July 8, 2024 • 21 mins
Indexing has become the navigation tool of choice for investors seeking simplicity amid the blur of financial complexity. Central to indexing’s popularity is low-cost diversification, which has fueled the rise of passive investing, a trend that S&P Dow Jones Indices CEO Dan Draper says still has room to run. Yet, with nearly 90% of asset managers underperforming their benchmarks, how might the competition for assets shake out? David Ingles of Bloomberg Television and Rebecca Sin of Bloomberg Intelligence put those questions to Dan in this installment of Tiger Money.
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Speaker 1 (00:00):
This podcast is brought to you by HKX, Asia's ETF Marketplace. Well,
you'll find a gateway to liquidity and a diverse selection
of opportunities across asset classes, sectors, and themes in Asia
and beyond. Search HKX to learn more.
Speaker 2 (00:18):
Good morning, good afternoon, good evening, and good nights wherever
in this vast, beautiful planet you're joining us from. I'm
David Inglass, non award winning journalist, host of The China
Show and Chief Markets editor for The Age Pacific at
Bloomberg TV. And joining me in my co pilots on
this journey Rebeccasin, head of Asia Pacific ETF Research at
Bloomberg Intelligence, which is, just in case you didn't know,
(00:41):
our proprietary research department, five hundred analysts all across the world,
covering more than two thousand companies, ninety industries, one hundred
market benchmarks, currencies and commodities. Welcome, you're listening to Tiger Money.
Speaker 3 (00:55):
Thank you, David, and we're so excited to have Dan
Draper CEO of SMP Dow Jones Indices, who just happens
to be in Tokyo with me at the same time.
He's responsible for all aspects of the index business globally.
Welcome Dan, and we're so excited that you could join
us on Tiger Money.
Speaker 4 (01:12):
Rebecca David, great to see you.
Speaker 3 (01:14):
Before joining SMP, Dan held leadership roles in asset and
wealth management and investment banking, working across New York, London,
Hong Kong and Jakata.
Speaker 2 (01:24):
Dan a pleasure to have you and fantastic having you
in the region. There's lots to talk about. By the way,
where you guys are Rebecca and Dan in Japan. The
resurgence of the market and the economy is a separate conversation.
We'll get to that in a moment. But I guess Dan,
maybe just take a half a step back for our
listeners who might know what your company is and what
you guys do, but perhaps that's all they know. Could
(01:45):
you just give us a sense of just how do
you guys make money?
Speaker 4 (01:49):
Yeah?
Speaker 5 (01:49):
So, sp Dow Jones Indices has been around in some form,
you know, the Belgians Industrial Average and even the Bell
Jiums original Transportation Average has been around for one hundred
and years. So the SMP brand has been there through
incredible different types of market cycles and what I think
originally started was creating a barometer measuring some market. That's
(02:11):
what Charles now did when he created the Dow Jones
Industrial Average. Well, what's happened over time evolution of capital
markets is the barometer started creating benchmarks, so active managers
started using in the case of the S and P
five hundred really is a performance attribution benchmark for active management.
And then the evolution of passive investing in the nineteen
(02:33):
seventies and eighties and beyond now with ETFs in particular,
now they've become the basis. Indices have become the basis
of investment products. So there's been a long evolution and
through that we make our money as a business in
three basic ways. Once these indices are used within investment products,
very similar to an asset manager, we would make a
(02:53):
very small percentage of fees on assets under management. We'd
call that asset linked revenues. The second bucket is these
indices are also used within derivative contracts, particularly things like
futures contracts options, particularly in exchanges like CME CBOW in
the US, So in those cases we'd need money on
the traded volume effectively. And then finally, the third area
(03:16):
is that you need data to support the use of
ETFs or the use of these derivative contracts. So we're
able to sell subscription packages to clients around the world
for the data.
Speaker 2 (03:28):
Okay, so we're looking at three separate businesses, three revenue lines.
What's the split.
Speaker 5 (03:32):
Yeah, roughly, it kind of varies quarter to quarter, but
you have roughly about sixty percent come from those asset
linked fees, which really aligns again with our customers. In
those areas, you have roughly you know, about twenty twenty
five percent or in exchange traded derivatives, and the remaining
amount would be in the data subscriptions.
Speaker 2 (03:49):
Okay, understood, And where do you see fees going feed
compression or fee expansion.
Speaker 5 (03:53):
Well, if you look in the asset linked area, which
again is the largest portion of the revenues, there's been
a lot of feed pressure and we see the very
mature markets for passive like the United States, you've seen
a forty percent decline in the total expense ratio of
ETFs over the past decade.
Speaker 4 (04:09):
So this is nothing new.
Speaker 5 (04:10):
There's been significant kind of competition there, but clearly you've
seen the growth in the volumes the active to passive
shift that has been.
Speaker 4 (04:18):
Even even kind of bigger.
Speaker 5 (04:19):
A lot of that price compression has been in traditional data,
if you will, but now you see higher margin areas
like thematics factors, things like sustainability, so new areas of growth, innovation,
and it's rewarded. But overall it's a fantastic story for
end investors who've really benefited from this lower cost, transparent
access to financial markets.
Speaker 3 (04:40):
So you guys definitely are one of the largest index
providers across ETF. You guys have roughly ten percent of
ETFs track the SMP indices, and from an AUM perspective,
it's roughly three point two trillion dollars out of the
twelve trillion globally it's roughly twenty five percent, so huge
market share. In Hong Kong, for instance, the Hangsang just
launched the s and P five one hundred ETF. In
(05:01):
Hong Kong, there are almost seven hundred million in assets
split across the various SMP indices, with everything from Indio
oil China high dived into Vietnam. So from the SMP
Dolls Jones Indus perspective, as a business, what are some
of the key growth areas for you?
Speaker 5 (05:19):
If you look at a world or global index, US
equities constitute about sixty percent, so the majority of the
exposure is there, and that's where we provide leading with
the S and P five hundred exposure of that marketplace.
I would say other trends, the demand for income is
quite high, and particularly around equity income with dividend strategies,
we're seeing a lot of demand. We're also starting to
(05:41):
see other thematic areas. Sustainability is a big theme, you know,
looking at things around carbon efficiency for example, as well
as other growth and fixed income for example, is a
big growth area. So we're starting to see a number
of trends coming together. But i'd say on a global basis,
investors tend to really think now on a portfolio basis
(06:02):
and thinking across multiple asset classes.
Speaker 2 (06:05):
You're in Japan, we're based here in Hong Kong. We're
trying to figure out where we are in this. I
guess still in some ways a prolonged bear market in
the Chinese equity market, but things have picked up a
late of Note, what are your plans around the Asia Pacific?
What are you guys busy with?
Speaker 4 (06:19):
Yeah, so I mean Asia Pacific.
Speaker 5 (06:21):
It remains one of the fastest growing areas for passive
investing in specific areas like ETF, so you can compare
the growth rates coming from a lower base growing a
bit faster than Europe and the US this year. And
if you look at again, with the US being probably
the most mature market for areas like ETFs, you typically
see Europe maybe growing at a seven to eight year lag,
(06:43):
but on the same trajectory, but a few years behind
the US. And then I think you look at Asia
and you can see you growing at a lagged rate,
but again accelerating and much the same trajectory that the
US did more than a decade ago. I think education
for investors is critical, especially as younger investors, where you're
seeing markets like Japan over generations. Now you're starting to
(07:06):
see wealth transfer if you want money in motion to
younger investors. Younger investors have more digital access to education
about investing, and now they have more tools the rise
of kind of digital wealth portals being able to manage
their wealth in a very different way. And the general
investors also tend to have more of a global view,
so that combination of being able to access different types
(07:28):
of investment exposures being able to think more on a
portfolio basis, and also, as we talked about from the beginning,
particularly in Japan, moving away from kind of traditional savings
into more investment portfolios as we're seeing through the new
NISA accounts or the Nippon Investment Savings accounts, which are
learning in popularity in places like Japan. So that combination
(07:51):
does bode well for kind of younger generations looking to.
Speaker 4 (07:55):
Invest and build investment portfolios.
Speaker 3 (07:58):
So I think if we see the growth that we've
seen in passive, you know, to your point, there's been
a huge adoption across technology with the use of passive,
and there's been a long debate of whether you know,
active versus passive and how do they coexist together. We've
seen a huge shift in recent years to actively manage
funds with the likes of JP Morgan Ark Investment, where
(08:18):
investors are willing to pay more. If we look at
the S and P five hundred alone, the Magnific seven
account for thirty percent of the waiting and from a
performance standpoint, since the S and P five hundred was
launched in nineteen fifty seven, it's returned seven point four
percent annually. So with the rapid growth and adoption of
passive and indexing. What are your views on the rapid
(08:42):
growth of index based investing and why do you think
there's been an increase in index adoption all around the world.
Speaker 5 (08:48):
Well, look, I personally believe that the rise of passive investing,
and you know, I consider the ETF wrapper as a
digital innovation, and I think it's probably one of the
most significant investment innovations we've had, certainly in our generation.
The key to successful investing is knowing what goals you
want to achieve, and one of the most important ways
of achieving the goals is using diversification to your benefit,
(09:12):
being able to target and use of risk to your
advantage by having a longer investment time arise. And so
these are just more precise tools if you will, to
be able to do that. For example, if you look
at the United States over the past decade, eighty seven
percent of large cap active managers eighty seven percent have
(09:33):
underperformed the S and P five hundred over that time period,
and it's persistent you come to Japan.
Speaker 4 (09:38):
Over that same ten.
Speaker 5 (09:39):
Year period, eighty five percent of large CAB Japanese active
managers have underperformed the benchmark. It's really the strength and
the competitiveness of the active community that actually serves to
work against it. These are incredibly smart and motivated individuals
with better technology, but finding that information and being able
to execute to fid alpha to find out performance has
(10:02):
gotten increasingly more and more difficult, and it simply makes
the case for passive a lot more attractive. And then
I think also the rise for investors around the world
the focus rather than picking funds or picking individual securities,
by taking an approach to buy a portfolio, and the
rise of basically fee based paying an annual fee to
(10:23):
get an entire portfolio with one all in cost. That's
something that long term investors have really latched onto. And
these fee based accounts and portfolios, which many cases largely
contain ETFs, is a trend that we're seeing that's really
picking up, and only develop markets, but now markets like
Japan and other markets across Asia.
Speaker 2 (10:44):
Is there a limit you think, Dan, how dominant passive
investment becomes as a percentage of the total BIBE. You
just outline what I would describe as almost evidence that's
really hard to argue. I mean, ninety percent of active
funds have underperformed. One part of me to ask why
they keep trying. But then again, you have a ten
percent of that pool that raise their hands and say
(11:05):
this is why we exist. And I'm wondering, is there
an existential threat? I believe in your view to active
management is what I'm trying to get to.
Speaker 5 (11:13):
I don't think so, not within the foreseeable future. I
would say too, also defend active management. Active management, in
my opinion, remains the critical marginal investor for price discovery
and that price discovery around value. And now what do
I mean by that? What I mean is that if
you think about the numbers that I throw out earlier
that in the US, you know, let's say roughly about
(11:35):
thirty percent of funded assets so index funds ETFs mutual funds.
If about thirty percent of that is passive today, that's
our estimate. But then if you actually look at the
associated traded volume of the securities backing that, it's depending
on the estment, probably ten to fifteen percent on a
given day. And that's because most of the passive ETFs
(11:57):
mutual funds are market cap weighted, meaning that the rebalancing
turnover is lower. Active management typically in order to find
alpha to try to outperform, tends to trade more, It
has to find information advantages, has to identify value, and
typically has to again have higher turnover in the funds. Therefore,
(12:18):
if I kind of extrapolate that relationship that if today,
let's say, for example, active management constitutes over eighty five
percent of daily trading volume, that's where the price discovery
is taking place.
Speaker 4 (12:32):
Our estimate for passive to.
Speaker 5 (12:35):
Become more than fifty percent of traded volume on a
daily basis in a market like the United States, for example,
aem or the percent of assets under management of pass
it would have to go up to about eighty three
percent based on current levels. So it just gives you
an idea. So I think the assets under management levels
are interesting to look at, but I really get to
that incremental point who decides the value of a price
(12:57):
in the marketplace, And I think again of managers still
dominate and for some time period we'll do those incremental
investors reflecting value in the marketplace, and again just using
kind of secondary trading volume as an indicator around that.
Speaker 1 (13:12):
This podcast is brought to you by HKX Asia's ETF marketplace,
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Speaker 2 (13:28):
You know, in one of the previous episodes of this podcast,
if We Have, we were joined by the CEE of
the largest ETF provider in mailand China. We aswered the
same question on competition. It became very philosophical. Really, you know,
how do you defend market share when you're on top?
Do you look at products and then just make it better?
Do you look at competition and see what they're doing,
what's new? Are you even bothered by competition?
Speaker 4 (13:52):
Yes?
Speaker 5 (13:52):
We What I'd say specifically about looking at competition, the
barriers to indexing are exceptionally row. I mean to be
able to come up with an index idea, to back
test some data and produce an index. Frankly, it doesn't
take a huge amount of effort, particularly in today's digital world.
So the barrier to entry is exceptionally low, but the
(14:13):
bayer to success is exceptionally high. So to be able
to have a trusted benchmark for active managers you know,
who want to be able to prove that they can
outpreform potentially, they need a reliable, independent benchmark and then
being able to use into exchange traded passive products, being
able to again have a reliable, independent brand when there's
(14:34):
a lot of choice in the marketplace, But why do
people choose It's because of the trust that's been built,
so being able to bring I think, the trust and
the transparency and the rigor to really also do it
at scale and think about the complexity of rebalancing these
indices on regular basis, dealing with various corporate actions over time, mergers,
special dividends, all of these things.
Speaker 4 (14:55):
There's a huge amount of complexity that you know, on.
Speaker 5 (14:57):
The surface you want everything to live very smooth, but
underneath it takes an incredibly dedicated, talented team. It takes
a huge commitment to investing in technology and really you know,
scaled the processes to do it well.
Speaker 2 (15:10):
And I guess just to follow up on that longer term,
I need to ask you what your plans are in
the Asia Pacific. You know, the US market is just
the dominant market really market cap, whatever measure you want
to come up with, although the next few markets a
bility US. You have China, you have Japan, you have
Hong Kong and India. The Asia Pacific is a big
part of investor portfolio's future. What are your plans in Asia?
(15:32):
Where do you want to see the brand over the
next ten years as part of the world.
Speaker 4 (15:36):
Yes, look, we've had you know.
Speaker 5 (15:38):
I look at markets like Japan where I am today.
Australia's in the market where we partnered first with the
local stock exchanges I say for JPX or Tokyo Stock
Exchange here or even ASX in Australia over twenty years ago.
So these are long term partnerships, being able to understand
local capital markets capital formation there, but being able to
(15:58):
then partner to build locals, you know, as we've done.
So these are opportunities to work with some of the
leading institutions in APEX and then being able to then
go partner with the leading asset managers, banks and others
to then service and investors. So I think from here
we see other opportunities to grow really throughout Asia. But
also for US, we have the leading range of Sharia
(16:19):
compliant so countries like Indonesia, for example, focusing on Sharai
investment gives us an opportunity also in more northern Asia,
you know, looking at Korea, Taiwan, those are very vibrant market,
so you know, we really see big opportunities for the future.
We want to kind of build on success. The key
is in partnering with local exchanges, with local partners in
(16:40):
the marketplace, being committed to investing, and also building the
brand with our partners. And a big portion of that
commitment isn't just to show up with products, but it's
to show up with education, show up to research, but
to be relevant and partner, like I said, with with
local exchanges, with you know, regulators in some cases, and
the broader marketplace to ensure that there's better education, more understanding,
(17:03):
and ultimately the tools they're going to help all investors
in each of these Asian markets reach better outcomes.
Speaker 3 (17:10):
An interesting fact, you guys have been running this SMP
ETF conference in Japan for sixteen years and through that time,
across sixteen years, the etfaum has grown sixteen percent every year,
and so I thought that was a little cool fun
fact for our listeners. So we're going to move on
to the fun stuff now with the last few minutes
of the podcast.
Speaker 2 (17:29):
Wait, that was the fun stuff. Now we just did
the fun stuff. We're doing them kidding, Okay.
Speaker 3 (17:36):
Growth over the past sixteen years.
Speaker 2 (17:38):
Okay, I think Rebecca had some really hard hitting questions.
Speaker 3 (17:40):
Next, best career advice someone's given you, and what would
you tell someone today?
Speaker 5 (17:46):
Persistence, I think really being able to you know, early
in your career you want to have a variety of experiences,
develop specific skill sets, but stick to it. They're going
to be so many things that try to divert you,
tempt you away, or maybe you know, discouraging, especially if
you're in an industry like finance, which you know is
very market driven and cyclical, Stick through the down cycles,
(18:09):
stick through different times, invest in yourself. Persistence pays off
in the long term.
Speaker 3 (18:15):
That's one thing you wish you could have done before,
or new or would have done differently.
Speaker 4 (18:21):
That's a tough question.
Speaker 6 (18:22):
As I mentioned the earlier question, I think markets changed
a great deal, and I think perhaps early in my
career I was very much a linear thinker, you know,
just thinking that probably had more control over things than
I did.
Speaker 5 (18:34):
Whereas I think being opportunistic, I think change, unexpected volatility
only provides risk, but also provides opportunity. So I would
say being more open minded earlier, but kind of embracing
change to offer as much opportunity as it would potential risk.
So I think, yeah, early in the career probably have
been a bit more of a risk taker, but more opportunistic.
Speaker 4 (18:54):
I think just thinking about risk differently, being more opportunistic earlier.
Speaker 2 (18:57):
Dan, the best advice you could give for managing people,
you know, the hardest job in the world, the most
necessary job in the world.
Speaker 5 (19:05):
I think being direct, being consistent, I think is very important.
I think, especially when you have high performers, you want
to be able to really help develop, manage expectations and
really to give people opportunities. But I think being able
to identify the talent, giving kind of the guidance. It's necessary,
but it takes a high level of consistency and I
(19:26):
think directness and transparency to really do that.
Speaker 4 (19:29):
You know what people are going to do.
Speaker 5 (19:30):
When you, as a manager aren't in the room is
I think arguably more important than when you are there
directly supervising.
Speaker 2 (19:37):
Maybe just a follow up on managing people, have you
noticed a difference in managing and communicating and motivating people
across generations? You know, you're millennials of the world and
then you move to the the gen zs.
Speaker 5 (19:48):
I do think I mean I think basic, you know,
like I said, communications and kind of managing expectations, expecting
a character.
Speaker 4 (19:54):
You can never ever cut.
Speaker 5 (19:56):
Corners on character, and I think values of individuals those
are kind of time as qualities. But I do think
younger generations, through access of information through digital means, are
very well educated, you know, and I think they have
access to that, and also it tends to be maybe
higher expectations because of that access to information or being
able to compare others experiences.
Speaker 4 (20:17):
So I mean, you have to be on your game,
I think as a manager.
Speaker 5 (20:20):
But at the same time, younger people are also similar
to earlier generations. They want to learn, they want to
progress in careers, and I think it just puts an
onus more for engagement from managers as well as kind
of investing, more direct feedback and more probably regular communications,
and perhaps managers were able to get away with in
the past.
Speaker 2 (20:38):
Yeah, there we go, Dad. It was an absolute pleasure
to speak with you. We could be here literally for
hours to talk us through, of course all the parts
of your business, your career. We didn't even get to
talk about. Maybe we could say this right next time.
How Hong Kong was. I'm curious to get your thoughts
and really you know how things have changed. And yeah,
anyway we can save that, we can save it for
(21:00):
another time.
Speaker 4 (21:01):
We'll save it for another another conversation. But thank you
for having me.
Speaker 5 (21:03):
It's a real pleasure to spend time with both you
and Rebecca jan.
Speaker 2 (21:07):
Thank you so much to you and your team.
Speaker 3 (21:09):
Thank you for listening to Tiger Money, your Bloomberg podcast
about investing funds and financial markets in Asia and beyond.
If you like what you hear, don't forget to subscribe, like,
and share. Until next time. You can find David and
myself inside the Bloomberg terminal or on LinkedIn. We look
forward to hearing from you. This podcast was produced by
Clara Check
This podcast is brought to you by HKX, Asia's ETF Marketplace. Well,
you'll find a gateway to liquidity and a diverse selection
of opportunities across asset classes, sectors, and themes in Asia
and beyond. Search HKX to learn more.
Speaker 2 (00:18):
Good morning, good afternoon, good evening, and good nights wherever
in this vast, beautiful planet you're joining us from. I'm
David Inglass, non award winning journalist, host of The China
Show and Chief Markets editor for The Age Pacific at
Bloomberg TV. And joining me in my co pilots on
this journey Rebeccasin, head of Asia Pacific ETF Research at
Bloomberg Intelligence, which is, just in case you didn't know,
(00:41):
our proprietary research department, five hundred analysts all across the world,
covering more than two thousand companies, ninety industries, one hundred
market benchmarks, currencies and commodities. Welcome, you're listening to Tiger Money.
Speaker 3 (00:55):
Thank you, David, and we're so excited to have Dan
Draper CEO of SMP Dow Jones Indices, who just happens
to be in Tokyo with me at the same time.
He's responsible for all aspects of the index business globally.
Welcome Dan, and we're so excited that you could join
us on Tiger Money.
Speaker 4 (01:12):
Rebecca David, great to see you.
Speaker 3 (01:14):
Before joining SMP, Dan held leadership roles in asset and
wealth management and investment banking, working across New York, London,
Hong Kong and Jakata.
Speaker 2 (01:24):
Dan a pleasure to have you and fantastic having you
in the region. There's lots to talk about. By the way,
where you guys are Rebecca and Dan in Japan. The
resurgence of the market and the economy is a separate conversation.
We'll get to that in a moment. But I guess Dan,
maybe just take a half a step back for our
listeners who might know what your company is and what
you guys do, but perhaps that's all they know. Could
(01:45):
you just give us a sense of just how do
you guys make money?
Speaker 4 (01:49):
Yeah?
Speaker 5 (01:49):
So, sp Dow Jones Indices has been around in some form,
you know, the Belgians Industrial Average and even the Bell
Jiums original Transportation Average has been around for one hundred
and years. So the SMP brand has been there through
incredible different types of market cycles and what I think
originally started was creating a barometer measuring some market. That's
(02:11):
what Charles now did when he created the Dow Jones
Industrial Average. Well, what's happened over time evolution of capital
markets is the barometer started creating benchmarks, so active managers
started using in the case of the S and P
five hundred really is a performance attribution benchmark for active management.
And then the evolution of passive investing in the nineteen
(02:33):
seventies and eighties and beyond now with ETFs in particular,
now they've become the basis. Indices have become the basis
of investment products. So there's been a long evolution and
through that we make our money as a business in
three basic ways. Once these indices are used within investment products,
very similar to an asset manager, we would make a
(02:53):
very small percentage of fees on assets under management. We'd
call that asset linked revenues. The second bucket is these
indices are also used within derivative contracts, particularly things like
futures contracts options, particularly in exchanges like CME CBOW in
the US, So in those cases we'd need money on
the traded volume effectively. And then finally, the third area
(03:16):
is that you need data to support the use of
ETFs or the use of these derivative contracts. So we're
able to sell subscription packages to clients around the world
for the data.
Speaker 2 (03:28):
Okay, so we're looking at three separate businesses, three revenue lines.
What's the split.
Speaker 5 (03:32):
Yeah, roughly, it kind of varies quarter to quarter, but
you have roughly about sixty percent come from those asset
linked fees, which really aligns again with our customers. In
those areas, you have roughly you know, about twenty twenty
five percent or in exchange traded derivatives, and the remaining
amount would be in the data subscriptions.
Speaker 2 (03:49):
Okay, understood, And where do you see fees going feed
compression or fee expansion.
Speaker 5 (03:53):
Well, if you look in the asset linked area, which
again is the largest portion of the revenues, there's been
a lot of feed pressure and we see the very
mature markets for passive like the United States, you've seen
a forty percent decline in the total expense ratio of
ETFs over the past decade.
Speaker 4 (04:09):
So this is nothing new.
Speaker 5 (04:10):
There's been significant kind of competition there, but clearly you've
seen the growth in the volumes the active to passive
shift that has been.
Speaker 4 (04:18):
Even even kind of bigger.
Speaker 5 (04:19):
A lot of that price compression has been in traditional data,
if you will, but now you see higher margin areas
like thematics factors, things like sustainability, so new areas of growth, innovation,
and it's rewarded. But overall it's a fantastic story for
end investors who've really benefited from this lower cost, transparent
access to financial markets.
Speaker 3 (04:40):
So you guys definitely are one of the largest index
providers across ETF. You guys have roughly ten percent of
ETFs track the SMP indices, and from an AUM perspective,
it's roughly three point two trillion dollars out of the
twelve trillion globally it's roughly twenty five percent, so huge
market share. In Hong Kong, for instance, the Hangsang just
launched the s and P five one hundred ETF. In
(05:01):
Hong Kong, there are almost seven hundred million in assets
split across the various SMP indices, with everything from Indio
oil China high dived into Vietnam. So from the SMP
Dolls Jones Indus perspective, as a business, what are some
of the key growth areas for you?
Speaker 5 (05:19):
If you look at a world or global index, US
equities constitute about sixty percent, so the majority of the
exposure is there, and that's where we provide leading with
the S and P five hundred exposure of that marketplace.
I would say other trends, the demand for income is
quite high, and particularly around equity income with dividend strategies,
we're seeing a lot of demand. We're also starting to
(05:41):
see other thematic areas. Sustainability is a big theme, you know,
looking at things around carbon efficiency for example, as well
as other growth and fixed income for example, is a
big growth area. So we're starting to see a number
of trends coming together. But i'd say on a global basis,
investors tend to really think now on a portfolio basis
(06:02):
and thinking across multiple asset classes.
Speaker 2 (06:05):
You're in Japan, we're based here in Hong Kong. We're
trying to figure out where we are in this. I
guess still in some ways a prolonged bear market in
the Chinese equity market, but things have picked up a
late of Note, what are your plans around the Asia Pacific?
What are you guys busy with?
Speaker 4 (06:19):
Yeah, so I mean Asia Pacific.
Speaker 5 (06:21):
It remains one of the fastest growing areas for passive
investing in specific areas like ETF, so you can compare
the growth rates coming from a lower base growing a
bit faster than Europe and the US this year. And
if you look at again, with the US being probably
the most mature market for areas like ETFs, you typically
see Europe maybe growing at a seven to eight year lag,
(06:43):
but on the same trajectory, but a few years behind
the US. And then I think you look at Asia
and you can see you growing at a lagged rate,
but again accelerating and much the same trajectory that the
US did more than a decade ago. I think education
for investors is critical, especially as younger investors, where you're
seeing markets like Japan over generations. Now you're starting to
(07:06):
see wealth transfer if you want money in motion to
younger investors. Younger investors have more digital access to education
about investing, and now they have more tools the rise
of kind of digital wealth portals being able to manage
their wealth in a very different way. And the general
investors also tend to have more of a global view,
so that combination of being able to access different types
(07:28):
of investment exposures being able to think more on a
portfolio basis, and also, as we talked about from the beginning,
particularly in Japan, moving away from kind of traditional savings
into more investment portfolios as we're seeing through the new
NISA accounts or the Nippon Investment Savings accounts, which are
learning in popularity in places like Japan. So that combination
(07:51):
does bode well for kind of younger generations looking to.
Speaker 4 (07:55):
Invest and build investment portfolios.
Speaker 3 (07:58):
So I think if we see the growth that we've
seen in passive, you know, to your point, there's been
a huge adoption across technology with the use of passive,
and there's been a long debate of whether you know,
active versus passive and how do they coexist together. We've
seen a huge shift in recent years to actively manage
funds with the likes of JP Morgan Ark Investment, where
(08:18):
investors are willing to pay more. If we look at
the S and P five hundred alone, the Magnific seven
account for thirty percent of the waiting and from a
performance standpoint, since the S and P five hundred was
launched in nineteen fifty seven, it's returned seven point four
percent annually. So with the rapid growth and adoption of
passive and indexing. What are your views on the rapid
(08:42):
growth of index based investing and why do you think
there's been an increase in index adoption all around the world.
Speaker 5 (08:48):
Well, look, I personally believe that the rise of passive investing,
and you know, I consider the ETF wrapper as a
digital innovation, and I think it's probably one of the
most significant investment innovations we've had, certainly in our generation.
The key to successful investing is knowing what goals you
want to achieve, and one of the most important ways
of achieving the goals is using diversification to your benefit,
(09:12):
being able to target and use of risk to your
advantage by having a longer investment time arise. And so
these are just more precise tools if you will, to
be able to do that. For example, if you look
at the United States over the past decade, eighty seven
percent of large cap active managers eighty seven percent have
(09:33):
underperformed the S and P five hundred over that time period,
and it's persistent you come to Japan.
Speaker 4 (09:38):
Over that same ten.
Speaker 5 (09:39):
Year period, eighty five percent of large CAB Japanese active
managers have underperformed the benchmark. It's really the strength and
the competitiveness of the active community that actually serves to
work against it. These are incredibly smart and motivated individuals
with better technology, but finding that information and being able
to execute to fid alpha to find out performance has
(10:02):
gotten increasingly more and more difficult, and it simply makes
the case for passive a lot more attractive. And then
I think also the rise for investors around the world
the focus rather than picking funds or picking individual securities,
by taking an approach to buy a portfolio, and the
rise of basically fee based paying an annual fee to
(10:23):
get an entire portfolio with one all in cost. That's
something that long term investors have really latched onto. And
these fee based accounts and portfolios, which many cases largely
contain ETFs, is a trend that we're seeing that's really
picking up, and only develop markets, but now markets like
Japan and other markets across Asia.
Speaker 2 (10:44):
Is there a limit you think, Dan, how dominant passive
investment becomes as a percentage of the total BIBE. You
just outline what I would describe as almost evidence that's
really hard to argue. I mean, ninety percent of active
funds have underperformed. One part of me to ask why
they keep trying. But then again, you have a ten
percent of that pool that raise their hands and say
(11:05):
this is why we exist. And I'm wondering, is there
an existential threat? I believe in your view to active
management is what I'm trying to get to.
Speaker 5 (11:13):
I don't think so, not within the foreseeable future. I
would say too, also defend active management. Active management, in
my opinion, remains the critical marginal investor for price discovery
and that price discovery around value. And now what do
I mean by that? What I mean is that if
you think about the numbers that I throw out earlier
that in the US, you know, let's say roughly about
(11:35):
thirty percent of funded assets so index funds ETFs mutual funds.
If about thirty percent of that is passive today, that's
our estimate. But then if you actually look at the
associated traded volume of the securities backing that, it's depending
on the estment, probably ten to fifteen percent on a
given day. And that's because most of the passive ETFs
(11:57):
mutual funds are market cap weighted, meaning that the rebalancing
turnover is lower. Active management typically in order to find
alpha to try to outperform, tends to trade more, It
has to find information advantages, has to identify value, and
typically has to again have higher turnover in the funds. Therefore,
(12:18):
if I kind of extrapolate that relationship that if today,
let's say, for example, active management constitutes over eighty five
percent of daily trading volume, that's where the price discovery
is taking place.
Speaker 4 (12:32):
Our estimate for passive to.
Speaker 5 (12:35):
Become more than fifty percent of traded volume on a
daily basis in a market like the United States, for example,
aem or the percent of assets under management of pass
it would have to go up to about eighty three
percent based on current levels. So it just gives you
an idea. So I think the assets under management levels
are interesting to look at, but I really get to
that incremental point who decides the value of a price
(12:57):
in the marketplace, And I think again of managers still
dominate and for some time period we'll do those incremental
investors reflecting value in the marketplace, and again just using
kind of secondary trading volume as an indicator around that.
Speaker 1 (13:12):
This podcast is brought to you by HKX Asia's ETF marketplace,
where you can get exposure to themes ranging from AI
to virtual assets, small cap to large cap Greater China
to global search HKX to learn more.
Speaker 2 (13:28):
You know, in one of the previous episodes of this podcast,
if We Have, we were joined by the CEE of
the largest ETF provider in mailand China. We aswered the
same question on competition. It became very philosophical. Really, you know,
how do you defend market share when you're on top?
Do you look at products and then just make it better?
Do you look at competition and see what they're doing,
what's new? Are you even bothered by competition?
Speaker 4 (13:52):
Yes?
Speaker 5 (13:52):
We What I'd say specifically about looking at competition, the
barriers to indexing are exceptionally row. I mean to be
able to come up with an index idea, to back
test some data and produce an index. Frankly, it doesn't
take a huge amount of effort, particularly in today's digital world.
So the barrier to entry is exceptionally low, but the
(14:13):
bayer to success is exceptionally high. So to be able
to have a trusted benchmark for active managers you know,
who want to be able to prove that they can
outpreform potentially, they need a reliable, independent benchmark and then
being able to use into exchange traded passive products, being
able to again have a reliable, independent brand when there's
(14:34):
a lot of choice in the marketplace, But why do
people choose It's because of the trust that's been built,
so being able to bring I think, the trust and
the transparency and the rigor to really also do it
at scale and think about the complexity of rebalancing these
indices on regular basis, dealing with various corporate actions over time, mergers,
special dividends, all of these things.
Speaker 4 (14:55):
There's a huge amount of complexity that you know, on.
Speaker 5 (14:57):
The surface you want everything to live very smooth, but
underneath it takes an incredibly dedicated, talented team. It takes
a huge commitment to investing in technology and really you know,
scaled the processes to do it well.
Speaker 2 (15:10):
And I guess just to follow up on that longer term,
I need to ask you what your plans are in
the Asia Pacific. You know, the US market is just
the dominant market really market cap, whatever measure you want
to come up with, although the next few markets a
bility US. You have China, you have Japan, you have
Hong Kong and India. The Asia Pacific is a big
part of investor portfolio's future. What are your plans in Asia?
(15:32):
Where do you want to see the brand over the
next ten years as part of the world.
Speaker 4 (15:36):
Yes, look, we've had you know.
Speaker 5 (15:38):
I look at markets like Japan where I am today.
Australia's in the market where we partnered first with the
local stock exchanges I say for JPX or Tokyo Stock
Exchange here or even ASX in Australia over twenty years ago.
So these are long term partnerships, being able to understand
local capital markets capital formation there, but being able to
(15:58):
then partner to build locals, you know, as we've done.
So these are opportunities to work with some of the
leading institutions in APEX and then being able to then
go partner with the leading asset managers, banks and others
to then service and investors. So I think from here
we see other opportunities to grow really throughout Asia. But
also for US, we have the leading range of Sharia
(16:19):
compliant so countries like Indonesia, for example, focusing on Sharai
investment gives us an opportunity also in more northern Asia,
you know, looking at Korea, Taiwan, those are very vibrant market,
so you know, we really see big opportunities for the future.
We want to kind of build on success. The key
is in partnering with local exchanges, with local partners in
(16:40):
the marketplace, being committed to investing, and also building the
brand with our partners. And a big portion of that
commitment isn't just to show up with products, but it's
to show up with education, show up to research, but
to be relevant and partner, like I said, with with
local exchanges, with you know, regulators in some cases, and
the broader marketplace to ensure that there's better education, more understanding,
(17:03):
and ultimately the tools they're going to help all investors
in each of these Asian markets reach better outcomes.
Speaker 3 (17:10):
An interesting fact, you guys have been running this SMP
ETF conference in Japan for sixteen years and through that time,
across sixteen years, the etfaum has grown sixteen percent every year,
and so I thought that was a little cool fun
fact for our listeners. So we're going to move on
to the fun stuff now with the last few minutes
of the podcast.
Speaker 2 (17:29):
Wait, that was the fun stuff. Now we just did
the fun stuff. We're doing them kidding, Okay.
Speaker 3 (17:36):
Growth over the past sixteen years.
Speaker 2 (17:38):
Okay, I think Rebecca had some really hard hitting questions.
Speaker 3 (17:40):
Next, best career advice someone's given you, and what would
you tell someone today?
Speaker 5 (17:46):
Persistence, I think really being able to you know, early
in your career you want to have a variety of experiences,
develop specific skill sets, but stick to it. They're going
to be so many things that try to divert you,
tempt you away, or maybe you know, discouraging, especially if
you're in an industry like finance, which you know is
very market driven and cyclical, Stick through the down cycles,
(18:09):
stick through different times, invest in yourself. Persistence pays off
in the long term.
Speaker 3 (18:15):
That's one thing you wish you could have done before,
or new or would have done differently.
Speaker 4 (18:21):
That's a tough question.
Speaker 6 (18:22):
As I mentioned the earlier question, I think markets changed
a great deal, and I think perhaps early in my
career I was very much a linear thinker, you know,
just thinking that probably had more control over things than
I did.
Speaker 5 (18:34):
Whereas I think being opportunistic, I think change, unexpected volatility
only provides risk, but also provides opportunity. So I would
say being more open minded earlier, but kind of embracing
change to offer as much opportunity as it would potential risk.
So I think, yeah, early in the career probably have
been a bit more of a risk taker, but more opportunistic.
Speaker 4 (18:54):
I think just thinking about risk differently, being more opportunistic earlier.
Speaker 2 (18:57):
Dan, the best advice you could give for managing people,
you know, the hardest job in the world, the most
necessary job in the world.
Speaker 5 (19:05):
I think being direct, being consistent, I think is very important.
I think, especially when you have high performers, you want
to be able to really help develop, manage expectations and
really to give people opportunities. But I think being able
to identify the talent, giving kind of the guidance. It's necessary,
but it takes a high level of consistency and I
(19:26):
think directness and transparency to really do that.
Speaker 4 (19:29):
You know what people are going to do.
Speaker 5 (19:30):
When you, as a manager aren't in the room is
I think arguably more important than when you are there
directly supervising.
Speaker 2 (19:37):
Maybe just a follow up on managing people, have you
noticed a difference in managing and communicating and motivating people
across generations? You know, you're millennials of the world and
then you move to the the gen zs.
Speaker 5 (19:48):
I do think I mean I think basic, you know,
like I said, communications and kind of managing expectations, expecting
a character.
Speaker 4 (19:54):
You can never ever cut.
Speaker 5 (19:56):
Corners on character, and I think values of individuals those
are kind of time as qualities. But I do think
younger generations, through access of information through digital means, are
very well educated, you know, and I think they have
access to that, and also it tends to be maybe
higher expectations because of that access to information or being
able to compare others experiences.
Speaker 4 (20:17):
So I mean, you have to be on your game,
I think as a manager.
Speaker 5 (20:20):
But at the same time, younger people are also similar
to earlier generations. They want to learn, they want to
progress in careers, and I think it just puts an
onus more for engagement from managers as well as kind
of investing, more direct feedback and more probably regular communications,
and perhaps managers were able to get away with in
the past.
Speaker 2 (20:38):
Yeah, there we go, Dad. It was an absolute pleasure
to speak with you. We could be here literally for
hours to talk us through, of course all the parts
of your business, your career. We didn't even get to
talk about. Maybe we could say this right next time.
How Hong Kong was. I'm curious to get your thoughts
and really you know how things have changed. And yeah,
anyway we can save that, we can save it for
(21:00):
another time.
Speaker 4 (21:01):
We'll save it for another another conversation. But thank you
for having me.
Speaker 5 (21:03):
It's a real pleasure to spend time with both you
and Rebecca jan.
Speaker 2 (21:07):
Thank you so much to you and your team.
Speaker 3 (21:09):
Thank you for listening to Tiger Money, your Bloomberg podcast
about investing funds and financial markets in Asia and beyond.
If you like what you hear, don't forget to subscribe, like,
and share. Until next time. You can find David and
myself inside the Bloomberg terminal or on LinkedIn. We look
forward to hearing from you. This podcast was produced by
Clara Check
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