:05:05.160 --> 0:05:07.240 sometimes from like a rule in the exchange or the 0:05:07.279 --> 0:05:09.960 plumbing as I call it. So that has like can 0:05:09.960 --> 0:05:12.560 when breggsit happened, that did not happen. However, it is 0:05:12.600 --> 0:05:14.560 true you have to trade the e t F. In 0:05:14.600 --> 0:05:17.839 the high yield case, I think that most of the 0:05:17.880 --> 0:05:20.200 money and high yields still goes for mutual funds because 0:05:20.200 --> 0:05:23.039 active mutual funds that's where they really kick butt. In 0:05:23.080 --> 0:05:25.880 the high yield area or bonds in general, I think 0:05:26.600 --> 0:05:28.800 beat h y G So the high yield e t 0:05:28.960 --> 0:05:31.560 F I think is more used as like quick beta 0:05:31.720 --> 0:05:35.000 for traders. Maybe there's some long term money, but for 0:05:35.040 --> 0:05:37.800 the most part, I think investors have figured out that 0:05:37.839 --> 0:05:40.200 you can do better going active in a mutual fund. 0:05:40.760 --> 0:05:44.200 UM But so just two caveats on that, but I 0:05:44.240 --> 0:05:47.719 think both points are very valid. Something interesting, UM, you know, 0:05:47.760 --> 0:05:50.839 in your own research and aperture, you've been in the 0:05:50.880 --> 0:05:53.000 mutual fund industry for so long, but you still see 0:05:53.040 --> 0:05:55.320 something wrong with the mutual fund industry. You've said there 0:05:55.320 --> 0:05:58.000 are too many of them. Can you explain your thinking 0:05:58.000 --> 0:06:00.800 here and what's the idea with aperture, what's the what's 0:06:01.000 --> 0:06:04.760 where did this big idea come from? So um I 0:06:04.839 --> 0:06:07.360 have been operating in the mutual fund industry for a 0:06:07.440 --> 0:06:12.040 very long time, and of course any portfolio manager in 0:06:12.040 --> 0:06:14.680 the mutual fund industry, any portfolio managing the industry, will 0:06:14.680 --> 0:06:17.919 say that their objective is to actually perform. That's what 0:06:18.000 --> 0:06:20.880 they would say every day. The problem is the incentive 0:06:20.920 --> 0:06:24.200 structure is actually not set up that way. The incentive 0:06:24.279 --> 0:06:28.719 structure is you're paid based on your asset levels, not 0:06:28.839 --> 0:06:32.960 based on your performance. And that's a fundamental disconnect. And 0:06:33.120 --> 0:06:37.960 over many years, thirty forty years. It led to companies 0:06:38.200 --> 0:06:40.880 being focused on the growth of their assets. I have 0:06:40.920 --> 0:06:42.760 to before you go any farther, I want to ask 0:06:42.880 --> 0:06:45.320 if you said this at any of your prior jobs 0:06:45.320 --> 0:06:48.400 with the table has been flipped over. I did say 0:06:48.400 --> 0:06:51.000 this that many of my prior jobs at the tables over. 0:06:51.120 --> 0:06:54.400 In many cases they did. Now I have been saying 0:06:54.400 --> 0:06:58.000 this for really literally the past three years, um and 0:06:58.040 --> 0:07:00.400 I think what happened is is that we got to 0:07:00.440 --> 0:07:04.359 a tipping point, which was sometime before this, where the 0:07:04.520 --> 0:07:08.200 size of assets under management was so large it became 0:07:08.360 --> 0:07:12.320 difficult to perform. And I spent a lot of time 0:07:12.360 --> 0:07:16.720 investigating long term performance of managers of different types of managers, 0:07:16.720 --> 0:07:21.440 concentrated managers, diversified managers, managers and large cap managers and 0:07:21.520 --> 0:07:27.120 small cap managers outside the United States, and unfortunately, the 0:07:27.240 --> 0:07:31.360 data that's available, which is you know, publicly available to anybody, 0:07:31.720 --> 0:07:34.720 really proves the point that there's no easy way to 0:07:34.800 --> 0:07:38.760 identify a manager that will persistently perform, and on average, 0:07:39.280 --> 0:07:43.400 managers do not perform in access of their fees. And 0:07:43.440 --> 0:07:46.720 that's a really troubling problem. And of course the investor 0:07:46.840 --> 0:07:49.920 in the world has figured that out and in fact, 0:07:49.960 --> 0:07:53.640 they've moved their money from you know, mutual fund assets 0:07:53.680 --> 0:07:57.360 and active management to E t S and passive. And 0:07:57.400 --> 0:07:59.840 I actually think we need et S and passive because 0:08:00.360 --> 0:08:04.120 basic hypothesis is there's too much money being managed actively 0:08:04.240 --> 0:08:07.280 to actually perform. So can you explain your fee structure 0:08:07.320 --> 0:08:09.360 that what does the future look like when so many 0:08:09.360 --> 0:08:11.640 people are going to zero? So if you take the 0:08:11.680 --> 0:08:14.920 prospect that I'm assuming I'm right for the minute, that 0:08:14.960 --> 0:08:17.840 there's too much money being managed actively, you need to 0:08:17.920 --> 0:08:19.960 change the incentive structure. Because if you don't change the 0:08:20.000 --> 0:08:22.800 incentive structure, then people will just keep managing the assets 0:08:22.800 --> 0:08:24.920 because they're paid to manage the assets and they're paid 0:08:24.960 --> 0:08:27.480 to gather the assets. But if you go back to 0:08:27.520 --> 0:08:30.400 basic principles, which is why is the PM there and 0:08:30.440 --> 0:08:34.599 BYM portfolio manager, yes, I'm sorry, I'm sorry. The portfolio 0:08:34.640 --> 0:08:38.280 manager exists because they want to perform. And if you 0:08:38.360 --> 0:08:41.120 ask a portfolio manager that that is what they would say, 0:08:41.240 --> 0:08:44.959 I'm here to create performance for my clients. If that's 0:08:45.000 --> 0:08:48.360 the basic concept, guess what, let's pay you based on 0:08:48.400 --> 0:08:51.160 that concept. If you don't perform, you don't get paid. 0:08:51.240 --> 0:08:53.480 If you do perform, you do get paid. It seems 0:08:53.480 --> 0:08:55.520 like a fair deal. There's a cap to how much 0:08:55.559 --> 0:08:58.000 you can get paid. Still, there is a cap in 0:08:58.040 --> 0:09:02.280 the US under the the Act rules. There. The the 0:09:02.520 --> 0:09:06.360 SEC view is that we should have performance linked fees, 0:09:06.400 --> 0:09:10.559 and there's performance linked fees include a fulcrum structure which 0:09:10.600 --> 0:09:14.280 creates a cap. But the cap is reasonable and so 0:09:14.320 --> 0:09:20.239 if managers hit that cap, they're still possible out performance 0:09:20.320 --> 0:09:24.280 over the cap and the managers performance uh fee. Then 0:09:24.320 --> 0:09:28.360 it's just declined by the certain pro rata amount by 0:09:28.360 --> 0:09:33.280 which the actual excess return exceeds the cap. But just 0:09:33.320 --> 0:09:36.320 a question on this performance fees. This has been something 0:09:36.400 --> 0:09:38.600 been hearing a lot about and on Twitter where a 0:09:38.640 --> 0:09:42.160 lot of I called the gladiator pit of debate with ideas. 0:09:42.800 --> 0:09:45.120 A lot of people will push back on performance fees 0:09:45.120 --> 0:09:47.280 and say, well, the problem with them is it it 0:09:47.360 --> 0:09:53.240 inspires really outrageous bets, reckless behavior, because now you're really 0:09:53.600 --> 0:09:57.000 looking to get as much money as possible, and couldn't 0:09:57.040 --> 0:09:59.880 that really turn out bad for the investor? Right, So 0:10:00.000 --> 0:10:02.400 that's a very good point. And so you need an 0:10:02.440 --> 0:10:06.120 ecosystem in which the performance fee exists. So there's both 0:10:06.559 --> 0:10:09.400 a structure for the performance fee. So point one is 0:10:10.120 --> 0:10:13.440 Our proposition is that there's too much money being managed actively, 0:10:13.679 --> 0:10:15.400 And the reason why there's too much money is there 0:10:15.520 --> 0:10:18.280 too many managers who are paid based on the amount 0:10:18.320 --> 0:10:20.840 of assets they have rather than the performance. If they 0:10:20.880 --> 0:10:24.120 were paid on performance, given their historical performance, they wouldn't 0:10:24.160 --> 0:10:28.480 exist and therefore be less managers and less capacity. More 0:10:28.520 --> 0:10:31.720 money would be impassive, but the managers that did exist 0:10:31.800 --> 0:10:34.840 would perform and produce performance for clients that we're saying 0:10:34.840 --> 0:10:36.839 there's a dinosaur die off that needs to happen. There 0:10:36.880 --> 0:10:38.760 is a dinosaur die off. And people have asked me 0:10:38.800 --> 0:10:42.160 many many times, wouldn't that happen by consolidation, And I've 0:10:42.160 --> 0:10:46.840 said to people, you know, and consolidation in the manufacturing business, 0:10:46.920 --> 0:10:53.760 for example, generally leads to more efficiencies. Consolidation in the 0:10:53.840 --> 0:10:57.880 asset management business, however, is the opposite. When one firm 0:10:58.000 --> 0:11:01.600 buys another, they don't expect the portfolio managers in the 0:11:01.640 --> 0:11:04.440 acquired firm to go out of business. They actually expect 0:11:04.920 --> 0:11:08.720 the portfolio managers to grow. There's no reduction in the capacity. 0:11:09.040 --> 0:11:11.400 In fact, there's a there's an expectation that will it 0:11:11.440 --> 0:11:14.160 will grow. So consolidation is not the answer. The only 0:11:14.200 --> 0:11:18.559 answer I've said sort of uh uh with gallows humor 0:11:18.640 --> 0:11:21.440 is death. You know, then the portfolio manager out of business. 0:11:21.600 --> 0:11:24.480 But another answer would be to change the revenue structure. 0:11:24.520 --> 0:11:26.800 And if you change the revenue structure, then those managers 0:11:26.800 --> 0:11:29.640 who can't perform will be out of business and they 0:11:29.640 --> 0:11:33.079 won't carry any money. So put that's point one. Point 0:11:33.080 --> 0:11:35.120 to to go back to Eric's point if I if 0:11:35.120 --> 0:11:38.560 I'm a longer answer, sorry, Point two is all right, 0:11:38.600 --> 0:11:41.840 how do we deal with if you pay people in performance? 0:11:41.840 --> 0:11:45.200 How do we deal with risk taking? Because on the 0:11:45.240 --> 0:11:48.000 one hand, people say, well, I don't like the fact 0:11:48.040 --> 0:11:51.000 that I pay you a fee to try to perform 0:11:51.040 --> 0:11:53.000 and you get it whether you do or you don't. 0:11:53.160 --> 0:11:54.760 I don't like that, But I also don't want to 0:11:54.760 --> 0:11:56.520 pay you a performance fe because I'm worried you'll take 0:11:56.559 --> 0:11:59.040 too much risk. Now, look, you sort of can't have 0:11:59.040 --> 0:12:00.880 your cake and eat it too, But just for the moment, 0:12:00.960 --> 0:12:03.720 let's assume that that's the position. When so what we've 0:12:03.720 --> 0:12:07.840 said at apertures, look, that's a fair point. So number one, 0:12:08.360 --> 0:12:11.280 in the forty act vehicles, the fees are capped, and 0:12:11.360 --> 0:12:15.360 so excessive risk taking that is attempting to produce a 0:12:15.400 --> 0:12:18.319 return and excess of the cap doesn't actually pay the manager, 0:12:18.840 --> 0:12:21.280 so they really don't have any real reason to do that. 0:12:21.920 --> 0:12:23.959 But the way we set up the compensation structure is 0:12:24.040 --> 0:12:27.120 quite interesting. So we've said two managers, look, we're going 0:12:27.160 --> 0:12:30.400 to pay you on performance, but half of your compensation 0:12:30.960 --> 0:12:35.559 is deferred. You receive that compensation if in the succeeding 0:12:35.600 --> 0:12:40.079 two years you actually produce zero or positive returns for 0:12:40.200 --> 0:12:43.760 your client. If you actually produce negative returns for your client, 0:12:44.160 --> 0:12:47.800 you reduce that deferred compensation or potentially lose all of it. 0:12:48.240 --> 0:12:52.480 So that is a very significant impact on how the 0:12:52.520 --> 0:12:55.800 manager takes risk. Now there's a further interesting element in 0:12:55.840 --> 0:12:59.720 the ecosystem. You've heard of high water marks. In the 0:12:59.760 --> 0:13:03.240 head fund industry, firms use high water marks. I don't 0:13:03.280 --> 0:13:05.880 like high water marks they do in gender risk taking 0:13:05.960 --> 0:13:07.840 because what happens in a high water mark is if 0:13:07.880 --> 0:13:10.920 you're down five you have to earn the five percent 0:13:11.040 --> 0:13:14.560 back before you earn any money. That actually makes you 0:13:14.679 --> 0:13:16.920 a risk taker. It take makes you take too much risk, 0:13:16.960 --> 0:13:19.400 And if you actually don't earn the five percent in 0:13:19.440 --> 0:13:22.200 the second year, then you're really swinging for the fences 0:13:22.240 --> 0:13:24.600 because you're gonna be you won't have earned any money 0:13:24.600 --> 0:13:27.880 for two years. So we we set the performance every 0:13:27.960 --> 0:13:31.560 year and we use this three year averaging, and that 0:13:31.640 --> 0:13:34.480 deferred compensation is a way to control risk. So it's 0:13:34.480 --> 0:13:37.760 a complicated ecosystem, yes, but I think we've actually addressed 0:13:37.800 --> 0:13:49.440 your concern. You were talking about consolidation being a bad thing. 0:13:49.520 --> 0:13:51.840 It's funny you say that because earlier this year we 0:13:51.920 --> 0:13:55.360 broke that JP Morgan was among um large banks that 0:13:55.400 --> 0:13:58.240 we're looking to buy et F companies. So you know, 0:13:58.280 --> 0:14:03.080 with JP Morgan, with Goldman's Acts becoming massive et F players, now, 0:14:03.320 --> 0:14:05.280 is this a good thing or a bad thing for 0:14:05.320 --> 0:14:07.680 their business models? Well, my proposition is is that we 0:14:07.720 --> 0:14:12.000 need more passive investing vehicles essentially, or more passive providers. 0:14:12.040 --> 0:14:14.120 I don't like the fact, although I think it's gonna 0:14:14.120 --> 0:14:16.679 be hard to change because passive is so benefited by 0:14:16.679 --> 0:14:20.680 scale that between you know, the two large players, three 0:14:20.720 --> 0:14:24.240 large players, State Street, Van Guarden and black Rock, you 0:14:24.320 --> 0:14:27.560 have you know, enormous concentration, and so you have operational 0:14:27.640 --> 0:14:31.440 risk in inside of those firms, which the market completely discounts, 0:14:31.440 --> 0:14:35.200 but there is real risk there. Having said that, investors 0:14:35.240 --> 0:14:38.160 will need to continue to have passive vehicles to allocate 0:14:38.200 --> 0:14:42.400 capital too. And everybody's portfolio should include a substantial amount 0:14:42.440 --> 0:14:46.280 of passive and managers who are paid for performance, who 0:14:46.320 --> 0:14:50.240 actually produce performance. And then over the whole portfolio managers 0:14:50.680 --> 0:14:55.000 clients will actually get performance, which today they're not getting. UM. 0:14:55.160 --> 0:14:58.960 And so I think that JP Morgan, Goldman Sachs getting 0:14:58.960 --> 0:15:01.520 into the t F business just provides for a more 0:15:01.520 --> 0:15:05.200 diversification of the passive vehicles. And that's a good thing. Um. 0:15:05.240 --> 0:15:08.480 And let's talk about this. There needs to be more passive. 0:15:08.520 --> 0:15:11.040 So let me give you the numbers here right now, 0:15:11.320 --> 0:15:14.600 I think the fund industry is about sixteen trillion dollars 0:15:15.600 --> 0:15:20.080 that is passively managed. The rest is active. Obviously that 0:15:20.200 --> 0:15:24.160 swing from a pendulum twenty years ago where it was active. 0:15:24.960 --> 0:15:27.680 Where is that pendulum going to stop, in your opinion, 0:15:27.760 --> 0:15:30.960 where they'll have a nice new equilibrium were active will 0:15:31.000 --> 0:15:36.680 be right sized fifty passive. Great question. I don't know 0:15:36.760 --> 0:15:40.360 the answer, as you would you would expect that that's 0:15:40.360 --> 0:15:43.480 a guess. But um, look we know. One of the 0:15:43.480 --> 0:15:45.720 reasons why I pushed very hard to try to change 0:15:45.760 --> 0:15:48.800 the revenue structure in the industry is that the existential 0:15:48.880 --> 0:15:53.320 question is that if managers were paid fixed fees I eat, 0:15:53.320 --> 0:15:56.720 paid to try as opposed to pay to perform. Over time, 0:15:57.320 --> 0:16:00.120 more and more money would leave the active industry and 0:16:00.320 --> 0:16:02.480 go into the passive industry. And what I was concerned 0:16:02.520 --> 0:16:05.680 about is that you didn't have a level playing field 0:16:05.720 --> 0:16:11.280 between active and passive. Fee structures inactive were just materially 0:16:11.360 --> 0:16:15.360 higher than fee structures in passive and ets. So investors 0:16:15.400 --> 0:16:18.040 were saying, look, I don't get I don't get returns 0:16:18.120 --> 0:16:20.000 net of fees in the active space. I might as 0:16:20.040 --> 0:16:22.200 well just pay less fees and get the market return 0:16:22.280 --> 0:16:26.480 minus the fee. And if you if you looked out 0:16:26.480 --> 0:16:29.120 over a long period of time and said, well, philosophically, 0:16:29.200 --> 0:16:31.280 that means that people would just move from active to 0:16:31.320 --> 0:16:33.360 passive because they're not getting paid anything to be an 0:16:33.360 --> 0:16:36.320 active in fact, their returns are less than what they 0:16:36.320 --> 0:16:38.560 would get in passive. Then you end up with a 0:16:38.640 --> 0:16:41.480 market that's pent passive. And that, of course, theoretically is 0:16:41.480 --> 0:16:43.960 a disaster because now you don't have a capital market 0:16:44.000 --> 0:16:47.800 that actually prices. So I I went down to Washington 0:16:47.880 --> 0:16:49.920 to talk to the SEC and I said and the 0:16:49.920 --> 0:16:52.560 tragicy Department, And I said to them, look, you have 0:16:52.560 --> 0:16:56.720 a philosophical or fiduciary problem. Nobody wants the markets to 0:16:56.720 --> 0:16:59.080 be passive because we will be able to price an 0:16:59.080 --> 0:17:02.040 ip L. That's a really bad thing. And this is 0:17:02.080 --> 0:17:04.320 the largest capital market in the world, and we need 0:17:04.359 --> 0:17:06.600 to be the most robust capital market in the world. 0:17:07.359 --> 0:17:09.919 So what you you're not going to say, as regulators, 0:17:09.960 --> 0:17:11.959 we're going to outlaw passive or you can't have more 0:17:12.000 --> 0:17:14.240 than ext percent passive. That's not going to happen. But 0:17:14.280 --> 0:17:16.720 what you can do is create a level playing field 0:17:16.720 --> 0:17:22.119 so that competition allows investors to actually move money into 0:17:22.200 --> 0:17:25.120 vehicles that makes sense to them, and that will create 0:17:25.119 --> 0:17:27.560 a balance in the market. And that was why I 0:17:27.600 --> 0:17:31.439 was pushing the regulators and treasury to think about a 0:17:31.560 --> 0:17:35.480 structure where the base fee was this et F like fee. 0:17:35.760 --> 0:17:37.959 Then investors could say, look, I could have either active 0:17:38.040 --> 0:17:40.320 or passive at the same cost, but I have an 0:17:40.320 --> 0:17:44.720 option on the active managers performing. So Derik's question, I 0:17:44.720 --> 0:17:48.480 think passive will continue to grow. It's at thirty today. 0:17:48.600 --> 0:17:50.840 I think it will easily get the fifty. Whether it 0:17:50.880 --> 0:17:54.879 goes beyond fifty or sixty, I don't know. My guess 0:17:54.920 --> 0:17:58.639 is that somewhere in the fifty to six level is 0:17:58.720 --> 0:18:02.000 kind of where it tops out. I think that, uh, 0:18:02.080 --> 0:18:05.520 if you thought about, well, of your sixteen trillion, could 0:18:05.520 --> 0:18:09.719 eight trillion be actively managed? You know, that's a question. 0:18:09.760 --> 0:18:12.560 I don't know, but I do think in ten to 0:18:12.640 --> 0:18:14.800 fifteen years there's going to be at least a trillion 0:18:14.840 --> 0:18:18.520 dollars managed by these performance structors. And you know, the 0:18:18.680 --> 0:18:21.760 old industry isn't going to go away tomorrow. The old 0:18:21.800 --> 0:18:23.920 industry is going to remain for a long period of time. 0:18:24.080 --> 0:18:26.840 By the way, there are managers in the old industry 0:18:26.840 --> 0:18:29.360 that do perform, that do cap their capacity, but they're 0:18:29.480 --> 0:18:33.200 very small number. Is it hard to recruit talent? You're 0:18:33.240 --> 0:18:36.440 pushing down fees across the board? Do people want defer 0:18:37.280 --> 0:18:39.800 and differing compensation? You're telling people they are going to 0:18:39.840 --> 0:18:42.040 get paid less, So what is it like to recruit 0:18:42.040 --> 0:18:45.160 money managers? Well, I'm actually not telling people they're gonna 0:18:45.200 --> 0:18:47.840 get paid less. I'm actually telling people if they perform, 0:18:47.880 --> 0:18:51.600 they're going to get paid substantially more, actually substantially more, 0:18:52.080 --> 0:18:57.000 And we pay the managers thirty of the that's a 0:18:57.040 --> 0:19:01.160 significant improvement in the percentage of the revenues that they 0:19:01.280 --> 0:19:04.520 earn relative to industry standards. Let's focus on appertuers, I 0:19:04.560 --> 0:19:07.240 can what products are you selling and how much are 0:19:07.280 --> 0:19:10.760 they going to cost? So I can't focus on specific 0:19:10.760 --> 0:19:13.280 products because as you know, there's a registration process, but 0:19:13.680 --> 0:19:16.800 we do expect to have all of our products available 0:19:16.960 --> 0:19:21.639 in both registered investment vehicles, both in the US and 0:19:21.640 --> 0:19:24.520 in Europe and perhaps in Asia over time, as well 0:19:24.560 --> 0:19:29.160 as separate accounts for institutions. So what we are our 0:19:29.240 --> 0:19:32.720 thesis is that we want these investing vehicles and these 0:19:32.720 --> 0:19:34.960 fees available to anybody who wants to be able to 0:19:35.000 --> 0:19:38.000 participate them, anybody meaning retail investor all the way to 0:19:38.080 --> 0:19:41.159 institutional investors. So does that mean mutual fund Yes, that 0:19:41.160 --> 0:19:45.720 would mean mutual funds. Act Advisor of funds UH and 0:19:46.160 --> 0:19:48.560 use its funds which are mutual funds in Europe. And 0:19:48.600 --> 0:19:50.679 of course they could be in different vehicles if we 0:19:50.680 --> 0:19:52.480 were in Asia, but for the time being, I think 0:19:52.520 --> 0:19:54.360 the U S and Europe's a very big market. Now 0:19:54.480 --> 0:19:56.399 there's a couple, there's I think at least one e 0:19:56.520 --> 0:19:58.320 t F that has a folk groum fee. Why not 0:19:58.480 --> 0:20:00.200 do this in the e t F structure is because 0:20:00.200 --> 0:20:01.760 you don't want to show your holdings every day, or 0:20:02.280 --> 0:20:05.280 specifically because of what you talked about earlier, not like 0:20:05.400 --> 0:20:09.199 the trading aspect. Why a mutual fund because clearly, you know, 0:20:09.320 --> 0:20:11.359 people are all kind of thinking et F right now. 0:20:11.359 --> 0:20:12.760 I wouldn't want to be where the money is going. 0:20:14.040 --> 0:20:17.000 So it's a very interesting question, Eric, very interesting question. 0:20:17.040 --> 0:20:21.679 I hope you're ready for the response embracing Okay, well 0:20:21.760 --> 0:20:27.119 we'll see so. Um. Along with the idea that I 0:20:27.160 --> 0:20:30.159 wanted to change the revenue structure of the market, I 0:20:30.240 --> 0:20:33.760 also think that the structure of the mutual fund and 0:20:33.800 --> 0:20:35.760 the pricing of the mutual fund meaning NAV at the 0:20:35.840 --> 0:20:38.679 end of the day, is an anachronism. I mean, we 0:20:38.800 --> 0:20:41.399 have that structure because it's seventy years old, not because 0:20:41.440 --> 0:20:43.600 we would design it that way. Today, we can price 0:20:43.600 --> 0:20:46.679 a mutual fund all day long. What stops a mutual 0:20:46.680 --> 0:20:50.560 fund from being priced all day long like a security answer? Nothing, 0:20:51.200 --> 0:20:54.479 just the rules. So one of the things that I 0:20:54.480 --> 0:20:56.960 think the industry needs to do is to recognize that 0:20:57.040 --> 0:20:59.679 continuous pricing for mutual funds is actually very healthy for 0:20:59.680 --> 0:21:03.240 invest sters. If you continuously priced mutual funds, what's the 0:21:03.240 --> 0:21:04.879 difference shereet of mutual fund and in e t F 0:21:05.400 --> 0:21:08.639 Exactly nothing excepted in the mutual fund case, we actually 0:21:08.680 --> 0:21:11.560 are not disclosing the positions to the street and allowing 0:21:11.560 --> 0:21:15.359 the street potentially to disrupt the pricing value that the 0:21:15.400 --> 0:21:19.240 investor keeps because the securities are known only to the investor. 0:21:20.040 --> 0:21:22.639 So I think one of the things that has to 0:21:22.680 --> 0:21:25.520 happen in the next year or so is the sec 0:21:25.800 --> 0:21:29.760 needs to examine continue to examine the possibility for continuously 0:21:29.760 --> 0:21:32.920 trading mutual funds. If you continuously traded mutual funds as 0:21:32.960 --> 0:21:34.920 a security that was listed in the New York Stock 0:21:34.920 --> 0:21:38.800 Et Change, you could tomorrow take sixteen trillion dollars and 0:21:38.840 --> 0:21:41.040 turn them into e t s, the only difference being 0:21:41.080 --> 0:21:43.880 the tax treatment, which is a biggie for a lot 0:21:43.880 --> 0:21:46.200 of people. It's about the tax treat of capital gains. 0:21:46.440 --> 0:21:49.479