Speaker 1: This is Bloomberg Business Wait inside from the reporters and
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Speaker 1: Podcast with Carol Messer and Tim Stenebeck from Bloomberg Radio.
Speaker 2: Live at Schwab Impact twenty twenty.
Speaker 3: Three here in Philadelphia. And we just turned Charlie wrapping up.
Speaker 2: The markets right now.
Speaker 3: But the S and P five hundred still headed toward
Speaker 3: its toward it's lois since May gauge briefly crossing the
Speaker 3: threshold of a correction, down ten percent from its July peak.
Speaker 3: So I'm curious what Jeff Klinapp has.
Speaker 2: To say about all of this.
Speaker 3: He's chief Global investment strategist at Charles Schwab and he's
Speaker 3: here with us on site.
Speaker 2: It's good to see you. It's been a while.
Speaker 4: Thanks for having me.
Speaker 5: Yeah, it's great to be bad.
Speaker 2: So what do you make about I don't know.
Speaker 3: I don't know whether it's smart to ever look at
Speaker 3: one day, given trend, day of trade or really think
Speaker 3: about kind of where we are from the summer, Like,
Speaker 3: how do you look at it?
Speaker 6: There's been a lot of days like this Carol, though,
Speaker 6: that's what I'll say.
Speaker 3: Recently, Well, and this is a wacky one where we
Speaker 3: got aggressive growth data backward looking, and then yields moved lower.
Speaker 2: So how do you look at it?
Speaker 7: Yeah, they came down, and those Magnificent seven stocks weren't
Speaker 7: so magnificent today. They were the Keystone cops, I guess,
Speaker 7: just tripping over themselves. And I think that's one of
Speaker 7: the interesting things I've noticed, particularly in recent months, but.
Speaker 5: Really over the last year.
Speaker 7: The average international stock is outperforming the average US stock.
Speaker 7: So if we look at the equal weight of benchmarks,
Speaker 7: the equal weighted ETH index outperforming the equal weighted SMP
Speaker 7: five hundred, and I think because doesn't have those Magnificent
Speaker 7: seven stocks in it, but also because they're more value oriented, right,
Speaker 7: lower valuations. But interestingly, in the third quarter, what do
Speaker 7: we get today? We got really strong US economic data.
Speaker 7: Not true in Europe. Germany is probably in its fourth
Speaker 7: quarter of negative economic growth. But that's what central banks
Speaker 7: want to see. And so you know, we're seeing probably
Speaker 7: a clearer path to rate cuts over seas than in
Speaker 7: the US.
Speaker 5: I think that's favoring those equities.
Speaker 2: All right, So wait a minute, though, so it doesn't.
Speaker 3: It feels more dire overseas, right in terms of the economy, economics,
Speaker 3: so right economically, so it makes sense that those stocks
Speaker 3: are under more pressure versus what we're seeing in the US.
Speaker 7: Note, Well, what I'm saying is they're outperforming on an
Speaker 7: equal weight basis in almost every sector, which is counterintuitive
Speaker 7: looking at the economic and earnings picture. But they're undervalued,
Speaker 7: and I think, looking forward to great.
Speaker 2: Cuts, outperforming undervalua.
Speaker 6: So essentially they're ahead of us when it comes to
Speaker 6: great cuts from their own central banks. And perhaps that's
Speaker 6: why we're seeing, in your opinion, opportunity there.
Speaker 7: Yeah, I think so. I think that's where I want
Speaker 7: to be focused for next year. And there are a
Speaker 7: couple different reasons. One valuations, they're braced for more difficult environment.
Speaker 7: I really do think we're going to see it turned
Speaker 7: down in the job environment. You know, there's so many
Speaker 7: leading indicators of a softening in the labor market. I
Speaker 7: think we're starting to begin to see beginning to see that,
Speaker 7: and I don't think the US markets are as well
Speaker 7: positioned for that that overseas.
Speaker 6: We did just hear from Mark Bitzer, the CEO of Whirlpool,
Speaker 6: who said you know, we're not at the same place
Speaker 6: we were when it comes to employees over the last
Speaker 6: two years. I mean, you know, raises aren't the same.
Speaker 6: It's not as difficult to get them as they've been.
Speaker 6: But still, I mean, look at Jeff the data that
Speaker 6: we get each week when it comes to the jobs market,
Speaker 6: and then each month we're still adding more than two
Speaker 6: hundred thousand dollars two undre thousand jobs a month in
Speaker 6: the US.
Speaker 7: Yeah, it's interesting. I think there's a bit of a lag.
Speaker 7: And what we're seeing is, you know, credit conditions tightening
Speaker 7: banks are the tightening lending standards. We're hearing more from
Speaker 7: CEOs that we moved out of a labor shortage environment
Speaker 7: to maybe a labor glut, and that's maybe that's overstated.
Speaker 6: I haven't heard about a glut yet.
Speaker 7: But they've talked more about, you know, just tracking the
Speaker 7: number of mentions of layoffs or headcount reductions or euphemisms
Speaker 7: for layoffs versus those for hiring in recent quarters has
Speaker 7: really started to pick up, and we're now seeing more
Speaker 7: layoff announcements than hiring discussions or talking about jobs being
Speaker 7: difficult to fill. I think that's the start of a
Speaker 7: turn here that what may see towards the end of
Speaker 7: the quarter.
Speaker 3: I will say our Bloomberg Economics team, I was just
Speaker 3: looking through my notes. The surgeon continuing unemployment insurance claims
Speaker 3: indicates workers are find finding it increasingly difficult to find
Speaker 3: new jobs. So if you start to parse through, as
Speaker 3: just the CEO of Worldpool said, go below the headlines,
Speaker 3: like you start to see some weak points, all right,
Speaker 3: So hmm okay, So I'm want to go back to international.
Speaker 3: So if they are out performing even though their economy
Speaker 3: is underperforming, are investors they're already factoring good news or
Speaker 3: good news to come at some point because they're starting
Speaker 3: to kind of trade on what their expectations of kind
Speaker 3: of where things go.
Speaker 2: I'm trying to get an idea of yes as being
Speaker 2: a forward looking mark.
Speaker 7: Yeah, that's a good way to put it. Rampant pessimism
Speaker 7: in Europe. We've got war recession beginning to turn around,
Speaker 7: some signs of improvement. Some get tied to China's economic
Speaker 7: growth actually showing some signs of improving. I like to
Speaker 7: watch air pollution in China that's been on the rise
Speaker 7: for a couple of months now.
Speaker 6: That's depressing, but that's like a good news.
Speaker 4: It's good news.
Speaker 6: I'm just going to throw that up right, like.
Speaker 2: What the different metrics you what you watch yet?
Speaker 7: But sort of the Magnificent four in Europe are luxury
Speaker 7: good stocks and they benefit from a stronger Chinese consumer,
Speaker 7: So they're already starting a price in that turn.
Speaker 2: So we've had a mixed bag with some of that
Speaker 2: luxury guys we have.
Speaker 7: I mean, I think it's early to count on that,
Speaker 7: but I think they're beginning to price in a better
Speaker 7: twenty twenty four.
Speaker 2: So you're saying, if you have new money to put
Speaker 2: to work, you would go to Europe?
Speaker 4: I would you would go to Europe?
Speaker 3: And so what's your exposure to the US, Like how
Speaker 3: much of you scaled back? I'm assuming you would still
Speaker 3: suggest some position to the United States? People are are
Speaker 3: you saying, no.
Speaker 7: What the right allocation is to international versus US? And
Speaker 7: I'm just saying more international than you have. Now it's
Speaker 7: been fifteen years, it's probably time to reconsider that and
Speaker 7: rebalance back into it. So I think almost any exposure
Speaker 7: is going to benefit of portfolio.
Speaker 6: Okay, that's interesting because sorry.
Speaker 3: Go ahead, Well, but then I want to get an
Speaker 3: idea of like, what would you say in terms of
Speaker 3: the US exposure?
Speaker 7: You know, I worry a little bit more about the
Speaker 7: very narrow US market. So I think if you can
Speaker 7: get away from those, you know, the thirty percent of
Speaker 7: the market, the magnificent seven, I think the market's looking better.
Speaker 7: But I would favor energy and financials in the US,
Speaker 7: which are where you can find the more attractive values
Speaker 7: and the stronger cash flow, which I think is going
Speaker 7: to be king of all right.
Speaker 3: So you're not going to say thirty percent US. I
Speaker 3: know it's all individual, but I just try and get
Speaker 3: an idea of how aggressive you are saying Europe VERSUS
Speaker 3: are outside US versus US.
Speaker 7: I mean, I think you could look at it in
Speaker 7: the way you might look at the all country world, right,
Speaker 7: which is like sixty percent US and forty percent international.
Speaker 5: I don't think that's a bad allegation.
Speaker 6: Okay, what would you say to someone who would push
Speaker 6: back on you and say, wait a second, if you
Speaker 6: look at the stocks in.
Speaker 2: The S and P five I say, wait a second, Wait.
Speaker 6: A second, that so many of the stocks in the
Speaker 6: S and P five hundred have huge exposure internationally. I mean,
Speaker 6: especially those those big you know, big ones like Apple,
Speaker 6: you know, the majority of its revenue comes from outside
Speaker 6: of the US.
Speaker 7: For example, They're huge international companies that have a lot
Speaker 7: of US revenue. So I think what it really comes
Speaker 7: down to is where is the investor base. For example, NESLEI,
Speaker 7: I think, is the second largest stock in the EF index.
Speaker 7: Compare that to Coca Cola. They stealt beverages and snacks
Speaker 7: to literally the same people around the world. Their revenue
Speaker 7: growth is almost exactly the same every year, but one
Speaker 7: trades three or four multiple points above the other Coca Cola.
Speaker 7: Why Because eighty percent of Cokes investors are US based,
Speaker 7: about eighty percent of Nestle's investors are European based. And again,
Speaker 7: recession war, their pessimism is giving you a cheaper valuation.
Speaker 6: I think those converted opportunities.
Speaker 3: Okay, how confident do you feel about making calls right now? Well,
Speaker 3: you know, do you even have like the federals, You know,
Speaker 3: you have Jay Powell to talk about. Listen, there's multiple
Speaker 3: that the idea in terms of what kind of scenarios
Speaker 3: could come why, you know, I forget how we said it,
Speaker 3: but there's a lot out there in terms of how
Speaker 3: we could move from here globally in markets, in the economy.
Speaker 2: Obviously, his focus is on the US.
Speaker 4: So I think the.
Speaker 3: Thinking was like, all right, so how confident does he
Speaker 3: feel about making forecasts?
Speaker 2: How confident do you feel at this point?
Speaker 7: I think that benefits a broader allocation rather than a
Speaker 7: concentrated one. Right, when you're super confident in an outcome,
Speaker 7: you can concentrate. I think now broader global acid allocation
Speaker 7: makes even more sense in a more uncertain world.
Speaker 2: Yeah, when's the last time you made that kind of call?
Speaker 4: Oh gosh?
Speaker 7: I mean, so we liked international in the two thousands,
Speaker 7: right in the twenty tens, a long time. We were
Speaker 7: in a different cycle where interest rates were so low
Speaker 7: and barrow, you know, borrowing was so cheap. Now you
Speaker 7: want cash rich companies, You're going to find more.
Speaker 4: Of those overseas.
Speaker 2: China. You like China too, You know.
Speaker 7: China's a tougher call. I do think the economy is improving,
Speaker 7: but you have political risk is such a wild card
Speaker 7: over there, and the stocks can swing sixty percent on
Speaker 7: you know, up or or down.
Speaker 5: We we've even seen that this year.
Speaker 7: I know, I'm more confident in developed markets than Yeah, Okay,
Speaker 7: well here's.
Speaker 6: The develop market that's close to home the US. Are
Speaker 6: we headed into a recession or are we in a recession?
Speaker 6: Are adding?
Speaker 7: I think we are in a cardboard box recession. Manufacturing
Speaker 7: and trade are inner recession things we put in a box.
Speaker 7: If you can't put it in a box, it's not
Speaker 7: in a recession. I lived three miles from Walt Disney World.
Speaker 7: There's no recession at Space Mountain right now, and so
Speaker 7: I'm a little worried that services slide into a recession
Speaker 7: and meet we're manufacturing is rather than a rapid rebound
Speaker 7: in manufacturing. So I'm gonna watch for that next year.
Speaker 3: Jeff, what do you think we've got thirty seconds left?
Speaker 3: What every investor should be asking themselves at this.
Speaker 2: Point right now?
Speaker 7: I think I think asking themselves about their you know,
Speaker 7: their allocation international. I'm going to come back to this
Speaker 7: because when international is in favor, it tends out performed
Speaker 7: five six hundred basis points a year. That's important to
Speaker 7: stay on track.
Speaker 3: To You're find I have to say, when I started,
Speaker 3: I feel like we used to talk about international investing.
Speaker 2: So much more.
Speaker 3: And you know, our global investing, including the whatever you
Speaker 3: know but it's just interesting how it's gone kind to
Speaker 3: the wayside.
Speaker 4: Yeah, Timer, what's good reason?
Speaker 2: Maybe, but maybe it's a different environment. Jeff, thank you
Speaker 2: so much, my pleasure.
Speaker 4: Thanks for having me.
Speaker 2: Really fun.
Speaker 3: Jeff clientop Chief Global Investment Strategies at Charles Schwab obviously
Speaker 3: onsite with us here in Philadelphia at Schwab Impact twenty
Speaker 3: twenty three. A lot going on, Carol Master, timstead of It,
Speaker 3: a lot more interviews to come actually from the Saved.
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Speaker 3: So much going on in the market environment, and we've
Speaker 3: got a great guest. Chloe Berry is Managing director and
Speaker 3: head of the Infrastructure Income Strategy over at Brookfield Asset
Speaker 3: Management firm, very well known to our audience, of course,
Speaker 3: run by Bruce Flatt, and she joins us here at
Speaker 3: Schwab Impact.
Speaker 2: Welcome, Welcome, so nice to have you. Thank you, it's
Speaker 2: great to be here.
Speaker 3: Tell us about your world and how you think about
Speaker 3: the environment that's out there in a day where you know,
Speaker 3: we get a hot GDP report and yet guilds go down,
Speaker 3: like things don't always make sense, and we're trying.
Speaker 2: To read the tea leaves. So tell us how you
Speaker 2: guys see it.
Speaker 8: Yeah, so look in infrastructure. The beautiful thing about infrastructure
Speaker 8: is that it's really an assa class for all cycles. Right,
Speaker 8: So so current environment to only plays a small part
Speaker 8: in what we're looking for, because infrastructure are essential assets.
Speaker 8: They're the backbone of the global economy. They're you know,
Speaker 8: electricity transmission lines powering the buildings we're sitting in. It's
Speaker 8: the telecom towers you know, pinging the signal for this call,
Speaker 8: or the you know, data centers housing our photos, and
Speaker 8: so these are essential assets with long term contracted revenues,
Speaker 8: inflation linkage and downside protection through these stable cash flows.
Speaker 8: And so infrastructure is really like what we like to say,
Speaker 8: is an asset class for all cycles, and so we
Speaker 8: don't have to predict what's going to happen tomorrow to
Speaker 8: have a stable, predictable cash flow stream.
Speaker 6: To what extent do you watch governments spending around the
Speaker 6: world affecting your asset classes.
Speaker 8: So it's a really good question, because so much is
Speaker 8: going on in that right now. Right We've seen the
Speaker 8: Inflation Reduction Act, the Chips Act, the Infrastructure and Jobs Act.
Speaker 8: It's all positive. We love people talking about infrastructure. They
Speaker 8: should be talking about infrastructure. We need to modernize our infrastructure,
Speaker 8: and so it's great that it's more of a household topic.
Speaker 8: And all that influx of capital, all the incentives that
Speaker 8: the government is putting, multiple governments are putting really into
Speaker 8: the infrastructure sector is really a tailwind. We at Brookfield,
Speaker 8: we don't rely on those, you know, to make an
Speaker 8: economic return r in our investments, but they are huge tailwinds.
Speaker 2: For the sector.
Speaker 6: But what one challenge with rising interest rates, of course,
Speaker 6: is also the deficit. And there's a concern too that
Speaker 6: Washington might pull back on some of the spending as
Speaker 6: a result of rising rates and as a result of look,
Speaker 6: you know, there's no other way to put it, but
Speaker 6: disagreements between Democrats and Republicans. Things are pretty frack even
Speaker 6: within parties as we speak. How does that concern you?
Speaker 8: So so again we're not relying on you know, the
Speaker 8: government programs to to earn our return that we're looking
Speaker 8: you know, with the you know down to it, we
Speaker 8: are economic investors looking for a return, and we don't
Speaker 8: rely on that. It's helpful, but really we're looking, you know,
Speaker 8: for assets that withstand that and and and I think
Speaker 8: just more generally, it's you know, the interest rate environment
Speaker 8: and capitalized or i should say more constrained balance sheets,
Speaker 8: whether that's governments or corporates right that are trying to
Speaker 8: de lever in this environment. That creates opportunity for us
Speaker 8: because we're private capital investors, and there's a huge deficit
Speaker 8: in what these governments and corporates who have traditionally funded
Speaker 8: infrastructure can spend in today's market relative to the trillions
Speaker 8: of dollars that needs to be spent to upgrade our infrastructure.
Speaker 8: And so we play a really critical role and opportunities
Speaker 8: are opening all the time.
Speaker 4: Because of that.
Speaker 2: We're more opportunities public or private infrastructure.
Speaker 8: So we're predominantly private market infrastructure, right, but we see
Speaker 8: opportunity in the public markets to take assets or companies private.
Speaker 8: What that really allows us to do is take a
Speaker 8: longer term view on the asset. Right, we're not subject
Speaker 8: to the whim of the market and the shareholders on
Speaker 8: any one day or what is the sentiment of that day.
Speaker 8: We can drive value and really long term compounded growth
Speaker 8: over significant periods of time instead of making decisions based
Speaker 8: on really what's on vogue today.
Speaker 3: When I do wonder what expands or reduces maybe the
Speaker 3: expected timeline for returns for your investors. Right, you guys
Speaker 3: do these massive fundraises and I think there's is it
Speaker 3: one hundred billion dollars twenty twenty three your goal for
Speaker 3: is it going to happen?
Speaker 8: So, look, infrastructure, I think that number is across Brookfield
Speaker 8: more broadly in the infrastructure space. Look, we're raising huge
Speaker 8: amounts of capital and it's still coming in. It's still
Speaker 8: coming in. Look that you know, capital is more constrained
Speaker 8: than it has been in the past. But infrastructure assets
Speaker 8: are what people are looking for today. Inflation linkage, right,
Speaker 8: so topical, Maybe we're peaked on inflation, but it's still high,
Speaker 8: right right, interesst rate protection rates all the higher for longer,
Speaker 8: all that sentiment. These are assets that can be financed
Speaker 8: with long term fixed rate debt, and so the assets
Speaker 8: are protected from that interest rate environment. And when we
Speaker 8: buy new assets, you know, we're pricing that in to
Speaker 8: the assets that we're buying.
Speaker 3: What would you say, Chloe, are the most interesting assets
Speaker 3: out there when it comes to infrastructure investing that you
Speaker 3: guys are just really keen on. You're known for, you know,
Speaker 3: certain trends and plays, but what is it in particular?
Speaker 8: So so we like to talk about what we call
Speaker 8: the three d's, and this is decarbonization, deglobalization, and digitalization.
Speaker 8: And so really this is about dec urbanization. It's everything
Speaker 8: from you know, more renewable power generation of course, you
Speaker 8: know that's an obvious one, but it's going beyond that.
Speaker 8: It's building out electricity transmission lines to connect that renewable
Speaker 8: power to population centers or to the grids, and it's
Speaker 8: in our homes. It's residential infrastructure, rooftop solar panels, heat pumps, generators,
Speaker 8: ev charging stations.
Speaker 6: What about nuclear?
Speaker 8: So nuclear where we like to play in nuclear is
Speaker 8: on nuclear services, right, So nuclear generation itself is often
Speaker 8: done by governments or government utilities because projects.
Speaker 2: So this is again where public drives it. But you
Speaker 2: guys find.
Speaker 8: Exactly will we will service it and be around the ancillary,
Speaker 8: but we will not generate the nuclear pack.
Speaker 6: Where do you rely on that in terms of like
Speaker 6: do you believe more of that will happen in the
Speaker 6: US or those projects too big and too daunting for
Speaker 6: local governments to take on just the last thirty seconds
Speaker 6: that we yes, So.
Speaker 8: We believe that nuclear will pay a critical role in
Speaker 8: decarbonizing our environment and really you know, energizing the world
Speaker 8: of the future. It's really critical for that baseline power even.
Speaker 2: In the US. Yes, really do you see signs of it?
Speaker 8: Look, there's there's opportunities kind of around the world where
Speaker 8: we're seeing it. You know, we we just looked in
Speaker 8: Poland and got some opportunities there. You know, geopolitical concerns
Speaker 8: around the world that's really driving you know, on shoring
Speaker 8: of critical industries and energy security and so you know,
Speaker 8: could it happen?
Speaker 2: Yeah?
Speaker 4: I think so.
Speaker 2: Really interesting. Chloe, thank you.
Speaker 6: So much for the infrastructure.
Speaker 2: Come back. So do we come back into here, come
Speaker 2: back and join us. We do love it infrastructure.
Speaker 3: Chloe Berry, she's managing director and head of the Infrastructure
Speaker 3: Income Strategy over at Brookfield Asset Management. Joining us here
Speaker 3: live in Philadelphia at Schwab Impact twenty twenty three.
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Speaker 1: Just Say Alexa playing Bloomberg eleven thirty.
Speaker 3: You know, earning is certainly front and center right now,
Speaker 3: especially in the blackout period as we wait for the
Speaker 3: next FED meeting. Having said that, one of the things
Speaker 3: we continue to talk about here at Schwab Impact twenty
Speaker 3: twenty three is all about the fixed income market higher
Speaker 3: for longer rate environment. We heard Janet Yellen, former FED
Speaker 3: official head of the FED, obviously US Treasury Secretary, making
Speaker 3: some comments. Well, it continues to be top of mind
Speaker 3: for investors. And what's interesting is Schwab has actually done
Speaker 3: Schwab Asset Management a survey specifically on ETFs. They do
Speaker 3: it an annually survey and it's called ETFs and Beyond.
Speaker 3: So we want to bring in David Botset to talk
Speaker 3: about it. He's head of Equity Product Management at Schwab
Speaker 3: Asset Management with us in Philadelphia. I'm stumbling through because
Speaker 3: I want to get to you. There's a lot going on.
Speaker 3: This is our world, So forgive, forgive, forgive, we're going
Speaker 3: to watch earnings and bring them to our our audience.
Speaker 3: But you guys did do a survey about millennials and ETFs.
Speaker 2: Tell us about that what you found.
Speaker 9: Yes, so this is a survey we've been doing for
Speaker 9: over a decade. So not only do we get great
Speaker 9: results this year, but we can compare it to past years.
Speaker 9: And one of the things we're seeing you mentioned fixed income,
Speaker 9: is the increased interest and familiarity with fixed income ETFs
Speaker 9: and millennials in particular, using more fixed income in their
Speaker 9: portfolios than what we're seeing from Gen X or baby boomers.
Speaker 6: I mean, is there anything hotter out there right now
Speaker 6: than TLT?
Speaker 5: There isn't.
Speaker 6: Okay, that's what I thought. Let's just get right to
Speaker 6: the Let's just get right to it here. Even though losses,
Speaker 6: you know, it's anyone who's invested in TLT this year
Speaker 6: has just gotten hammered.
Speaker 5: They have.
Speaker 9: But right they're really thinking about the future. You mentioned
Speaker 9: the FED. Where they going are they stopping? We clearly
Speaker 9: we're on the precipice of perhaps a pause.
Speaker 5: We're closer to the top.
Speaker 9: We don't know if it's the top, but I think
Speaker 9: they're looking at where do I position my portfolio for
Speaker 9: what comes next?
Speaker 3: When the millennials start talking about fixed income, does it
Speaker 3: just mean that the error is over and then.
Speaker 2: It's time to sorry saying peak read the peak?
Speaker 10: Now?
Speaker 2: I do wonder, like, how do you guys read and
Speaker 2: interpret that?
Speaker 9: You know, when we think about what the millennials have
Speaker 9: gone through, think about the Great Financial Crisis. You know,
Speaker 9: some of the older millennials have hit the tech boom
Speaker 9: and bust. They've seen what their parents have experienced, and
Speaker 9: in some cases we believe they're a little bit more
Speaker 9: conservative with their allocations that when we're seeing with the
Speaker 9: older generation they are conservned.
Speaker 2: You know, it's funny.
Speaker 3: I was listening to I think the team on Surveillance
Speaker 3: or maybe it was Paul and Matt on Markets Today,
Speaker 3: But this whole idea of you have this generation, the
Speaker 3: millennial generation that came out of the crisis that was
Speaker 3: really rough. They saw maybe the impact on their parents,
Speaker 3: they saw themselves if they were entering the job market
Speaker 3: not easy. And then to see kind of coming out
Speaker 3: of the pandemic.
Speaker 6: T me to keep going student loan debt.
Speaker 2: Yeah, it's crippling, bumped out right, Yeah.
Speaker 6: Like I mean, you know then you to try to
Speaker 6: buy your first house and then mortgage rates hit eight percent.
Speaker 9: Well thanks, be pretty great. They but let's look at
Speaker 9: the flip side. Suddenly income is part of fixed income
Speaker 9: investing again. So we're out of your interest rate environment.
Speaker 9: You're looking at duration, you know, intermediate term five six percent,
Speaker 9: ending on where you're going. So it's a much more
Speaker 9: attractive opportunity in your portfolio today than it was two
Speaker 9: years ago.
Speaker 6: Okay, there's a glad glasses always tough full.
Speaker 3: Well, well, I always do wonder what you guys do
Speaker 3: with like these studies and like you know, we've been
Speaker 3: talking to many members of the Schwab investment team, you know,
Speaker 3: who are looking at the markets and trying to fig
Speaker 3: We talked, you know, figure out what goes next. Jeff
Speaker 3: clientap talking about like overseas like not you know, non us.
Speaker 3: How you now, maybe it's time to start looking at it.
Speaker 3: So does it mean that in terms of the thinking
Speaker 3: and strategy, this whole idea of fixed income right, that
Speaker 3: it is going to be a strategy that sticks around
Speaker 3: a lot longer than everybody.
Speaker 2: May be anticipating.
Speaker 9: Absolutely so from an asset management standpoint, for Swab, asset management.
Speaker 5: We use this type of data to inform the type
Speaker 5: of things we want to bring to market.
Speaker 11: Right.
Speaker 9: Earlier this year we launched the Schwab High Yield ETF
Speaker 9: and recently we reduced the expense ratio to three basis
Speaker 9: points of that product responding to client needs.
Speaker 6: Does it just go to zero eventually?
Speaker 5: I don't think it goes to zero.
Speaker 6: Is there a race to zero?
Speaker 5: I think we're getting very close to the bottom, right.
Speaker 9: There's always going to be costs that we're going to
Speaker 9: need to be able to cover for the product, and
Speaker 9: we're going to need.
Speaker 5: To have an expense ratio that's going to cover those costs.
Speaker 2: But that makes it tough, right to be very careful
Speaker 2: in terms of the pricing.
Speaker 9: You have to be very careful, and you've got a
Speaker 9: price at a level that you're expecting a certain asset
Speaker 9: level to get to.
Speaker 5: You know.
Speaker 3: One of the things that we keep hearing too and
Speaker 3: I feel like we heard it for a while, David,
Speaker 3: and then I feel like it went away.
Speaker 2: But this whole idea of.
Speaker 3: Personalization in terms of portfolios, does stuff come out of
Speaker 3: the survey on that as well?
Speaker 9: Yes, it has greatly. So that's one of the questions
Speaker 9: we ask is about personalization. And when we think about
Speaker 9: the personalization, we think about it in a couple of
Speaker 9: different ways. One is what type of ETFs investors are using,
Speaker 9: So using things like thematic ETFs to get exposure to
Speaker 9: specific areas of the market where they may not want
Speaker 9: to take the individual stock rist of an Amazon, Afford
Speaker 9: and Intel, right, but they want exposure to that.
Speaker 5: Industry very narrowly within their portfolio.
Speaker 9: So thematic is a play other things like ESG is
Speaker 9: playing forward as well.
Speaker 3: Is ESG is as a try active or interesting two
Speaker 3: millennials or others at this point, Yeah, I think know
Speaker 3: the reckoning and we all keep talking about where people
Speaker 3: want to really kind of understand what exactly is e
Speaker 3: SG so that when I invest, what is it really doing?
Speaker 9: I think that's one thing the industry continues to be
Speaker 9: challenged with. Everybody defines it in a different way. If
Speaker 9: we had a common nomenclature that everybody could get behind,
Speaker 9: it would be much easier.
Speaker 3: Does money back off because as a result, I don't
Speaker 3: think so. It's also a performance like I think. I
Speaker 3: think when when it was a cheap money environment, everything
Speaker 3: seemed to do well.
Speaker 9: It did, but you still look at that differentiation by demographics.
Speaker 9: The younger generation continually looks at that opportunity and they
Speaker 9: want to be closer to investing as their values.
Speaker 6: How long do you think we're going to be in
Speaker 6: a high rate environment?
Speaker 4: Oh?
Speaker 2: Boy, if he knew, he would not be talking to him, you.
Speaker 6: Would still be out with us. Were cool, We talk
Speaker 6: about TLT, we talk about new ETL.
Speaker 5: So I don't know how long we'll be in a
Speaker 5: high rate environment.
Speaker 9: I set through a session yesterday and they ask the
Speaker 9: group of rias that were in the room how many
Speaker 9: of them thought interest rates were going to be come
Speaker 9: down from the FED in the first half of next year. Yeah,
Speaker 9: I'd say it's probably ten to fifteen percent of that audience. Okay,
Speaker 9: they ask about the second half of that of next year,
Speaker 9: it was like ninety percent of the audience. So I
Speaker 9: think it's telling from the community and from the professionals
Speaker 9: we have at this conference what their view is.
Speaker 3: Yeah, but remember was it earlier this year that if
Speaker 3: you had done that, you probably got the same response,
Speaker 3: like when the regional bank.
Speaker 2: Crest is very true, it's just been a tricky environment.
Speaker 9: It is a very tricky environment. The numbers came out
Speaker 9: this morning. The US economy much stronger than anticipated. I
Speaker 9: don't think anybody's necessarily lower.
Speaker 2: Yes, So it's really fascinating. Great to check in on survey.
Speaker 2: Thank you so much, Thanks for your patience.
Speaker 3: As we were going through kind of all of the
Speaker 3: earnings completely understand.
Speaker 5: Thanks for the time, so appreciate it.
Speaker 2: David Bwow.
Speaker 3: David Bot said he's head of Equity product Management at
Speaker 3: Schwab Asset Management. Onsite with us here in Philadelphia.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us
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Speaker 3: We are live at swap in Back twenty twenty three,
Speaker 3: and there's a lot of.
Speaker 6: You might hear some stuff in the background. It's like,
Speaker 6: you know, we're getting toward the end of the keynote here,
Speaker 6: people are packing up, the wine is out, the Wi
Speaker 6: Fi is working really well because people are starting to leave.
Speaker 6: So's that's we're just setting the scene here.
Speaker 10: Actually before we went on air, They're like bringing us wine,
Speaker 10: which was like yes, no, yes, no wine until six o'clock, Carol,
Speaker 10: we can't do all right, We're gonna talk.
Speaker 2: We're gonna get serious for a moment.
Speaker 3: Because the markets, Charlie was breaking down some of the earnings,
Speaker 3: a lot of stuff. We saw a rebound in tech
Speaker 3: giants kind of fading in the after hours, Amazon whipsawing around.
Speaker 2: It's a hard market to make sense of.
Speaker 3: Bringing Kevin Gordon Hello, Hello, senior investment strategist at Charles Schwab.
Speaker 3: I'm curious after two days they are wrapping up, but
Speaker 3: there's been tons and tons of conversations about kind of
Speaker 3: where we are and where we go from here. So
Speaker 3: tell us about some of the chats you've had and
Speaker 3: have you had all kind of altered your outlook about
Speaker 3: maybe the next.
Speaker 2: Six months into the market.
Speaker 12: Know, we kicked it off on the big stage Tuesday night.
Speaker 12: I took Wi Jeff klentop Are chief global strategist, and
Speaker 12: Mike Townsend, who's our man in Washington, And at the
Speaker 12: time it was.
Speaker 4: Who's going to be the speaker?
Speaker 12: And you know, in Washington fashion, it's got solved, you know,
Speaker 12: pretty quick as no one was expecting quick as not
Speaker 12: took a quick catch a few weeks After a few weeks, yeah,
Speaker 12: but after so many you know, disruptions and trying to
Speaker 12: figure out who it was going to be. But you know,
Speaker 12: I think the outlook actually hasn't really adjusted in my view,
Speaker 12: because you've got these really interesting opposing forces at work
Speaker 12: in the at least the US equity market, which is
Speaker 12: you know what I focus on where since July. Definitely
Speaker 12: it's been exacerbated over the past month, but since the
Speaker 12: July peak for the SMP, you've had a pretty significant
Speaker 12: washout and sentiment both on the attitude and on the
Speaker 12: behavioral side, and the degree of pessimism we're starting to
Speaker 12: see in all the metrics that we track would actually
Speaker 12: start to lay the groundwork for a pretty nice rally.
Speaker 2: I like when people get down on the market.
Speaker 12: The only yeah, and the only trouble with that is
Speaker 12: you need a catalyst to get you there. And so
Speaker 12: the opposing force for that is that you don't have
Speaker 12: bread statistics that are acting well at all, whether you're
Speaker 12: looking at the percentage of you know, S and P
Speaker 12: five hundred members, rustle two thousand members above their fifty
Speaker 12: or two hundred day moving a yeah, exactly not so
Speaker 12: that deteriorating bread puts more downward pressure on the market.
Speaker 12: And that's the two opposing forces right now.
Speaker 6: So what could be that catalyst? I mean, does it
Speaker 6: have to be a rate cut from the Fed?
Speaker 12: No, I actually don't think that's what we need. I
Speaker 12: think definitely more clarity on whether we've got the pause
Speaker 12: in place, But I don't think that matters for the
Speaker 12: equity market at all because actually what's interesting is if
Speaker 12: you go back in the long history of the FED
Speaker 12: and tightening cycles and when they've been done, you know,
Speaker 12: you could look at an average move for the S
Speaker 12: and P and yeah, it's up just a little bit
Speaker 12: six and twelve months after that final hike, but there's
Speaker 12: a huge range around that, with the max up thirty percent,
Speaker 12: that then the men down thirty percent twelve months after.
Speaker 4: So you never want to use.
Speaker 12: The FED you know, final hike as or the first
Speaker 12: cut as a signal for the market itself. I actually
Speaker 12: think the catalyst is probably somewhere within it, because.
Speaker 3: I feel like so many other people like, hey, as
Speaker 3: soon as the FED stops, that's like, you know, yeah, historically, what.
Speaker 6: He just said, we just he just said what the
Speaker 6: catalyst is and I didn't hear.
Speaker 12: Well somewhere in earning season. But to Carrol's point, I
Speaker 12: will say, you know what's interesting is I keep hearing
Speaker 12: this narrative where well, as soon as the FED is done,
Speaker 12: we're off to the races. That's not the case, as
Speaker 12: you know, as history would show, and history is actually
Speaker 12: consistent in saying that every single time is different. And
Speaker 12: what I mean by that is, if you know, we
Speaker 12: got used to in this kind of great moderation era,
Speaker 12: you know, sort of post two thousands, early two thousands,
Speaker 12: in those tightening cycles, from start to finish, what was
Speaker 12: normal for the US equity market was from you know,
Speaker 12: the first hike to the last hike, stocks went up
Speaker 12: the entire time. It wasn't until after where you really
Speaker 12: started to see the long and variable lags kick in
Speaker 12: and then the market was looking ahead and that's when
Speaker 12: you turned over into a bear market. So what kind
Speaker 12: of confused this whole situation was that we had a
Speaker 12: bear market last year as the FED was aggressively tightening.
Speaker 12: That was not normal for the past decade or so.
Speaker 3: I feel like we've had a market that is at
Speaker 3: point looking ahead and then all of a sudden kind
Speaker 3: of smacked down.
Speaker 12: And you know, I think looking ahead actually, and what's
Speaker 12: interesting is that everything has sort of been masked by
Speaker 12: the super seven that we all know now has been
Speaker 12: doing so well this year. But actually, if you just
Speaker 12: peel that market, you know, onion layer back one just
Speaker 12: one bit, I think out of the surface, the market's
Speaker 12: telling almost the same story as the economy because our view,
Speaker 12: and you know, I work for Thos Anzander's our chief
Speaker 12: investment strategists, and what we've been thinking about and how
Speaker 12: we've been explaining the economy for the past year and
Speaker 12: a half is that we've been suffering from rolling recessions.
Speaker 12: Different parts of the economy have been deep in recession,
Speaker 12: like housing, housing related consumer goods, while you've had the
Speaker 12: offsetting strength from services in labor. And that's actually kind
Speaker 12: of what the market's telling you too, where if you
Speaker 12: take out the big players, the sort of beneficiaries of
Speaker 12: rates even going up because they're earning more on their
Speaker 12: cash than they have to oh on their debt. When
Speaker 12: you take all that away, SMP equal weight it is,
Speaker 12: you know down here to date, Russell two thousand is
Speaker 12: now retesting its lows from last summer breaking through, So
Speaker 12: that is more consistent with the economic message in my mind.
Speaker 2: So US market, do you what's your advice to investors?
Speaker 12: You know, we've been a lot more as getting away
Speaker 12: at least in this environment from kind of your traditional
Speaker 12: sector focus and to factor focus, you know, investing where
Speaker 12: you know, I'll give an example right now. The biggest
Speaker 12: worry for the economy, arguably aside from everything going on geopolitically,
Speaker 12: but if we want to look domestically, is the interest environment,
Speaker 12: the interest expense environment, where rates are going, what companies
Speaker 12: have turned out their debt and don't have to suffer
Speaker 12: from it as much. And I think actually one of
Speaker 12: the reasons that energy has been the outperformer since the
Speaker 12: July peak in the market is not only because of
Speaker 12: oil prices, but is also because it has a high
Speaker 12: and rising interest coverage ratio and it actually scores pretty
Speaker 12: well on some of those profitability metrics. So you can
Speaker 12: find you can screen for that metric or that factor
Speaker 12: and find it in any sector.
Speaker 2: So that is that is that your only factor that
Speaker 2: you're no, not.
Speaker 12: The only one, no anything quality profitability based, So looking
Speaker 12: at forward profit margins, what the expectations are for companies
Speaker 12: also trailing profit margins to show that they actually have
Speaker 12: some strength. But I would also add in there, and
Speaker 12: back to my comment earlier about earning season kind of
Speaker 12: being the little gem or the little catalyst, is revenue growth.
Speaker 12: You know, for all the cheering in the second quarter,
Speaker 12: when we had an earnings beat rate that went up
Speaker 12: closer to eighty percent, you had a revenue beat rate
Speaker 12: that was still trending down and you actually had almost
Speaker 12: no revenue growth for the entire market, and an inflation
Speaker 12: adjusted terms, it was down for the third quarter. Yeah,
Speaker 12: So I think that's going to be the thing to
Speaker 12: watch for because if you have revenue growth that's continuing
Speaker 12: to slow, but you have earnings growth that keeps rising,
Speaker 12: that just means you're aggressively cutting costs and you can't
Speaker 12: cost cut your way to glory. So I think you
Speaker 12: need to show actually right.
Speaker 6: So, your colleague Jeff Kinetop was on with us a
Speaker 6: little earlier, and he was very bullish on European equities
Speaker 6: and said he wouldn't give us a target, but he
Speaker 6: basically said, you know, if you have in your portfolio
Speaker 6: you need you need to increase your allocation to European
Speaker 6: I mean, do you guys like duke it out because
Speaker 6: you're the US guy.
Speaker 12: No, I mean this is this is our you know,
Speaker 12: not just I mean I think that it's a time
Speaker 12: to check you're wrong. No, definitely not. I mean I
Speaker 12: think no, I think the world of Jeff no pun intended.
Speaker 4: I think he is. I mean, he's he's right about
Speaker 4: this aspect.
Speaker 12: And I would I would weave in our Collie Kathy
Speaker 12: Jones on the fixed income sites, Yes, because you have
Speaker 12: to think about where we're at across the spectrum of
Speaker 12: asset classes for fixed income now, I would I would
Speaker 12: actually just point to fixed income almost as a way
Speaker 12: of playing defense as an equity investor, because you have
Speaker 12: an income in fixed income again, and at a time
Speaker 12: when risk reward for equity still doesn't look as good
Speaker 12: from a valuation perspective. You know, all the valuation metrics
Speaker 12: we track for the market here are still relatively expensive.
Speaker 12: Even you know, with all of the selloff that we've
Speaker 12: seen in the past few months, you're still looking pretty expensive.
Speaker 12: So I just think international, Yes, when we go through
Speaker 12: something like dual cycles, what we call dual cycles, where
Speaker 12: you've got you know, some form of a recession, some
Speaker 12: a form of a bear market, which we did have
Speaker 12: last year, and arguably we're still in that process. It
Speaker 12: tends to usher in new leadership. It's not this instant,
Speaker 12: you know, turn the switch and then you go into
Speaker 12: new you know, sort of new leadership. But I think
Speaker 12: you need to start considering that because you know, x
Speaker 12: US fixed income have been shunned by a lot of investors,
Speaker 12: and for some investors in a younger generation, these yields
Speaker 12: are sort of a new thing.
Speaker 6: I mean, let's be honest. For you and me, well
Speaker 6: you know.
Speaker 4: And hey, well it's fine, it's fine.
Speaker 6: But Carol, you make this point all the time, Carroll,
Speaker 6: with with people who I'm trying to think myself, I'm
Speaker 6: trying to think myself out of a hole available with
Speaker 6: the truth here. But you make the point all the time, Carroll,
Speaker 6: that there are many people on Wall Street. There's an
Speaker 6: entire generation of people on Wall Street, not just people
Speaker 6: media really talk to media, but there's an entire generation
Speaker 6: of people on Wall Street that have not seen a
Speaker 6: market like this, that have not seen rates like perspective.
Speaker 3: I was listening to Matt Miller and Paul Sweeni on air,
Speaker 3: you know, and Paul just got a mortgage and it
Speaker 3: was I think six percent or something or four percent,
Speaker 3: I don't know, four six percent, and he was like.
Speaker 6: It's pretty good.
Speaker 3: He was complaining, this was this was a few months ago.
Speaker 3: He was like complaining, and then he's like, no, I
Speaker 3: actually feel pretty good about it right now. So it's
Speaker 3: like perspective, best investment thought right now, idea thirty seconds.
Speaker 4: Don't get caught trying to time the market.
Speaker 12: And I say that not as just general advice, but
Speaker 12: because last year at the October low, a lot of
Speaker 12: people are comparing this most recent action today with the
Speaker 12: October low we saw last year in the S and
Speaker 12: P and we've just passed the anniversary of it. So
Speaker 12: what I would say is pay attention to bread statistics,
Speaker 12: the fact that we're a year off of a major
Speaker 12: market low and you are not seeing any action under
Speaker 12: the service that you would tend to see in the
Speaker 12: year after a major market low, whether it's a recessionary
Speaker 12: or a non recessionary.
Speaker 4: Bear, I want to say.
Speaker 2: It's different this time around. I know I'm going to
Speaker 2: get in trouble all that, but if.
Speaker 4: You're done, respect it. If it's like, I don't know.
Speaker 2: Did you did you ever live through a pandemic before?
Speaker 12: In kind of it, the only thing I'll say is
Speaker 12: that take a look at bank stocks and small caps.
Speaker 12: They're never looking like this after a year you've made
Speaker 12: off of low I will say.
Speaker 2: That interesting thoughts. This was fun.
Speaker 4: Thank you so much, guys.
Speaker 3: We got to run Kevin Gordon, Senior Investment Strategies at
Speaker 3: Charles Schwab right here at Schwab Impact twenty twenty three.
Speaker 1: You're listening to the Bloomberg Business Week podcast. Catch us live.
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Speaker 3: No secret when it comes to atfs that they've been
Speaker 3: gaining ground on mutual funds for years. You know, I
Speaker 3: actually started my career flows this news no on.
Speaker 2: The mutual fund industry. It was a mutual fund show.
Speaker 2: It was twenty five thirty.
Speaker 6: Year and you know what's pretty amazing.
Speaker 3: Because it was like everybody all of a sudden had
Speaker 3: four oh one k's and they were investing.
Speaker 6: What's the show that Bloomberg TV has now about funds
Speaker 6: etfiq etfi right, So we're not doing a mutual fun show.
Speaker 6: We're doing an ETF show.
Speaker 2: It's really fascinating terms of the shift.
Speaker 6: Yeah, the numbers are there to back it up. So
Speaker 6: the divide between flows into the two different investment types
Speaker 6: wide into an all time high in twenty twenty two,
Speaker 6: hitting a record rift carol of one point five trillion dollars.
Speaker 6: It's between bonds or exceeds me between ETFs and mutual funds.
Speaker 2: From nine hundred and fifty billion and twenty twenty one.
Speaker 2: That's according to our own Bloueberg intelligence.
Speaker 3: It makes sense ETFs are tax efficient and a tray
Speaker 3: like stocks, But what about separately managed accounts, And that's
Speaker 3: what we wanted to talk about SMAs. Our next guest
Speaker 3: argues that they are even more tax efficient than atfs.
Speaker 3: Manji Brea is head of custom SMA Investments over at
Speaker 3: all Spring Global Investments.
Speaker 2: He is with us on site at Schwab Impact. It's
Speaker 2: getting a little darker. They're bringing the lights.
Speaker 5: Down, I know.
Speaker 4: Yeah, end of the day, we say the best for last.
Speaker 3: We like to do it intimately here, So talk to us,
Speaker 3: make your case about SMAs.
Speaker 11: Sure, yeah. I mean, you know, as you were talking
Speaker 11: about the flows into mutual funds and ETFs. So what
Speaker 11: has happened Carol in the last call it like a
Speaker 11: decade or so, is the sms have actually tripled in size.
Speaker 11: If you look at the overall sm sizes about two
Speaker 11: point five trillion and growing double digits, so it's probably
Speaker 11: the second largest growing you know, kind of vehicle after ETFs. Yeah,
Speaker 11: and they're kind of three factors that are actually driving that.
Speaker 11: So one is really I think from you mentioned, ETFs
Speaker 11: are tax efficient, but sms are probably relatively more tax
Speaker 11: efficient than ETFs. So tax efficiency in the SME vehicle
Speaker 11: is probably the most just because you're holy individual stocks
Speaker 11: and bonds, so you can harvest losses and you can
Speaker 11: kind basically maximize your after tax returns.
Speaker 1: Right.
Speaker 11: The second thing is customization. You've talked about like personalization, customization,
Speaker 11: you know, touching all aspects of investing. I think SMAs
Speaker 11: actually provide you a great vehicle to customize your portfolio
Speaker 11: based on investor needs, values, you know, risk tolerance, tax objectives.
Speaker 11: And the last thing is there is actually multiple trends
Speaker 11: in the industry that's actually helping assets move from legacy
Speaker 11: portfolios into kind of more tax official wealth exactly. Yeah,
Speaker 11: the great transfer of wealth, you know, moving assets from
Speaker 11: like brokerage to more managed solutions in the wirehouse space.
Speaker 11: So for that again, SMAs is a great vehicle to
Speaker 11: do that. So those three factors.
Speaker 6: Yeah, But what happens when a lot of retail interest
Speaker 6: is in stuff that's kind of easy, which is like ETFs,
Speaker 6: And don't don't SMAs have to be served by advisors?
Speaker 5: They do?
Speaker 11: Yeah, so I agree. I mean, I think the knowledge
Speaker 11: base across the advisors is actually growing. It used to
Speaker 11: be the case that they didn't really understand what sms are.
Speaker 11: ETFs are easy, it's easier to buy its one line
Speaker 11: item versus like hundreds, right, But actually that has changed
Speaker 11: in the last few years, tim, So what has happened is,
Speaker 11: you know, direct indexing something.
Speaker 4: That we all hear about.
Speaker 6: Is that an SMA.
Speaker 11: That's an SMA. So if you think about SMAs, there
Speaker 11: are three big categories, right, direct and xing Inequities is
Speaker 11: the largest, followed by munis and then taxable fixing.
Speaker 6: Explain direct equities because I think a lot a lot
Speaker 6: of people they think about, okay, buy buying an s
Speaker 6: and P five hundred etf Right. Direct indexing essentially gives
Speaker 6: you tax benefits, but you're able to more control what's
Speaker 6: in that basket of stocks. Right, that's correct.
Speaker 11: Yeah, so you're essentially tracking an index passively. But what
Speaker 11: you're doing is while you're doing that, your housing processes.
Speaker 11: So you might be holding two hundred stocks to track
Speaker 11: an S and P. Right, you're not holding all five hundred,
Speaker 11: but in the process, when markets go down or go up, right,
Speaker 11: depending on what's happening, there will always be stocks in
Speaker 11: that two hundred that you hold which are in losses,
Speaker 11: so you can basically harvest them, right. And while you
Speaker 11: do that, you can accumulate those losses, so that actually
Speaker 11: helps you boost your after tax returns. Right. Twenty twenty
Speaker 11: two S and P was down eighteen percent. The after
Speaker 11: tax return if you had direct and xing was probably
Speaker 11: four percent better than that eighteen percent, Right, so tax
Speaker 11: alpha was close to four to five percent.
Speaker 4: Yeah.
Speaker 2: So if it's so good, why doesn't everybody do it?
Speaker 11: Because it's catching you know, listen, it's catching hold. It's
Speaker 11: been a process. If you look at direct and xing,
Speaker 11: it's probably around two hundred billion or more.
Speaker 4: But I think it's growing.
Speaker 11: It's growing double digits, and to me, I think custom
Speaker 11: messim is leading with direct and xing is the future, right,
Speaker 11: That's where the direction of travel is. So I do
Speaker 11: think that it's going to pick up. But if you
Speaker 11: look at the advisors, there are three hundred thousand advisors
Speaker 11: in US. Yeah, I would say about forty percent of
Speaker 11: them I've actually embraged rerect and xing or heard of
Speaker 11: directing and xing, So there are sixty percent of them they
Speaker 11: don't know what direct indexing is. So there's a huge
Speaker 11: education piece, right, So I think that's really where the
Speaker 11: opportunity set is to But is it.
Speaker 2: Something you could do through your four OHEK.
Speaker 3: You could potentially, yes, but it has to be if
Speaker 3: it's part of the plan.
Speaker 11: If it is part of the plan, but it has
Speaker 11: to be a separately managed account, meaning you have to
Speaker 11: I believe some of them do they actually because I'm.
Speaker 3: Just thinking that there's so much in terms of retirement
Speaker 3: assets what they want to impact an investment trend or
Speaker 3: if it makes sense, I feel like it eventually finds
Speaker 3: its way into four oh one K plans, And I
Speaker 3: guess that's my question.
Speaker 11: Potentially actually, you know, if you think about the taxable
Speaker 11: and you can tell.
Speaker 2: Me, oh, that's a really super stupid question.
Speaker 4: I don't know. I haven't seen that yet.
Speaker 2: But what I'm saying that eventually the trends find their
Speaker 2: way there.
Speaker 11: It's definitely feasible. I haven't seen it yet, but it's feasible.
Speaker 11: It can definitely get into the four one case.
Speaker 6: Is it always a passive strategy.
Speaker 4: Direct indexing case.
Speaker 11: But if you look at other parts of SMS, right,
Speaker 11: so like you know, text income ESMEs, they're actively managed.
Speaker 11: Some of them are like if it's a ladder, right,
Speaker 11: you can actively manage that. So you do have passive
Speaker 11: and active SMS. Direct indexing have to be a passive SM.
Speaker 6: Okay, what if somebody's listening to this and they're saying,
Speaker 6: wait a second, what is the difference between this and
Speaker 6: a mutual fund or this in an ETF?
Speaker 11: Right, So in an ETF, you're essentially holding, you know,
Speaker 11: a share class of a fund that you know that
Speaker 11: actually holds the usual stocks of bonds. Right in SMAs,
Speaker 11: you're directly holding the bonds or stocks, and you know,
Speaker 11: in an account, so you essentially have direct ownership of
Speaker 11: bonds or stocks, But.
Speaker 6: In a mutual fund, you're directly on in the stocks too.
Speaker 11: Right, that's right, but you're holding part of the Commingle fund, right,
Speaker 11: So you don't really actually have direct ownership of stocks
Speaker 11: a bond. So that's what like, you know, when they're
Speaker 11: basically capital you know, gains distributions and things like that,
Speaker 11: you get a piece of that right as part of
Speaker 11: holding the fund, but you don't really own like an
Speaker 11: actual share of Tesla or Apple for that matter.
Speaker 3: What's been the biggest, biggest question you've gotten about SMAs
Speaker 3: at this event? We just got about thirty seconds left.
Speaker 6: Yeah.
Speaker 11: I think the thing people want to know is really
Speaker 11: what the direction of travel is, right, So I do
Speaker 11: believe personalization and private So the two trends that are
Speaker 11: actually facting retail essumes, you know, So personalization to me,
Speaker 11: it's all about custom esmeys and customer a sismie is
Speaker 11: all about like direct indexing inequities munis and taxable fixed income.
Speaker 11: I think that's really what the direction of probl is.
Speaker 11: So people want to know where that's heading, right, So
Speaker 11: to me, I think the growth is pretty obvious.
Speaker 3: Well, you're magical because you got the lights back on
Speaker 3: for us, although we just lost these lights.
Speaker 6: Yeah that's okay, I can't win them on Carl.
Speaker 4: Yeah, listen, this.
Speaker 2: Was really interesting. I really appreciate it. Magic Break is
Speaker 2: head of custom SMA bestcas there at.
Speaker 3: All Spring Global Investments, joining us here at Job Impact
Speaker 3: twenty twenty.
Speaker 4: Thank you so much, Thank you so much.
Speaker 11: Thanks for having me.
Speaker 2: Yeah, well, good evening.
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