WEBVTT - Balancing $5.7T in Active and Passive Management with Lori Heinel 0:00:02.480 --> 0:00:07.000 Bloomberg Audio Studios, podcasts, radio News. 0:00:08.280 --> 0:00:10.560 This week on the podcast Another Banger. 0:00:11.280 --> 0:00:15.320 Lori Heinel is executive vice president and Global Chief Investment 0:00:15.400 --> 0:00:20.720 Officer at State Street Investment Management. She oversees five point 0:00:20.720 --> 0:00:23.840 seven trillion dollars in assets and that's as of the 0:00:23.960 --> 0:00:24.239 end of. 0:00:24.200 --> 0:00:25.079 Twenty twenty five. 0:00:25.120 --> 0:00:31.480 It's obviously market has appreciated since then. She oversees index funds, ETFs, 0:00:31.760 --> 0:00:37.960 active strategies, alternatives, multi asset solutions, and really drives an 0:00:37.960 --> 0:00:43.080 incredible organization. I thought this conversation was fascinating and I 0:00:43.120 --> 0:00:46.760 think you will also with no further ado, my interview 0:00:47.040 --> 0:01:00.640 with State Streets Lori Heinel. Lori Heinel, Welcome Bloomberg. 0:01:00.760 --> 0:01:01.640 Thanks for having me. 0:01:02.160 --> 0:01:05.720 So let's start out with your early career and your 0:01:05.760 --> 0:01:10.440 academic background. You study religion at Princeton before getting your 0:01:10.560 --> 0:01:15.240 MBA at Carnegie Mellon. What was the career plan with 0:01:15.360 --> 0:01:16.440 religious studies. 0:01:17.400 --> 0:01:19.600 Well, that's a long story, but I'll try to keep 0:01:19.640 --> 0:01:22.720 it short. Bottom line is I went to Princeton because 0:01:22.720 --> 0:01:24.640 I wanted to get more of a liberal arts education. 0:01:25.280 --> 0:01:28.320 And what I realized pretty quickly is it didn't really 0:01:28.360 --> 0:01:31.040 matter what I majored in. I could major in economics, 0:01:31.040 --> 0:01:33.720 I could major in history, and I happened to take 0:01:33.800 --> 0:01:37.560 a religious studies course, which I just absolutely adored. And 0:01:38.800 --> 0:01:41.360 from a personal standpoint, I had a number of people 0:01:41.400 --> 0:01:46.760 in my family who were incredibly staunch practicing Catholics or 0:01:46.800 --> 0:01:50.720 other kinds of Christian religions, and they would do things 0:01:50.760 --> 0:01:53.240 that to me were quite odd at times, and so 0:01:53.280 --> 0:01:53.880 I thought. 0:01:53.680 --> 0:01:55.880 From a personal perspective. 0:01:55.320 --> 0:01:57.840 It would be an interesting way to get more insight 0:01:57.880 --> 0:01:59.920 into what was going on with some of these family members. 0:02:00.640 --> 0:02:03.320 So short answer is that I decided to pursue that 0:02:03.400 --> 0:02:06.520 as an academic undertaking. And then I got to a 0:02:06.520 --> 0:02:09.040 place where I needed to think about a career and 0:02:09.240 --> 0:02:11.799 my first thought was, well, geez, maybe I'll go to 0:02:11.880 --> 0:02:14.200 law school. Well, then I realized I needed to make 0:02:14.240 --> 0:02:16.679 some money. So my second thought was, well, geez, you 0:02:16.720 --> 0:02:19.360 know there's this analyst program thing that they have on 0:02:19.440 --> 0:02:23.560 Wall Street. Surely you know they recruited fine institutions like 0:02:23.600 --> 0:02:27.640 Princeton and Lo and Behold. That catapulted me into what 0:02:27.919 --> 0:02:31.120 became a really long career in finance by just moving 0:02:31.160 --> 0:02:34.400 from an institution like Princeton into an analyst program. 0:02:34.600 --> 0:02:36.040 So let's move forward. 0:02:36.080 --> 0:02:39.560 You started credit Swiss First Boston, where you ran equity. 0:02:39.240 --> 0:02:40.880 And fixed income sales. 0:02:41.600 --> 0:02:45.480 Then you ended up working on with trading at Parker 0:02:45.560 --> 0:02:46.800 Hunter in Pittsburgh. 0:02:46.919 --> 0:02:48.119 Am I getting. 0:02:47.840 --> 0:02:50.400 These Well, I didn't start by running anything, So I 0:02:50.480 --> 0:02:52.840 started out as a two year grunt right. I think 0:02:52.919 --> 0:02:55.640 most of your listeners know what these analyst programs look like. 0:02:56.080 --> 0:03:00.239 I was effectively in investment banking for public finance, worked 0:03:00.240 --> 0:03:04.440 with hospitals, airports, municipal authorities. But I did all the 0:03:04.600 --> 0:03:06.519 kind of grunt work, if you will, all the numbers 0:03:06.600 --> 0:03:08.920 crunching behind the scenes and helping to run the deal 0:03:08.960 --> 0:03:10.200 models and things of that nature. 0:03:10.440 --> 0:03:11.760 And I just found that fascinating. 0:03:11.760 --> 0:03:16.120 I thought it was really amazing to connect both you 0:03:16.160 --> 0:03:18.080 know what's going on in the world with you know 0:03:18.080 --> 0:03:20.880 how finance supports that. And so I did that for 0:03:20.880 --> 0:03:22.440 a couple of years. And then at the end of 0:03:22.440 --> 0:03:24.639 the two year program, you're typically expected to go back 0:03:24.639 --> 0:03:25.359 to business school. 0:03:25.760 --> 0:03:26.560 Well, I still. 0:03:26.360 --> 0:03:28.359 Needed to make money because I had student loans to 0:03:28.400 --> 0:03:31.200 pay off. So I decided I wanted to stay and 0:03:31.240 --> 0:03:33.840 that me led me to an opportunity on the trading 0:03:33.880 --> 0:03:38.880 desk at First Boston, which really was an incredible opportunity 0:03:38.920 --> 0:03:41.480 because that was my first real introduction to markets. 0:03:41.960 --> 0:03:44.720 So what did working on the trading floor teach you 0:03:44.760 --> 0:03:45.560 about markets? 0:03:46.360 --> 0:03:47.160 So many things. 0:03:47.640 --> 0:03:49.680 I think the first and most important thing is I 0:03:49.800 --> 0:03:54.240 was there during the eighty seven Black Monday crash, and 0:03:54.560 --> 0:03:56.800 I happened to be working in fixed income. So it 0:03:56.840 --> 0:04:00.600 was a really interesting day because, of course that time, 0:04:00.720 --> 0:04:03.200 the first Boston trading floor was on two different levels, 0:04:03.400 --> 0:04:05.600 so you had all the fixed income was on one level, 0:04:05.680 --> 0:04:08.400 all the equities was on a different level. And we 0:04:08.440 --> 0:04:11.320 went dead silent in the first part of the day, 0:04:11.760 --> 0:04:14.920 and suddenly people were starting to realize what was happening 0:04:14.960 --> 0:04:18.400 in the market, crashing you know, twenty plus percent over 0:04:18.440 --> 0:04:20.479 the course of you know, a day, which of course 0:04:20.520 --> 0:04:23.240 today we've got calibrators that don't let that happen anymore. 0:04:23.560 --> 0:04:25.520 But then all of a sudden, towards the end of 0:04:25.520 --> 0:04:28.800 the day, things on the fixed income markets started going 0:04:28.880 --> 0:04:31.559 crazy because now you had the FED coming out alan 0:04:31.600 --> 0:04:33.920 Greenspan saying, you know, we're going to go ahead and 0:04:33.960 --> 0:04:36.919 provide liquidity. We're going to make sure that there's you know, 0:04:37.040 --> 0:04:41.520 active engagement to forestall any further you know, recessions or 0:04:41.520 --> 0:04:44.080 other things that might be caused by this kind of 0:04:44.200 --> 0:04:46.920 major crash. So I guess the first lesson I learned 0:04:47.120 --> 0:04:50.159 was that there are winners and there are losers in 0:04:50.279 --> 0:04:52.880 every market event, and it's better. 0:04:52.680 --> 0:04:53.760 To be on the winning side. 0:04:53.800 --> 0:04:55.200 So I happened to be at that time on the 0:04:55.240 --> 0:04:58.320 bond side, which was the big winner that day. But 0:04:58.360 --> 0:05:00.000 then I think the other thing that I learned was 0:05:00.160 --> 0:05:02.800 that you have to be really careful about things like 0:05:02.880 --> 0:05:06.880 moral hazard, because we became accustomed in that moment to 0:05:06.960 --> 0:05:10.360 this idea of the fed put and I think many 0:05:10.440 --> 0:05:14.679 years later, we are still wondering about what that really 0:05:14.720 --> 0:05:16.800 does mean in terms of the reaction function. 0:05:17.200 --> 0:05:20.400 So take me back to nineteen eighty seven for a second. 0:05:21.000 --> 0:05:23.840 I was in grad school at the time, but I 0:05:23.880 --> 0:05:28.920 can only imagine the fixed income trading floor. Were people 0:05:28.960 --> 0:05:32.120 sitting around their feet on their desk, sipping lattes like 0:05:32.640 --> 0:05:34.960 or did anyone say let's go down to the equity 0:05:35.360 --> 0:05:38.440 floor and look at the chaos and carnate. 0:05:38.560 --> 0:05:39.960 Well, the first thing we were doing, we were sitting 0:05:40.000 --> 0:05:42.279 there doing the Crossford puzzles. There were lots of days, 0:05:42.320 --> 0:05:44.320 and I was in unibond trading, so it was a 0:05:44.400 --> 0:05:47.640 little bit of trade by appointment, very sleepy very sleepy 0:05:47.680 --> 0:05:51.400 at times. Obviously, fixing come markets got a lot more 0:05:51.400 --> 0:05:54.560 interesting throughout my career, but at that time it was 0:05:54.600 --> 0:05:56.840 not uncommon. In the early morning we do a few 0:05:56.880 --> 0:05:58.880 trades and then we'd have a little break, we'd go 0:05:58.960 --> 0:06:01.520 get some lunch, we'd do a little crossboard puzzle. 0:06:01.800 --> 0:06:03.760 So that day was different, right, So we had. 0:06:03.680 --> 0:06:06.640 Our normal morning, but by the time you got to 0:06:06.720 --> 0:06:10.480 the early afternoon, it's like, wow, something's really happening here, 0:06:10.480 --> 0:06:12.839 and you started to see major moves in bond markets, 0:06:12.880 --> 0:06:16.040 including in the MENI market, and so suddenly it was 0:06:16.200 --> 0:06:18.800 a very different, more chaotic even on our floor. 0:06:19.000 --> 0:06:22.040 So money was flying out of equities, did it roll 0:06:22.120 --> 0:06:25.039 right into just safe harbor and body. 0:06:24.760 --> 0:06:26.839 Well, cash was the big place, right, So we had 0:06:26.839 --> 0:06:31.880 these variable rate demand notes offerings which were seven day 0:06:31.920 --> 0:06:34.680 resets and so they acted like a form of cash. 0:06:34.760 --> 0:06:38.320 So we saw massive demand almost immediately in that particular 0:06:38.360 --> 0:06:40.880 market because it was a cash substitute. But with the 0:06:40.920 --> 0:06:43.040 tax advantages, when. 0:06:42.960 --> 0:06:46.599 Was the yield in eighty seven, Well. 0:06:46.400 --> 0:06:48.200 On those it would have been in the sevens, probably 0:06:48.240 --> 0:06:51.240 because you look at the spread and on a tax free. 0:06:51.080 --> 0:06:56.880 Oh man, that's twelve exactly, exactly amazing Yeah, So before 0:06:57.560 --> 0:07:01.359 after Credit Swiss, but before State Street, you had a 0:07:01.360 --> 0:07:04.880 couple of really interesting positions. You were head of investments 0:07:05.200 --> 0:07:09.640 at City Private Bank, You ran global investment products for Sei, 0:07:09.720 --> 0:07:13.880 You led new business development at Melon Financial, and you 0:07:13.960 --> 0:07:17.280 were chief investment strategist in Oppenheim Are Funds. 0:07:17.040 --> 0:07:18.480 What's the throughput? 0:07:18.520 --> 0:07:20.600 What's the common thread in all of those? 0:07:20.880 --> 0:07:24.040 Well, some of those were personal. So at the time 0:07:24.120 --> 0:07:26.440 that I was in New York, I met my then 0:07:26.760 --> 0:07:29.440 to become a husband, where since divorced, but at the 0:07:29.440 --> 0:07:33.040 time we were engaged and we ended up moving to Pittsburgh. 0:07:33.080 --> 0:07:35.240 He got a job there and so I followed him there. 0:07:35.560 --> 0:07:39.400 So the Parker hunter was really you know, personal reasons, 0:07:39.520 --> 0:07:42.240 needed to find something to do totally different city. I 0:07:42.280 --> 0:07:44.240 had grown up in Pittsburgh, so in some ways it 0:07:44.280 --> 0:07:46.280 was a real blessing because that's where we ended up 0:07:46.280 --> 0:07:48.760 having our two children, and so it was great to 0:07:48.800 --> 0:07:51.000 have that support network at a time where I wanted 0:07:51.040 --> 0:07:55.040 to continue to work through my early child childbearing years, 0:07:55.040 --> 0:07:58.000 if you will. And then I think after that we 0:07:58.840 --> 0:08:02.160 consolidated on the East Coast because we both realized and 0:08:02.200 --> 0:08:04.360 he was in finance as well. He stated in Investment 0:08:04.400 --> 0:08:08.320 banking that we wanted to have more opportunities in Pittsburgh's 0:08:08.320 --> 0:08:11.080 a great city for many many reasons, but it's not 0:08:11.120 --> 0:08:13.160 a place where you have a lot of opportunities in finance. 0:08:13.360 --> 0:08:15.920 So we ended up settling then in Philadelphia. 0:08:16.320 --> 0:08:19.280 So once again I was on the prow for a role, 0:08:19.760 --> 0:08:22.720 and that led me to first Mail in Financial, where 0:08:22.720 --> 0:08:25.640 I did business development and started from scratch, built a 0:08:25.640 --> 0:08:28.560 book over a couple of years, and then got very 0:08:28.600 --> 0:08:31.880 fortunate recruited by a head hunter to go to Sei Investments, 0:08:32.240 --> 0:08:34.400 and I would say that that was where I really 0:08:34.440 --> 0:08:38.040 got the bug in asset management. So Sei has two 0:08:38.120 --> 0:08:41.360 primary business lines. At least at the time, they were 0:08:41.360 --> 0:08:44.160 a back office outsourcing firm, and then they also had 0:08:44.240 --> 0:08:48.480 a pretty meaningful investment management arm, which was an outgrowth 0:08:48.480 --> 0:08:51.640 of their early consulting days. And so I was hired 0:08:51.679 --> 0:08:55.479 to basically build the asset management franchise for their community 0:08:55.600 --> 0:08:59.720 and regional banking division. And so I would travel around 0:08:59.720 --> 0:09:04.319 the you know, meeting with trust officers and financial advisors 0:09:04.360 --> 0:09:07.800 and other kinds of practitioners at these small regional and 0:09:07.800 --> 0:09:11.640 community banks and encouraging them to transition their business from 0:09:11.880 --> 0:09:14.400 you know, do it themselves buying individual stocks and. 0:09:14.320 --> 0:09:16.080 Bonds into a platform like SEI. 0:09:16.280 --> 0:09:19.320 So for me that was a really eye opening experience. 0:09:19.400 --> 0:09:22.199 One it just really opened up my eyes to all 0:09:22.240 --> 0:09:25.560 of America. I traveled literally around the around the country, 0:09:26.040 --> 0:09:28.680 but also just looking at the different needs that these 0:09:28.760 --> 0:09:31.040 types of clients had and how we could serve them. 0:09:31.640 --> 0:09:35.400 So you starting with the client's objectives and perhaps there 0:09:35.440 --> 0:09:39.120 are future liabilities, you have to determine what's the most 0:09:39.120 --> 0:09:45.680 efficient combination of vehicles, risk exposure, what's that process like 0:09:45.880 --> 0:09:48.360 and is that sort of the through line of all 0:09:48.360 --> 0:09:49.599 these different positions. 0:09:49.760 --> 0:09:52.840 So the major through line of all the positions is 0:09:52.880 --> 0:09:56.320 that focusing on the client first. So maybe if I 0:09:56.360 --> 0:09:59.520 can regress just a half a beat. One of my 0:10:00.120 --> 0:10:03.280 most formative experiences was when I was an investment banker 0:10:03.360 --> 0:10:06.080 at First Boston. We were working on a deal for 0:10:06.360 --> 0:10:10.040 the Arlington Airport Authority and at the time they were 0:10:10.080 --> 0:10:12.760 doing what was called a pre refunding where they were basically, 0:10:13.679 --> 0:10:15.760 you know, issuing new debt to pay for old debt 0:10:16.240 --> 0:10:18.840 and tried to reduce their debt servicing costs over time. 0:10:18.920 --> 0:10:22.480 So pretty common activity, and at the time, we kept 0:10:22.559 --> 0:10:25.000 running all these numbers and we kept showing the director 0:10:25.400 --> 0:10:29.520 these amazing discounted net present value savings that she was 0:10:29.520 --> 0:10:32.319 getting from the deal, and every time she would leave 0:10:32.360 --> 0:10:35.600 the room and say, this is not what I expected, 0:10:35.640 --> 0:10:37.600 This is not what I wanted, this is not the 0:10:37.640 --> 0:10:39.520 deal that I need to have happen. 0:10:40.000 --> 0:10:43.199 And you know, I'm the most junior person running the numbers. 0:10:43.200 --> 0:10:45.960 We've got the vps, the mds and everybody else around 0:10:45.960 --> 0:10:49.840 the room, and they're all men. Turns out and they're like, 0:10:49.880 --> 0:10:52.840 she's crazy. You know what's wrong with this woman. We're 0:10:52.840 --> 0:10:56.480 delivering amazing net present value savings. So I happened to 0:10:56.640 --> 0:10:59.360 run into her in the ladies room and said, you know, 0:11:00.120 --> 0:11:02.719 it really helped me if I understood better why this 0:11:02.800 --> 0:11:06.240 isn't working for you. And it turned out that statutorially 0:11:06.840 --> 0:11:10.080 that they could only keep the savings in the first 0:11:10.200 --> 0:11:13.560 year for the authority, and then every subsequent years of 0:11:13.640 --> 0:11:17.800 savings would basically reduce the tax leans against all the 0:11:19.360 --> 0:11:21.520 or or the fees that they were collecting at the airport, 0:11:21.600 --> 0:11:24.280 so they didn't actually get savings from anything after. 0:11:24.040 --> 0:11:24.640 The first year. 0:11:24.840 --> 0:11:27.720 I was like, okay, got that, we're going to frolload 0:11:27.760 --> 0:11:29.760 it off we go, right, So that told me a 0:11:29.760 --> 0:11:32.600 lot of lessons around one, Listen to the client. 0:11:32.679 --> 0:11:33.680 Don't just think. 0:11:33.480 --> 0:11:36.560 Because you're the expert, you know all the answers. They 0:11:36.600 --> 0:11:39.200 might need something different that you haven't thought of. And 0:11:39.240 --> 0:11:40.960 it also taught me that it doesn't have to be 0:11:41.000 --> 0:11:43.240 the most experienced person in the room that's going to 0:11:43.360 --> 0:11:46.319 have that insight, because it took me five minutes to 0:11:46.360 --> 0:11:48.720 figure out what we'd spent meeting after meeting trying to 0:11:48.760 --> 0:11:52.120 gel through. Nobody asked that question right because they just 0:11:52.160 --> 0:11:56.320 thought they knew better because every other client wanted max 0:11:56.760 --> 0:12:00.520 net present value savings period full stop. One of the 0:12:00.600 --> 0:12:03.120 I think the big threads that went throughout my entire 0:12:03.120 --> 0:12:06.160 career that sort of you got to really listen. Sometimes 0:12:06.160 --> 0:12:08.080 the problem is not what you thought the problem was. 0:12:08.720 --> 0:12:11.439 And sometimes the answer, even though it's not optimal, it's 0:12:11.480 --> 0:12:12.200 the best answer. 0:12:12.760 --> 0:12:15.079 So how did you find your way to global CIO 0:12:15.200 --> 0:12:15.840 at State Street? 0:12:16.160 --> 0:12:20.600 Yeah, Well, the good news is I once again sort 0:12:20.640 --> 0:12:22.920 of another theme in my career once I sort of 0:12:22.960 --> 0:12:26.040 got to more of a senior level was I mostly 0:12:26.360 --> 0:12:30.000 got recruited because I would have, you know, exposure, and 0:12:30.760 --> 0:12:33.079 I'd get sort of known in the industry, and so 0:12:33.160 --> 0:12:35.480 I got a call out of the blue from a headhunter, 0:12:36.000 --> 0:12:37.640 and at the time I was very happy I was 0:12:37.679 --> 0:12:40.040 living in New York City. I was actually had gotten 0:12:40.160 --> 0:12:42.480 divorced by that point in time, was living in Jersey 0:12:42.480 --> 0:12:45.520 City and working in Lower Manhattan. So I had a fabulous, 0:12:45.600 --> 0:12:48.520 you know, six minute commute across the Ferry. 0:12:48.240 --> 0:12:49.120 Which I relished. 0:12:50.200 --> 0:12:53.000 But I felt like maybe I didn't have the next 0:12:53.000 --> 0:12:55.959 step available to me at Oppenheimer Funds, which. 0:12:55.800 --> 0:12:57.319 Of course is now part of Invesco. 0:12:57.880 --> 0:13:00.560 And so I got a call and they were looking 0:13:00.559 --> 0:13:05.959 for someone who would run their investment professionals more from 0:13:06.000 --> 0:13:08.439 the sales and commercial side. The people that they called 0:13:08.480 --> 0:13:12.120 like portfolio strategists, so some people know these people as 0:13:12.200 --> 0:13:15.680 client portfolio managers. But they also wanted somebody who could 0:13:15.679 --> 0:13:20.880 be groomed for other opportunities within the investment organization. And 0:13:21.040 --> 0:13:22.839 you know, one thing led to another. I did a 0:13:22.880 --> 0:13:26.600 little flyer to Boston, had a couple of conversations, and 0:13:26.640 --> 0:13:30.120 what I really liked about, you know, what State Street 0:13:30.120 --> 0:13:32.400 had to offer at that point in time was it 0:13:32.480 --> 0:13:36.120 was a very broad platform. They covered all asset classes. 0:13:36.840 --> 0:13:39.760 State Street, as you know, had a prime position in 0:13:39.880 --> 0:13:42.560 ETFs and indexing, which you know, this would have been 0:13:42.600 --> 0:13:46.800 you know, twenty fourteen, and while certainly those instruments were 0:13:47.000 --> 0:13:51.599 very widely available and adopted by investors, nothing like that 0:13:51.800 --> 0:13:53.560 ramp up in terms of growth that we've seen over 0:13:53.600 --> 0:13:56.880 the last decade plus. And so what I saw was 0:13:56.920 --> 0:14:00.400 a place where I could have the ultimate toolkit working 0:14:00.440 --> 0:14:04.480 with the ultimate global client base to solve problems for 0:14:04.520 --> 0:14:06.319 those clients using my expertise. 0:14:06.960 --> 0:14:12.959 And just as a point, State Street has the Spiders, 0:14:13.000 --> 0:14:16.800 the Spy which is the biggest institutional ETF for the 0:14:16.840 --> 0:14:20.400 S and P five hundred, and the Gold Spiders GLD 0:14:20.600 --> 0:14:23.960 which obviously gold is way off its highs, but that's 0:14:24.000 --> 0:14:29.320 another giant ETF. What is it like overseeing what really 0:14:29.360 --> 0:14:34.680 has become the standard bearers for both index funds and ETFs. 0:14:34.800 --> 0:14:38.600 Yeah, well, look, there's a lot of complexity as you 0:14:38.680 --> 0:14:41.680 well know to running ETFs, but one of the benefits 0:14:42.200 --> 0:14:45.760 is that it's one large pool of capital, so you 0:14:45.800 --> 0:14:48.760 can run it as a single proposition if you will, 0:14:48.760 --> 0:14:52.080 you have one account. So there's definitely complexity there, but 0:14:52.160 --> 0:14:57.400 in some ways that's more straightforward than the separate accounts 0:14:57.440 --> 0:14:59.840 book of business that we manage for institutional clients. 0:15:00.600 --> 0:15:02.119 Literally every. 0:15:03.480 --> 0:15:08.000 SMP exposure Russell exposure BARAG exposure is going to be 0:15:08.040 --> 0:15:11.760 customized to that particular client. So what's really interesting about 0:15:11.760 --> 0:15:13.920 our platform is that we have both these you know, 0:15:14.520 --> 0:15:18.040 large scale funds if you will, ETFs, but we also 0:15:18.080 --> 0:15:21.720 have this massive separate account separate account management business which 0:15:21.720 --> 0:15:25.720 we can deliver to institut institutional clients at a very 0:15:25.800 --> 0:15:28.440 price competitive and very customized way. 0:15:29.080 --> 0:15:29.880 Really interesting. 0:15:30.560 --> 0:15:34.000 Coming up, we continue our conversation with Lori Heinel, executive 0:15:34.080 --> 0:15:38.000 vice president at State Street, discussing a day in the 0:15:38.040 --> 0:15:42.040 life of a global CIO helping to oversee five point 0:15:42.080 --> 0:15:44.760 seven trillion dollars in client assets. 0:15:45.120 --> 0:15:48.400 I'm Barry Results. You're listening to Masters in Business on 0:15:48.520 --> 0:15:49.440 Bloomberg Radio. 0:15:50.000 --> 0:15:53.200 I'm Barry Redults. You're listening to Masters in Business on 0:15:53.240 --> 0:15:56.680 Bloomberg Radio. My extra special guest today is Lori Heinel. 0:15:56.880 --> 0:16:00.920 She is executive vice president and global Chief Investment Officer 0:16:01.280 --> 0:16:04.440 at State Street, where she helps to oversee five point 0:16:04.480 --> 0:16:09.360 seven trillion dollars in assets. So let's talk a little 0:16:09.360 --> 0:16:13.480 bit about State Street. I recall way back when they 0:16:13.600 --> 0:16:16.400 launched Spy I want to say that was thirty years 0:16:16.400 --> 0:16:21.120 a something like that, the first US ETF, and they've 0:16:21.120 --> 0:16:25.800 been a pioneer of indexing and ETFs. You know, ever since, 0:16:26.840 --> 0:16:29.840 how do you look at the role of indexing in portfolios? 0:16:29.840 --> 0:16:33.480 How has this changed not only over your tenure at 0:16:33.520 --> 0:16:35.280 State Street, but over your entire career. 0:16:35.520 --> 0:16:38.640 Yeah, well, I think the first thing I would say 0:16:38.840 --> 0:16:42.520 is that once upon a time, it wasn't really possible 0:16:42.600 --> 0:16:45.360 for people to get index replication, right. So that was 0:16:45.400 --> 0:16:49.640 the great innovation of something like spy, where suddenly every 0:16:49.920 --> 0:16:54.520 individual investor could buy one security and effectively get the market. 0:16:55.080 --> 0:16:57.480 And for much of my career, particularly in the early 0:16:57.520 --> 0:16:59.960 part of my career, it was all about beating the market. 0:17:00.160 --> 0:17:03.040 Let's get the best active managers who could beat that index. 0:17:03.080 --> 0:17:07.000 And what you find in for decades now is in 0:17:07.680 --> 0:17:10.640 many markets, especially large cap us, it's. 0:17:10.480 --> 0:17:12.320 Really challenging to do that net of fees. 0:17:12.720 --> 0:17:16.040 And so I've thought for many decades now that this 0:17:16.200 --> 0:17:20.240 combination of index exposure where it was really hard to 0:17:20.280 --> 0:17:23.959 find managers who could consistently outperformed, coupled with maybe some 0:17:24.040 --> 0:17:28.679 satellite managers or specialist managers or managers and other parts 0:17:28.680 --> 0:17:32.879 of the market, think emerging markets, small cap adding your 0:17:33.080 --> 0:17:35.840 risk budget and your active management budget there just made 0:17:35.840 --> 0:17:38.600 a lot of sense So when I think about portfolio construction, 0:17:38.720 --> 0:17:41.879 it really is I want to accomplish some sort of outcome, 0:17:41.960 --> 0:17:44.119 some sort of risk based outcome for that client, but 0:17:44.200 --> 0:17:45.680 I also want to do it in a way that 0:17:46.040 --> 0:17:51.160 covers fees, provides opportunities for alpha or outperformance, but does 0:17:51.200 --> 0:17:52.920 so in a kind of measured way. 0:17:53.680 --> 0:17:57.680 So stage treats or record inflows in twenty twenty five 0:17:58.200 --> 0:18:02.600 into I think this is the ETF and index business. 0:18:02.880 --> 0:18:06.560 One hundred and eighty billion net inflows, management fees up 0:18:06.600 --> 0:18:09.080 thirteen percent, and engross growth. 0:18:09.720 --> 0:18:11.200 Where do you see the growth. 0:18:10.920 --> 0:18:15.160 Coming from in the space I keep hearing indexing is over. 0:18:15.240 --> 0:18:18.400 ETFs have had their day, and yet year after year 0:18:18.440 --> 0:18:19.840 it seems to be the big winner. 0:18:20.160 --> 0:18:22.760 Well, I think there's still lots of room for indexing 0:18:22.800 --> 0:18:25.520 to run, because if you think about places like fixed income, 0:18:25.960 --> 0:18:29.080 we've only started to scratch the surface relative to what 0:18:29.119 --> 0:18:32.160 you see on the equity side of things. So increasingly 0:18:32.280 --> 0:18:36.240 or even seeing quote unquote exotic fixed income things like 0:18:36.280 --> 0:18:40.280 emerging debt, things like high yield, which we've had index 0:18:40.320 --> 0:18:43.439 products for quite a long time, become much more adopted 0:18:43.520 --> 0:18:45.800 by clients globally because they see that as a great 0:18:45.840 --> 0:18:48.679 way to get access again to a market in a 0:18:48.680 --> 0:18:51.000 way that they can really understand the risk and manage 0:18:51.000 --> 0:18:53.320 it within the portfolio context. So I think there's still 0:18:53.359 --> 0:18:55.879 plenty of room for indexing to run. I think the 0:18:55.880 --> 0:18:58.960 other thing is we've seen a major shift in terms 0:18:59.040 --> 0:19:03.320 of the client segmentation, if you will. So once upon time, 0:19:03.400 --> 0:19:06.240 the big investors were the large institutional investors, you know, 0:19:06.280 --> 0:19:10.399 the defined benefit plans, sovereign wealth funds. Those investors are 0:19:10.400 --> 0:19:13.880 still important, but increasingly the net incremental dollar is coming 0:19:13.960 --> 0:19:17.760 from the retail client, whether it's through defined contribution or 0:19:18.480 --> 0:19:22.159 rollovers or you know, other kinds of assets that they 0:19:22.200 --> 0:19:25.920 might have, And that's happening globally, and those investors are 0:19:26.240 --> 0:19:30.119 really early to the ETF if you will, journey and 0:19:30.160 --> 0:19:33.000 have lots of opportunity there. And then most recently you'll 0:19:33.000 --> 0:19:35.680 have seen that we were selected for the Trump accounts 0:19:35.720 --> 0:19:39.400 as the default investment. So that's another vector of investor 0:19:39.480 --> 0:19:41.840 that we think comes online into the indexing platforms. 0:19:42.160 --> 0:19:45.520 Really really interesting. I want to I want you to 0:19:45.560 --> 0:19:52.760 push back on my understanding of indexing in equity and 0:19:52.840 --> 0:19:56.320 indexing in fixed income. So here's what I have been 0:19:56.400 --> 0:20:00.679 led to believe over many, many years of acad study 0:20:00.680 --> 0:20:06.480 and research and lots and lots of great academic analysis. 0:20:07.080 --> 0:20:11.320 It's really really hard to beat the market through active 0:20:11.359 --> 0:20:16.600 management of equities. It's relatively easy to beat the market 0:20:17.040 --> 0:20:22.359 through reducing risk, changing duration, reduced improving credit quality through 0:20:22.440 --> 0:20:27.199 active management of fixed income. How accurate or inaccurate are 0:20:27.240 --> 0:20:28.480 those statements. 0:20:28.080 --> 0:20:30.040 So this is a classic of it depends on how 0:20:30.080 --> 0:20:33.560 you think about the problem, right, So first, it is 0:20:33.840 --> 0:20:38.320 absolutely empirically true that in many spaces and equities, the 0:20:38.359 --> 0:20:41.040 average manager just does not outperform. We have all those 0:20:41.040 --> 0:20:45.720 studies from all the various you know, research that that 0:20:45.800 --> 0:20:50.239 substantiate's at in fixed income. To your point, there is 0:20:50.320 --> 0:20:53.600 more evidence that active managers can add value. But what's 0:20:53.640 --> 0:20:56.320 been interesting over the last decade or so is this 0:20:56.520 --> 0:21:00.520 rise of better understanding of factor based investing at a 0:21:00.560 --> 0:21:03.439 lot of fixed income factors. As I mean, factor investing 0:21:03.480 --> 0:21:06.000 has been around for a long time decades, but within 0:21:06.040 --> 0:21:08.119 fixed income in particular, I think we've gotten more and 0:21:08.160 --> 0:21:12.560 more sophisticated models that help us to disaggregate where those 0:21:12.560 --> 0:21:15.320 returns are coming from. And what we found is that 0:21:15.440 --> 0:21:18.680 a lot of those active alphas, if you will, out 0:21:18.680 --> 0:21:20.800 of fixed income managers are really one of two things. 0:21:20.960 --> 0:21:24.560 They go down in credit quality or the extenduration, and 0:21:24.600 --> 0:21:28.800 when you actually neutralize for those two things, suddenly the 0:21:28.840 --> 0:21:32.840