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Speaker 1: This podcast is brought to you by HKX, Asia's ETF Marketplace. Well,

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Speaker 1: you'll find a gateway to liquidity and a diverse selection

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Speaker 1: of opportunities across asset classes, sectors, and themes in Asia

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Speaker 1: and beyond. Search HKX to learn more.

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Speaker 2: Good morning, good afternoon, good evening, and good nights wherever

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Speaker 2: in this vast, beautiful planet you're joining us from. I'm

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Speaker 2: David Inglass, non award winning journalist, host of The China

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Speaker 2: Show and Chief Markets editor for The Age Pacific at

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Speaker 2: Bloomberg TV. And joining me in my co pilots on

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Speaker 2: this journey Rebeccasin, head of Asia Pacific ETF Research at

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Speaker 2: Bloomberg Intelligence, which is, just in case you didn't know,

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Speaker 2: our proprietary research department, five hundred analysts all across the world,

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Speaker 2: covering more than two thousand companies, ninety industries, one hundred

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Speaker 2: market benchmarks, currencies and commodities. Welcome, you're listening to Tiger Money.

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Speaker 3: Thank you, David, and we're so excited to have Dan

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Speaker 3: Draper CEO of SMP Dow Jones Indices, who just happens

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Speaker 3: to be in Tokyo with me at the same time.

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Speaker 3: He's responsible for all aspects of the index business globally.

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Speaker 3: Welcome Dan, and we're so excited that you could join

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Speaker 3: us on Tiger Money.

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Speaker 4: Rebecca David, great to see you.

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Speaker 3: Before joining SMP, Dan held leadership roles in asset and

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Speaker 3: wealth management and investment banking, working across New York, London,

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Speaker 3: Hong Kong and Jakata.

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Speaker 2: Dan a pleasure to have you and fantastic having you

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Speaker 2: in the region. There's lots to talk about. By the way,

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Speaker 2: where you guys are Rebecca and Dan in Japan. The

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Speaker 2: resurgence of the market and the economy is a separate conversation.

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Speaker 2: We'll get to that in a moment. But I guess Dan,

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Speaker 2: maybe just take a half a step back for our

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Speaker 2: listeners who might know what your company is and what

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Speaker 2: you guys do, but perhaps that's all they know. Could

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Speaker 2: you just give us a sense of just how do

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Speaker 2: you guys make money?

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Speaker 4: Yeah?

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Speaker 5: So, sp Dow Jones Indices has been around in some form,

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Speaker 5: you know, the Belgians Industrial Average and even the Bell

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Speaker 5: Jiums original Transportation Average has been around for one hundred

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Speaker 5: and years. So the SMP brand has been there through

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Speaker 5: incredible different types of market cycles and what I think

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Speaker 5: originally started was creating a barometer measuring some market. That's

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Speaker 5: what Charles now did when he created the Dow Jones

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Speaker 5: Industrial Average. Well, what's happened over time evolution of capital

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Speaker 5: markets is the barometer started creating benchmarks, so active managers

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Speaker 5: started using in the case of the S and P

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Speaker 5: five hundred really is a performance attribution benchmark for active management.

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Speaker 5: And then the evolution of passive investing in the nineteen

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Speaker 5: seventies and eighties and beyond now with ETFs in particular,

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Speaker 5: now they've become the basis. Indices have become the basis

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Speaker 5: of investment products. So there's been a long evolution and

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Speaker 5: through that we make our money as a business in

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Speaker 5: three basic ways. Once these indices are used within investment products,

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Speaker 5: very similar to an asset manager, we would make a

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Speaker 5: very small percentage of fees on assets under management. We'd

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Speaker 5: call that asset linked revenues. The second bucket is these

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Speaker 5: indices are also used within derivative contracts, particularly things like

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Speaker 5: futures contracts options, particularly in exchanges like CME CBOW in

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Speaker 5: the US, So in those cases we'd need money on

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Speaker 5: the traded volume effectively. And then finally, the third area

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Speaker 5: is that you need data to support the use of

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Speaker 5: ETFs or the use of these derivative contracts. So we're

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Speaker 5: able to sell subscription packages to clients around the world

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Speaker 5: for the data.

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Speaker 2: Okay, so we're looking at three separate businesses, three revenue lines.

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Speaker 2: What's the split.

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Speaker 5: Yeah, roughly, it kind of varies quarter to quarter, but

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Speaker 5: you have roughly about sixty percent come from those asset

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Speaker 5: linked fees, which really aligns again with our customers. In

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Speaker 5: those areas, you have roughly you know, about twenty twenty

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Speaker 5: five percent or in exchange traded derivatives, and the remaining

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Speaker 5: amount would be in the data subscriptions.

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Speaker 2: Okay, understood, And where do you see fees going feed

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Speaker 2: compression or fee expansion.

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Speaker 5: Well, if you look in the asset linked area, which

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Speaker 5: again is the largest portion of the revenues, there's been

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Speaker 5: a lot of feed pressure and we see the very

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Speaker 5: mature markets for passive like the United States, you've seen

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Speaker 5: a forty percent decline in the total expense ratio of

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Speaker 5: ETFs over the past decade.

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Speaker 4: So this is nothing new.

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Speaker 5: There's been significant kind of competition there, but clearly you've

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Speaker 5: seen the growth in the volumes the active to passive

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Speaker 5: shift that has been.

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Speaker 4: Even even kind of bigger.

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Speaker 5: A lot of that price compression has been in traditional data,

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Speaker 5: if you will, but now you see higher margin areas

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Speaker 5: like thematics factors, things like sustainability, so new areas of growth, innovation,

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Speaker 5: and it's rewarded. But overall it's a fantastic story for

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Speaker 5: end investors who've really benefited from this lower cost, transparent

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Speaker 5: access to financial markets.

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Speaker 3: So you guys definitely are one of the largest index

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Speaker 3: providers across ETF. You guys have roughly ten percent of

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Speaker 3: ETFs track the SMP indices, and from an AUM perspective,

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Speaker 3: it's roughly three point two trillion dollars out of the

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Speaker 3: twelve trillion globally it's roughly twenty five percent, so huge

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Speaker 3: market share. In Hong Kong, for instance, the Hangsang just

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Speaker 3: launched the s and P five one hundred ETF. In

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Speaker 3: Hong Kong, there are almost seven hundred million in assets

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Speaker 3: split across the various SMP indices, with everything from Indio

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Speaker 3: oil China high dived into Vietnam. So from the SMP

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Speaker 3: Dolls Jones Indus perspective, as a business, what are some

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Speaker 3: of the key growth areas for you?

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Speaker 5: If you look at a world or global index, US

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Speaker 5: equities constitute about sixty percent, so the majority of the

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Speaker 5: exposure is there, and that's where we provide leading with

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Speaker 5: the S and P five hundred exposure of that marketplace.

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Speaker 5: I would say other trends, the demand for income is

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Speaker 5: quite high, and particularly around equity income with dividend strategies,

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Speaker 5: we're seeing a lot of demand. We're also starting to

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Speaker 5: see other thematic areas. Sustainability is a big theme, you know,

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Speaker 5: looking at things around carbon efficiency for example, as well

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Speaker 5: as other growth and fixed income for example, is a

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Speaker 5: big growth area. So we're starting to see a number

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Speaker 5: of trends coming together. But i'd say on a global basis,

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Speaker 5: investors tend to really think now on a portfolio basis

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Speaker 5: and thinking across multiple asset classes.

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Speaker 2: You're in Japan, we're based here in Hong Kong. We're

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Speaker 2: trying to figure out where we are in this. I

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Speaker 2: guess still in some ways a prolonged bear market in

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Speaker 2: the Chinese equity market, but things have picked up a

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Speaker 2: late of Note, what are your plans around the Asia Pacific?

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Speaker 2: What are you guys busy with?

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Speaker 4: Yeah, so I mean Asia Pacific.

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Speaker 5: It remains one of the fastest growing areas for passive

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Speaker 5: investing in specific areas like ETF, so you can compare

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Speaker 5: the growth rates coming from a lower base growing a

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Speaker 5: bit faster than Europe and the US this year. And

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Speaker 5: if you look at again, with the US being probably

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Speaker 5: the most mature market for areas like ETFs, you typically

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Speaker 5: see Europe maybe growing at a seven to eight year lag,

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Speaker 5: but on the same trajectory, but a few years behind

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Speaker 5: the US. And then I think you look at Asia

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Speaker 5: and you can see you growing at a lagged rate,

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Speaker 5: but again accelerating and much the same trajectory that the

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Speaker 5: US did more than a decade ago. I think education

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Speaker 5: for investors is critical, especially as younger investors, where you're

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Speaker 5: seeing markets like Japan over generations. Now you're starting to

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Speaker 5: see wealth transfer if you want money in motion to

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Speaker 5: younger investors. Younger investors have more digital access to education

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Speaker 5: about investing, and now they have more tools the rise

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Speaker 5: of kind of digital wealth portals being able to manage

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Speaker 5: their wealth in a very different way. And the general

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Speaker 5: investors also tend to have more of a global view,

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Speaker 5: so that combination of being able to access different types

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Speaker 5: of investment exposures being able to think more on a

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Speaker 5: portfolio basis, and also, as we talked about from the beginning,

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Speaker 5: particularly in Japan, moving away from kind of traditional savings

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Speaker 5: into more investment portfolios as we're seeing through the new

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Speaker 5: NISA accounts or the Nippon Investment Savings accounts, which are

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Speaker 5: learning in popularity in places like Japan. So that combination

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Speaker 5: does bode well for kind of younger generations looking to.

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Speaker 4: Invest and build investment portfolios.

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Speaker 3: So I think if we see the growth that we've

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Speaker 3: seen in passive, you know, to your point, there's been

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Speaker 3: a huge adoption across technology with the use of passive,

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Speaker 3: and there's been a long debate of whether you know,

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Speaker 3: active versus passive and how do they coexist together. We've

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Speaker 3: seen a huge shift in recent years to actively manage

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Speaker 3: funds with the likes of JP Morgan Ark Investment, where

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Speaker 3: investors are willing to pay more. If we look at

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Speaker 3: the S and P five hundred alone, the Magnific seven

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Speaker 3: account for thirty percent of the waiting and from a

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Speaker 3: performance standpoint, since the S and P five hundred was

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Speaker 3: launched in nineteen fifty seven, it's returned seven point four

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Speaker 3: percent annually. So with the rapid growth and adoption of

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Speaker 3: passive and indexing. What are your views on the rapid

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Speaker 3: growth of index based investing and why do you think

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Speaker 3: there's been an increase in index adoption all around the world.

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Speaker 5: Well, look, I personally believe that the rise of passive investing,

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Speaker 5: and you know, I consider the ETF wrapper as a

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Speaker 5: digital innovation, and I think it's probably one of the

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Speaker 5: most significant investment innovations we've had, certainly in our generation.

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Speaker 5: The key to successful investing is knowing what goals you

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Speaker 5: want to achieve, and one of the most important ways

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Speaker 5: of achieving the goals is using diversification to your benefit,

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Speaker 5: being able to target and use of risk to your

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Speaker 5: advantage by having a longer investment time arise. And so

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Speaker 5: these are just more precise tools if you will, to

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Speaker 5: be able to do that. For example, if you look

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Speaker 5: at the United States over the past decade, eighty seven

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Speaker 5: percent of large cap active managers eighty seven percent have

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Speaker 5: underperformed the S and P five hundred over that time period,

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Speaker 5: and it's persistent you come to Japan.

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Speaker 4: Over that same ten.

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Speaker 5: Year period, eighty five percent of large CAB Japanese active

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Speaker 5: managers have underperformed the benchmark. It's really the strength and

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Speaker 5: the competitiveness of the active community that actually serves to

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Speaker 5: work against it. These are incredibly smart and motivated individuals

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Speaker 5: with better technology, but finding that information and being able

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Speaker 5: to execute to fid alpha to find out performance has

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Speaker 5: gotten increasingly more and more difficult, and it simply makes

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Speaker 5: the case for passive a lot more attractive. And then

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Speaker 5: I think also the rise for investors around the world

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Speaker 5: the focus rather than picking funds or picking individual securities,

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Speaker 5: by taking an approach to buy a portfolio, and the

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Speaker 5: rise of basically fee based paying an annual fee to

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Speaker 5: get an entire portfolio with one all in cost. That's

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Speaker 5: something that long term investors have really latched onto. And

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Speaker 5: these fee based accounts and portfolios, which many cases largely

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Speaker 5: contain ETFs, is a trend that we're seeing that's really

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Speaker 5: picking up, and only develop markets, but now markets like

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Speaker 5: Japan and other markets across Asia.

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Speaker 2: Is there a limit you think, Dan, how dominant passive

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Speaker 2: investment becomes as a percentage of the total BIBE. You

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Speaker 2: just outline what I would describe as almost evidence that's

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Speaker 2: really hard to argue. I mean, ninety percent of active

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Speaker 2: funds have underperformed. One part of me to ask why

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Speaker 2: they keep trying. But then again, you have a ten

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Speaker 2: percent of that pool that raise their hands and say

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Speaker 2: this is why we exist. And I'm wondering, is there

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Speaker 2: an existential threat? I believe in your view to active

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Speaker 2: management is what I'm trying to get to.

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Speaker 5: I don't think so, not within the foreseeable future. I

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Speaker 5: would say too, also defend active management. Active management, in

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Speaker 5: my opinion, remains the critical marginal investor for price discovery

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Speaker 5: and that price discovery around value. And now what do

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Speaker 5: I mean by that? What I mean is that if

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Speaker 5: you think about the numbers that I throw out earlier

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Speaker 5: that in the US, you know, let's say roughly about

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Speaker 5: thirty percent of funded assets so index funds ETFs mutual funds.

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Speaker 5: If about thirty percent of that is passive today, that's

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Speaker 5: our estimate. But then if you actually look at the

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Speaker 5: associated traded volume of the securities backing that, it's depending

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Speaker 5: on the estment, probably ten to fifteen percent on a

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Speaker 5: given day. And that's because most of the passive ETFs

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Speaker 5: mutual funds are market cap weighted, meaning that the rebalancing

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Speaker 5: turnover is lower. Active management typically in order to find

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Speaker 5: alpha to try to outperform, tends to trade more, It

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Speaker 5: has to find information advantages, has to identify value, and

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Speaker 5: typically has to again have higher turnover in the funds. Therefore,

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Speaker 5: if I kind of extrapolate that relationship that if today,

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Speaker 5: let's say, for example, active management constitutes over eighty five

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Speaker 5: percent of daily trading volume, that's where the price discovery

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Speaker 5: is taking place.

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Speaker 4: Our estimate for passive to.

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Speaker 5: Become more than fifty percent of traded volume on a

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Speaker 5: daily basis in a market like the United States, for example,

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Speaker 5: aem or the percent of assets under management of pass

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Speaker 5: it would have to go up to about eighty three

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Speaker 5: percent based on current levels. So it just gives you

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Speaker 5: an idea. So I think the assets under management levels

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Speaker 5: are interesting to look at, but I really get to

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Speaker 5: that incremental point who decides the value of a price

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Speaker 5: in the marketplace, And I think again of managers still

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Speaker 5: dominate and for some time period we'll do those incremental

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Speaker 5: investors reflecting value in the marketplace, and again just using

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Speaker 5: kind of secondary trading volume as an indicator around that.

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Speaker 1: This podcast is brought to you by HKX Asia's ETF marketplace,

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Speaker 1: where you can get exposure to themes ranging from AI

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Speaker 1: to virtual assets, small cap to large cap Greater China

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Speaker 1: to global search HKX to learn more.

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Speaker 2: You know, in one of the previous episodes of this podcast,

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Speaker 2: if We Have, we were joined by the CEE of

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Speaker 2: the largest ETF provider in mailand China. We aswered the

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Speaker 2: same question on competition. It became very philosophical. Really, you know,

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Speaker 2: how do you defend market share when you're on top?

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Speaker 2: Do you look at products and then just make it better?

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Speaker 2: Do you look at competition and see what they're doing,

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Speaker 2: what's new? Are you even bothered by competition?

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Speaker 4: Yes?

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Speaker 5: We What I'd say specifically about looking at competition, the

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Speaker 5: barriers to indexing are exceptionally row. I mean to be

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Speaker 5: able to come up with an index idea, to back

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Speaker 5: test some data and produce an index. Frankly, it doesn't

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Speaker 5: take a huge amount of effort, particularly in today's digital world.

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Speaker 5: So the barrier to entry is exceptionally low, but the

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Speaker 5: bayer to success is exceptionally high. So to be able

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Speaker 5: to have a trusted benchmark for active managers you know,

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Speaker 5: who want to be able to prove that they can

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Speaker 5: outpreform potentially, they need a reliable, independent benchmark and then

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Speaker 5: being able to use into exchange traded passive products, being

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Speaker 5: able to again have a reliable, independent brand when there's

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Speaker 5: a lot of choice in the marketplace, But why do

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Speaker 5: people choose It's because of the trust that's been built,

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Speaker 5: so being able to bring I think, the trust and

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Speaker 5: the transparency and the rigor to really also do it

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Speaker 5: at scale and think about the complexity of rebalancing these

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Speaker 5: indices on regular basis, dealing with various corporate actions over time, mergers,

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Speaker 5: special dividends, all of these things.

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Speaker 4: There's a huge amount of complexity that you know, on.

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Speaker 5: The surface you want everything to live very smooth, but

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Speaker 5: underneath it takes an incredibly dedicated, talented team. It takes

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Speaker 5: a huge commitment to investing in technology and really you know,

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Speaker 5: scaled the processes to do it well.

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Speaker 2: And I guess just to follow up on that longer term,

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Speaker 2: I need to ask you what your plans are in

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Speaker 2: the Asia Pacific. You know, the US market is just

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Speaker 2: the dominant market really market cap, whatever measure you want

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Speaker 2: to come up with, although the next few markets a

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Speaker 2: bility US. You have China, you have Japan, you have

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Speaker 2: Hong Kong and India. The Asia Pacific is a big

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Speaker 2: part of investor portfolio's future. What are your plans in Asia?

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Speaker 2: Where do you want to see the brand over the

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Speaker 2: next ten years as part of the world.

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Speaker 4: Yes, look, we've had you know.

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Speaker 5: I look at markets like Japan where I am today.

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Speaker 5: Australia's in the market where we partnered first with the

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Speaker 5: local stock exchanges I say for JPX or Tokyo Stock

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Speaker 5: Exchange here or even ASX in Australia over twenty years ago.

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Speaker 5: So these are long term partnerships, being able to understand

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Speaker 5: local capital markets capital formation there, but being able to

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Speaker 5: then partner to build locals, you know, as we've done.

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Speaker 5: So these are opportunities to work with some of the

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Speaker 5: leading institutions in APEX and then being able to then

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Speaker 5: go partner with the leading asset managers, banks and others

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Speaker 5: to then service and investors. So I think from here

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Speaker 5: we see other opportunities to grow really throughout Asia. But

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Speaker 5: also for US, we have the leading range of Sharia

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Speaker 5: compliant so countries like Indonesia, for example, focusing on Sharai

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Speaker 5: investment gives us an opportunity also in more northern Asia,

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Speaker 5: you know, looking at Korea, Taiwan, those are very vibrant market,

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Speaker 5: so you know, we really see big opportunities for the future.

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Speaker 5: We want to kind of build on success. The key

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Speaker 5: is in partnering with local exchanges, with local partners in

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Speaker 5: the marketplace, being committed to investing, and also building the

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Speaker 5: brand with our partners. And a big portion of that

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Speaker 5: commitment isn't just to show up with products, but it's

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Speaker 5: to show up with education, show up to research, but

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Speaker 5: to be relevant and partner, like I said, with with

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Speaker 5: local exchanges, with you know, regulators in some cases, and

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Speaker 5: the broader marketplace to ensure that there's better education, more understanding,

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Speaker 5: and ultimately the tools they're going to help all investors

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Speaker 5: in each of these Asian markets reach better outcomes.

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Speaker 3: An interesting fact, you guys have been running this SMP

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Speaker 3: ETF conference in Japan for sixteen years and through that time,

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Speaker 3: across sixteen years, the etfaum has grown sixteen percent every year,

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Speaker 3: and so I thought that was a little cool fun

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Speaker 3: fact for our listeners. So we're going to move on

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Speaker 3: to the fun stuff now with the last few minutes

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Speaker 3: of the podcast.

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Speaker 2: Wait, that was the fun stuff. Now we just did

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Speaker 2: the fun stuff. We're doing them kidding, Okay.

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Speaker 3: Growth over the past sixteen years.

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Speaker 2: Okay, I think Rebecca had some really hard hitting questions.

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Speaker 3: Next, best career advice someone's given you, and what would

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Speaker 3: you tell someone today?

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Speaker 5: Persistence, I think really being able to you know, early

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Speaker 5: in your career you want to have a variety of experiences,

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Speaker 5: develop specific skill sets, but stick to it. They're going

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Speaker 5: to be so many things that try to divert you,

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Speaker 5: tempt you away, or maybe you know, discouraging, especially if

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Speaker 5: you're in an industry like finance, which you know is

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Speaker 5: very market driven and cyclical, Stick through the down cycles,

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Speaker 5: stick through different times, invest in yourself. Persistence pays off

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Speaker 5: in the long term.

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Speaker 3: That's one thing you wish you could have done before,

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Speaker 3: or new or would have done differently.

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Speaker 4: That's a tough question.

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Speaker 6: As I mentioned the earlier question, I think markets changed

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Speaker 6: a great deal, and I think perhaps early in my

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Speaker 6: career I was very much a linear thinker, you know,

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Speaker 6: just thinking that probably had more control over things than

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Speaker 6: I did.

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Speaker 5: Whereas I think being opportunistic, I think change, unexpected volatility

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Speaker 5: only provides risk, but also provides opportunity. So I would

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Speaker 5: say being more open minded earlier, but kind of embracing

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Speaker 5: change to offer as much opportunity as it would potential risk.

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Speaker 5: So I think, yeah, early in the career probably have

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Speaker 5: been a bit more of a risk taker, but more opportunistic.

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Speaker 4: I think just thinking about risk differently, being more opportunistic earlier.

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Speaker 2: Dan, the best advice you could give for managing people,

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Speaker 2: you know, the hardest job in the world, the most

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Speaker 2: necessary job in the world.

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Speaker 5: I think being direct, being consistent, I think is very important.

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Speaker 5: I think, especially when you have high performers, you want

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Speaker 5: to be able to really help develop, manage expectations and

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Speaker 5: really to give people opportunities. But I think being able

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Speaker 5: to identify the talent, giving kind of the guidance. It's necessary,

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Speaker 5: but it takes a high level of consistency and I

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Speaker 5: think directness and transparency to really do that.

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Speaker 4: You know what people are going to do.

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Speaker 5: When you, as a manager aren't in the room is

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Speaker 5: I think arguably more important than when you are there

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Speaker 5: directly supervising.

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Speaker 2: Maybe just a follow up on managing people, have you

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Speaker 2: noticed a difference in managing and communicating and motivating people

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Speaker 2: across generations? You know, you're millennials of the world and

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Speaker 2: then you move to the the gen zs.

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Speaker 5: I do think I mean I think basic, you know,

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Speaker 5: like I said, communications and kind of managing expectations, expecting

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Speaker 5: a character.

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Speaker 4: You can never ever cut.

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Speaker 5: Corners on character, and I think values of individuals those

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Speaker 5: are kind of time as qualities. But I do think

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Speaker 5: younger generations, through access of information through digital means, are

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Speaker 5: very well educated, you know, and I think they have

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Speaker 5: access to that, and also it tends to be maybe

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Speaker 5: higher expectations because of that access to information or being

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Speaker 5: able to compare others experiences.

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Speaker 4: So I mean, you have to be on your game,

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Speaker 4: I think as a manager.

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Speaker 5: But at the same time, younger people are also similar

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Speaker 5: to earlier generations. They want to learn, they want to

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Speaker 5: progress in careers, and I think it just puts an

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Speaker 5: onus more for engagement from managers as well as kind

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Speaker 5: of investing, more direct feedback and more probably regular communications,

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Speaker 5: and perhaps managers were able to get away with in

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Speaker 5: the past.

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Speaker 2: Yeah, there we go, Dad. It was an absolute pleasure

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Speaker 2: to speak with you. We could be here literally for

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Speaker 2: hours to talk us through, of course all the parts

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Speaker 2: of your business, your career. We didn't even get to

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Speaker 2: talk about. Maybe we could say this right next time.

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Speaker 2: How Hong Kong was. I'm curious to get your thoughts

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Speaker 2: and really you know how things have changed. And yeah,

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Speaker 2: anyway we can save that, we can save it for

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Speaker 2: another time.

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Speaker 4: We'll save it for another another conversation. But thank you

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Speaker 4: for having me.

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Speaker 5: It's a real pleasure to spend time with both you

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Speaker 5: and Rebecca jan.

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Speaker 2: Thank you so much to you and your team.

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Speaker 3: Thank you for listening to Tiger Money, your Bloomberg podcast

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Speaker 3: about investing funds and financial markets in Asia and beyond.

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Speaker 3: If you like what you hear, don't forget to subscribe, like,

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Speaker 3: and share. Until next time. You can find David and

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Speaker 3: myself inside the Bloomberg terminal or on LinkedIn. We look

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Speaker 3: forward to hearing from you. This podcast was produced by

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Speaker 3: Clara Check