June 26, 2025 • 45 mins
What happens when the investment playbook that worked for the past decade suddenly stops working? In this eye-opening discussion with Paul Baiocchi, Chief ETF Strategist at SS&C Alps Advisors, we explore the compelling case for looking beyond the S&P 500 and its dominant mega-cap tech stocks.
The conversation centers on one of the most overlooked megatrends reshaping our economy: electrification. As Paul explains, this isn't just about utilities—it's a convergence of AI data centers, EV adoption, and home electrification driving unprecedented electricity demand growth after two decades of flat consumption. This transformation creates investment opportunities across multiple sectors, from midstream energy companies transporting natural gas to industrial firms building the expanded grid infrastructure.
We also examine why international markets are showing signs of life after 16 years of U.S. dominance. With developed markets outside the U.S. trading at a 30% valuation discount, experiencing stronger earnings growth, and benefiting from a weakening dollar, the stage may be set for a multi-year period of outperformance. Similarly, small caps and REITs represent potential mean reversion opportunities, with both segments trading at historically deep discounts despite improving fundamentals.
The key takeaway? Investment cycles eventually turn, and positioning your portfolio for what's next rather than what's worked in the past requires looking beyond the obvious. Whether through thematic approaches capturing structural economic shifts, international allocations benefiting from valuation gaps, or quality-focused small cap strategies, diversification may be coming back into favor.
Ready to explore investment opportunities beyond the concentrated mega-cap tech trade? This conversation provides a roadmap for navigating the next market cycle rather than the last one.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
It sounds to me like it's actually hard for sort of
the average investor thatbelieves in everything you just
said to sort of really properlyidentify individual stocks.
So talk me through sort of thenuances there a little bit more.
Speaker 2 (00:12):
Yeah.
So let's just take AI, forexample, as a theme that
everyone's hearing about,everyone's reading about.
I think a lot of people justassume I'm getting AI exposure
from my S&P 500 portfoliobecause it has the hyperscalers
in it, it has the chip makers init, dominated, of course, by
NVIDIA.
Now, the reality is, once youstart to get away from just the
(00:36):
chips and just the compute andjust the hyperscalers, you start
to realize that there'sknock-on effects of AI, whether
it's increasing electricitydemand, which is increasing
natural gas demand, which isalso increasing, logically,
copper demand as an input togrid expansion and grid
modernization.
Then you start to understandthat there is not necessarily
(00:59):
one way to play a given theme interms of a specific sector or a
specific portfolio approach.
And so, to get back to yourquestion, I think the nuance of
building a thematic portfolio isit's not going to fit cleanly
in any one investment bucket.
It's not necessarily just goingto be utilities, not necessarily
just going to be industrials ormidstream energy infrastructure
(01:19):
.
It, in theory, is going to be acombination of those.
But how do you define that Well?
Speaker 1 (01:24):
this would be a really good conversation with
Paul, who I've gotten over thelast several months.
His firm is now one of myclients, so this is a sponsored
conversation of Lead Black Live,but we're going to be talking
about one of my favorite topicsof the market, which is small
caps holding the key and maybeif that key is going to be
turned here and what that keycould actually be.
With all that said, my name isMichael Guy, a publisher of the
(01:47):
Lead Lagrime.
You're joining me at Paul Biakiof Alps.
So, paul, I'm sure people haveseen you doing some media routes
, but introduce yourselfformally.
Who are you?
What's your background?
What have you done throughoutyour career?
What are you doing currently?
Speaker 2 (01:58):
Yeah, I appreciate it .
Thanks for the opportunity here.
So opportunity here.
So Paul Biocchi title is ChiefETF Strategist at SS&C Alps
Advisors, which meanseffectively.
I help support our distributionand travel with our sales guys,
both the national accounts teamthat is engaging with home
offices, as well as ourwholesalers, who are trying to
engage advisors and help tellthe story around our product
(02:20):
suite and they bring me in to bethe SME on the various
categories where our productscompete, know the competitive
landscape, put it in the contextof the capital markets backdrop
and portfolio constructiontopics and ultimately be a
resource for the advisors thatwe partner with beyond simply
the products but as it relatesto content, perspectives and
(02:41):
increasingly, as advisors getaway from the home office model
or the wirehouse model and breakaway and become independent,
they lose a lot of the accessthat they have to research and
perspectives.
And that's sort of where Ibridge the gap between research
and sales.
And my background is prettysimple.
I studied finance, knew Iwanted to get into financial
(03:03):
services, my uncle was in theindustry and he taught me a lot
about the industry and so when Icame out of undergrad I went
and worked for a small brokerdealer as a series seven broker
realized that I wanted to domore, maybe strategically, went
back to get my MBA.
And when I was in grad school Igot introduced to a
sub-advisory relationshipthrough a guy who I used to work
(03:26):
with.
He sort of hired me to do someconsulting for his RIA who was
doing sub-advisory work for afun shop which some people might
remember, claymore, buildingindexes for UITs and we were
doing thematics.
So Global Coal or CanadianRoyalty Trust for those of you
who remember those or otherglobal thematic strategies and
they came to us one day and said, for those of you who remember
those or other global thematicstrategies, and they came to us
(03:47):
one day and said, hey, can youbuild an index for an ETF?
And we said yes, of course.
But also, once we starteddigging into the ETF wrapper,
you sort of become enamored withthe opportunities.
And this was 2008, 2009.
And we built a global shippingindex for a global shipping ETF
which timing-wise wasn't idealbecause the world entered the
(04:09):
great financial crisis and itwas hard to get a letter of
credit just to ship goods acrossthe world, let alone to invest
in global shipping companies.
But that was my firstintroduction to the ETF wrapper
and earnest, and so shortlyafter that I was able to get a
position at a firm at the timecalled Index Universe, which has
since become ETFcom, buildingETF analytics and a
classification system,moderating panels at the old
(04:32):
Inside ETFs conferences andreally just getting to know the
landscape and networking, butalso just living, breathing the
ETF wrapper every day.
And that set me up for a role atFidelity, helping to build
their ETF capability and expandtheir ETF offering and engage
both their branch network andadvisors that custody there and
beyond around Fidelity ETFs.
(04:55):
And I've been at Alps now forjust over five years doing a lot
of the same things in terms ofhelping to support the growth of
the ETF lineup, contributing tothe ETF roadmap as it relates
to product development, but alsoon a day-to-day basis, ensuring
that the products we have fitthe right types of strategies
and get their model insertionopportunities and, ultimately,
(05:18):
that the story that we tellaround our product suite is
consistent and clear andtransparent, aligned with the
ETF wrapper itself.
So that's sort of who I am andwhere I've come from and how I
came to be in the seat I'm in.
Speaker 1 (05:30):
So there's a lot of directions that we can go, but I
want to touch on sort ofadvisor frustrations for a bit.
Since you're talking anddealing with so many of these
guys, let's do it.
I got to assume that the lastseveral years have been mildly
irritating to the advisorcommunity because, let's face it
, I mean it's been hard to beatthe S&P 500 and the NASDAQ when
those have been kind of the onlygame in town they do.
(05:50):
Any kind of asset allocationdoesn't really translate in
terms of outperformance becauseyou're diluting automatically
the number one winner.
What are you hearing fromadvisors in terms of their
viewpoints going forward?
Do they believe that we'remaybe in a better environment
for diversification, the findinginteresting, fun ideas like
what you guys offer?
Speaker 2 (06:09):
Yeah.
So to get back to the periodwe've come out of, because I
think that informs the answer tothe question, I do think a lot
of advisors were frustrated in,say, 2022, because the 60-40
portfolio was down, and it wasremarkable because it really
hadn't happened.
You hadn't had a year in whichyou had such poor performance
from equities paired with suchpoor performance from fixed
(06:30):
income.
That was really anomalous.
And so the idea that they hadbeen telling their clients that
they're diversifying betweenstocks and bonds for the
specific purpose of insulatingthem somewhat against that type
of market backdrop, and then forthat market backdrop to play
out in the way that it did andhave both stocks and bonds down,
was really challenging foradvisors.
(06:51):
And so I do think that thecycle we've been in, where the
S&P 500's outperformance ofevery other category and global
markets writ large, as well asthe dominance of so few
companies in the index and theincreased concentration in the
index, was a point offrustration for some advisors.
I think it was a point of pridefor other advisors who would
(07:12):
tell you hey, I have this bigposition in NVIDIA, or I'm not
focused on anything else otherthan large cap growth and that
worked, and so maybe thoseadvisors are a little bit more
frustrated here in early 2025,because what has worked over the
cycle hasn't necessarily workedso far in 2025, although the
May bounce back was dramatic,and certainly that performance
of the S&P 500 in May washistoric, going back 30 years
(07:34):
and led by the MAG-7 and thecompanies that had dominated
over the course of thistwo-plus-year bull market.
And so I do think to get backto your question that advisors
are getting a little bit maybemore excited, rubbing their
hands together at the prospectthat diversification is starting
to become back in vogue, andnot just diversification between
(07:55):
cap buckets or relative to theS&P 500, but also
diversification among differentasset classes, whether that's
developed, xus, emerging markets, whether it's commodities,
whether it's hard assets, realassets, whatever it might be.
I do think that there is asubset of advisors, and maybe a
strong preponderance of advisors, who are at a point where
they're feeling excited aboutthe prospects of that type of
(08:18):
dirty work that they do, rollingup their sleeves to try and
build out an asset allocationframework for their clients
that's customized to meet theirneeds and does include things
other than, say, just the S&P500.
And I think that's the setupthat we have in this market on a
go-forward basis is excitingfor a firm like us, because
(08:38):
we're not the firm that offersthe cheapest version of the S&P
500 and a passive wrapper.
We do offer eitherfactor-oriented, active or
thematic strategies that don'tnecessarily constitute the bulk
of a diversified assetallocation strategy.
In the core categories, theyeither live at the margins in
the case of thematics or they'rea way to sort of reorient a
(09:02):
segment of an asset allocation,whether it's equities or fixed
income, away from cap-weightedor value-weighted toward a
factor or leaning on an activemanager.
Speaker 1 (09:11):
All right.
So let's go to the thematicside, because I do think there's
a lot of interesting themesthat you can argue the
administration is enabling,right.
So nuclear comes to mindbecause of the recent order that
Trump gave.
But from your vantage point, ifwe think from a cycle
perspective, from a thematicperspective, what are some of
the more interesting areas thatare getting traction?
Speaker 2 (09:28):
Yeah.
So themes are interestingbecause they come in favor and
they come out of favor and bynature themes are.
They tend to be a little bitchallenging to implement for
some advisors because they'reGIX breakers by definition.
They don't fit cleanly into onegiven GIX sector.
They tend to span multiplesRenewable energy is a great
example of that.
(09:49):
Where you have technologycompanies, you have energy
companies, you have industrialscompanies.
If you look at disruptivetechnology portfolios or
cybersecurity portfolios, inmany cases they just don't fit
cleanly in your typical bucketsas defined by GICs or IC or
whatever sector framework you'reimplementing.
And so in that way, there'sbeen a challenge at times for
(10:10):
investors and advisors workingon their behalf to implement
themes because they don'tnecessarily know how they fit.
They don't necessarily knowwhat percentage you should have
in a diversified assetallocation framework.
But to your point about thecurrent administration, I think
part of it is owed to theirpolicy and what they're focused
on.
I think part of it is just thenature of some of the economic
(10:31):
changes and capital marketschanges that we're seeing and in
many ways, the theme we're mostfocused on, which is in some
ways, a convergence of multiplethemes, so that energy
transition theme converges uponthe AI theme, which converges
upon the electrification theme,all of which we think are the
biggest megatrend in investing,which is the electrification
(10:51):
theme at a high level.
You've got increasing demandfrom AI data centers for
electricity, which is drivingthis upward mobility and overall
electricity demand expectationsand forecasts.
You're also seeing increased EVadoption domestically and
globally.
You're seeing the push towardelectrifying things like your
gas stove into an inductionstove, your heater in your house
(11:14):
toward a heat pump, all ofwhich is going to require
significantly more gridinfrastructure and grid
investment, as well asadditional electricity demand
capacity or electricitygeneration capacity.
And so the electrification ofthe economy, I think, is the
biggest megatrend because it's aconvergence of a number of
different trends that are goingto impact our economy over the
(11:35):
course of the next five years.
When you look at electricitydemand growth in the United
States expected to increasedramatically, depending on your
forecast, over the course of thenext five years, coming off of
a period where it's basicallybeen flat over the course of the
past 20 or so years, and then,in addition to that, you have
all of these small thematicentry points that are also
(11:56):
influencing the electricity andelectrification theme, and so
that's the thing I would saywe're most focused on, from a
thematic perspective, talking toadvisors about and the numbers
are pretty astonishing when youthink about all of these AI data
centers that are going to berequired to be built to support
all of these LLMs and theimplementation of AI
(12:16):
economy-wide, not just as itrelates to technology, but also
as it relates to other sectorsof the market, whether it's
healthcare, whether it'sindustrials, whether it's energy
companies, all of which aregoing to be impacted by the
electrification theme and theimplementation of AI.
And so when we think about theelectrification theme, we think
it's one of those thematics thatnaturally doesn't fit within
any one sector.
When we think about theelectrification theme, we think
it's one of those thematics thatnaturally doesn't fit within
(12:39):
any one sector.
Now you could argue utilitiesare the clearest beneficiary of
increasing electricity demandbecause that's what they provide
.
But the reality is is there'snuance to it, because a lot of
these utilities are regulatedand they can only increase rates
so much, based on what thecommission says.
And even if you've gotincreasing electricity demand,
they're not able to necessarilyhave full leverage to the
(13:01):
increase in demand and theincreasing output.
And so, from the perspective ofthe electrification theme.
You mentioned nuclear that'scertainly at some point in the
future five years, 10 years, 15years down the road, likely to
be implemented as part of ourenergy matrix.
But when you think about themidstream companies that are
moving natural gas from whereit's produced here in the United
(13:21):
States to where it'sincreasingly consumed, which is
not just abroad in the form ofLNG, but also increasingly in
order to support the electricityneeds of these AI data centers,
we're seeing midstreamcompanies building pipelines
specifically earmarked for adata center project which is
then being run by a GE Vernovagas turbine.
(13:42):
So when you think about theelectrification theme and just
that example of it an AI datacenter getting a natural gas
pipeline built specifically tosupport its electricity needs
well, all of a sudden you'retalking about midstream
companies, you're talking aboutcomponents, you're talking about
industrials as well asutilities companies and, in
theory, nuclear eventually.
And so the textured approach toinvesting in themes is one of
(14:04):
the most important concepts asit relates to thematic investing
, and the right indexmethodology, the right starting
universe, the right definitionof what's included, goes a long
way to ensuring that, whenyou're trying to capitalize on a
theme, that the portfolio thatyou invest in is actually going
to reflect the performance ofthat theme.
Because the worst thing that canhappen is you put a thematic
(14:27):
investment in a client'sportfolio, they read headlines
about something likeelectrification or increasing
electricity demand or nameanother theme, and then all of a
sudden they look in theirportfolio and that strategy is
down or that strategy is notoutperforming the market and
they're wondering why you're inthat thematic strategy.
And so, to the extent that youcan have a durable process for
(14:50):
selecting companies that also isreflective of all of the
beneficiaries of that theme notin one sector but in multiple
sectors and then ensure that theway that portfolio is
constructed at the very leastavoids some of the worst
offenders or some of the worstoutcomes in that theme, goes a
(15:11):
long way toward making athematic portfolio investable
not just for individual retailinvestors on a brokerage website
but also, importantly, for anadvisor who's trying to build a
durable asset allocationstrategy customized to meet
individual investor needs.
Speaker 1 (15:29):
And I believe you have a fund for that which we
should touch on.
But let's talk about you hit onit.
The index constitution, thedefinitions.
It sounds to me like it'sactually hard for the average
investor that believes ineverything you just said to
really properly identifyindividual stocks.
So talk me through the nuancesthere a little bit more.
Speaker 2 (15:51):
Yeah.
So let's just take AI, forexample, as a theme that
everyone's hearing about,everyone's reading about.
I think a lot of people justassume I'm getting AI exposure
from my S&P 500 portfoliobecause it has the hyperscalers
in it, it has the chip makers init, dominated of course, by
NVIDIA headlines, and on theearnings calls and on the
(16:14):
conference calls from companieslike NVIDIA that they're at the
forefront of producing the chipsthat are supporting the most
complicated use cases of AI.
And there's scarcity in thatchip because they're hard to
produce, they're expensive toproduce, they have a lot of
inputs that are hard to source.
We have these complicatedglobal supply chains and they're
(16:35):
really only produced in a verysmall geographical location
globally.
Now the reality is, once youstart to get away from just the
chips and just the compute andjust the hyperscalers, you start
to realize that there'sknock-on effects of AI, whether
it's increasing electricitydemand, which is increasing
natural gas demand, which isalso increasing, logically,
(16:58):
copper demand as an input togrid expansion and grid
modernization.
Then you start to understandthat there is not necessarily
one way to play a given theme interms of a specific sector or a
specific portfolio approach.
And so, to get back to yourquestion, I think the nuance of
building a thematic portfolio isit's not going to fit cleanly
(17:21):
in any one investment bucket.
It's not necessarily just goingto be utilities, not
necessarily just going to beindustrials or midstream energy
infrastructure.
It, in theory, is going to be acombination of those.
But how do you define that?
Well, in the case of Elfie, ourETF that focuses on
electrification, we partneredwith an analyst, someone who has
experience in utility financeand in this theme decades
(17:45):
actually and has been working onthis index and trying to
determine which subsectors ofthe market are likely to be
influenced by theelectrification theme.
And then you start with auniverse that is defined by 18
different subsectors.
You start with companies thathave 5 billion in market cap or
larger, so you avoid some ofthese companies that might be in
the startup phase, might bepre-profitability or pre-cash
(18:08):
flow, so you try and avoid someof the worst outcomes in terms
of companies who are just, insome ways, drafting on some of
these key themes from a headlinebasis or from a relative
performance perspective andbuilding a portfolio that is
durable.
Actually, in the case of Elfie,you're also equally weighting
all of the portfolio positionsand so you're not going to have
(18:29):
the high concentration that youtypically have in a cap weighted
strategy or a revenue weightedstrategy, and so ultimately what
you have is a lot more balancein terms of the companies that
you have in the portfolio.
It spreads across a number ofdifferent subsectors pulled from
a number of different sectors,so energy materials, industrials
, utilities all included in thesort of comprehensive type of
(18:52):
exposure that you're getting inthis specific theme.
And so, getting back to aportfolio construction
conversation, the challenge iswhere does the theme fit?
Because I think if I'm aninvestor, my S&P 500 exposure
gives me disproportionate accessto the AI theme.
But the electrification themeis not just about AI, data
center demand, increasingelectricity demand.
(19:14):
It's also about the otherdrivers of increasing
electricity demand which we laidout before, whether that's the
electrification of homeappliances, electrification of
the automobile industry.
And ultimately, the goal shouldbe to ensure that the portfolio
that you're investing in thatis targeting that theme has a
unique and nuanced approach togetting exposure to that theme
(19:37):
that isn't so rigid that itdoesn't allow for companies to
grow into eligibility anddoesn't quickly watch companies
fall out of the portfolio, ifthat makes sense 100% makes
sense and I encourage those thatare listening to learn more
about that fund.
Speaker 1 (19:57):
It's funny.
I don't know if people considerinternational investing a theme
, but it seems like it's a themein some way shape or form,
because international investingtends to have certain style
tilts, tends to be more valuethan growth, has to be more
(20:18):
sector heavy and financials andother things as opposed to tech.
Obviously, I want to hear fromyou as far as the idea we could
be at a cycle shift that favorsinternational markets, finally,
after more than a decade ofunderperformance.
Speaker 2 (20:26):
Yeah.
So your typical cycle of USoutperformance of developed
ex-US and vice versa is around 8to 10 years and to your point,
we were going on coming into2025, about 16 years or so of US
outperformance of developed XUS.
So S&P 500 outperformance ofsomething like IFA, and if you
(20:47):
even look at it on a three-yearrolling basis, so three-year
relative performance of USversus developed XUS it hasn't
been green for developed XUSsince, let's call it 2010.
So that's a pretty big samplesize of US outperformance and
what that leads to, as you know,michael, is a behavioral shift
(21:07):
in advisors' approach to assetallocation, meaning you see this
contribution of global marketcap and the acui of the US
market grow as a result of thatrelative outperformance and we
were coming into the yearupwards of 60 plus percent of
global market cap in the UnitedStates, just as defined by MSCI
(21:27):
ACWI, and I think that's a proxyfor how most people were
positioning because, justanecdotally, talking to advisors
, a lot of advisors had zeroexposure to developed XUS over
the course of the past couple ofyears, largely because it
hasn't worked and it's been asore thumb in client portfolios
and they were just tired ofclients asking about why you had
this developed XUS through thisemerging markets exposure, when
(21:49):
they're underperforming the USyear in and year out.
And a lot of clients, a lot ofadvisors just sort of threw up
their hands on this story.
And the reality is is you'reright, there is a factor
orientation to developed XUS andto non-US markets that's
distinct from the profile of theUS market, whether it's value
relative to growth, whether it'sthe dividend yield on offer
from developed XUS relative tothe dividend yield on offer in
(22:12):
the US market.
That part of the calculus isimportant.
But it's also about positioning.
And if you look at where wewere coming into the year based
on the B of A manager survey, wewere basically at all-time
highs in terms of US overweightsrelative to developed ex-US
overweights, at least inDecember of 2024.
(22:33):
And that quickly shifted.
If you go to March of this yearin the same survey, there was a
massive reversal in thatoverall allocation and that
quickly shifted.
If you go to March of this yearin the same survey, there was a
massive reversal in thatoverall allocation and we
actually saw one of a historicalamount of fleeing from US
markets relative to developedex-US markets.
So at the positioning level,people were offsides US markets
relative to developed, they wereeither at zero, they were below
(22:55):
their sort of neutralrecommendations and they started
either inching or runningtoward developed ex-US
allocations.
And the question of course isis this a head fake?
Is this sustainable?
And there's no way to answerthat question because I don't
have a crystal ball andcertainly nobody listening to
this does.
But when you try to break downwhat a catalyst might be for
(23:16):
developed XUS to continue tooutperform the market remember
EFA is up about 15%, 16%, maybe17% on the S&P 500 so far in
2025.
Typically, the catalysts havebeen a wide gap in the relative
valuation which is in placecoming into the year.
If you look at the valuationspread from developed XUS to the
US market, there was about a30% or so discount on a PE basis
(23:41):
to the US market in developedXUS as measured by IFA.
But also one of the mostimportant determinants of
relative performance fordeveloped XUS versus the US
market, at least historically,has been the dollar and the
dollar had been strong andthat's been a headwind for
developed XUS.
We're starting to see someweakness in the Dixie and the
dollar index, which measures abasket of currencies against the
(24:03):
US dollar, and ultimately, ifwe're starting to see a
meaningful, maybe evenstructural, decline in the Dixie
that is, and historically hasbeen, a tailwind for US
investors investing in thoseforeign markets.
Because when you repatriatethose returns and the dollar is
going down, the value of thosereturns goes up and most people
(24:24):
have been oriented in thatdeveloped market world below
neutral or some investors havebeen implying a hedged portfolio
in order to insulate themselvesagainst the strength of the
dollar in those strategies.
Given that we're seeing thedollar start to break down, at
least technically, maybe notfundamentally, and the
fundamental perspective whichwe've talked about, the
(24:45):
valuations, we've talked aboutthe dollar, the fundamental case
for developed XUS is perhapsjust as strong.
When you think about theearnings growth expected from
developed XUS versus the US inQ3 2025, you're expecting
upwards of 10.5%, maybe 11%earnings growth for the MSCI IFA
index in aggregate, you'reexpecting in Q3 2025, maybe sub
(25:08):
1%, maybe even negative earningsgrowth on a quarter, over a
quarter basis for S&P 500companies in aggregate.
And the earnings revisionmomentum for US stocks is
negative, not positive, whereasin some of these markets in the
developed ex-US universe you'reseeing positive revisions or
slightly less negative revisionsfrom an earnings perspective
(25:29):
and long-term stocks followearnings.
So that's a big driver of youroverall performance attribution.
But when you stack those threethings together valuation, the
dollar and fundamentals withsome of the capital markets
which is easy monetary policy wesaw another cut from the EU
just this week.
The relative monetary policyposture in developed ex-US is
(25:52):
easier than it is currently inthe United States.
We're seeing fiscal stimulus insome of these key markets, in
some cases directed towarddefense spending, but fiscal
spending nonetheless, which isexpansionary from a fiscal
policy perspective, which isalso, in theory, supportive of a
developed XUS rotation.
So I tend to be on the side ofthe opportunity set, for
developed XUS is maybe a littlebit better than it has been over
(26:16):
the course of this cycle,certainly going back 15 or 16
years of this US outperformance.
But the reality is, in orderfor this to be a sustained
relative performance rotation,you need some of these things to
follow through, so thatearnings growth needs to be
realized, that monetary policyneeds to be fully captured, as
does the fiscal stimulus, andthat alligator mouth of
(26:39):
valuation differences needs toclose, and it needs to close
based on relative performance,not necessarily because PEs in
the United States are going inthe wrong direction and PEs in
Europe are staying flat.
That is one way that they close, but ideally, over time, you'd
see PEs or multiple expansion inEurope, as well as some
(27:00):
normalization of the PE on offerfor the domestic market, which
we've seen to some degree herein 2025.
Speaker 1 (27:07):
I mean this is a very early trend.
If it's a trend right.
I mean you mentioned the jaws.
I mean it's not like a one-yeartype of dynamic.
If it's real, it's going to bemulti-year.
Speaker 2 (27:16):
No, you're absolutely right, and we're five months
into this, so this could in factbe a head fake.
And you're starting to see insome of those manager surveys
and even from some of the homeoffice research, that people are
starting to temper theirexpectations for developed ex-US
outperformance, xusoutperformance, given that we
(27:38):
seem to have moved forward someof that relative performance so
far here in 2025 on the back ofthat strong EFA outperformance
of the S&P 500 so far in 2025.
And so, naturally, because Alpsis focused largely on products
that aren't cap-weighted anddon't necessarily track the
given benchmark in a givencategory of the market, the way
we're talking to advisors is bylegging back toward developed
(28:00):
XUS, but doing so in a way thatis maybe a little bit more value
oriented, yield oriented and,importantly, has a little bit
more balance to the sectorprofile.
So iDog is a product whichequally weights the highest
yielding stocks, five highestyielding stocks in the gig
sectors in the developed ex-USmarket, excluding real estate,
and by doing that you end upgetting away from some of the
(28:23):
financials which you mentionedwhich dominate the EFA index,
some of those European bankswhich have been problematic and
still have a lot of uncertaintyon a go-forward basis and get
some additional exposure toother sectors which are more
cyclical value in nature thanthey are at the index level.
And so, in terms of approachinga given market segment,
oftentimes the story we'retelling is here's the setup for
(28:45):
the category, writ large.
But here's why you might wantto reorient away from the
cap-weighted view of, away fromthe value weighted view of the
market in the case of fixedincome.
Here's the factor that we thinkyou should.
Theme of mine for the last twoyears.
Speaker 1 (29:14):
Small caps have been I keep joking in the US have
been.
It's not even a joke.
It's halfway through a lostdecade when you look at the
Russell 2000.
And I'm of the mindset that ifderegulation is going to be a
big picture theme, if yields endup dropping, there's a lot of
potential for small cap stocksto really run.
But talk us through what's heldback that part of the
(29:38):
marketplace and what's it goingto take for that to wake up.
Speaker 2 (29:41):
Yeah.
So I'm with you.
We've been talking about smallcaps for a couple of years now
and we've been sort of bangingour head against the wall
because the story really hasn'tworked to your point and we're
going on a historic run of largecap outperformance of small
caps that shows no signs ofabating, based on the, even the
relative performance we've seenhere in 2025, that the reality
(30:05):
is, and this is probably a termthat gets used a little bit too
much as it relates to investmentstrategies.
Reversion to the mean is realand sometimes you have to have
patience in order for that toplay out.
And so you can go backhistorically and say the small
cap factor is one of the mostimportant drivers of return.
Historically, if you look atsmall caps, going back to 1925,
they've outperformed large capsconsistently.
(30:27):
But there are naturally cycleswithin the cycle, and this
current cycle, which has beendominated by inflation and
interest rates, is naturallyvery punishing for the small cap
universe because, famously, 40%or so of the Russell 2000 is
unprofitable.
Famously, most of thosecompanies have higher leverage
(30:49):
levels and less capital marketsaccess than their large cap
counterparts and in anenvironment where interest rates
are going up and staying up,that's a much more punishing
environment for companies thatare profitable and have more
leverage.
And when you pile on that withthe fact that 35% or so of the
(31:09):
leverage in small caps isfloating rate, it makes sense
that this would be a segment ofthe fact that 35% or so of the
leverage in small caps isfloating rate.
It makes sense that this wouldbe a segment of the market that
is harmed in an environmentwhere interest rates have gone
up, inflation has beenchallenging and the overall
operating environment has beenuncertain at best.
And so if you just sort of takethat as a driver of the
underperformance of small capsin this cycle and then you start
(31:32):
to say, well, why would thatchange?
Well, in theory we're going toget a couple of Fed cuts, either
later this year or maybe out in2026.
That should be supportive ofthe small cap story.
And if you look at the Russell2000, 9% of it is regional banks
.
18% of the Russell 2000, orvalue or so, is regional banks.
Those are companies thatnaturally are a little bit more
(31:53):
impacted by the interest ratebackdrop and the leverage that
comes with operating a regionalbank.
And so if we do get some Fedrate cuts, that should be
supportive of the small capuniverse.
In theory, a reshoring and ordomestic reorientation of our
economy based on the tariffpolicy, based on the current
administration's policy, shouldbe supportive of companies that
(32:14):
are more domestically oriented.
Famously, so much of the largecap universe gets so much of
their revenue from abroad.
Technology is the one thatstands out.
But then you have othersegments of the large cap
universe also have a lot ofexposure to foreign revenue
sources and so, to the extentthat the policy is implemented
and does lead to a reshoring anda domestic reorientation of our
(32:36):
economy, that in theory is alsosupportive of the more domestic
orientation in the small capuniverse.
But again, getting back to thisidea that you're starting with
the case for small caps, whichis they trade at historically
cheap levels on a PE basis totheir large cap counterparts 30%
or so discount to the S&P 500,just based on forward PE, they
(32:58):
typically do generate strongrelative performance over long
periods of time to large caps.
If that's the starting case forY to be in small caps, then you
also have to come to grips withthe fact that most people just
default to the index, whetherit's the S&P 600 or the Russell
2000 and ETFs that track them.
And the case we're making, asyou can imagine, is that you can
(33:20):
take that universe and call itdown to a smaller sampling of
that universe that is defined byhigher ROA, lower net debt to
EBITDA, five-year dividendgrowth and strong dividend
coverage.
Ousm is that product.
The idea is you don't have toresign yourself to the fact that
, just because I'm in small caps, I'm going to have to deal with
the fact that a lot of thesecompanies are unprofitable or
(33:42):
they're not really well run orthey're really low quality,
because I know that small capshave generally outperformed over
long periods of time.
You can take that universe andbring down the overall
volatility of it, bring downyour drawdown risk and improve
your risk-adjustedoutperformance by simply
filtering that universe down tocompanies that are able to
(34:04):
generate profitability importantwhen 40% of the companies can
on their asset base withoutexcess leverage that have
dividends that are well-coveredand have been growing.
Those are factors that anactive manager sitting across
the table from you might saythat they're fishing for in the
small cap pond, but have a teamof analysts to do.
In the case of something likeOUSM, or a smart beta or
(34:26):
strategic beta or a factor-basedstrategy, all you're doing is
systematizing that process, andso you don't have people looking
at satellite photos of parkinglots, but you're also trying to
drill down to the samecharacteristics that an active
manager might tell you.
We want high quality companieswith strong balance sheets who
are growing their dividends.
Well, you can do that, but youcan do it in a rules-based way
(34:47):
and sort of remove some of theemotional impact of trying to
manage a portfolio and notgetting married to individual
positions.
Speaker 1 (34:57):
Yeah, I mean, I think the big takeaway there is that
you've got to be selective rightMuch more when you're dealing
with smaller companies than themega cap companies.
Speaker 2 (35:05):
Yeah, because the reality is, when interest rates
started to rise, when the Fedstarted its hiking cycle,
interestingly, the net interestcosts of the S&P 500 actually
went down.
It didn't go up.
And why is that?
Because most of the companiesthat dominate that index don't
actually have a lot of leverage.
In fact, a lot of them have alot of cash and they were
(35:27):
earning more on that cash thanthey were prior to the beginning
of that hiking cycle.
And so the opposite is true forsmall cap companies, because
they do have a lot of leverage,much of which is floating rate,
and so when interest rates go up, their interest costs go up,
and naturally that puts pressureon their operations.
And one of the things that'simportant about small caps is, I
(35:49):
think a lot of people gofishing in that pond because
they believe by buying a smallcap portfolio, they're going to
be buying some of the companiesthat will eventually graduate to
mid rates, from small to mid tolarge, in a high interest rate
(36:12):
environment, which is somewhat,I guess, confusing, because you
would think that would be a morepunishing environment for small
caps, but the reality is itkind of separates the wheat from
the chaff, and so to that end,I think it's important to know
that there are companies thatare just destined to be small
caps.
The addressable market's notnecessarily big enough to be
(36:33):
supportive of a large cap,market cap or large cap
valuation, and those companiesare often really well run and
run in a way that aligns withthe quality factor, and so you
don't necessarily just have tothink about small caps as the
next large cap portfolio.
They in some cases might just becompanies who are destined to
always be in the small capuniverse but are really well run
(36:55):
, executed at a high leveloperationally and generate
really strong ROA, roe or ROIC.
But, importantly, the approachyou take to small caps should be
different than the approach youtake to other segments of the
market, because of all of thoserisks, and even just your
quality metrics matter.
If you look at just ROE andsmall caps, it tends to be less
(37:18):
successful as a screening metricin that universe than something
like ROA.
Well, why is that?
Because of the leverage.
If you're just looking at theequity piece of the balance
sheet, you're ignoring a bigslice of the balance sheet on a
lot of these companies, and sotheir ability to generate
profitability on a comprehensivemeasure of assets, as opposed
to just equity has been animportant signal for that
(37:39):
segment of the universehistorically, whereas ROE, roic,
those measures tend to be, atleast historically, a little bit
more effective in the large capsegment of the market as
opposed to small caps.
Speaker 1 (37:51):
Before we wrap, I know you want to touch on REITs
for a bit, which I typicallydon't tend to talk about.
Who?
Speaker 2 (37:56):
does.
Speaker 1 (37:57):
Because REITs are not exactly the most exciting area,
but they could be.
So let's make the case forREITs here.
Speaker 2 (38:03):
Yeah.
So REITs are again not to beata dead horse with the mean
reversion story, but they are,in my mind, another mean
reversion candidate, Because Ithink you go back to COVID and
we had these stories aboutpeople working from home and the
debtmageddon for commercialreal estate, and people just
associate REITs with commercialreal estate and, in the private
(38:25):
case, people investing inprivate real estate portfolios
they do tend to have a lot ofcommercial real estate exposure,
but if you look at public REITsas measured by the indexes that
the largest ETFs follow,there's a very small slug of
public REITs that are actuallyin the commercial real estate
segment, and I think that'spartly owed to the evolution
that we've seen in our economy,but also the evolution in the
(38:47):
REIT category.
You also have dominance now ofcell towers, of data center
REITs, of industrial REITs avery different makeup of public
REITs than most people think,and so in some ways it feels as
if REITs themselves have beencaught up in the negativity and
the headline risk associatedwith commercial real estate,
when in reality, public REITsdon't have a lot to do with that
(39:09):
commercial real estate story,which is still a very
challenging dynamic for regionalbanks, tying back to that small
cap story, but also the balancesheets of a number of companies
that have exposure tocommercial real estate.
And so if you look at thevaluation again breaking it down
by valuation fundamentals andthe operating backdrop as well
as the capital markets backdropthe public REIT segment is
(39:31):
trading at let's call it a 10%or so discount to net asset
value.
If you look at the spread to theS&P 500 between REITs and AFFO
one of the important measures ofprofitability for REITs it's
trading at a discount we reallyhaven't seen since COVID, and so
in some ways, reits are beingpriced as if we're in the midst
of COVID, as if the world isshut down and everyone's forced
(39:54):
to be at their home and wearmasks when they're walking their
dog, when in reality theoperating environment is a
little bit better than that.
And that points to thefundamental story, where you've
got a lot of resiliency in thesegments that public REITs
actually measure, which is notoffice but rather industrials,
retail apartments, as well asthe data center footprint, which
is increasing.
(40:15):
And so if you look at NOIgrowth year over year in those
categories over the course ofthe past couple of years, you're
talking about 4%, 3%, expectedto be 4% through 2029.
That's a pretty strong baselineof net operating growth for a
category that is in many waysbeing priced as if the world is
(40:35):
still in COVID.
And so when you think about theoperating environment and you
combine that relative valuationcase with that fundamental story
and the fact that we are not inCOVID and the operating
environment is much better for alot of these public REITs than
is being priced in the market,and you combine that with the
historical context, which is, ifyou look at REITs over the
course of the past 25 years youdon't even have to go back 50
(40:59):
years or to 1925, like we didwith small caps.
You're talking aboutoutperformance over the S&P 500
of 2.5% or so annualized overthe past 25 years and yet we've
seen strong relativeunderperformance of REITs
compared to the S&P 500 over thecourse of the past five years.
So that mean reversion story interms of REITs being a
(41:20):
diversifier, having inflationmitigation characteristics,
having some of these drafting onsome of these bigger trends,
whether it's electrification orthe AI data center investment
and then you combine it with thefact that they perform so
poorly relative to other sectorsand relative to the broader
market, the setup for REITs ispotentially attractive on a
go-forward basis, coming out ofthis period where they've had
(41:42):
such poor relative performance.
And again, speaking to our book, we've got an actively managed
REIT strategy which allows youto leverage the insights, our
book.
We've got an actively managedREIT strategy which allows you
to leverage the insights,perspectives, expertise of a
team of managers who have beendoing that.
Roll your sleeves up.
Fundamental valuation researchon REITs going back 30 years and
REIT is the ticker there.
(42:03):
It's another way to takeadvantage of the confluence of
valuations, fundamentals and theoperating backdrop which, in
some ways, is not being pricedrelative to what the reality is
in some cases.
Speaker 1 (42:18):
Paul, for those who want to learn more about the
various funds your firm offers,where would you point them to?
Speaker 2 (42:22):
Alpsfundscom is where you go for everything Alps.
We've got our lineup there,we've got research, we've got
insights.
Of course, if you ever want toconnect with me directly, my
email address is the best way toreach me.
That's paulbiaki at ssncinccom.
Speaker 1 (42:37):
Appreciate those that watch this live.
Again, this will be a sponsoredconversation by SSNC Alps.
Special thanks to Paul and I'llsee you all in the next episode
.
Thank you, Paul, Appreciate it.
Speaker 2 (42:46):
Thanks, Michael.
Speaker 1 (42:46):
Cheers everybody.
It sounds to me like it's actually hard for sort of
the average investor thatbelieves in everything you just
said to sort of really properlyidentify individual stocks.
So talk me through sort of thenuances there a little bit more.
Speaker 2 (00:12):
Yeah.
So let's just take AI, forexample, as a theme that
everyone's hearing about,everyone's reading about.
I think a lot of people justassume I'm getting AI exposure
from my S&P 500 portfoliobecause it has the hyperscalers
in it, it has the chip makers init, dominated, of course, by
NVIDIA.
Now, the reality is, once youstart to get away from just the
(00:36):
chips and just the compute andjust the hyperscalers, you start
to realize that there'sknock-on effects of AI, whether
it's increasing electricitydemand, which is increasing
natural gas demand, which isalso increasing, logically,
copper demand as an input togrid expansion and grid
modernization.
Then you start to understandthat there is not necessarily
(00:59):
one way to play a given theme interms of a specific sector or a
specific portfolio approach.
And so, to get back to yourquestion, I think the nuance of
building a thematic portfolio isit's not going to fit cleanly
in any one investment bucket.
It's not necessarily just goingto be utilities, not necessarily
just going to be industrials ormidstream energy infrastructure
(01:19):
.
It, in theory, is going to be acombination of those.
But how do you define that Well?
Speaker 1 (01:24):
this would be a really good conversation with
Paul, who I've gotten over thelast several months.
His firm is now one of myclients, so this is a sponsored
conversation of Lead Black Live,but we're going to be talking
about one of my favorite topicsof the market, which is small
caps holding the key and maybeif that key is going to be
turned here and what that keycould actually be.
With all that said, my name isMichael Guy, a publisher of the
(01:47):
Lead Lagrime.
You're joining me at Paul Biakiof Alps.
So, paul, I'm sure people haveseen you doing some media routes
, but introduce yourselfformally.
Who are you?
What's your background?
What have you done throughoutyour career?
What are you doing currently?
Speaker 2 (01:58):
Yeah, I appreciate it .
Thanks for the opportunity here.
So opportunity here.
So Paul Biocchi title is ChiefETF Strategist at SS&C Alps
Advisors, which meanseffectively.
I help support our distributionand travel with our sales guys,
both the national accounts teamthat is engaging with home
offices, as well as ourwholesalers, who are trying to
engage advisors and help tellthe story around our product
(02:20):
suite and they bring me in to bethe SME on the various
categories where our productscompete, know the competitive
landscape, put it in the contextof the capital markets backdrop
and portfolio constructiontopics and ultimately be a
resource for the advisors thatwe partner with beyond simply
the products but as it relatesto content, perspectives and
(02:41):
increasingly, as advisors getaway from the home office model
or the wirehouse model and breakaway and become independent,
they lose a lot of the accessthat they have to research and
perspectives.
And that's sort of where Ibridge the gap between research
and sales.
And my background is prettysimple.
I studied finance, knew Iwanted to get into financial
(03:03):
services, my uncle was in theindustry and he taught me a lot
about the industry and so when Icame out of undergrad I went
and worked for a small brokerdealer as a series seven broker
realized that I wanted to domore, maybe strategically, went
back to get my MBA.
And when I was in grad school Igot introduced to a
sub-advisory relationshipthrough a guy who I used to work
(03:26):
with.
He sort of hired me to do someconsulting for his RIA who was
doing sub-advisory work for afun shop which some people might
remember, claymore, buildingindexes for UITs and we were
doing thematics.
So Global Coal or CanadianRoyalty Trust for those of you
who remember those or otherglobal thematic strategies and
they came to us one day and said, for those of you who remember
those or other global thematicstrategies, and they came to us
(03:47):
one day and said, hey, can youbuild an index for an ETF?
And we said yes, of course.
But also, once we starteddigging into the ETF wrapper,
you sort of become enamored withthe opportunities.
And this was 2008, 2009.
And we built a global shippingindex for a global shipping ETF
which timing-wise wasn't idealbecause the world entered the
(04:09):
great financial crisis and itwas hard to get a letter of
credit just to ship goods acrossthe world, let alone to invest
in global shipping companies.
But that was my firstintroduction to the ETF wrapper
and earnest, and so shortlyafter that I was able to get a
position at a firm at the timecalled Index Universe, which has
since become ETFcom, buildingETF analytics and a
classification system,moderating panels at the old
(04:32):
Inside ETFs conferences andreally just getting to know the
landscape and networking, butalso just living, breathing the
ETF wrapper every day.
And that set me up for a role atFidelity, helping to build
their ETF capability and expandtheir ETF offering and engage
both their branch network andadvisors that custody there and
beyond around Fidelity ETFs.
(04:55):
And I've been at Alps now forjust over five years doing a lot
of the same things in terms ofhelping to support the growth of
the ETF lineup, contributing tothe ETF roadmap as it relates
to product development, but alsoon a day-to-day basis, ensuring
that the products we have fitthe right types of strategies
and get their model insertionopportunities and, ultimately,
(05:18):
that the story that we tellaround our product suite is
consistent and clear andtransparent, aligned with the
ETF wrapper itself.
So that's sort of who I am andwhere I've come from and how I
came to be in the seat I'm in.
Speaker 1 (05:30):
So there's a lot of directions that we can go, but I
want to touch on sort ofadvisor frustrations for a bit.
Since you're talking anddealing with so many of these
guys, let's do it.
I got to assume that the lastseveral years have been mildly
irritating to the advisorcommunity because, let's face it
, I mean it's been hard to beatthe S&P 500 and the NASDAQ when
those have been kind of the onlygame in town they do.
(05:50):
Any kind of asset allocationdoesn't really translate in
terms of outperformance becauseyou're diluting automatically
the number one winner.
What are you hearing fromadvisors in terms of their
viewpoints going forward?
Do they believe that we'remaybe in a better environment
for diversification, the findinginteresting, fun ideas like
what you guys offer?
Speaker 2 (06:09):
Yeah.
So to get back to the periodwe've come out of, because I
think that informs the answer tothe question, I do think a lot
of advisors were frustrated in,say, 2022, because the 60-40
portfolio was down, and it wasremarkable because it really
hadn't happened.
You hadn't had a year in whichyou had such poor performance
from equities paired with suchpoor performance from fixed
(06:30):
income.
That was really anomalous.
And so the idea that they hadbeen telling their clients that
they're diversifying betweenstocks and bonds for the
specific purpose of insulatingthem somewhat against that type
of market backdrop, and then forthat market backdrop to play
out in the way that it did andhave both stocks and bonds down,
was really challenging foradvisors.
(06:51):
And so I do think that thecycle we've been in, where the
S&P 500's outperformance ofevery other category and global
markets writ large, as well asthe dominance of so few
companies in the index and theincreased concentration in the
index, was a point offrustration for some advisors.
I think it was a point of pridefor other advisors who would
(07:12):
tell you hey, I have this bigposition in NVIDIA, or I'm not
focused on anything else otherthan large cap growth and that
worked, and so maybe thoseadvisors are a little bit more
frustrated here in early 2025,because what has worked over the
cycle hasn't necessarily workedso far in 2025, although the
May bounce back was dramatic,and certainly that performance
of the S&P 500 in May washistoric, going back 30 years
(07:34):
and led by the MAG-7 and thecompanies that had dominated
over the course of thistwo-plus-year bull market.
And so I do think to get backto your question that advisors
are getting a little bit maybemore excited, rubbing their
hands together at the prospectthat diversification is starting
to become back in vogue, andnot just diversification between
(07:55):
cap buckets or relative to theS&P 500, but also
diversification among differentasset classes, whether that's
developed, xus, emerging markets, whether it's commodities,
whether it's hard assets, realassets, whatever it might be.
I do think that there is asubset of advisors, and maybe a
strong preponderance of advisors, who are at a point where
they're feeling excited aboutthe prospects of that type of
(08:18):
dirty work that they do, rollingup their sleeves to try and
build out an asset allocationframework for their clients
that's customized to meet theirneeds and does include things
other than, say, just the S&P500.
And I think that's the setupthat we have in this market on a
go-forward basis is excitingfor a firm like us, because
(08:38):
we're not the firm that offersthe cheapest version of the S&P
500 and a passive wrapper.
We do offer eitherfactor-oriented, active or
thematic strategies that don'tnecessarily constitute the bulk
of a diversified assetallocation strategy.
In the core categories, theyeither live at the margins in
the case of thematics or they'rea way to sort of reorient a
(09:02):
segment of an asset allocation,whether it's equities or fixed
income, away from cap-weightedor value-weighted toward a
factor or leaning on an activemanager.
Speaker 1 (09:11):
All right.
So let's go to the thematicside, because I do think there's
a lot of interesting themesthat you can argue the
administration is enabling,right.
So nuclear comes to mindbecause of the recent order that
Trump gave.
But from your vantage point, ifwe think from a cycle
perspective, from a thematicperspective, what are some of
the more interesting areas thatare getting traction?
Speaker 2 (09:28):
Yeah.
So themes are interestingbecause they come in favor and
they come out of favor and bynature themes are.
They tend to be a little bitchallenging to implement for
some advisors because they'reGIX breakers by definition.
They don't fit cleanly into onegiven GIX sector.
They tend to span multiplesRenewable energy is a great
example of that.
(09:49):
Where you have technologycompanies, you have energy
companies, you have industrialscompanies.
If you look at disruptivetechnology portfolios or
cybersecurity portfolios, inmany cases they just don't fit
cleanly in your typical bucketsas defined by GICs or IC or
whatever sector framework you'reimplementing.
And so in that way, there'sbeen a challenge at times for
(10:10):
investors and advisors workingon their behalf to implement
themes because they don'tnecessarily know how they fit.
They don't necessarily knowwhat percentage you should have
in a diversified assetallocation framework.
But to your point about thecurrent administration, I think
part of it is owed to theirpolicy and what they're focused
on.
I think part of it is just thenature of some of the economic
(10:31):
changes and capital marketschanges that we're seeing and in
many ways, the theme we're mostfocused on, which is in some
ways, a convergence of multiplethemes, so that energy
transition theme converges uponthe AI theme, which converges
upon the electrification theme,all of which we think are the
biggest megatrend in investing,which is the electrification
(10:51):
theme at a high level.
You've got increasing demandfrom AI data centers for
electricity, which is drivingthis upward mobility and overall
electricity demand expectationsand forecasts.
You're also seeing increased EVadoption domestically and
globally.
You're seeing the push towardelectrifying things like your
gas stove into an inductionstove, your heater in your house
(11:14):
toward a heat pump, all ofwhich is going to require
significantly more gridinfrastructure and grid
investment, as well asadditional electricity demand
capacity or electricitygeneration capacity.
And so the electrification ofthe economy, I think, is the
biggest megatrend because it's aconvergence of a number of
different trends that are goingto impact our economy over the
(11:35):
course of the next five years.
When you look at electricitydemand growth in the United
States expected to increasedramatically, depending on your
forecast, over the course of thenext five years, coming off of
a period where it's basicallybeen flat over the course of the
past 20 or so years, and then,in addition to that, you have
all of these small thematicentry points that are also
(11:56):
influencing the electricity andelectrification theme, and so
that's the thing I would saywe're most focused on, from a
thematic perspective, talking toadvisors about and the numbers
are pretty astonishing when youthink about all of these AI data
centers that are going to berequired to be built to support
all of these LLMs and theimplementation of AI
(12:16):
economy-wide, not just as itrelates to technology, but also
as it relates to other sectorsof the market, whether it's
healthcare, whether it'sindustrials, whether it's energy
companies, all of which aregoing to be impacted by the
electrification theme and theimplementation of AI.
And so when we think about theelectrification theme, we think
it's one of those thematics thatnaturally doesn't fit within
any one sector.
When we think about theelectrification theme, we think
it's one of those thematics thatnaturally doesn't fit within
(12:39):
any one sector.
Now you could argue utilitiesare the clearest beneficiary of
increasing electricity demandbecause that's what they provide
.
But the reality is is there'snuance to it, because a lot of
these utilities are regulatedand they can only increase rates
so much, based on what thecommission says.
And even if you've gotincreasing electricity demand,
they're not able to necessarilyhave full leverage to the
(13:01):
increase in demand and theincreasing output.
And so, from the perspective ofthe electrification theme.
You mentioned nuclear that'scertainly at some point in the
future five years, 10 years, 15years down the road, likely to
be implemented as part of ourenergy matrix.
But when you think about themidstream companies that are
moving natural gas from whereit's produced here in the United
(13:21):
States to where it'sincreasingly consumed, which is
not just abroad in the form ofLNG, but also increasingly in
order to support the electricityneeds of these AI data centers,
we're seeing midstreamcompanies building pipelines
specifically earmarked for adata center project which is
then being run by a GE Vernovagas turbine.
(13:42):
So when you think about theelectrification theme and just
that example of it an AI datacenter getting a natural gas
pipeline built specifically tosupport its electricity needs
well, all of a sudden you'retalking about midstream
companies, you're talking aboutcomponents, you're talking about
industrials as well asutilities companies and, in
theory, nuclear eventually.
And so the textured approach toinvesting in themes is one of
(14:04):
the most important concepts asit relates to thematic investing
, and the right indexmethodology, the right starting
universe, the right definitionof what's included, goes a long
way to ensuring that, whenyou're trying to capitalize on a
theme, that the portfolio thatyou invest in is actually going
to reflect the performance ofthat theme.
Because the worst thing that canhappen is you put a thematic
(14:27):
investment in a client'sportfolio, they read headlines
about something likeelectrification or increasing
electricity demand or nameanother theme, and then all of a
sudden they look in theirportfolio and that strategy is
down or that strategy is notoutperforming the market and
they're wondering why you're inthat thematic strategy.
And so, to the extent that youcan have a durable process for
(14:50):
selecting companies that also isreflective of all of the
beneficiaries of that theme notin one sector but in multiple
sectors and then ensure that theway that portfolio is
constructed at the very leastavoids some of the worst
offenders or some of the worstoutcomes in that theme, goes a
(15:11):
long way toward making athematic portfolio investable
not just for individual retailinvestors on a brokerage website
but also, importantly, for anadvisor who's trying to build a
durable asset allocationstrategy customized to meet
individual investor needs.
Speaker 1 (15:29):
And I believe you have a fund for that which we
should touch on.
But let's talk about you hit onit.
The index constitution, thedefinitions.
It sounds to me like it'sactually hard for the average
investor that believes ineverything you just said to
really properly identifyindividual stocks.
So talk me through the nuancesthere a little bit more.
Speaker 2 (15:51):
Yeah.
So let's just take AI, forexample, as a theme that
everyone's hearing about,everyone's reading about.
I think a lot of people justassume I'm getting AI exposure
from my S&P 500 portfoliobecause it has the hyperscalers
in it, it has the chip makers init, dominated of course, by
NVIDIA headlines, and on theearnings calls and on the
(16:14):
conference calls from companieslike NVIDIA that they're at the
forefront of producing the chipsthat are supporting the most
complicated use cases of AI.
And there's scarcity in thatchip because they're hard to
produce, they're expensive toproduce, they have a lot of
inputs that are hard to source.
We have these complicatedglobal supply chains and they're
(16:35):
really only produced in a verysmall geographical location
globally.
Now the reality is, once youstart to get away from just the
chips and just the compute andjust the hyperscalers, you start
to realize that there'sknock-on effects of AI, whether
it's increasing electricitydemand, which is increasing
natural gas demand, which isalso increasing, logically,
(16:58):
copper demand as an input togrid expansion and grid
modernization.
Then you start to understandthat there is not necessarily
one way to play a given theme interms of a specific sector or a
specific portfolio approach.
And so, to get back to yourquestion, I think the nuance of
building a thematic portfolio isit's not going to fit cleanly
(17:21):
in any one investment bucket.
It's not necessarily just goingto be utilities, not
necessarily just going to beindustrials or midstream energy
infrastructure.
It, in theory, is going to be acombination of those.
But how do you define that?
Well, in the case of Elfie, ourETF that focuses on
electrification, we partneredwith an analyst, someone who has
experience in utility financeand in this theme decades
(17:45):
actually and has been working onthis index and trying to
determine which subsectors ofthe market are likely to be
influenced by theelectrification theme.
And then you start with auniverse that is defined by 18
different subsectors.
You start with companies thathave 5 billion in market cap or
larger, so you avoid some ofthese companies that might be in
the startup phase, might bepre-profitability or pre-cash
(18:08):
flow, so you try and avoid someof the worst outcomes in terms
of companies who are just, insome ways, drafting on some of
these key themes from a headlinebasis or from a relative
performance perspective andbuilding a portfolio that is
durable.
Actually, in the case of Elfie,you're also equally weighting
all of the portfolio positionsand so you're not going to have
(18:29):
the high concentration that youtypically have in a cap weighted
strategy or a revenue weightedstrategy, and so ultimately what
you have is a lot more balancein terms of the companies that
you have in the portfolio.
It spreads across a number ofdifferent subsectors pulled from
a number of different sectors,so energy materials, industrials
, utilities all included in thesort of comprehensive type of
(18:52):
exposure that you're getting inthis specific theme.
And so, getting back to aportfolio construction
conversation, the challenge iswhere does the theme fit?
Because I think if I'm aninvestor, my S&P 500 exposure
gives me disproportionate accessto the AI theme.
But the electrification themeis not just about AI, data
center demand, increasingelectricity demand.
(19:14):
It's also about the otherdrivers of increasing
electricity demand which we laidout before, whether that's the
electrification of homeappliances, electrification of
the automobile industry.
And ultimately, the goal shouldbe to ensure that the portfolio
that you're investing in thatis targeting that theme has a
unique and nuanced approach togetting exposure to that theme
(19:37):
that isn't so rigid that itdoesn't allow for companies to
grow into eligibility anddoesn't quickly watch companies
fall out of the portfolio, ifthat makes sense 100% makes
sense and I encourage those thatare listening to learn more
about that fund.
Speaker 1 (19:57):
It's funny.
I don't know if people considerinternational investing a theme
, but it seems like it's a themein some way shape or form,
because international investingtends to have certain style
tilts, tends to be more valuethan growth, has to be more
(20:18):
sector heavy and financials andother things as opposed to tech.
Obviously, I want to hear fromyou as far as the idea we could
be at a cycle shift that favorsinternational markets, finally,
after more than a decade ofunderperformance.
Speaker 2 (20:26):
Yeah.
So your typical cycle of USoutperformance of developed
ex-US and vice versa is around 8to 10 years and to your point,
we were going on coming into2025, about 16 years or so of US
outperformance of developed XUS.
So S&P 500 outperformance ofsomething like IFA, and if you
(20:47):
even look at it on a three-yearrolling basis, so three-year
relative performance of USversus developed XUS it hasn't
been green for developed XUSsince, let's call it 2010.
So that's a pretty big samplesize of US outperformance and
what that leads to, as you know,michael, is a behavioral shift
(21:07):
in advisors' approach to assetallocation, meaning you see this
contribution of global marketcap and the acui of the US
market grow as a result of thatrelative outperformance and we
were coming into the yearupwards of 60 plus percent of
global market cap in the UnitedStates, just as defined by MSCI
(21:27):
ACWI, and I think that's a proxyfor how most people were
positioning because, justanecdotally, talking to advisors
, a lot of advisors had zeroexposure to developed XUS over
the course of the past couple ofyears, largely because it
hasn't worked and it's been asore thumb in client portfolios
and they were just tired ofclients asking about why you had
this developed XUS through thisemerging markets exposure, when
(21:49):
they're underperforming the USyear in and year out.
And a lot of clients, a lot ofadvisors just sort of threw up
their hands on this story.
And the reality is is you'reright, there is a factor
orientation to developed XUS andto non-US markets that's
distinct from the profile of theUS market, whether it's value
relative to growth, whether it'sthe dividend yield on offer
from developed XUS relative tothe dividend yield on offer in
(22:12):
the US market.
That part of the calculus isimportant.
But it's also about positioning.
And if you look at where wewere coming into the year based
on the B of A manager survey, wewere basically at all-time
highs in terms of US overweightsrelative to developed ex-US
overweights, at least inDecember of 2024.
(22:33):
And that quickly shifted.
If you go to March of this yearin the same survey, there was a
massive reversal in thatoverall allocation and that
quickly shifted.
If you go to March of this yearin the same survey, there was a
massive reversal in thatoverall allocation and we
actually saw one of a historicalamount of fleeing from US
markets relative to developedex-US markets.
So at the positioning level,people were offsides US markets
relative to developed, they wereeither at zero, they were below
(22:55):
their sort of neutralrecommendations and they started
either inching or runningtoward developed ex-US
allocations.
And the question of course isis this a head fake?
Is this sustainable?
And there's no way to answerthat question because I don't
have a crystal ball andcertainly nobody listening to
this does.
But when you try to break downwhat a catalyst might be for
(23:16):
developed XUS to continue tooutperform the market remember
EFA is up about 15%, 16%, maybe17% on the S&P 500 so far in
2025.
Typically, the catalysts havebeen a wide gap in the relative
valuation which is in placecoming into the year.
If you look at the valuationspread from developed XUS to the
US market, there was about a30% or so discount on a PE basis
(23:41):
to the US market in developedXUS as measured by IFA.
But also one of the mostimportant determinants of
relative performance fordeveloped XUS versus the US
market, at least historically,has been the dollar and the
dollar had been strong andthat's been a headwind for
developed XUS.
We're starting to see someweakness in the Dixie and the
dollar index, which measures abasket of currencies against the
(24:03):
US dollar, and ultimately, ifwe're starting to see a
meaningful, maybe evenstructural, decline in the Dixie
that is, and historically hasbeen, a tailwind for US
investors investing in thoseforeign markets.
Because when you repatriatethose returns and the dollar is
going down, the value of thosereturns goes up and most people
(24:24):
have been oriented in thatdeveloped market world below
neutral or some investors havebeen implying a hedged portfolio
in order to insulate themselvesagainst the strength of the
dollar in those strategies.
Given that we're seeing thedollar start to break down, at
least technically, maybe notfundamentally, and the
fundamental perspective whichwe've talked about, the
(24:45):
valuations, we've talked aboutthe dollar, the fundamental case
for developed XUS is perhapsjust as strong.
When you think about theearnings growth expected from
developed XUS versus the US inQ3 2025, you're expecting
upwards of 10.5%, maybe 11%earnings growth for the MSCI IFA
index in aggregate, you'reexpecting in Q3 2025, maybe sub
(25:08):
1%, maybe even negative earningsgrowth on a quarter, over a
quarter basis for S&P 500companies in aggregate.
And the earnings revisionmomentum for US stocks is
negative, not positive, whereasin some of these markets in the
developed ex-US universe you'reseeing positive revisions or
slightly less negative revisionsfrom an earnings perspective
(25:29):
and long-term stocks followearnings.
So that's a big driver of youroverall performance attribution.
But when you stack those threethings together valuation, the
dollar and fundamentals withsome of the capital markets
which is easy monetary policy wesaw another cut from the EU
just this week.
The relative monetary policyposture in developed ex-US is
(25:52):
easier than it is currently inthe United States.
We're seeing fiscal stimulus insome of these key markets, in
some cases directed towarddefense spending, but fiscal
spending nonetheless, which isexpansionary from a fiscal
policy perspective, which isalso, in theory, supportive of a
developed XUS rotation.
So I tend to be on the side ofthe opportunity set, for
developed XUS is maybe a littlebit better than it has been over
(26:16):
the course of this cycle,certainly going back 15 or 16
years of this US outperformance.
But the reality is, in orderfor this to be a sustained
relative performance rotation,you need some of these things to
follow through, so thatearnings growth needs to be
realized, that monetary policyneeds to be fully captured, as
does the fiscal stimulus, andthat alligator mouth of
(26:39):
valuation differences needs toclose, and it needs to close
based on relative performance,not necessarily because PEs in
the United States are going inthe wrong direction and PEs in
Europe are staying flat.
That is one way that they close, but ideally, over time, you'd
see PEs or multiple expansion inEurope, as well as some
(27:00):
normalization of the PE on offerfor the domestic market, which
we've seen to some degree herein 2025.
Speaker 1 (27:07):
I mean this is a very early trend.
If it's a trend right.
I mean you mentioned the jaws.
I mean it's not like a one-yeartype of dynamic.
If it's real, it's going to bemulti-year.
Speaker 2 (27:16):
No, you're absolutely right, and we're five months
into this, so this could in factbe a head fake.
And you're starting to see insome of those manager surveys
and even from some of the homeoffice research, that people are
starting to temper theirexpectations for developed ex-US
outperformance, xusoutperformance, given that we
(27:38):
seem to have moved forward someof that relative performance so
far here in 2025 on the back ofthat strong EFA outperformance
of the S&P 500 so far in 2025.
And so, naturally, because Alpsis focused largely on products
that aren't cap-weighted anddon't necessarily track the
given benchmark in a givencategory of the market, the way
we're talking to advisors is bylegging back toward developed
(28:00):
XUS, but doing so in a way thatis maybe a little bit more value
oriented, yield oriented and,importantly, has a little bit
more balance to the sectorprofile.
So iDog is a product whichequally weights the highest
yielding stocks, five highestyielding stocks in the gig
sectors in the developed ex-USmarket, excluding real estate,
and by doing that you end upgetting away from some of the
(28:23):
financials which you mentionedwhich dominate the EFA index,
some of those European bankswhich have been problematic and
still have a lot of uncertaintyon a go-forward basis and get
some additional exposure toother sectors which are more
cyclical value in nature thanthey are at the index level.
And so, in terms of approachinga given market segment,
oftentimes the story we'retelling is here's the setup for
(28:45):
the category, writ large.
But here's why you might wantto reorient away from the
cap-weighted view of, away fromthe value weighted view of the
market in the case of fixedincome.
Here's the factor that we thinkyou should.
Theme of mine for the last twoyears.
Speaker 1 (29:14):
Small caps have been I keep joking in the US have
been.
It's not even a joke.
It's halfway through a lostdecade when you look at the
Russell 2000.
And I'm of the mindset that ifderegulation is going to be a
big picture theme, if yields endup dropping, there's a lot of
potential for small cap stocksto really run.
But talk us through what's heldback that part of the
(29:38):
marketplace and what's it goingto take for that to wake up.
Speaker 2 (29:41):
Yeah.
So I'm with you.
We've been talking about smallcaps for a couple of years now
and we've been sort of bangingour head against the wall
because the story really hasn'tworked to your point and we're
going on a historic run of largecap outperformance of small
caps that shows no signs ofabating, based on the, even the
relative performance we've seenhere in 2025, that the reality
(30:05):
is, and this is probably a termthat gets used a little bit too
much as it relates to investmentstrategies.
Reversion to the mean is realand sometimes you have to have
patience in order for that toplay out.
And so you can go backhistorically and say the small
cap factor is one of the mostimportant drivers of return.
Historically, if you look atsmall caps, going back to 1925,
they've outperformed large capsconsistently.
(30:27):
But there are naturally cycleswithin the cycle, and this
current cycle, which has beendominated by inflation and
interest rates, is naturallyvery punishing for the small cap
universe because, famously, 40%or so of the Russell 2000 is
unprofitable.
Famously, most of thosecompanies have higher leverage
(30:49):
levels and less capital marketsaccess than their large cap
counterparts and in anenvironment where interest rates
are going up and staying up,that's a much more punishing
environment for companies thatare profitable and have more
leverage.
And when you pile on that withthe fact that 35% or so of the
(31:09):
leverage in small caps isfloating rate, it makes sense
that this would be a segment ofthe fact that 35% or so of the
leverage in small caps isfloating rate.
It makes sense that this wouldbe a segment of the market that
is harmed in an environmentwhere interest rates have gone
up, inflation has beenchallenging and the overall
operating environment has beenuncertain at best.
And so if you just sort of takethat as a driver of the
underperformance of small capsin this cycle and then you start
(31:32):
to say, well, why would thatchange?
Well, in theory we're going toget a couple of Fed cuts, either
later this year or maybe out in2026.
That should be supportive ofthe small cap story.
And if you look at the Russell2000, 9% of it is regional banks
.
18% of the Russell 2000, orvalue or so, is regional banks.
Those are companies thatnaturally are a little bit more
(31:53):
impacted by the interest ratebackdrop and the leverage that
comes with operating a regionalbank.
And so if we do get some Fedrate cuts, that should be
supportive of the small capuniverse.
In theory, a reshoring and ordomestic reorientation of our
economy based on the tariffpolicy, based on the current
administration's policy, shouldbe supportive of companies that
(32:14):
are more domestically oriented.
Famously, so much of the largecap universe gets so much of
their revenue from abroad.
Technology is the one thatstands out.
But then you have othersegments of the large cap
universe also have a lot ofexposure to foreign revenue
sources and so, to the extentthat the policy is implemented
and does lead to a reshoring anda domestic reorientation of our
(32:36):
economy, that in theory is alsosupportive of the more domestic
orientation in the small capuniverse.
But again, getting back to thisidea that you're starting with
the case for small caps, whichis they trade at historically
cheap levels on a PE basis totheir large cap counterparts 30%
or so discount to the S&P 500,just based on forward PE, they
(32:58):
typically do generate strongrelative performance over long
periods of time to large caps.
If that's the starting case forY to be in small caps, then you
also have to come to grips withthe fact that most people just
default to the index, whetherit's the S&P 600 or the Russell
2000 and ETFs that track them.
And the case we're making, asyou can imagine, is that you can
(33:20):
take that universe and call itdown to a smaller sampling of
that universe that is defined byhigher ROA, lower net debt to
EBITDA, five-year dividendgrowth and strong dividend
coverage.
Ousm is that product.
The idea is you don't have toresign yourself to the fact that
, just because I'm in small caps, I'm going to have to deal with
the fact that a lot of thesecompanies are unprofitable or
(33:42):
they're not really well run orthey're really low quality,
because I know that small capshave generally outperformed over
long periods of time.
You can take that universe andbring down the overall
volatility of it, bring downyour drawdown risk and improve
your risk-adjustedoutperformance by simply
filtering that universe down tocompanies that are able to
(34:04):
generate profitability importantwhen 40% of the companies can
on their asset base withoutexcess leverage that have
dividends that are well-coveredand have been growing.
Those are factors that anactive manager sitting across
the table from you might saythat they're fishing for in the
small cap pond, but have a teamof analysts to do.
In the case of something likeOUSM, or a smart beta or
(34:26):
strategic beta or a factor-basedstrategy, all you're doing is
systematizing that process, andso you don't have people looking
at satellite photos of parkinglots, but you're also trying to
drill down to the samecharacteristics that an active
manager might tell you.
We want high quality companieswith strong balance sheets who
are growing their dividends.
Well, you can do that, but youcan do it in a rules-based way
(34:47):
and sort of remove some of theemotional impact of trying to
manage a portfolio and notgetting married to individual
positions.
Speaker 1 (34:57):
Yeah, I mean, I think the big takeaway there is that
you've got to be selective rightMuch more when you're dealing
with smaller companies than themega cap companies.
Speaker 2 (35:05):
Yeah, because the reality is, when interest rates
started to rise, when the Fedstarted its hiking cycle,
interestingly, the net interestcosts of the S&P 500 actually
went down.
It didn't go up.
And why is that?
Because most of the companiesthat dominate that index don't
actually have a lot of leverage.
In fact, a lot of them have alot of cash and they were
(35:27):
earning more on that cash thanthey were prior to the beginning
of that hiking cycle.
And so the opposite is true forsmall cap companies, because
they do have a lot of leverage,much of which is floating rate,
and so when interest rates go up, their interest costs go up,
and naturally that puts pressureon their operations.
And one of the things that'simportant about small caps is, I
(35:49):
think a lot of people gofishing in that pond because
they believe by buying a smallcap portfolio, they're going to
be buying some of the companiesthat will eventually graduate to
mid rates, from small to mid tolarge, in a high interest rate
(36:12):
environment, which is somewhat,I guess, confusing, because you
would think that would be a morepunishing environment for small
caps, but the reality is itkind of separates the wheat from
the chaff, and so to that end,I think it's important to know
that there are companies thatare just destined to be small
caps.
The addressable market's notnecessarily big enough to be
(36:33):
supportive of a large cap,market cap or large cap
valuation, and those companiesare often really well run and
run in a way that aligns withthe quality factor, and so you
don't necessarily just have tothink about small caps as the
next large cap portfolio.
They in some cases might just becompanies who are destined to
always be in the small capuniverse but are really well run
(36:55):
, executed at a high leveloperationally and generate
really strong ROA, roe or ROIC.
But, importantly, the approachyou take to small caps should be
different than the approach youtake to other segments of the
market, because of all of thoserisks, and even just your
quality metrics matter.
If you look at just ROE andsmall caps, it tends to be less
(37:18):
successful as a screening metricin that universe than something
like ROA.
Well, why is that?
Because of the leverage.
If you're just looking at theequity piece of the balance
sheet, you're ignoring a bigslice of the balance sheet on a
lot of these companies, and sotheir ability to generate
profitability on a comprehensivemeasure of assets, as opposed
to just equity has been animportant signal for that
(37:39):
segment of the universehistorically, whereas ROE, roic,
those measures tend to be, atleast historically, a little bit
more effective in the large capsegment of the market as
opposed to small caps.
Speaker 1 (37:51):
Before we wrap, I know you want to touch on REITs
for a bit, which I typicallydon't tend to talk about.
Who?
Speaker 2 (37:56):
does.
Speaker 1 (37:57):
Because REITs are not exactly the most exciting area,
but they could be.
So let's make the case forREITs here.
Speaker 2 (38:03):
Yeah.
So REITs are again not to beata dead horse with the mean
reversion story, but they are,in my mind, another mean
reversion candidate, Because Ithink you go back to COVID and
we had these stories aboutpeople working from home and the
debtmageddon for commercialreal estate, and people just
associate REITs with commercialreal estate and, in the private
(38:25):
case, people investing inprivate real estate portfolios
they do tend to have a lot ofcommercial real estate exposure,
but if you look at public REITsas measured by the indexes that
the largest ETFs follow,there's a very small slug of
public REITs that are actuallyin the commercial real estate
segment, and I think that'spartly owed to the evolution
that we've seen in our economy,but also the evolution in the
(38:47):
REIT category.
You also have dominance now ofcell towers, of data center
REITs, of industrial REITs avery different makeup of public
REITs than most people think,and so in some ways it feels as
if REITs themselves have beencaught up in the negativity and
the headline risk associatedwith commercial real estate,
when in reality, public REITsdon't have a lot to do with that
(39:09):
commercial real estate story,which is still a very
challenging dynamic for regionalbanks, tying back to that small
cap story, but also the balancesheets of a number of companies
that have exposure tocommercial real estate.
And so if you look at thevaluation again breaking it down
by valuation fundamentals andthe operating backdrop as well
as the capital markets backdropthe public REIT segment is
(39:31):
trading at let's call it a 10%or so discount to net asset
value.
If you look at the spread to theS&P 500 between REITs and AFFO
one of the important measures ofprofitability for REITs it's
trading at a discount we reallyhaven't seen since COVID, and so
in some ways, reits are beingpriced as if we're in the midst
of COVID, as if the world isshut down and everyone's forced
(39:54):
to be at their home and wearmasks when they're walking their
dog, when in reality theoperating environment is a
little bit better than that.
And that points to thefundamental story, where you've
got a lot of resiliency in thesegments that public REITs
actually measure, which is notoffice but rather industrials,
retail apartments, as well asthe data center footprint, which
is increasing.
(40:15):
And so if you look at NOIgrowth year over year in those
categories over the course ofthe past couple of years, you're
talking about 4%, 3%, expectedto be 4% through 2029.
That's a pretty strong baselineof net operating growth for a
category that is in many waysbeing priced as if the world is
(40:35):
still in COVID.
And so when you think about theoperating environment and you
combine that relative valuationcase with that fundamental story
and the fact that we are not inCOVID and the operating
environment is much better for alot of these public REITs than
is being priced in the market,and you combine that with the
historical context, which is, ifyou look at REITs over the
course of the past 25 years youdon't even have to go back 50
(40:59):
years or to 1925, like we didwith small caps.
You're talking aboutoutperformance over the S&P 500
of 2.5% or so annualized overthe past 25 years and yet we've
seen strong relativeunderperformance of REITs
compared to the S&P 500 over thecourse of the past five years.
So that mean reversion story interms of REITs being a
(41:20):
diversifier, having inflationmitigation characteristics,
having some of these drafting onsome of these bigger trends,
whether it's electrification orthe AI data center investment
and then you combine it with thefact that they perform so
poorly relative to other sectorsand relative to the broader
market, the setup for REITs ispotentially attractive on a
go-forward basis, coming out ofthis period where they've had
(41:42):
such poor relative performance.
And again, speaking to our book, we've got an actively managed
REIT strategy which allows youto leverage the insights, our
book.
We've got an actively managedREIT strategy which allows you
to leverage the insights,perspectives, expertise of a
team of managers who have beendoing that.
Roll your sleeves up.
Fundamental valuation researchon REITs going back 30 years and
REIT is the ticker there.
(42:03):
It's another way to takeadvantage of the confluence of
valuations, fundamentals and theoperating backdrop which, in
some ways, is not being pricedrelative to what the reality is
in some cases.
Speaker 1 (42:18):
Paul, for those who want to learn more about the
various funds your firm offers,where would you point them to?
Speaker 2 (42:22):
Alpsfundscom is where you go for everything Alps.
We've got our lineup there,we've got research, we've got
insights.
Of course, if you ever want toconnect with me directly, my
email address is the best way toreach me.
That's paulbiaki at ssncinccom.
Speaker 1 (42:37):
Appreciate those that watch this live.
Again, this will be a sponsoredconversation by SSNC Alps.
Special thanks to Paul and I'llsee you all in the next episode
.
Thank you, Paul, Appreciate it.
Speaker 2 (42:46):
Thanks, Michael.
Speaker 1 (42:46):
Cheers everybody.
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