At The Money: Andrew Slimmon on Closet Indexing  (April 17, 2024)

Are your expensive active mutual funds and ETFs actually active? Or, as is too often the case, are they only pretending to be active? Do they charge a high active fee but then behave more like an index fund? If so, you are the victim of closet indexing. We discuss the best ways to avoid the funds that charge high fees but fail to provide the benefits of active management.

Full transcript below.

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About this week’s guest:

Andrew Slimmon is Managing Director at Morgan Stanley Investment Management, and leads the Applied Equity Advisors team; he serves as Senior Portfolio Manager for all long equity strategies.

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TRANSCRIPT: Andrew Slimmon on Closet Indexers

 

[Musical Intro:   Out into the cool of the evening,  strolls the pretender. He knows that all his hopes and dreams begins and ends there.]

Barry Ritholtz: What if I were to tell you that many of the active mutual funds you own are really expensive passive vehicles? It’s a problem called closet indexing and it’s when supposedly active funds Own hundreds and hundreds of names, making them look and perform like big indexes, minus the low fees.

None other than legendary stock picker Bill Miller has said, “Closet indexers are killing active investing.” That’s from the guy who beat the S& P 500 index 15 years in a row. I’m Barry Ritholtz and on today’s edition of At The Money, we’re going to discuss how you can avoid the scourge of overpriced closet indexers.

To help us unpack all of this and what it means for your portfolio, let’s bring in Andrew Slimmon. He is the managing director at at Morgan Stanley Investment Management, where he leads the Applied Equity Advisors Team and serves as a Senior Portfolio Manager for all long equity strategies. His team manages over 8 billion in client assets. Slimmon’s concentrated U. S. portfolios have done well against the indices, and his global portfolio has trounced its benchmarks.

Let’s start with the basics. What are the dangers of closet indexing?

Andrew Slimmon: I think that the dangers is just what Bill Miller said, which is it’s giving the mutual fund business a bad name. And the reason for that is that if you are charging active fees, so inherently you’re charging a fee to manage a fund, but you really don’t differentiate from the index. Then you can’t drive enough active performance to make up for the fees differential. And that’s why I think so many portfolio managers or money managers, mutual fund managers don’t outperform over time. It’s because they aren’t, they don’t drive enough differential to the index to justify the fee.

So in my opinion, Hey, good. It’s good for the industry. It is forcing managers to either, uh, get out of the business, investors to move to indexing or what’s going to be left is managers that are truly active that can justify Uh, charging a fee above a, you know, kind of index fee.

Barry Ritholtz: How do we get to the point where so many active managers have become little more than high price closet indexers? How did this happen?

Andrew Slimmon: Well, it’s the business, Barry, which is. If you run a very, very active fund, which over time has proven to generate excess return, because at the end of the day, if you’re very active, it’s going to be quickly become apparent whether you’re good or not.

So if you last in the business as an active manager, you must be pretty good.  You end up with performance  differential on a month to month basis. Some months you might be up 1%, the market’s down 1%. Some months you might be down 1%, the market’s up 1%. Over time, higher active share works, but clients tend to get on the scale on a very short-term basis. So if you slowly bleed under performance, you’re less likely to have clients pull money at the wrong time versus a higher active share manager might go through a period of underperformance and become, it becomes more apparent on an immediate basis that they’re underperformed.

So there’s kind of a business incentive to stick close to the index to keep the money in the fund.

Barry Ritholtz: So you’re, you’re just essentially describing, career risk, that this is a issue of job preservation for a lot of active managers.

Andrew Slimmon: There is statistical proof, academic proof, Barry, that the more you, the more active you are in your fund — So you differ from the index funds — the bigger the spread between how your fund does and how the average investor in the fund does. And I’m going to give you a perfect example of what I mean.

The decade of 2000 to 2009,  the number one performing mutual fund. domestic fund was a company called the CGM Focus Fund. It generated an 18 percent annualized return. Phenomenal. The average investor in the fund during that time generated a negative 11 percent annualized return. [wow] Let me repeat that. The fund generated 18 percent annualized return. The average investor generated negative 11.

The reason which, you know, when you think about it, it seems obvious is, well, the manager, he was never up 18%. He was up a lot one year and then money would flow in. And then he was down the next year a lot and money would flow out.

So investors weren’t capturing the best time to invest with the manager, which was after a bad year. And they were only chasing after good year. So the point of this is, is that the. Further you go out on the spectrum of active, the more your flows become volatile. And so again, it’s, it’s just, there’s plenty of academic proof that says closet indexing leads to less flow volatility.

Barry Ritholtz: So you keep mentioning active share, define what active share is and, and how do we measure it?

Andrew Slimmon: If, if you think about, uh, you know, my global, global concentrated fund, The MSCI world is the benchmark; it has roughly 1600 stocks. Global concentrate has 20 stocks, so it doesn’t own 1580 stocks that are in the index.

It is therefore a very, very Active son. So active share measures how much you differ from the index. If I’m in, if my benchmark is the S&P 500 and I own 400 of the 500 (which we don’t) you’re not very active. So it is proven over time again that active share is a definitional term that higher Active share managers outperform over time because again, you’re going to find out pretty quickly whether they’re good or not because they don’t kind of benchmark hug. So it’s a very good measure of of how a manager difference.

The however, which is very important.  Is let’s say my index is MSCI world. What happens if I didn’t own any of those stocks, but I went out and bought bonds, copper futures, I’m making it up. Well, I would also have very high active share because those instruments that I put into my fund weren’t actually in the index.

And so what you really want to measure is something called tracking error. And I apologize, getting wonky, but, but you, you don’t want to have a manager that has high access share because he’s making big kind of bets that have nothing to do with what he’s benchmarked or she’s benchmarked against. So tracking error is a measure of how volatile your portfolio is relative to the index. So again, if I own say copper and bond futures and currencies, I might go up and down, but the days I went up and down, probably wouldn’t be consistent with the days the market went up and down. And so, I would have what’s called high tracking.

What you really want to have in this business is higher active share but not a lot of tracking or I’m not making a big directional bet against my benchmark. I just don’t own a lot of the benchmark.

Barry Ritholtz: So it sounds like if you look too much like the index you’ll never be able to outperform it because you’ll just get what the index gives you. High active share makes you different enough from the index to potentially outperform. And as long as you steer clear of tracking error, you’re not going to be so different that it no longer relates to that particular index or benchmark.

Andrew Slimmon: That’s exactly right. And one of the dangers that I have seen and observed and studied before I started concentrated funds is what happened. What has happened in the past is say you have a manager that has a more diversified fund and he or she has done great.

And then the firm comes and says, Hey, you know what? You’ve done so great. Let’s take your best ideas. and put it into a concentrated fund.

The problem is a lot of times those best ideas are highly correlated.  And so if those, if that best idea, whatever it is, works really well, they do well. But if that best idea doesn’t work. then the fund, you know, more or less implodes.

So this is why I think it’s really important if you run concentrated portfolios, focusing on what is the correlation of the stocks in the portfolio are supremely, supremely important.

And I’ll give you an example. What I mean, we own, uh, you know, in our global concert, we own NVIDIA, which has done great. Everyone knows about it. It’s a big position, But another big position in our portfolio is CRE, which is a cement company equally as large. What does AI have to do with cement? Not much. A third largest position is Ameriprise, which is a asset management firm. So you have a tech company, you have a basic materials company, and you have a finance company, that are all very large positions, but they probably don’t all move together given the diversity of those of those stocks.

So I think it’s high, high active share means a limited number of positions, but making sure they don’t all zig and zag together. Because what I’ve seen is concentrated managers that blow up, it’s because they had a great idea, and it worked for a while, and then it didn’t work, and all their stocks, you know, were correlated to that idea.

Barry Ritholtz: So we keep coming back to volatility and drawdowns. For the people who are engaging in closet indexing, how much of that strategy is to avoid the volatility, to avoid the drawdowns, and in exchange, they’re giving up some performance?

Andrew Slimmon: Absolutely. The point that I was trying to drive with that story of the fund in the nineties is by the very nature that that manager had such a difference between how the fund did and how the investor did, it implied that there were huge swings in flows.

You did well, money came pouring in. He did badly. Money went pouring out.  That’s the only way you have such a differential. So closet indexing the flows actually are they’re not as extreme. And so it’s easier to manage a Fund that has less extreme flows. It’s better for the, in many ways, it’s better for the fund management company, but it’s perverse to what drives performance over time.

I like to say Warren Buffett doesn’t own 400 stocks or 300 stocks? So why do these funds drive have so many, so many stocks it’s because I think it’s, it’s easier to. Manage kind of the, uh, client expectation.

Barry Ritholtz: Let’s talk a little bit about transparency. Your global portfolio is 20 stocks. Your concentrated us is 30 stocks. Pretty transparent.

Your investors know exactly what you own. Seems like the closet indexers. are not quite as transparent. People think they’re getting an active fund, but what they’re really getting is something that looks and acts just like the index.

Andrew Slimmon: Yeah. So I’ve given you the kind of the academic reason why the benefits of concentrated portfolios, which is called active share, higher active share managers outperform over time, lower active share.

But then there’s a practical reason, Barry, which I know that, you know, we’ve talked about in the past and you’ll get a chuckle out of this, but, but it’s my, you know, I started my career at Morgan Stanley’s advisor in the nineties and what I observed was that, you know, everyone wants to think they add low, as Liz Anne Sonders said last on your podcast last week – I loved it – add low, reduce high.  Actually, what?  Because of the desire for preservation of well, what really has happened is, you know, some geopolitical event happens around the world and the market goes down and people want to sell or reduce their exposure to the market. And what I observed over time was that investors who held individual stocks were less likely to sell at the wrong time than when people just held the market.

So, whenever someone called, I was like, Oh my God, you know, something bad’s happened 4,000 miles away. If I could move the conversation to, well, I know you want to sell the market, but your biggest position is. Apple. “Whoa, I love Apple. Let’s not sell that.”

Right? Getting the conversation to stocks kept people invested, and the most important thing to do  is to ride out the down downturn.

So again, what I thought was, hey, if I could start these funds that had just a few stocks so people could actually see their positions on a page or a page and a half. You know, they’re, they’re more likely to stick with it. So there was the kind of academic reason, and then there was the practical reason, which is people stick with stocks over time, less so than the market.

Barry Ritholtz: So to wrap up investors who want some of their assets and active management should avoid those managers that ape the indexes, but charge high fees. That gives you the worst of both worlds – Passive investing, but high cost. Instead. You should remember that a huge part of passive success or low fees, low turnovers and low taxes.

If you’re going to go active, well then. Go active, own a concentrated portfolio with some high active share so you have a chance to outperform the index.

I’m Barry Ritholtz, and this is Bloomberg’s At The Money.

 

 

 

 

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The post At the Money: Closet Indexing appeared first on The Big Picture.



 

 

The transcript from this week’s, MiB: Samara Cohen, CIO, Blackrock ETF & Index Investments, is below.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

 

 

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Bloomberg Audio Studios, podcasts, radio News.

This is Masters in business with Barry Ritholtz on Bloomberg Radio.

Barry Ritholtz: This week on the podcast, I have an extra special guest. Samara Cohen is, wow, what a career. She has Chief Investment Officer of ETF and Index Investments for BlackRock, the investing giant that manages $10 trillion. She’s responsible for about 6.6 trillion of that. She sits on the BlackRock Global Markets Executive Committee. She leads a team of portfolio managers and traders and platform architects and market structure developers. Really a unique insight into how markets operate, how money flows, what investors are looking for. Just an absolutely fascinating set of positions at the largest investing firm in the world. I found our conversation about passive versus active, about the Bitcoin ETF, and about changes in market structure, really to be absolutely intriguing. With no further ado my discussion with BlackRocks Samara Cohen,

 Samara Cohen: Thanks so much. It’s great to be here in person with you, Barry.

Barry Ritholtz:  Yes, it’s great to have you. So, so last time we went pretty in-depth into your education. You have a BS in economics from Wharton and a BA in theater arts from the, from their College of Arts and Sciences at the University of Pennsylvania. As a refresher, how do you go from theater to finance? What, what’s the relationship?

Samara Cohen: Well, I started with theater, as you said, because when I was in high school, I loved it. And now I am the parent of two high schoolers, Barry. So I, I think back to how important it was to me to go all in on something that I loved, and that’s my hope for them, that they find something they’re passionate about. For me, it was theater, not film, not entertainment. It was bringing people together in a live way, in an audience to have some sort of experience that would maybe change them a little bit…

Barry Ritholtz:  Big theater nerd?

Samara Cohen: Big total, big theater nerd, right? And so I went to college wanting to pursue that as a major. Now in high school, I was also very good at math, but it, it didn’t feel like something I loved, but it was something I was good at. But when I got to college, I had all of this credit so that I didn’t need to take another math class. And to my surprise, I found that I missed it. So I discovered economics. I heard about a professor, he was supposed to be good and felt like, like learning about markets and economics felt like math with purpose to me. And so I started pursuing that in parallel. That made my parents really happy, of course, because I was spending my summers working for regional theater companies. So they felt secure in the idea that I had a backup plan. And I felt like I got to live in these two different worlds, which really kind of widened my aperture on lots of things. And then when it was time to graduate, I wanted to, to take my backup plan out for a test drive and make some money so that I could support myself and be financially independent. And I found that I really loved markets.

Barry Ritholtz:  Huh, that, that’s really interesting. I, I’m kind of intrigued by something you told Fortune magazine not too long ago. 90% of directing is casting, right? Fascinating conversation. Lots of film directors have said similar things to that, and the world has changed so much that they’re even a now adding a casting director, Oscar, which amazingly hasn’t existed for years. But I’m curious how youthink of casting in the job you have now where you’re managing so many different teams and so many different people. Is 95% of index management casting,

Samara Cohen: I think 95% of leadership, Barry is putting the right person in the right job and assembling teams that build trust and can work together and maximize their individual strengths. So I guess what felt so specific to theater to me when I was doing it, and especially when I was directing now feels like a pretty profound lesson in leadership.

Barry Ritholtz: It’s less a specific idea to theater and, and instead is really a very broad principle.

Samara Cohen: I think it’s absolutely true. Look, when you’re a leader, your job is to make the most, to get the most out of, out of people and organizations. It’s not what you yourself can do, it’s how you position other people to do their best work. That’s pretty much what casting is.

Barry Ritholtz: So you mentioned you spent summers doing regional theater. There’s a lot of technical work that goes into that direction. Lighting design, set design. There’s just a ton of background work that goes to staging a show. What parallels can we draw to asset management? How much of the daily block and tackling that goes into putting on a show goes on to managing assets?

Samara Cohen: So I’ve often been asked about the theater part of my background. I’ve never been asked that question, so thank you because I love bringing back those memories of being in theater, being in tech week of a show. And I would start by saying, there’s lots of different types of theater and there’s lots of different types of asset management. So the place that has the most relevant parallel for me was putting on large scale musical productions during theater festivals where you had multiple stages going at the same time. In the business that I’m in right now, which is the ETF business at BlackRock, I would say that work is similarly orchestral. We like to say it takes an ecosystem for our ETFs to really deliver to investors, which means really being sensitized to all of the different places, how they work together and how they work together, especially during moments of high velocity in markets.

Barry Ritholtz: So let’s talk about a moment of high velocity. We’re recording this 2024. 2022 was one of those years where velocity picked up, volatility picked up, it was a big negative for equities. It was a double digit loser for fixed income. Unusual, both of those in one year. How did ETFs hold up and and what did we learn in that rough year of 2022 about the ETF complex?

Samara Cohen: Well, as you said, 2022 was a remarkable year for markets around the world because we had declines in both equity markets and bond markets. It was the worst bond market in 50 years. I will say, as someone who has really had the bulk of of my career in the bond market markets overall, and the bond market in particular are much more resilient, transparent, and accessible today because ETFs are in them. So ETFs have contributed in a very important way to market structure growth and development. And what we saw in 2022 is first a lot of really important portfolio reallocation decisions being made. All of a sudden, investors really had to think the role of bonds in their portfolio, how they were gonna position for higher interest rates, what inflation would actually look like, what was the meaning of this new regime. And the first place that they turned to to do this was often ETFs. So we saw ETF trading pickup, and that’s not flows, that’s just people using ETFs, buyers and sellers to manage their risk and reallocate their portfolios. And we did also see etf inflows, particularly in fixed income ETFs. So fixed income ETFs gathered really over $200 billion in 2022. And the reason for that is the bond market has historically really lacked transparency and been harder to access for individual investors who all of a sudden were realizing they probably needed a much more significant allocation to fixed income than they’d had before. So they turned to ETFS

Barry Ritholtz: You know, it’s funny, we’re talking about this now, looking back at 2022, when you and I spoke in the spring of 2022, we talked about the volatility of 2020 and you pointed out ETFs held up splendidly. If anything, there were certain stocks that were halted, other parts of the market had structural issues. ETFs came through that with flying colors. Is that a fair statement?

Samara Cohen: That’s exactly right. And during these stressed markets, high velocity markets, investors need some outlet for risk management and for transparency. And so if ETFs have matured in the market, which has been over the past 30 years in the us, it has actually improved markets broadly.

Barry Ritholtz:  You mentioned flows. I think people assume there are flows into a particular fund and the prices go up, but that it’s not always correlated that easily. What we saw into the rally in 2023 were outflows and the market went up regardless. How do you at BlackRock and you overseeing all these ETFs, think about the role of money flows into and out of various funds and what it might mean for the health of those funds and the subsequent performance of those funds and, and the market.

Samara Cohen: Across the ETF complex, as you pointed out, there are, you know, at iShares we have 1300 different ETFs. So being able to provide ways for investors to quickly change their exposures, move out of one fund into another fund, it’s a healthy thing for markets. It’s a healthy thing for portfolios. I don’t know if your question is more around the role of ETFs and price formation and markets just generally…

Barry Ritholtz:. So, you know, I, I’m always astonished when I flip on the TV and I hear someone say, oh, there are a lot of out flows from mutual funds and ETFs that bodes poorly for the market. We saw outflows pretty much right into the, from the lows in 2022 in October straight up to the, you know, recent highs. It’s only recently they started turning positive. It seems like people are drawing the wrong conclusion by tracking flows. I, I dunno if I’m getting into the weeds too much. This is too, too much arcana. It just seems that whenever I hear people discuss flows, the context doesn’t always tell the full story.

Samara Cohen:  I think that’s right with respect to direction of markets. Now we actually love talking about our investment strategists actually have a piece that they publish called a flow and tell where they look to flows, which give lots of different types of information, but not necessarily directional information. So one of the things about ETFs is because they are trading intraday, they’re super transparent, they’re measurable on exchange, they actually give us some pretty useful measures around investor sentiment, also around positioning, around allocation decisions. And so there is lots of information that can be extracted from the transparency and availability of fund flow data, particularly with ETFs. But to your point, that doesn’t necessarily translate into direction of markets. And just as an example, there’s a statistic that I love to look at. We call it the imputed flow statistic, which tells you how much flow into or out of ETFs was present in a particular stock. And if I look across the entire US stock market, that statistic is usually about five or 6%. It actually goes down during times of market stress that there’s actually less market flow attributable to ETFs. So I think there’s a lot of other things going on with respect to price formation, but there are really important, I think, sentiment conclusions you can draw from, you know, flow intel type data. I,

Barry Ritholtz:   I love that name “Flow & Tell,” you should use it. Sentiment is obvious. I think if you suddenly see people selling value funds and flowing into anything that’s tech heavy, clearly there’s been a a shift in investor sentiment when that happens. What other data points do you look at in flow and tell that might surprise people?

Samara Cohen: Definitely asset allocation decisions. So how people are shifting portfolios around,

Barry Ritholtz: Is that from stocks to bonds or is it even within the equity market? What sectors are dominating?

Samara Cohen: It can be from stocks to bonds and it also can be very interestingly within the fixed income complex. And that’s been important particularly lately given kind of all of the focus and you know, potential surprises coming out of the Fed and direction of monetary policy. See, you’ve seen a lot of kind of implicit curve positioning happening across the fixed income ETF complex

Barry Ritholtz:  Though since the last time we spoke two years ago. The ETF space has definitely evolved. What do you see as some of the bigger changes since we last spoke?

Samara Cohen: So I feel like Barry, if you have me back in two years, I’m probably gonna say the last two years have been the most, you know, exciting years…

Barry Ritholtz:  We’ll talk about, remember that volatility right after we had the recording like two years…?

Samara Cohen:. But the point is this has been a fast moving stream. A lot has been happening in the ETF space and in markets. What I would say to me has really defined the last two years since we spoke are two things and they’re both really exciting. The first is the move that we are seeing around the world with what we call self-directed investors. But more and more invest more and more savers becoming investors. And we can measure that globally. There were about 40 million individual investor accounts that have been open in the last two years. That’s more than the past decade combined. Wow. 40 million individual investors coming to the market. Now when I te when I say, and I will say this, everywhere markets are better today, it’s because to me a healthy capital marketplace is one that has the transparency, resilience, and agility to bring more people off the sidelines so that they can save for retirement or whatever financial wellness looks like to them. So that’s theme number one. And the second one is the ongoing convergence between index and active.

And you will never hear me use the word passive Barry. In fact, if I ever have my own podcast, it’s going to be called, there is nothing passive about ETF and index investing because we’ve really obliterated that concept. There are so many different types of strategies and outcomes that are available now through index strategies, which investors buy through ETFs that it gives them, again, much more agility with respect to their portfolios and their goals.

Barry Ritholtz:  And even the S&P500 is, there are a lot of active decisions. It’s market cap weighted, that’s a choice. There are rules that determine who can and can’t be in there. Companies get added and subtracted all the time. There’s a decent amount of active within passive. But I want to come back to the 40 million new accounts. When I think of new accounts, I kind of harken back to 2020 and the pandemic lockdown and all the kids playing on Robinhood and that sort of stuff are, are these small fun accounts or are these people really saving for things like paying for college or retirement or buying a home? Like when, what are those? The constitution of these 40 million new accounts.

Samara Cohen: I think it’s both of those things. So when people had their stimulus checks and there was commission free trading and to your point they were home and learning about all of the things they could do with technology, maybe some people got involved more to just check out the ecosystem and what it felt like. But when you look at the data, despite all of the headline excitement that meme stock mania generated, right? More people were actually buying ETFs than we’re buying meme stocks. So I think it has been a really important moment for investors who are coming into the market and coming in maybe because they’re starting with a single stock decision, but actually moving and learning about ETFs and, and then participating in a more diversified and long-term way.

Barry Ritholtz: I would like to see the flow and tell piece that looks at potential investors looking at some of the crazy meme stocks and saying, you know what? I’m just gonna buy a broad index and put it away for a few decades and not get sucked into this mania. Do you guys track that closely?

Samara Cohen: We Do. We do track it closely. And a few people have done really interesting work. Particularly NASDAQ has done some interesting work on individual stocks versus allocations to ETFs and to index. And this trend that we’re talking about, the individual investor trend is absolutely across the market. We’ve seen it in options as well, which is why ETFs that have some sort of embedded options outcome are also seeing a lot of interest, particularly from the self-directed investors. ,

Barry Ritholtz:  Hmmmm Really, really intriguing. So let’s talk a little bit about some interesting news recently. Low cost index ETFs and mutual funds now make up more than 50% of the fun complex, put a flag in the ground and declare victory. Does, does this mean that it’s the end of active? Is there a ceiling for passive? What does that 50% line mean?

Samara Cohen: First of all, Barry, I am a huge fan of active managers and what they can achieve. My disclosure here will be that I’m married to a brilliant active manager. So I like to say that we are an alpha beta couple, but increasingly active managers use have beta allocations. They always have, of course they might use S&P Futures for example, as part of their strategies. And increasingly really all of the biggest active asset managers in the world use ETFs for some part of their alpha-seeking strategy.

So let’s look at two things. Number one, the statistics that you gave. That’s just really about the, the fund market. It’s important to realize that what is available through an index strategy has evolved massively over the past few years. So we’re really not just talking about traditional cap weighted strategies, which are kind of what you would get in a, in a future type strategy like with, you know, Russell 2000 or S&P500.

There are factor strategies, there are increasingly diverse range of bond market strategies across the different sub-asset classes of fixed income. So increasingly for us, we like to think of that whole new genre of, of index ETFs as almost active risk benchmark. Anything that’s not cap weighted represents a decision by the investor to take some active risk versus the the standard cap weighted benchmark. So that’s why I really think of index and active as a really broad continuum with index being able to take on more and more types of strategies that importantly were never accessible to individualinvestors before. And that’s why I maintain that today’s markets as a function of index and ETF technology are simply better because they’re more accessible and diversification and more sophisticated strategies. For example, like target date funds for the 57 million Americans that actually don’t have a workplace savings account, they can now through an ETF access target date investor investing where they basically make one decision, which is when do I think I’m going to retire? And then they can allocate to the ETF and the ETF will manage their, you know, risk exposure, their stock/bond proportion over time. Time exactly.

Or automatically adjust it. And since it’s an ETF wrapper, there’s no capital gains to pay until you finally cash that in. So It’s a victory for investors and it’s a victory for those, you know, millions of people who are moving from being savers to investors, which is incredibly important in today’s world as we think about, you know, retirement and, and what and, and people being able to retire with dignity.

And then the other important part of your question though, and I know you agree with me on this’cause I’ve heard you talk about it, is we have to look at the equity market overall, right? So that 50% stat, you know, is a little bit misleading with respect to the denominator ETFs are probably about 12 or 13% of the equity market, not 50%. And that gets back to these questions about, you know, is there a ceiling, like there is mostly active management happening, right? In price formation in global equity markets. The,

Barry Ritholtz: The broadest interpretation of passive indexing that I’ve seen is of the total equity market, about 17% can be described as managed through a broad index, not active stock selection. People have argued that, well, you can look at flows and foundations and sovereign wealth funds are, are managing stuff passively, quote unquote. But some of the numbers, 35, 40% seem kind of fabricated. You wanna say it’s 20% okay back of the envelope. We can pretend, but there’s just no data, no evidence showing that it’s even that big. And when we look at we can add up what’s in ETFs, we can add up what’s in mutual funds and it’s a relatively small part of the total asset management world. — Unless you think I’m overstating this,

Samara Cohen: I think you’re exactly right. And I think additionally, if we agree that as a gut check 20% of the equity market is indexed right ETFs or otherwise, it’s important to remember that that is often by active managers who are, who have beta as some component of their alpha seeking strategy. So their decision to make a beta allocation through some sort of index strategy is, is an active one and is part of the, you know, broader setup of their portfolio and potentially given the technology and, and you know, indexing has risen alongside computing power. It actually required actually the, the first kind of commercial microchip came about around the same time as as index investing. ’cause you needed computing power to be able to do that. And now that asset managers can make beta allocations, they can focus their attention and resources on their highest conviction, single stock or bond opportunities.

Barry Ritholtz: And, and let’s put a little flesh on that ’cause I, I don’t know if lay people are aware of how fund managers behave. You’re running a concentrated portfolio, you have 30 or 40 stocks and suddenly this stock generates a sell signal and you remove it from your portfolio and that stock gets taken over by another company and it’s achieved 99% of your price target. Now suddenly you have a five or a 10% slug of cash, which if it’s sitting around in cash, you’re gonna be under-performing an upmarket. So instead you turn around and say, my benchmark is this, here’s the ETF that tracks that. I’m gonna park this cash here so I don’t fall behind my benchmark. And when I’m ready to actively select a, areplacement for these stocks, I’ll swap out of one to another. Again, fair description of of how it works in the real world.

Samara Cohen:  Totally fair description. But I would say it’s a relatively modern one because even five years ago those managers might buy futures instead of ETFs. And what we found when we engaged with a lot of them, one of the things we did was we built technology to help asset managers evaluate the relative value between an ETF and a futures contract. It really mattered what they were earning on their cash. You had to be earning something in order to make it worth the price of the futures. Otherwise the ETF looked quite cheap and as it turned out, remember where rates were five years ago, right? It was much more economic for them to move into the ETF. So using the ETF for the cash equitization has become a really standard active use of of an ETF strategy. But it is a more modern one.

Barry Ritholtz: So let’s talk a little bit about, you’ve mentioned market structure and we’re talking about active versus passive. Last month I had hedge fund manager David Einhorn of of Greenlight Capital on and he said, I view the markets as fundamentally broken. Passive investors have no opinion about value. They’re gonna assume everybody else has done the work, caused a big stir. Everybody kind of freaked out about it a little bit, but it raises the question, what has been the impact of this shift towards indexing and passive investing? I know you don’t love that word on overall market structure and the resiliency of our modern market economy.

Samara Cohen: Markets are more transparent and resilient as a result of ETFs being in them than they have ever been in history. Barry and I reject the notion that a transparent, resilient, and more accessible market, again, look at these 40 million investors that are coming into the market and are only able to do it through diversified strategies because of ETFs and index. I reject the notion that there’s anything broken about that, that is a healthy market and that is a market that is better positioned for the next decade of growth than ever before.

Barry Ritholtz: So let’s talk a little bit about index and ETF technology. What is it specifically about that approach that wrapper around a stock investment that provides transparency and resiliency? How is this different than the way we used to manage assets 20, 30 years ago?

Samara Cohen:  Well first ETFs are literally transparent. You always can see what’s in the holdings of a particular ETF that’s available on a daily basis. But even more critically ETFs trade on exchange all day long and provide price formation in that way. So one of the things we often see, for example, in country fund ETFs, perfect example of it is looking at ETFs with China equities underlying them over the lunar new year. They are providing price formation by trading on stock exchanges. So investors can exchange risk on exchange while those underlying equity markets are actually closed. The bond market, by the way you probably know this, I’m a bond market veteran. Like the bond market has a lot of closure days where equity markets aren’t open, right? So bond ETFs are providing a price transparency to fixed income markets all of the time. And we really saw that profoundly over the covid volatility period where bonds, because you know, the bond market had largely traded and you know, still trades big parts of the bond market trade in a very bilateral voice over telephone way. And these traders were literally packing up their desks and having to go home and reconstruct their workstations at home. And so there were days where if you took an investment grade ETF, it’s top 10 holdings might trade 35 times in the day in the bond market. We can see that through trace reporting while the ETFitself traded 90,000 times, right? So that’s an example of real time price formation that just wasn’t available in the bond market before the ETFI

Barry Ritholtz:  I think a lot of lay people don’t realize the Russell 5,000 is what, 3,400 stocks today? There are millions and mul millions of CUSIPs of specific bonds, different credit ratings, different vintages. Every municipality has a run of bonds. Every state, every city there are tons of bonds, hundreds of thousands, maybe even millions of bonds. So pricing is opaque and it’s not al always current. That’s not true on the fixed income side for, for ETFs it’s all day long and you get a price whenever you, you look at the ETF.

Barry Ritholtz: Yeah, so that’s totally true. But one of the things that gets me super excited ’cause I am just a career markets modernizer, is that there’s been a virtuous cycle and effect back on the bond market because investors have really demanded and wanted to participate in fixed income ETFs, bond dealers and trading desks have had to develop algorithmic pricing capabilities so that they could make markets in those ETFs. And that has had the effect of increasing electrification and transparency in the underlying bond market. Which is why again, there’s been this, you know, introduction of ETFs as a new bond tool has actually had an important modernizing effect on that underlying market ecosystem.

Barry Ritholtz:  Samara Cohen: 00:28:58 [Speaker Changed] So you guys have been one of the larger bond fund managers over years

and, and in old Wall Street there were hundreds of shops that were managing individual bond

portfolios. What’s it like when you wanna put together a, a bond E-T-F-I-I would imagine your desk has

to revert to some form of old school, you know, picking up the phone and hey, who has these bonds?

We wanna, we’re a buyer. What, what can you get us? How do you marry the old with the new? How do

you marry the phone with the algorithm?

00:29:35 [Speaker Changed] Well one of the things we talked about before are the challenges of cash

management in a portfolio and certainly in a bond market portfolio, that’s a challenge for a manager

who doesn’t want to underperform the benchmark but has

00:29:47 [Speaker Changed] To put, especially when you have some yield these

00:29:49 [Speaker Changed] Days. That’s right. Who has to put cash to work. Now, one of the most

exciting aspects of the ETF innovation is the fact that portfolio managers of ETFs don’t have to manage

the cash they can if they want to, but they can also do what we call in kind trades with, with the street

or with liquidity providers. So if, so first, if people are buying the ETF number one difference just to take

a step back is that you can go and buy the ETF on exchange through your brokerage account. You don’t

have to write a check and send it into a mutual fund company. You are buying the ETF on exchange,

somebody is selling it to you. And if they have the seller on the other side, then there’s nothing that the

portfolio manager has to do, right? The buyers and sellers match off on exchange.

00:30:37 And that’s important because on average it’s about six to eight times as much trading happens

on exchange as in the actual ETF. But let’s say that there is an imbalance of demand, more people

wanna buy that ETF than sell that ETF. So we start to see the price of the ETF actually what we traded a

little bit of a premium to those underlying bonds. So then what the market maker can do is create more

ETF shares to meet that demand by buying the underlying bonds, delivering it to me. I will be the

portfolio manager in this case, and then we give you the ETF shares so I don’t have to put the cash to

work. The market has done that for me. They’ve been incentivized to do that because this marketmaker, she has captured the, the arbitrage spread that was available and I didn’t have to incur

transaction cost drag for the shareholders in my fund. So that’s one of the mechanisms that have made

ETFs deliver so effectively for investors.

00:31:40 [Speaker Changed] So let’s talk about who are the holders of, of ETFs. How granular can you

get in identifying here’s who, who owns our ETFs for the this fixed income product, this equity product

as a mutual fund company, you know exactly who, who owns that fund? Is it the same thing with ETFs or

is it a little fuzzier? It’s

00:32:05 [Speaker Changed] A little bit harder with the ETFs, but our ability to capture and analyze data

just as there’s much more information on everything, even if it’s just looking at the nature of prints on

exchange, we are able to derive much more data to make assumptions and really educated guesses

about who owns the ETFs. And increasingly we actually do have end user information. So really

important and exciting announcement we made, and we’re the first to do this is to, in our s and p 500

ETF, to for certain investors, individual investors give them the ability to decide if they wanna vote their

shares. Hmm. And that’s been a really important dialogue in the market because as an asset manager,

we don’t own the shares, but for our ETFs, often the laws say we need to vote the share, but our job is

to be asset managers. And so if clients want us to vote their shares for them, we can, but we prefer, and

with our institutional clients, we give them voting choice so they can tell us, BlackRock, we wanna vote

our own shares or we give them a menu of options and they direct us.

00:33:10 And so we have been, until now really unable to offer that to individuals. But as we get better

data and information, we’re able to expand choices to, to our clients.

00:33:22 [Speaker Changed] So there’s so many things to unpack with that. There’s been a lot of

pushback to the concept of indexing generally as well. Look at its BlackRock, Vanguard and State Street,

they control almost, you know, x percent of the market and therefore they’re running the world. And we

should break this up. It it seems to be a fundamental misunderstanding of who owns this stock and, and

what the role of the big index providers and big ETF providers are in this space. You are owning these

shares not on behalf of you or Larry Fink or BlackRock. You’re owning these on behalf of millions of

investors.

00:34:04 [Speaker Changed] Yeah, you’re spot on. So the number one misunderstanding is who owns

them? We are a fiduciary. The investors own those stocks. And then beyond that, it’s more of a

regulatory and technology problem to fix the regulations say that the asset manager votes the shares.

And so what we started to do on our institutional accounts were regulation permitted and it was just

technology and operations was to create a program of voting choice that other asset managers actually

then went and copied to say to institutions, let’s, let’s separate the two and if you wanna vote your

shares, go ahead and vote your shares. But it’s been much harder to do that for individual investors. So

being able to take a first step towards that is a really exciting progress.

00:34:47 [Speaker Changed] I I kind of feel like I’m cheating. Like I, I I brought in a ringer ’cause this is

just an exercise in confirmation bias for me.

00:34:55 [Speaker Changed] Well you’re

00:34:56 [Speaker Changed] Welcome. ’cause you know, it, it’s, you know, I have read over the years

that indexing is un-American, it’s Marxist, it’s a communist plot. There’s gonna be price fixing just everycrazy theory that you could come up with as to why indexing is so bad. And when you trace these

arguments back, they invariably are coming back to people who are the ones who are losing market

share to indexing. And it, it’s hard to have a legitimate discussion where, hey, you know, you are talking

your book and, and again, full disclosure for both of us, I’m talking my book because I’m a big believer in

indexers, but you guys, of the 10 trillion you have in assets, how much of this is indexed and how much

of this is more active management?

00:35:51 [Speaker Changed] Well, remember even within the index category, it’s becoming increasingly

active. So there are index strategies that take a lot of design principles around how to algorithmically

provide a strategy, right? And those are like everything, as we talked about these active risk

benchmarks, anything beyond market cap weighted. But also importantly in 2023 in the United States,

25% of new money going into ETFs was in active ETFs. So in 2019 actually the SEC passed a long awaited

ETF rule that made it much easier for any type of asset manager who wanted to distribute their strategy

in the ETF wrapper to do so. And there was actually a lot of questioning at the beginning, well because

ETFs are transparent, would they do that? Would they actually want to have to publish their holdings on

a daily basis or would they resist thinking that that was giving up some sort of secret sauce?

00:36:51 And as it turns out, a lot of managers were comfortable with the transparency. There was

some experimentation with non-transparent active ETFs. But as it turns out, I think those were pretty

easily reverse engineered. So going through the trouble of making it non-transparent didn’t help that

much given how much they trade. But investors still want active strategies. The question is, is that

manager delivering alpha or excess return such that the incremental fees justify it? And the

transparency of return that traditional ETFs give investors really holds those alpha seeking managers

accountable. But when they can produce it, people will pay for it and they’ll pay for it in an ETF wrapper.

00:37:34 [Speaker Changed] Hmm, really interesting. So let’s talk a little bit about the bitcoin ETF. What

are your thoughts on the process of, of getting here? What do you think is happening in that space now?

00:37:47 [Speaker Changed] It’s been a journey for markets, Barry. I think when I first started getting

asked about Bitcoin ETFs, it was about five years ago. And when I first heard about Bitcoin, it was

probably about 10 years ago. And for us, the question of whether we should provide access to Bitcoin in

an ETF is something that came about really in the last few years. There were issuers that filed for Bitcoin

ETFs before we did. There were issuers that actually launched futures based Bitcoin ETFs right before we

did. And I think that journey for the industry showed us a few things. First, it showed us with respect to

the futures ETFs, that that wasn’t really delivering what investors were looking for. Meaning for a whole

bunch of reasons, particularly position limits, the futures ETF actually underperformed spot bitcoin,

which is what investors wanted. Now, full disclosure, when I first got asked a few years ago about

Bitcoin ETFs and, and remember I am a bond market veteran, right?

00:38:47 So I thought to myself, look, I will come into the office like all day long. I get excited about

bringing access and transparency to markets where it didn’t exist before. So the high yield market, high

yield bond market for example, that’s a no brainer to put into an ETF wrapper, but to me it seemed like

it was pretty straightforward to just buy some Bitcoin using your mobile phone. And so for us to really

be convinced as to the value proposition of an ETF really took hearing from investors, all types of

investors over the subsequent years. And this is what we heard, number one we heard they wanted

access for to Bitcoin, many of them for different reasons, were interested in as as kind of an emerging

asset class that they wanted some access and they were trying to get access in a variety of ways, none ofwhich were fully satisfying. Whether they were buying it in a trust structure where they didn’t have a lot

of liquidity and high fees if they were buying a, you know, futures based product, which really wasn’t

delivering Bitcoin. If they were buying actual Bitcoin, they were having to deal with a whole new set of

infrastructure and pipes and custody questions, right? That weren’t transparent and hard to understand

00:39:56 [Speaker Changed] Passwords and anti-hacking and what’s easier than an ETF and what could

be harder than buying Bitcoin for the, you know, average mom and pop investor. It seems like a natural

marriage.

00:40:09 [Speaker Changed] And we heard from advisors too who were getting asked by their clients

and they wanted to provide whole portfolio solutions to their clients. So I think we really became

convinced, first of all that investors wanted access. And second, that the ETF would actually provide a

better access path than was currently available out there in the market.

00:40:33 [Speaker Changed] Why do you think it took so long for this ETF to get over the finish line? I

mean the SEC has been talking about this and having hearings and listening to investor input on this. It

seems like it’s been years, five years.

00:40:48 [Speaker Changed] Well first I think the narrative from investors really grew over the past few

years. The infrastructure in the crypto world was also evolving, but regulation and policy has been

evolving as well and still has a a long ways to go. So I think regulators needed to, and the SEC in

particular needed to hear from investors needed to work through the operating model. And then also

remember, I mean you and I have talked about what the past three years have looked like this SEC has a

very ambitious equity market structure agenda on their plate and that’s really been their priority. But I

think ultimately investor demand and desire for access in an ETF went out.

00:41:32 [Speaker Changed] I never had any doubt that it would eventually happen. I just had no idea if

it was this decade, next decade. But I’m curious as to your experience. What was it like going through

the process of applying for approval? BlackRock is such a giant participant in the market. I have to

imagine that you were one of the key firms the SEC was consulting with about things like security and

password protection and anti-hacking issues and all the custody issues that go with that. What was it

like processing the, oh, here’s a new ETF application. We’re just gonna sneak this in with a big pile of

other ETFs.

00:42:11 [Speaker Changed] Look, I think for all types of, of ETFs, as we talked about, it takes an

ecosystem to make them work. Given our experience as a market’s risk manager in all types of markets,

we engage frequently with all types of regulators who are a key part of the ecosystem on how things are

working with our observations around ETFs, around markets, around trading and around liquidity. So

with respect to the SEC, our engagement was much less about the if and much more about the how

here are the ways to provide robust and resilient access to investors in an ETF.

00:42:51 [Speaker Changed] So you guys came out much less expensive than just about every other

provider. Where do you think the Bitcoin ETF can go? Can this scale up to something along the sizes of

any sort of large index or is this gonna be a little niche product?

00:43:10 [Speaker Changed] I don’t know yet. Barry, I’m, I’m definitely curious your thoughts on that as

well. We know that there was demand for access. We know that there were, and are a lot of holders in

Bitcoin in vehicles that investors view as less preferable to the ETFs that are now out there. So in termsof the flows that we’re seeing, unclear, is that net new demand? Is that just wrapper switching demand?

For sure. So I think this is like early stages of, of how this story is gonna play out. I would say, by the way

though, I, I think we’re kind of middle of the pack When we think about what investors will look for in

terms of costs of an ETF, we really encourage people to look at what we call total cost of ownership,

which is not just the expense ratio but the liquidity, the spread, the access on exchange, the resilience of

the operating model. So all of those things contribute to total cost of ownership, which isn’t necessarily

all captured by the expense ratio.

00:44:06 [Speaker Changed] So there’s so many different ways to go with that. First, there’s some crazy

stat, 2020 5% of all bitcoin ever mind is lost, has been go lost, right? The passwords lost. The hard

drivers are so, so I think people, especially Main Street investors are looking for a familiar name.

BlackRock clearly is that. The other thing is all of the interim solutions that have come out, you

described that as wrapper migration. I have to think that the, the futures bitcoin products are all gonna

move to ETFs along with the various trusts and mutual funds. It seems this is the ideal structure to, to

put that in. Other than that, I have no guess as to where this, if you were to tell me five years from now,

it’s a hundred billion dollars, I would shrug and if you said, oh you never really caught on, it’s just a, a

couple of billion dollars, I I maybe I’m more surprised by that outcome. But it certainly in the range of

possibilities, it could be a giant smash, it could be pretty good or maybe it goes nowhere. I I, it’s hard to

judge if you are decentralizing finance. If that narrative about crypto is we are gonna take finance away

from the big banks, well then the whole concept of an ETF doesn’t make

00:45:25 [Speaker Changed] Any sense. Exactly. That was initially what we thought when people

approached us. Like there were a lot, we got defi so many calls from, you know, various crypto players

who wanted us to list an ETF. And the question we asked, the first question I asked was, why do you

even want this isn’t, this whole isn’t the whole point like disintermediation defi, like I’m pretty CFI with

this, with this, you know, ETF wrapper thing going. But I guess, you know, as it turns out it really is that

desire by investors for whole portfolio risk management. So for me, I guess I think about what is the best

long-term outcome for investors. And it’s probably an integration of these ecosystems as opposed to

them living separately so that you can manage risk holistically, but like you, we need to see how it plays

out.

00:46:15 [Speaker Changed] And the other thing that is obvious in hindsight, the whole concept of

trustless transactions where you don’t need to have a trust relationship with the opposite party. How

has that worked out? We’ve seen all the big crypto exchanges implode. It seems there’s just between

the criminals and the blackmailers and the, you know, just crazy run of crypto criminals doing it yourself

seems so fraught with risk. But if I could say to BlackRock, Hey, I’m gonna outsource all of my risk

management to you take care of the custody, take care of the passwords, I don’t want to deal with any

of this stuff. Just seems to be so much easier. I guess it’s laziness. I want the most friction-free approach

to making a a purchase and I don’t want to have to engrave a password that’s 97 letters long on a piece

of metal and bury it in my backyard. That that doesn’t appeal to me. So what are you hearing from

others in the space in terms of what they’re looking for in, in a crypto ETF?

00:47:26 [Speaker Changed] The convenience of ETFs is incredibly compelling for investors. They

understand the ecosystem. Now, importantly with the Bitcoin ETFs, the institutional grade custody is

really important for investors as well. Now you know, to your question about the, the crypto ecosystem

separate from ETFs, I think there’s a lot of questions there around how that evolves in terms of whatwe’ve seen so far. Is it the technology that’s created it or is it really the fact that there’ve been no

guardrails around the ecosystem that is built around it? I would say the technology has a lot of promise

in terms of its transparency and auditability. This is a technology that presumably could actually

decrease the utility for illicit finance. However, we would really need a regulatory and policy

environment supporting it. And I think that’s where there’s a lot of questions, particularly in the US

around future directions. So

00:48:23 [Speaker Changed] We have a Bitcoin ETF, what about other coins like Ethereum?

00:48:26 [Speaker Changed] We’ll have to watch this space I think. I think there’s really, with respect to

what we hear from investors, there’s one other coin right now and then a whole lot of coins that we’ll

just call them alt coins, right? But the question is to whether investors are interested in an Ethereum

ETF. Yes, we’re definitely hearing that They are, I think we’re early days of bitcoin, ETF trading. There’s a

lot of, you know, policy and regulator change that will probably happen in 2024. But we’ll have to see

what happens from here. And

00:48:57 [Speaker Changed] And the BlackRock I shares bitcoin ETF is Ibit right? That’s right. That’s the,

the stock symbol. What have the asset flows looked like? Where is this, is this thought of as a successful

launch? Where have you gone so far in assets under management there?

00:49:14 [Speaker Changed] So ibit is a little bit over $5 billion in really assets.

00:49:19 [Speaker Changed] That’s pretty quick to 5 billion considering how new this is.

00:49:22 [Speaker Changed] It is, and remember this dynamic that we talked about with respect to

wrapper switching. So we do know that there were a lot of, you know, bitcoin holders that were in

wrappers that they felt were less convenient, less transparent, maybe didn’t offer them the same sort

of, you know, custody that they have. And also maybe holders who are also interested in, in being able

to lend out et f shares where it was harder to deploy securities lending type trading in underlying crypto.

So I think this, this question that we were talking about before in terms of where does the long term

demand come out, it really depends on, on how investors and how advisors think about this in the

context of portfolio allocation.

00:50:02 [Speaker Changed] So I’m gonna assume BlackRock doesn’t take Bitcoin or do you, if a client

calls up and says, hey I have a million dollars in at at my bid X custodian and I want to transfer it into an

ETF, is that something a broker can do, a custodian can do? Or are we not quite at that point yet? Oh

00:50:21 [Speaker Changed] We are absolutely holding crypto on behalf of our clients in these ETFs. I, I

would think of it very similarly to gold where an investor who buys our gold ETF or our silver ETF, we

have a custodian who is storing silver bars or gold bars in their vault physically it’s the same thing in

Bitcoin. So we work with a custodian who is storing the actual Bitcoin for our investors in cold storage.

And on a daily basis we are sweeping actual coin into that cold storage and that custody and the fact

that they are actually owning the crypto, that’s an important part of the value proposition. That’s

00:51:03 [Speaker Changed] Really interesting. Since all bitcoins are created equal, I assume it’s not like

this fund manager or that stock screener or that index at a certain point it has to come down to cost.

Given your guys’ expertise scale, the ability to drive costs down. Is this just gonna become a a, a race to

the bottom in terms of fees or how do you see this evolving over time?00:51:32 [Speaker Changed] Investors care about total cost of ownership areas we were talking about

00:51:36 [Speaker Changed] Before. It’s not just the fee, it’s everything that’s involved with,

00:51:38 [Speaker Changed] It’s not, it’s the liquidity, it’s the on exchange access, it’s the diversity of the

counterparty ecosystem. All of these things you can measure broadly in thinking about market quality. Is

there an options ecosystem on the ETF and importantly the operating model matters as well. How is the

custody working? Is it you know, institutional grade custody? And if you really wanna get into the

details, you will start to see differences in some of the operating models as you would with commodity

ETFs as well.

00:52:08 [Speaker Changed] So it’s not strictly gonna be a competition based on fees there. There are

other factors there. ’cause you guys have the ability to dominate in terms of fees versus smaller

competitors. You know, my instinct is, oh we can dominate this market share by just undercutting

everybody else. It sounds like you’re taking a more holistic approach than that.

00:52:31 [Speaker Changed] We do take a more holistic approach and I think that’s what investors ask

us for. We’re certainly seeing this in the fixed income ETF complex, particularly in treasury ETFs where

there’s been a lot of interest and attention lately in the longer part of the curve. And what we will see is

as is ETFs that have much more liquidity options, ecosystems will actually maintain higher price points.

But from an investor’s experience perspective, probably a lower total cost of ownership and they’re

bigger.

00:53:03 [Speaker Changed] Hmm, interesting. I haven’t seen a whole lot of marketing for ibit. In fact, I

haven’t seen a whole lot of marketing for many Bitcoin ETFs, although they’re starting to bubble up

online. Is this a product that requires a lot of marketing muscle or is this something that hey, if you

wanna buy a Bitcoin ETF, you know where to go find one.

00:53:25 [Speaker Changed] This is a product that was launched in answer to investor demand for

access. So it really is a journey of education in terms of what access we’re providing and for investors

who want to learn more, not just about Bitcoin, but also it’s an opportunity to teach investors about

ETFs to get them to participate in a markets ecosystem that allows them to get diversified exposures

across lots of different types of asset classes. So for us it’s an opportunity to talk about access to

markets in a broader way. And that’s exciting. It’s gonna bring us the next, you know, a hundred million

of of savers into equity and bond markets

00:54:05 [Speaker Changed] And, and this is still really very early days, right? How, when did the Ibit

come out? Second

00:54:11 [Speaker Changed] Week of January.

00:54:12 [Speaker Changed] I read somewhere you were like the fourth or fifth largest flows for Bitcoin

ETFs without doing a whole lot of marketing. What does that say about where investors wanna manage

their risk, who they’re comfortable with, who they’re familiar with?

00:54:27 [Speaker Changed] I think that looking at the Bitcoin ETF flows, you do have to be very

sensitive to the wrapper switching dynamics and what’s driving it right now. But

00:54:35 [Speaker Changed] But you weren’t running well you running a futures Bitcoin ETF.00:54:41 [Speaker Changed] No, we weren’t running a futures.

00:54:42 [Speaker Changed] So it’s not like it was coming from internally. This is flows from outside.

00:54:46 [Speaker Changed] Oh, absolutely. Yeah. No, when I say wrapper switching, I’m talking about

all different types of, of wrapper switching. Whether it’s from a trust, whether it’s from a futures ETF or

whether it’s somebody who is holding Bitcoin who actually, you know, would prefer to hold their Bitcoin

in any tip because they’re worried about losing their key or whatever it is for the reasons

00:55:03 [Speaker Changed] That we, it seems much talked about. Right? It seems much such a way to,

to do it.

00:55:05 [Speaker Changed] So, so we were talking earlier Barry about flow and tell, what do you read

into from flows? So the point that I’m just making here is a month in it’s a little early to extract anything

about demand for Bitcoin. It’s very clear what investors are saying about ETFs and their desire to

manage whole portfolio risk and the convenience of the wrapper for the exposures that they want. The

ETF is the first choice and I think you’re gonna have to just have me back in a couple of years to see what

the Bitcoin journey is.

00:55:36 [Speaker Changed] So, so I don’t wanna put words in your mouth and I’m gonna say what you

are not saying. We already know Vanguard came out and they said they’re not gonna do it. State Street

seems to be lagging. I can easily see BlackRock being the dominant bitcoin ETF 12, 18 months from now.

Especially ’cause you don’t have those internal flows that some of your Bitcoin competitors do and

you’re still kicking butt. So I’m being complimentary and you’re kind of being coy about it and I

understand what, what your corporate charge is, but I think it’s a really fascinating story and it’s gonna

be interesting to watch what happens with Ethereum. But really it’s come down to a couple of coins that

serve slightly different technological purposes and then the rest of the technology around it. It feels like

we’ve been talking about a Bitcoin ETF for years and years and, and now it’s here and, and $5 billion in a

month is, you know, just kind of bonkers. Let’s leave the, I bit story behind and jump to my favorite

questions that I get to ask all of my guests. Starting with what are you streaming these days? Tell us

what you’re watching or listening to.

00:56:51 [Speaker Changed] I know you always ask this Barry. So, so here’s the secret with me in

podcasts, I do listen to them. I’m not a regular on any, my trick is that if there’s a topic I wanna learn

about or a person that I’m interested in, I search for that and just listen to recent podcasts. So I’ve been

interested in hearing how people are covering Bitcoin ETFs and, and I also actually currently am listening

to a podcast with a woman named Randy Braun, who we are having speak at BlackRock, but she just

wrote the New Playbook for Women at Work and I’m excited to meet her. I’ll be interviewing her. So

that’s how I listen to podcasts.

00:57:23 [Speaker Changed] What, what about Netflix, Amazon Prime, anything like that?

00:57:27 [Speaker Changed] So my husband is the curator of family shows and right now he’s going

through like a zombie series phase. Okay. So, so I don’t have a current show that I’m, that I’m super

00:57:37 [Speaker Changed] Excited about. Not a zombie fan, not a big zombie fan. I’m

00:57:39 [Speaker Changed] Not a big zombie fan either. Either. Yeah,00:57:41 [Speaker Changed] Everybody talked about Walking Dead and it’s not what I wanna see

00:57:45 [Speaker Changed] To relax. I love Buffy the Vampire Slayer,

00:57:47 [Speaker Changed] But that’s a whole D first of all, it’s got an element of humor and wit in it. It

inverts the whole model of, instead of the pretty cheerleader being killed by the monster, it, it’s

00:57:59 [Speaker Changed] A exactly

00:57:59 [Speaker Changed] It, it turns it on its head and she’s the, the Vampire Slayer from its

inception. It has a certain snarky knowingness that I, I just didn’t pick up in the Walking Dead. The

Walking Dead was just Awar

00:58:12 [Speaker Changed] Fest. But very, I’m really happy to hear you’re a Buffy fan.

00:58:15 [Speaker Changed] I’m a big sci-fi geek, so Me too. And it’s always funny when you discover

people that you would never in a million years guess are like deep sci-fi nerds. So it kind of comes with

the math territory. Yeah, there’s a big, you know, the Venn diagram has a big overlap with that. I’m still

have an image in, in my mind of, I I, I don’t remember if it was the series of the movie where it’s Peewee

Herman at the end, where he’s impaled on the stake and the death scene of him just going, ah, ah, just

slowly dying it, like that sort of hilarious parody of the genre. If you’re a, a film buff or a sci-fi, you have

to really appreciate that. It’s just, it’s classic. Most people, you know, don’t make movies that way. But

it’s really interesting. I don’t remember if last time we spoke about my two favorite streaming sci-Fi

recommendations.

00:59:11 I don’t think so. So one is Altered Carbon, which is this short two season series that if you’re

like a hardcore sci-fi geek, it’s amazing. I’ve heard of it. And then second on Amazon Prime was The

Expanse, which is insane and just, it morphs over time and goes in all sorts of crazy places. But the

universe, it creates, that’s not a million years in the future. It’s not radical technology. It, it’s far enough

in the future that people live on the moon. People live in Mars. People live out in the work in the

asteroid belt and they live out on, I think Titan, one of the moons of Jupiter. And then what are the

geopolitics of the Belters, the Earthers and the Martians? So the technology is close enough to today

that it’s very believable and the world that it creates is just, it’s completely mayhem. Really, really

fascinating. You don’t have to build weapons if you have the ability to just heave asteroids towards your

enemy. It’s just wild. So it definitely takes a couple of wacky turns in the latter seasons, but the whole

ride is, if you’re a sci-fi geek, you may, you may appreciate

01:00:28 [Speaker Changed] It on my list.

01:00:29 [Speaker Changed] Let’s talk about your mentors who helped shape your career.

01:00:33 [Speaker Changed] My earliest mentors were actually in theater. I had my first real backstage

experience being a stage manager. The head of the drama department reached out to me. He wrote me

a note afterwards and he let me follow him everywhere and just taught me a lot. But he wrote me a

note that said, and I kept this note for years that said, you’ve got what it takes, Samara. Thanks for

sharing it with us. And I remember I saved that note. And even when I was doing things that had nothing

to do with theater, it gave me a lot of confidence. So I would say that was kind of my first real

mentorship experience.01:01:06 [Speaker Changed] You mentioned some books earlier. Let’s talk about some of your favorites

and what, what you’re reading now.

01:01:10 [Speaker Changed] Well, now that you said the sci-fi thing, I will share my favorite book that I

read in 23. I dunno if you’ve read this. It was called Cloud Cuckoo Land, which is no a really cool book.

It’s I think six or seven different intertwined stories that range from ancient Greece to sometime in the

future. But it’s a story about hope and resilience and space and time and connections. And I thought it

was just gorgeously written and I read a lot of fiction and I like things that just kind of expand how I

think about the world. So I would definitely recommend Cloud Cuckoo land. And then I’m also a markets

history nerd and I always will be. So I am reading right now the Bitcoin standard, which is less about

Bitcoin, I think, and more about the history of money and the ways civilizations have sought to find

different ways to transfer value across space, across time. That’s fascinating to me. And I think really

instructive in thinking about the future markets.

01:02:16 [Speaker Changed] Did you happen to read either of the two big crypto sand Bankman, freed

FTX books, either going Infinit or number go up? They’re both delightful in different ways. Number goes

up is a little more horrifying. ’cause you see the CD Underworld of how criminals, yeah.

01:02:36 [Speaker Changed] You know,

01:02:37 [Speaker Changed] And human traffickers use Bitcoin, use all sorts of crypto, but it’s really a

great work of journalism and, and, and revealing and going infinite. Anything Michael Lewis writes is

always gonna be delightful. So our last two questions. What sort of advice would you give a recent

college grad interested in a career in investing, ETFs indexing any of the work you do at BlackRock?

01:03:03 [Speaker Changed] If they are interested, my advice would be to go for it. I talked to a lot of

college grads who are wondering, will I be good at this? Should I try it? And look, I had a theater

background and I gave it a shot. There are so many different ways to be successful in investing in

markets, and I’ve heard people say, you know, know your strengths and lean into your strengths. And

sure, that’s true in the long term, but I think college and learning, and again, I’m saying this as a parent

of teens, it’s about uncovering your passions and leaning into those. You have no idea what you’re

gonna be good at until you try. So if you are interested in investing and in markets, there’s so many

different jobs and types of ways to get involved, whether it’s at an asset manager or a trading firm, or a

broker dealer or a wealth manager. So get your foot in the door, start to see if it is, you know, what you

want it to be.

01:03:57 [Speaker Changed] And finally, what do you know about the world of investing today? You

wish you knew 30 years or so ago when you were first getting started?

01:04:05 [Speaker Changed] The moments that feel the worst in markets, the scariest, the most volatile

are the moments where you can define the outcomes that you’re delivering investors and, and define

your career. I look across my career at these moments that I thought, oh my gosh, we never thought,

you know, this, this sort of flash crash, this sort of dislocation, this sort of black swan event would

happen. But over the course of a 30 year career, which I’ve had, there have been many of those. And

what we learn in those moments, how we stay close in those moments, manage risk for investors, and

what we learn coming out of them are the biggest contributions we can make from a portfolioperspective. And, and I think from a market’s perspective. So it would’ve been interesting to have been

told that on my first day of work, which was about 30 years ago,

01:04:56 [Speaker Changed] I I love that answer. I I have a vivid recollection in the middle of the

financial crisis of saying to one of the traders, a line from Apocalypse Now, the Deval character, you

know, someday this war is gonna end. And he says, with a, a, a bit of longing and bittersweet recognition

that it’s a unique moment in time and drink it all in. ’cause you’re not gonna see anything like this again.

And I, I think people sometimes don’t appreciate that, at least in the mayhem of the moment. Exactly.

Real, really fascinating take on this. Samara, thank you so much for being so generous with your time.

We have been speaking with Samara Coh. She is Chief investment officer of ETF and Index Investments

for BlackRock. If you enjoy this conversation, check out any of the 500 previous discussions we’ve had

over the past 10 years.

01:05:52 You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcast. Check

out my new podcast at the money short, 10 minute conversations with experts about issues that matter

deeply for your earning spending, and most importantly, investing money at the money wherever you

find your favorite podcasts. And in the masters and business feed, I would be remiss if I did not thank

the crack team that helps us put these conversations together. Paris Walt is my producer, Juan Torres is

my audio engineer. Sean Russo is my researcher. Atika Al Bru is my project manager. I’m Barry Ritholtz.

You’ve been listening to Masters of Business on Bloomberg Radio.

 

~~~

 

 

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Avert your eyes! My Sunday morning look at incompetency, corruption and policy failures:

• The Rise Of The Bee Bandits: Where once there was cattle and horse rustling, the American West is now confronting the theft of its bees. (NOEMA)

• Why car insurance rates are so high: You’re paying a lot more for car insurance than you were in 2020. Here’s why. (Vox) see also Insurers Are Spying on Your Home From the Sky: Companies are using drones to check out roofs or to spot yard debris and undeclared trampolines. (Wall Street Journal)

• As Kushner’s Investment Firm Steps Out, the Potential Conflicts Are Growing: Jared Kushner’s Affinity Partners has invested more than $1.2 billion, much of it in firms abroad, drawing new scrutiny as his father-in-law, Donald Trump, again seeks the presidency. In total, 99% of the money placed with him by investors has come from foreign sources, according to a filing with the Securities and Exchange Commission. (New York Times)

• Big Pharma Stocks Need a Rethink. Investors Keep Making the Same Mistake. Pfizer’s patent expirations are great for humanity but terrible for investors. It’s a common story across the pharmaceutical industry. (Barron’s)

• How Tech Giants Cut Corners to Harvest Data for A.I. OpenAI, Google and Meta ignored corporate policies, altered their own rules and discussed skirting copyright law as they sought online information to train their newest artificial intelligence systems. (New York Times)

• ‘Lavender’: The AI machine directing Israel’s bombing spree in Gaza: The Israeli army has marked tens of thousands of Gazans as suspects for assassination, using an AI targeting system with little human oversight and a permissive policy for casualties, +972 and Local Call reveal. (+972)

• How an 1864 law set the stage for Arizona court’s abortion ruling: Arizona’s Supreme Court on Tuesday upheld that 1864 law, ruling on a request from the state’s former attorney general to restore it in the wake of the Supreme Court’s 2022 decision to overturn Roe v. Wade — a request that had set off a legal battle with Planned Parenthood. The justices’ 4-2 decision paves the way for most abortions to be banned in the state, making Arizona the 17th state to virtually outlaw abortion. The decision could still face legal challenges. The legal underpinning for the ban rests on a section of the 1864 Howell Code. (Washington Post)

• Russia Runs a Hidden Prison System for Ukrainian Detainees—In Crimea: Human rights monitors claim that occupation forces engage in torture and prolonged captivity in a sprawling penal network. (Vanity Fair) see also Russian trolls target U.S. support for Ukraine, Kremlin documents show. In an ongoing campaign that seeks to influence congressional and other political debates to stoke anti-Ukraine sentiment, Kremlin-linked political strategists and trolls have written thousands of fabricated news articles, social media posts and comments that promote American isolationism, stir fear over the United States’ border security and attempt to amplify U.S. economic and racial tensions, according to a trove of internal Kremlin documents. (Washington Post) see also Top GOPers’ extraordinary comments on their party and Russian propaganda: Two key GOP chairmen are merely the latest to warn about how Russian influence has infected their party https://www.washingtonpost.com/politics/2024/04/06/when-top-republican-says-russian-propaganda-has-infected-gop/

• The Method Behind Trump’s Mistruths: A close examination of every public word from the former president during a crucial week of his campaign. (New York Times)

• Arms Are Flying Off Their Hinges: Baseball is stuck in a velocity trap. In tandem with fastball velocity has risen another closely watched statistic: catastrophic arm injuries, with UCL tears being by far the most frequent. “The graphs essentially overlap each other,” Glenn Fleisig, the director of biomechanics at the American Sports Medicine Institute (ASMI), told me. Back in 2010, MLB pitchers made 241 trips onto the injured list. Last season, that number was 497. Arms are flying off their hinges all over the place, to the degree that it’s become a routine part of the game. (The Atlantic)

Be sure to check out our Masters in Business this week with Samara Cohen, Chief Investment Officer of the ETF and Index Investments (EII) roughly $6.6 trillion of BlackRock’s index funds and iShares ETFs. She is also a member of the firm’s Global Executive Committee.

 

What Makes Housing So Expensive?

Source: Construction Physics

 

Sign up for our reads-only mailing list here.

~~~

Still on book leave . . .  but I am past the midway point and making good progress!

 

The post 10 Sunday Reads appeared first on The Big Picture.

 

I wanted to share a few thoughts about the new podcast we formally launched in December of last year, At the Money.

The idea behind the show: Short, focused conversations with experts about any and all issues that affect you and your money, from spending it to investing it. Think of it as a guided tour of key ideas, sherpaed with the experts who I believe add enormous value to our understanding of how humans do behave — and should behave — around money.

By short, I mean 10-minutes (15 tops) or a 1,000-2,000 word transcript that takes even less time to read.

Currently, it’s part of the Masters in Business feed, but eventually, I’d like to see ATM have its own podcast feed.

At the Money was designed to be a little lighter and more fun than the usual pods; not its subjects or guests, but rather, how focused and tight the discussions are. I wanted to reflect that in the thumbnail tile (above) as well as audio soundscape of the show.

As much as I enjoy these recordings, the most fun part for me is finding an audio / music clip that suits the topic and the discussion. Bloomberg licensed the entire BMI/Ascap catalog, so I have access to an endless array of music from the 1940s to the present date. I can only use under 30 seconds at a time, but still, it’s an embarrassment of riches to choose from, and endless fun for me.

So far, I have run the gamut from Daft Punk to BB King, the Rolling Stones to Monty Python. The challenge comes when run-of-the-mill investing/economic topic turns out to be esoteric in terms of music; think Inflation or Contrarian investing. Its a fun little challenge to find something that is a little fun yet on point.

~~~

The full archive of At the Money with transcripts are here; you can also find these in your favorite pod sites in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg.

 

 

Previously:
Introducing “At The Money” (December 7, 2023)

 

The post Update: At the Money appeared first on The Big Picture.

The weekend is here! Pour yourself a mug of  coffee, grab a seat outside, and get ready for our longer-form weekend reads:

• This is the most consequential technology in America: (Spoiler alert: It’s YouTube.) It’s the most popular social app and music service, the healthiest economy on the internet and AI training fuel. (Washington Post)

• What I Learned from Daniel Kahneman. What’s the best way to get better investment returns? Should you study markets more deeply and analyze every asset more carefully? Should you try to anticipate other people’s mistakes and exploit their stupidity? I believe that’s necessary, but not sufficient. You must also try to predict, minimize and learn from your mistakes. Blindness to our own blunders is the biggest single obstacle to investing success. (Wall Street Journal)

• What Makes Housing So Expensive? Looking at housing costs chiefly through the lens of single-family homes, we see the costs of building them largely map to US housing costs generally. There’s also a large amount of data available on single-family home construction that doesn’t exist (or is much less accessible) for other types of housing. And most multi-family apartment buildings in the US will be built using the same basic technology, light-framed wood, used to build single-family homes, so much of what we learn about single-family costs, particularly on the construction side, will apply to multi-family apartments as well. (Construction Physics)

• How a Pioneering Blackjack Master Beats the Odds of Aging: Legendary gambler and hedge fund manager Edward Thorp, 91, shares what he’s learned about exercise, diet and managing risk in all areas of life. (Businessweek)

• The Podcast Host Who Also Manages a $1.6 Trillion Investment Fund: Top CEOs talk to Norway’s sovereign-wealth fund manager. This week’s guest was Elon Musk on the future of AI. (Wall Street Journal)

• Behind the Curtain: America’s reality distortion machine: What if we’ve been deceived into thinking we’re more divided, more dysfunctional and more defeated than we actually are? (Axios)

• Dark Matter: For twenty years, PostSecret has broadcast suburban America’s hidden truths—and revealed the limits of limitless disclosure. (Hazlitt)

• The Eclipse That Ended a War and Shook the Gods Forever: Thales, a Greek philosopher 2,600 years ago, is celebrated for predicting a famous solar eclipse and founding what came to be known as science. (New York Times)

• Is Jackson Holliday the best baseball prospect we have ever seen? His stats —at every level — are, frankly, amazing. In his senior year of high school — in Stillwater, Oklahoma — Holliday had 89 hits in 40 games. He hit .685. He hit 17 home runs and had 79 RBI. In 40 games!!! After being the #1 overall pick in the 2022 Major League Baseball draft, Holliday played at several levels of the minors. Here were his combined stats: 477 AB , 154 Hits, 113 Runs, 12 HRs, 51 XBH, 75 RBIs, 101 Walks, .323 AVG, .442 OBP, .499 SLG, .941 OPS. He was voted minor league player of the year in 2023. This year, he hit a home run in his first at-bat for the Orioles AAA affiliate. (The Replay)

• Larry David’s Rule Book for How (Not) to Live in Society: He’s a wild, monomaniacal jerk. He’s also our greatest interpreter of American manners since Emily Post. (New York Times)

Be sure to check out our Masters in Business this week with Samara Cohen, Chief Investment Officer of the ETF and Index Investments (EII) roughly $6.6 trillion of BlackRock’s index funds and iShares ETFs. She is also a member of the firm’s Global Executive Committee.

 

Ten Economic Facts About Rental Housing

Source: Brookings

 

Sign up for our reads-only mailing list here.

~~~

Still on book leave . . .  but I am past the midway point and making good progress!

 

The post 10 Weekend Reads appeared first on The Big Picture.



 

 

This week, we speak with Samara Cohen, senior managing director at BlackRock, and chief investment officer of the firm’s ETF & Index Investments, running about $6.6 trillion in client assets. She is also a member of BlackRock’s Global Executive Committee and its investment and talent subcommittees.

Cohen is also the Global Executive Committee’s sponsor for BlackRock’s Women’s Initiative & Allies Network and a member of the Global Diversity, Equity and Inclusion Steering Committee. She was previously a managing director in the securities division of Goldman Sachs Group Inc., where she built and led the global market transition team following the 2008 global financial crisis.

We discuss how her undergraduate theater experience has helped her in finance. “90% of directing is casting.” She notes in a leadership role, her job is to help her people do their best work.

A list of her favorite books is here; A transcript of our conversation is available here Tuesday.

You can stream and download our full conversation, including any podcast extras, on Apple Podcasts, Spotify, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

Be sure to check out our Masters in Business next week with Ashish Shah, Co-Head and CIO of Public Investing at Goldman Sachs Asset Management: He joined GS as a partner in 2018, and previously served as global co-head and CIO of Fixed Income + Liquidity Solutions . His group manages 2.3 trillion in client assets.

 

 

 

Samara Cohen Favorite Books

Cloud Cuckoo Land by Anthony Doerr

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

 

Books Barry Mentioned

Number Go Up: Inside Crypto’s Wild Rise and Staggering Fall by Zeke Faux

Going Infinite: The Rise and Fall of a New Tycoon by Michael Lewis

 

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Confused about where we are today?

A favorite exercise is to go back to first principles to consider how we got to where we are. (That is a favorite way to find fresh insights).

On the equity side, you have to go back a century or so. Equities were considered speculative endeavors, best suited for gamblers and punters. The exceptions? A handful of “Widows & Orphan” stocks, like Ma Bell, some railroads, utilities and the rare bank that was not suffering regular runs.

There were no disclosure rules, insider trading was rampant, and market manipulation the norm. Trading syndicates could make or break any stock, and rumors dominated the NYSE. It’s probably just the merest of coincidences that the 1929 crash and the Great Depression followed…

Soon after, World War 2 broke out; once that was resolved, 40 million GI’s returned home with cash in their pocket and the GI bill paying for college. The build-out of suburbia followed, along with the Interstate highway system, the electronics industry, automobile culture and even civilian aerospace. That powered the decades-long boom that came after the war.

In the 1960 and 70s, Merrill Lynch was bullish on America – they set their sales staff loose trying to sell the American dream to upper-middle class households. The technology didn’t really exist to easily track performance or costs – we simply took it on faith that equities would do well over the long haul.

Trading volumes increased dramatically. By 1968. the NYSE was averaging about $4 billion in unprocessed transactions. The solution? From June 12, 1968 to December 31, 1968, the exchange was closed on Wednesdays to allow the clerks to catch up with the orders.

Trading was expensive, and the clubby brokerage industry had long indulged the large institutions at the expense of individuals. That changed on May 1, 1975, when the Securities and Exchange Commission mandated a change in commission structures. Deregulating the brokerage industry, SEC allowed trading fees to be set by market competition for the first time in more than 180 years.

Costs continued to fall: Over the next 25 years, commissions would fall from about 1.0% of the value of a buy or sell to around 0.25% of stock value. They continued to drift lower, until 2019, when Schwab became the first major firm to offer free trading. And even still, fund fees and taxes remained a major cost element.

Vanguard launched in 1974, to surprisingly little notice. They slowly accumulated some assets, but hardly moved the needle on Wall Street. Few noticed what was to become a revolution in investing.

In 1978, Congress enacted Internal Revenue Code Section 401(k), which allowed tax-deferred savings through a company-administered plan. It was mostly ignored at the time.

A new bull market broke out in 1982. It was “Morning in America,” and stocks had become attractive to an increasing portion of savers here. Over the next 18 years, the Dow would gain about 1,000% — most of those gains came from multiple expansion.

Lower trading costs, a rampaging bull market, and tax-deferred investing led to millions of new entrants into markets.

Even still, most people only had a rough idea of how they were performing. CRSP data was around, but not widely available; Bloomberg terminals launched in 1981, but were expensive and oriented towards market professionals. Data was expensive, professional analysis complex, and only a handful of companies served individual investors. Founded in 1984, Morningstar would mail out hard copies of information on various Mutual Funds; ValueLine sent looseleaf binder pages on individual companies with regular updates about Stocks.  That new information arrived through the mail, once a quarter or so. S&P had a similar service.

When you wanted to buy or sell, you would call your stock broker on the phone to place an order. Every thing was done slowly and manually.

But a small handful of academics had discovered that nearly all active fund managers were not earning their keep. Whatever gains they had over the benchmark were soon consumed by their relatively high costs. During the bull market, this was more or less ignored.

Fidelity’s Peter Lynch was a rock-star stock picker and crushed all benchmarks over the next dozen or so years. Lots of other active managers did well. But again, there simply wasn’t an easy way to compare professional fund managers performance over the long haul relative to fees commissions and taxes.

The 2000s saw a few major changes: Computers had become ubiquitous and relatively cheap, data became widely available and people soon found out how well their active managers had — or had not — done. Most of the hedge fund community would be revealed post-2009 as not worth their costs.

The 1980s and 90s was a fabulous wealth-creation machine, right up until the wheels fell off the bus. First the Dotcom implosion occurred; then a series of scandals and frauds were revealed:  Merrill Lynch Orange County Bankruptcy, the mutual fund scandal, the analyst scandals,  the NASD Arbitration fraud, the earnings manipulation scandals, the IPO spinning scandal. This is before we get to the many many accounting frauds: Worldcom, Enron, Tyco, etc. Then came the GFC, with the implosion of Lehman Brothers, AIG, Bear Stearns, and most of the rest of Wall Street.

Among all of this, the academic research soon made it very clear: Nearly all of active management was not generating enough Alpha to justify their fees. Best of luck to anyone trying to guess the 5% that were in advance.

~~~

This history taught the average Mom & Pop investor a few things:

First, both Wall Street and its self-regulation were not to be trusted. There simply were too many criminals allowed to rob, cheat, and steal unchecked, and without consequences. There is another post entirely to be written about the arbitration scandals of the 1990s, but when the self-regulators are the biggest thieves in the room, you have a lot more than a PR problem.

First, the scandals weighed on people’s minds, then came the Great Financial Crisis. For many, the Wall Street bailouts were the last straw.

It is not a coincidence that following the GFC, Vanguard and Blackrock soon crossed a trillion dollars in assets, then doubled in size, then doubled again. The patsies at the table soon figured out they did not want to play Wall Street’s games. Their solution was to own the market, and let someone else pay a high management fee.

 

More to come later…

 

 

Previously:
Where Has the Retail Investor Gone? (August 25, 2012)

The Death of Active Management Has Been (Somewhat) Exaggerated, (April 5, 2017)

Why is Active Failing? (April 27, 2016)

Active vs Passive Management (Archives)

Vanguard Group (Archives)

 

The post A Short History of Stocks appeared first on The Big Picture.