The transcript from this week’s, MiB: BlackRock’s Salim Ramji, is below.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Overcast, Google, Bloomberg, and Stitcher. All of our earlier podcasts on your favorite pod hosts can be found here.
~~~
ANNOUNCER: This is my Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest and I know I say that all the time, but Salim Ramji, Global Head of iShares and Index Investments for BlackRock. iShares runs about 4.6 trillion of the 7 trillion in all of BlackRock, Index Investments is about 2.3 trillion, ETFs are another 2.3 trillion. And really, who is there better in the world to discuss ETFs and indexing than Salim Ramji.
We pretty much cover everything from passive to active. We talk about ESG as a rising investment class and why BlackRock thinks that’s going to exceed to trillion dollars over the next decade. We discussed how the entire fixed income and bond market has moved so aggressively to ETFs from what used to be a bespoke, over-the-counter sort of old-school type of Wall Street trade.
We also talk about the business of ETFs, how they’ve grown, how they’ve traded, and then most importantly, we went over a variety of things involving governance and what Larry Fink is doing to drive better behavior amongst the C-suite. In reality, BlackRock looks at ESG as a fundamental risk factor and it’s a way to help identify what companies are going to perform better, it’s not politics but it’s risk management.
The whole conversation was absolutely a tour de force about indexing and ETFs. If you were at all interested in wealth management or passive investing or active investing for that matter, you’re going to find this to be absolutely fascinating.
With no further ado, my conversation with BlackRock’s Salim Ramji.
ANNOUNCER: This is my Masters in Business with Barry Ritholtz on Bloomberg Radio.
RITHOLTZ: My extra special guest this week is Salim Ramji. He is the Global Head of iShares and index investments for BlackRock, that group runs about $4.6 trillion in client assets. Salim comes to us with an economics and politics degree from the University of Toronto and a law degree from Cambridge University.
Salim Ramji, of welcome to Bloomberg.
SALIM RAMJI, GLOBAL HEAD, ISHARES AND INDEX INVESTMENTS, BLACKROCK: Thanks a lot, Barry. It’s great to be here.
RITHOLTZ: So, that’s an interesting background. Toronto to Cambridge University doing law prior to joining BlackRock, you are a partner at McKinsey, how did that transition from consulting to asset management come about?
RAMJI: I haven’t thought about in a while. I had worked with BlackRock and worked with iShares for a number of years as an adviser before I joined. Back with in 2005 and with BlackRock, I’ve gotten to now the senior team around the time at the merger with BGI. And it was back in 2013.
After I’ve gotten to know a bunch of the senior leaders and a bunch of the members of the firm, and really like the culture that Larry had approached me and asked me whether I wanted to join the firm. And after a couple of discussions, I actually turned him down. He handled it pretty well and a week or two later, (inaudible) was speaking at a conference and our late partner, a guy named Charlie Hallac, who’d really built the Aladdin business and was the copresident of the firm before he died.
He came up to me and he said I heard you turn this down, I said yes. And then he asked me why I was such an idiot. He put in a slightly more colorful term than that. But then he sat me down and explained to me, he answered his own question for about an hour and explained to me why I was such an idiot.
And the very next day, Larry called back because, clearly, the two of them are in cahoots and I’d accepted the offer. So, I’d say it was a bumpy kind of prestart. But after a couple of wrong turns, I came to the right decision and loved it ever since that day.
RITHOLTZ: That’s pretty funny. I suspect you left out an important adverb …
RAMJI: Yes.
RITHOLTZ: … in that description.
RAMJI: Yes. Absolutely. Absolutely.
RITHOLTZ: So, you go from global head of corporate strategy, how do you migrate to ETF and indexing from that it doesn’t seem to be a natural path or am I misunderstanding that looking in from the outside?
RAMJI: Yes. There was one important beat in between. I can’t say I was — I was the head of strategy for just over a year and truthfully, I’m not sure that I had major impact in that one year on the firm. But what it was really useful for me was learned the culture from the inside, I built relationships.
I really learned how the place worked. And BlackRock’s a unique place and we’re a large public company. But their aspects which feel like a small family run business because we still are run by our founders. And I think for me, in that first year, getting an appreciation of how the firm works and operates and what’s some of the magic is inside, I think it was really important.
The first place that Larry and Rob Kapito would ask me to go after that year was our U.S. wealth business. And our U.S. wealth business at the time, this is back in 2015, was really in the early days of bringing together their active investment teams and their index investment teams. These two groups had kind of grown up as almost warring tribes.
And the goal was how do you bring them together and how do you reorient the whole business around financial advisers, wealth managers, principally big fee-based wealth managers which you are well familiar with and how do you really reorient the business around helping those clients build a better portfolio?
And so, by the time I left a few years later, U.S. wealth business became the source of more than half of iShares close globally. And so, I think it was a very natural then extension that when Larry called me up, just around two years ago and said it was time for the next that I went into this role around iShares and our index investing business.
RITHOLTZ: Quite fascinating. So, let’s talk a little bit about that index investing business. The index funds, more or less, have the assets run themselves but the business of ETFs is anything but passive. How do you describe what your primary responsibilities are overseeing indexing and ETFs at BlackRock?
RAMJI: One of the luxuries I had when I was running our client areas in U.S. wealth was you always got to assume that everything worked. And in my current role, there’s a lot of underlying engineering and precision and making sure that the whole ecosystem works.
So, one big part of what our teams do is really making sure that our index exposures, whether they’re in indexing, in ETFs, in index separate accounts, that they track precisely, that they have great liquidity, that they have great tax efficiency, that we’re working with all of our partners across the ecosystem to make sure that they work all the time and I think that’s one huge undertaking in terms of people and technology and partnership across a broad range of providers that’s one essential part of the role because we’re fond of talking about ETFs as a technology and they are.
But the thing about a technology is that it’s got to work. Not some of the time, but all of the time and there’s a big first order undertaking to make sure that that happens both in ETFs and in our separate account.
I’d say the second thing, Barry, is really about the nature of ETFs themselves. And increasingly, they’re doing much more than they did 20 years ago when I sure as first got off the ground, that what we’re starting to do more and more is not just increase the access of ETFs and some of the moves (ph) that a number of the platforms have announced last year towards commission free trading kind of certainly helped that.
But they’re starting to really be much more essential parts of whole portfolios even beyond market cap-weighted indices. So, things like factors and things like ESG are increasingly things that take active risk are increasingly becoming part of what ETFs do. And I would say even deeper than that and we can get into this in a little bit more detail whenever you want, they’re also becoming essential parts of the capital markets.
And so, a real force in terms of modernizing aspects of the bond market, for example, are what ETFs are doing. And so, a second really important part is working with our clients and working with our teams all around the world to start to imagine and start to think through all the different ways in which ETFs can do more, even well beyond what we already do with great precision across our traditional market cap-weighted indices.
The final part of a job is really just connecting the dot. There’s a lot of work that we need to do with our partners in Aladdin, about making it easier to access ETFs in the workflow with partners outside of BlackRock to really make it easier to access. And so, it’s really just staying alert and staying focused on other uses and other ways in which people are accessing these instruments all over the world.
RITHOLTZ: So, we’re definitely going to get to ESG and factor investing and fixed income but I have to ask one question about the index providers like S&P and …
RAMJI: Yes.
RITHOLTZ: … MSCI and anybody else who’s creating a popular index. How does that relationship work? How does BlackRock either say I want that index in an ETF or go to an index creator and say, we would like to see something like this? What is that relationship like?
RAMJI: It’s a relationship not — I guess, when I talk about the ecosystem in vague terms, index providers are one really important part of it. And sometimes, it’s really accessing intellectual property that they develop, take your well-known broad indices whether it’s MSCI in emerging markets or the S&P 500 or something like that and being able to use that to be able to make sure that as we’re being precise about what tracking to, we’re tracking to something clients know and respect.
And there are other ways in which we’ll work with them around new innovations in ESG, in factors and other areas as we keep expanding out the ecosystem. But I look at them as important partners just as I look at exchanges as important partners, just as I look at authorized participants and market makers as important partners which is bad (ph).
However, in our process to make high-quality ETFs, there are a lot of relationships and partnerships that we need to forge outside of BlackRock, index providers being one of them to really make sure it operates as client expect.
RITHOLTZ: Quite fascinating. Let’s talk a little bit about the fee war for ETFs and indexing. I guess that fee war is over for investors who are evaluating various products, what else should they be considering besides the sticker price?
RAMJI: The sticker price is important and I like to think we’ve been a leader in — as we grow, reinvesting a number of our gains back with our clients, just its context over the past six years or so, we’ve reinvested $600 million back into fee reductions, somewhere around one and a half to two and a half percent of our revenues in any given year. And we expect to continue to do that as we grow, particularly in our core series (ph).
But beyond the sticker price, there are a number of areas that are, if anything, more important and I wish more attention was paid to those aspects even as attention is paid to the expense ratios. Just — I mean, look at taxes. If you think about a taxable investor just in the United States, a typical active mutual fund has around 150, 160 basis points annually of tax drag in equities.
And that’s a huge headwind for most taxable investors. And so, the tax efficiency, the wrapper becomes a really important aspect to what the investor takes home at the end of each year. Liquidity and the ability to get in and out of an exposure relatively easily, that can add anywhere between 50 and 100 basis points or more of cost at the time of the trade. And I think that’s underappreciated as well.
And the third piece which is the cost is really the cost of not tracking precisely the index. We invest a lot in terms of people and technology to make sure we track precisely, but if you veer off by 50, 25 basis points, that’s ultimately a cost that’s going to the investors.
So, I think the expense ratios that a lot of attention. Some of the attention we’ve caused, but I think things like tax efficiency, things like liquidity, things like tracking are even more important financially to investors. And I wish they got the same kind of focus. I hope they will get the same kind of focus in the minds of investors and those who advise them.
RITHOLTZ: Let’s focus on attention on some of those issues. I’m not really worried about the tax inefficiency because active managers can make it up with their stock-picking prowess, so I don’t know if we really have to worry about that.
But let’s talk — let’s — and I’m joking in case people are — don’t realize that. But let’s talk a little bit about tracking error. How complex is it especially in some of these really substantially sized ETFs to make sure that they track precisely with the underlying index? I have to think, that’s a lot more work than people realize.
RAMJI: One of the benefits, I would say, of having a single technology platform which we do through Aladdin is the ability to really scale that across many trillions of assets and being able to bring a degree of precision and a great degree of expertise to it. But if you look across our teams who manager index investing, it’s a combination of great technology, it’s a combination of that plus incredibly disciplined process and there hundreds of different elements in the process and our teams, they’re rightfully called portfolio engineers because what they’re really doing is a — it’s an engineering task to make sure that everything works and operates as it should.
And it’s pretty fundamental element of data science because we’re always looking out in the securities markets, looking at our indices, looking at how our exposures track and particularly around the times that you have major index rebalances, every quarter or twice a year, all around the world is just making sure that that happens precisely, really defines, I think, a good quality and high quality index provider from someone who is a lot less precise or just not as well engineered.
RITHOLTZ: So, there’s been a lot of criticism of indexing over the past, I don’t know, 20 years. Really, since the great financial crisis, we’d seen a lot of inflows into indexing. What do you make of some of the wackier criticisms? Passive distorts price discovery and that it has this inherent monopoly problem, how do you look at those sort of claims?
RAMJI: Yes. Look. One is with a bit of a bit of a grain of salt and these had been going on for 40 y ears as an add that I keep in my office when where can we get back to our office which is from the late ’70s which talks about indexation being un-American because no American would want just average returns.
And so, this narrative around indexation has been around for a while and in any given period even in the past few years, I’ll see indexation be accused of being right at the center of concentrated capitalism. There was piece, a few years ago which accused us of being Marxist.
And so, I don’t — to be honest, Barry, I don’t pay a huge amount of attention to some of those kind of fringe theories. What I look at is two things. I look at the facts and I look at our clients. And what the facts say is that in the $180 trillion marketplace of equity and fixed income securities, indexation in all forms, ETFs funds separate accounts, we’re one-tenth of that. Active is about 25 percent of that total marketplace.
And if you look at it from an ETF lens, ETFs are five percent of the equity markets and one percent of the bond markets. And as we look at things like price discovery, ETFs have really been a vehicle that’s aided price discovery. It’s especially true in the bond market, there are a number of third parties. Bank of England published a report a few months ago around this about how ETFs aided price discovery and other third parties have also come to similar conclusions on the facts.
But the real thing I look to is our clients. And we now have 10 millions of investors in our ETFs. And ultimately, if we provide something that’s transparent, we provide something that’s good value, we provide something that has integrity both in terms of our own fiduciary mindset and terms of the engineering, more clients will come to us. And I think that’s what really matters and that where we really keep the area of our focus.
We always look at the facts but every time we look at the facts on things like pricing or on things like concentration, it’s kind of the opposite of what has been speculated about is actually the truth. So, it’s those two things that are really, I try and stay focused on and in some of the fringe theories get annoying from time to time.
And but I try and keep a relatively level head. And like, if the facts say something different, we come to a different conclusion. But I think we’re a long way away from us reaching some Marxist singularity that some have speculated may happen.
RITHOLTZ: Let’s talk about an outlier product that’s been out there, that’s very different than your core products. When we look at the way some of the oil ETFs like USO have traded or some of the VIX products that …
RAMJI: Right.
RITHOLTZ: … kind of went berserk a few years ago, how do you educate the public about your core products and why things like those two are really one. So, in this case, two-offs, they’re not the normal ETF product.
RAMJI: Yes. I think — look, the ETF has now been around for just over 30 years and I sure has been around for just over 20 years. And there now are several thousand ETFs and I think that there is — it’s time that there was a more consistent way of naming and naming conventions around. But appropriately should and shouldn’t be called an ETF.
But for us, we think ETFs are really transparent, rules-based, diversified investments in a ’40 Act fund structure. And we had joined with a coalition of about half a dozen other ETF providers that accounted for well over 90 percent of the assets of the industry who felt pretty much the same way that a number of things that fit that description are appropriately ETFs but if you’ve got a commodity fund including — we’ve got some commodity funds and things like gold and silver, that should appropriately be called a exchange-traded commodity because it’s different than some of the funds and the fund structures.
And some of the products out there that call themselves ETFs, they’re really just structured products and I think that some of the providers that do that should really own that. And if clients or investors want to buy those power to them but I think that having clarity around what is a transparent rules-based diversified investment fund versus what’s something else, be it a commodity or be it like a structured product or note (ph), I think really helps investors and helps the industry.
And so, that’s why we’ve been a really vocal part of his coalition and I think that the time has come and the industries come of age that it’s worth being able to provide that degree of clarity for investors to know exactly the type of structure that they’re getting into.
RITHOLTZ: Quite fascinating. Let’s talk a little bit about what’s going on these days in fixed income. If you would have told me a decade ago that the Fed would be out buying fixed income ETFs, I would have looked at you like you had two heads. But here we are, the Federal Reserve is buying fixed income products in ETF forms, what does that about the viability of ETFs and their ability to manage bonds?
RAMJI: Yes. I think, at first, just as a disclosure, Barry, the mandate that BlackRock has with the Federal Reserve is behind a wall with our financial markets advisory works, so I’m not involved in any way in terms of the fed and BlackRock’s work there. But if I could just pain a broader context and then answer your question, and the broader context is this which is that fixed income ETFs are now a couple thousand products and over $1.3 trillion of assets and they’ve been around for nearly 20 years.
And when we’ve looked at uses by central banks around the world, they’re well over 30 official institutions about half of them would be central banks that already use fixed income ETFs in one form or the other. The Federal Reserve is kind of the next. And obviously, a very significant central bank but it’s joining a group that are ready pretty significant sized and in their use of fixed income ETFs.
And when I look at why official institutions, why other asset managers, why pension funds, why insurance companies, so a whole range of institutional investors are turning to fixed income ETFs, they’re quite straightforward. They’re much cheaper to trade than the underlying bond market. I think the events of February and March and April showed that they were much more liquid than the underlying bond market itself.
I think they also showed that you could get better more actionable prices in the ETF and they really are an improvement or a modernizing force relative to certain antiquated aspects of the bond market itself. And so, for many of these institutional investors, over the past few years, they’ve been turning to fixed income ETFs to get cheaper trades more liquidity, better prices. I suspect that the reason why the Federal Reserve look to them was actually pretty similar to the reason why other central banks or other big institutional investors look to them which is that there were transparent, easier way to access the bond market.
RITHOLTZ: Makes a lot of sense to me. Let’s talk a little bit about that liquidity in preparing for this conversation. I found a Barron’s article that reported HYG, the high-yield bond ETF, the week of …
RAMJI: Right.
RITHOLTZ: … March 23rd, it traded about a 68,000 times a day. The top five holdings in the ETF only traded about five times a day which raises a really interesting question. Has BlackRock replaced the bond trading desk of old Wall Street?
RAMJI: I wouldn’t go that far. But let me explain two interesting things that have been going on. The second one answers kind of your question which is — but the first one is really what happened. And I think it’s happened across a dozen different instances of stress including the financial crisis in the bond markets is that when the bond markets turned volatile, more and more investors turn to ETFs as a means by which to get good price discovery and good liquidity.
And I think in that heightened period of volatility, probably the most significant volatility we’ve seen since the financial crisis of February and March and April, that the numbers your citing show exactly what was happening, which is the board investors were turning to the bond ETF, in this case HYG, but I can pitch (ph) you the same example with very similar numbers a week before in LQD, in the treasury market, in emerging markets, in a whole series of different categories across the bond market of investors turning to ETFs in times of volatility.
And I think the latest period of volatility made that happen in a much more significant way. And when you dig underneath it, what’s also happening underneath it is that ETFs are part of a modernizing force in the bond market itself. And so, whether it’s dealers on Wall Street not having to deal with individual bond trades because they can do it in a basket for certain low size, high efficiency, high scale bond trades, it’s easier to do it through a portfolio trade or through in with the ETF, that the ETF is becoming a way in which certain segments of the market can move to a more electronic means of bond trading, to move to a more efficient way of bond trading, and to really start to modernize aspects of the bond market, kind of like the equity markets did 15 or 20 years before.
I think the big thing that’s changed is that the ETF is bringing this degree of liquidity and bringing this degree of technology that starts to work in unison with how dealers operate, how some of these all-trading venues operate, as well as how issuers like ourselves operate, to be able to remove some of the more antiquated aspects of the bond market which aren’t really serving the needs of clients in the way that they need to anymore.
RITHOLTZ: Let’s dive a little deeper into that because it’s a fascinating subject. In the U.S. equity markets, there are what? The joke is the Wilshire (ph) 5000 is about 3,400 stocks. In the …
RAMJI: Yes.
RITHOLTZ: … bond market, if we include municipal bonds, treasuries, corporates, there are literally countless variations of duration and it seems like there’s millions of bonds. So, when we look at the idea of net asset value versus trading price whether it’s for the ag or anything like that, with any equity index everything in it is trading, if not, all the time …
RAMJI: Unchanged.
RITHOLTZ: Right. But when we look at these bonds …
RAMJI: Yes.
RITHOLTZ: So, what does that mean for actually considering that gap between NAV and price and how do we figure out NAV when a lot of these holdings trade so infrequently but by appointment only?
RAMJI: Look, in normal markets, and we’re tracking several dozen measures around the quality of our ETFs, the quality of our competitor ETFs relative to the markets in which they operate and particularly in times when markets are closed or you have certain dislocations in certain markets due to natural disasters or other events.
The bond though, as you said, is really quite unique and I think the important facet of it is that it trades largely over-the-counter. And I think that the — the important modernizing aspect of the ETF is all about E which is that it trades on exchange. And once a trades on exchange, prices become more transparent and access becomes much more widespread because whether you’re an institutional investor that’s looking to be able to access the ETF or you’re individual, that they be going on to a self-directed platform, you’re getting access to on exchange prices that in a very broadly accessible, almost democratized way.
And I think with that on exchange pricing, what’s happening is that it’s becoming more transparent as to where actionable markets are. And if you combine it with the point that you’ve made earlier about the HYG trading 168,000 times in a day, what’s happening is that the exchange or the exchange-traded fund in moments of stress is becoming the place in which actionable markets are made.
In normal markets, they track pretty clearly. But in dislocated markets, the thing that’s trading many, many thousand times in a given day is really where actionable prices are relative to where the best assessment of the previous days that might have been.
I almost think about it by analogy is that if you think about this isn’t a perfect analogy, but if you think about you might get an appraisal on your house. An appraisal on your house is based on the best comparables in your neighborhood and for other houses like yours. But the market for your house is the price at which you buy or sell.
And in the case of exchanges and exchange-traded funds, people are buying and selling in moments of stress, many tens of thousands of times a day and that’s where they are really becoming the point at which prices are discovered. And the final point I’d say to this, Barry, is just that this isn’t true for every fixed income ETF, it’s not even true for every iShares fixed income ETF but there are a number of number of what we look as flagship or Tier 1 iShares ETFs that are trading on average more than a $100 million a day and many of these or most of these exhibit these price discovery aspects.
And we think that that price discovery, coupled with the transparency of being on on exchange is really the modernizing force that we’re talking about. And I think that if anything, the stresses of February and of March and of April in the bond market is accelerating this force because people see how they performed under stress and even the skeptics are now becoming some of — are becoming our clients in in terms of — in terms of fixed-income ETFs.
RITHOLTZ: Quite interesting. Let’s talk a little bit about your boss’ letter. Larry Fink writes these letters to CEOs each year and it’s been one of the hallmarks of his leadership at BlackRock.
RAMJI: Right.
RITHOLTZ: What is he looking for from the C-suite? Does he believe he can cajole CEOs and CFOs into better ethical behavior? What are the purpose of those letters?
RAMJI: Yes. I think when I look at — particularly the letters around we’d issued in January that the most important thing for me coming out of this year’s letter was the notion that ESG risks and it critically focused on climate risk, is an investment risk. And I think that’s a really important and fundamental concept because it’s not about cajoling people into certain behaviors, it’s just recognizing that for long-term investors and index investors are the ultimate long-term investors because I can’t — I’m not permitted to sell the stock if it’s in the index. I’ve got to hold it for as long as it’s in the index, so we’re the ultimate long-term investors.
That we’re thinking about risk reward trade-offs or companies and asset classes and it’s about ESG risks, in this case climate risk being an example, as really being fundamental to the risk reward or tradeoff of investments or said differently through research we’ve done within BlackRock, research we read and worked with other third parties, it becomes a better way to do longer term investing is through an ESG lens.
And so, we really saw it and Larry really saw it as fundamental to our new fiduciary duty to help clients invest and help clients invest mindful of the different risks. And our firm was founded on a principle of risk management.
And so, just as we look at liquidity risks, just as we look at credit risks, just as we look at geopolitical risks, we also have to look at ESG-oriented risks.
And the practical application of this meant that for our active investors, they integrated ESG risks alongside all the other risks in terms of the trade-offs that they’re making and for Index investors or the area that I’m responsible for, what we set out to do was to really increase access through launching the breadth of product offerings in ESG investing so that investors who wanted to be able to invest through an ESG lens could do so with ETFs or with index funds while benefiting from all the efficiency and all the transparency and all the choice that we’re able to offer through being a scale ETF and index provider.
And so, it’s really that fundamental piece, Barry, which is it’s about investment risks that influenced Larry’s thinking and then influenced our thinking as fiduciaries.
RITHOLTZ: So, here’s the pushback I hear all the time. And full disclosure, I agree with you. I think that it’s a great risk screen. You’ll avoid all sorts of headaches especially on the governance side.
It certainly looks like a risk management tool. But some of the pushback we’ve heard including from the Labor Department has been this is just social justice warriors and politics and it has nothing, whatsoever, to do with assets or risk management. How do you responds to that sort of pushback including when you have the head of the DOL saying I want to consider whether or not we should allow ESG products and in 401(k)s?
RAMJI: Yes. I think the — without getting into all the specifics that the DOL’s proposal and I think BlackRock has commented on that separately, I think the fundamental and positive aspect is the notion that for us as fiduciaries, we have to be able to have conviction ourselves and be able to ensure that our clients equally have conviction, that these are the right risk reward trade-offs and we’re doing it to be able to improve their long-term investment returns.
And so, the facts in the analytics and the evidence behind that and our discussions with clients are really going to be the determinants of that. So, we’re actually totally fine with saying the bar should be about value, not just about values. And it’s really from that value lens that our whole thesis and the letter that Larry offered back in January is rooted.
So, we have no problem with that as a screen, if you will, because it’s very fundamental to how we think about kind of the issue.
RITHOLTZ: Very interesting.
RAMJI: The second thing that I’d say is that from an index lens, and actually from across all the assets that BlackRock manages, it’s not our money. It’s the client’s money.
And so, one of the things that from an index lens that we can do within our iShares and index investing is to be able to offer client’s choice. And so, that’s the reason why we’ve expanded our product lineup. Part of it was based on the investment thesis and part of it was based off of the client demand that said I just want this choice and I want the ability to choose which types of exposures I put my money in.
And one of the great things about indexation is that you can offer that at scale and suggest this contact. Like a couple of years ago we had about 20 ETF and index fund offerings and they mostly catered to socially responsible investing, kind do f a niche category largely in Europe.
Today, we have over 120 just a couple years later. And it’s really catering to a much more broad and mainstream audience all across the world in the United States, in Europe, in Asia. And the thing that surprised me about that has been I always thought demand existed in Europe but if you look at the just over $20 billion that we’ve raised in ETF, ESG assets to date, most of that has come from U.S. investors who really just wanted the ability to — for a provider to offer choice but still provide it with the same transparency and efficiency and all the other aspects that they’ve come to enjoy around ETFs.
RITHOLTZ: Let’s talk a little bit about those fund flows for the past, I don’t know, call it 20 years. It’s been relatively modest. ESG has been, historically, it’s been a niche product but BlackRock is talking about 1.2 trillion in global sustainable ETF assets within a decade. That’s a giant number.
We’ve seen some flows into sustainability and into ESG but nothing that extrapolates out to 1.2 trillion. How do you guys come up with a number that immense?
RAMJI: Yes. I think it’s two things. I look forward to returning to your show in 10 years of this is — if we’re still doing podcast in 10 years and see how accurate our projections are. But it’s really two things. The first thing is just the nature of his client demand and I’ve been surprised to the upside.
The $20 billion plus number I cited in flows this year, I thought it would be three, four years before we could start to cite those kind of numbers. But I’ve been surprised to the upside at the client demand that exist for this particular type of investing capabilities.
So, I think that we’re tapping into something which is deeper than just a niche and it’s pretty widespread amongst the demand or the latent demand amongst institutions, amongst wealth managers in the United States, in Europe, in all different kinds of investors looking to access this.
But the second thing, I think has been also overlooked which is that indexation hasn’t been brought to bear in sustainability much at all over the past several years. And maybe that’s because it was such a niche area of investment. And I think part of the demand that we’re seeing in ETF form is also coming from the fact that we can offer this type of choice, 120 different offerings that we can offer things that are at a fraction, typically one-fifth of the fee of a traditional ESG active fund.
And I think those pieces which have really been driving the ETF business to go from nothing to nearly $7 trillion over the past two or three decades are now being brought to ESG itself. And I think this is fundamental to what I think that the ETF is now doing which is that it’s become a way in which to wrap different investment disciplines.
We obviously started in market cap-weighted indices and that was really the basis of iShares, particularly in developed and emerging market equities. We’ve expanded into fixed income which as we talked about is a little bit more opaque and we’re bringing you transparency and some modernizing forces.
But some of the really exciting things are that we’re developing in things like ESG or in things like factors or in things like some of our thematic ETFs, ETFs that essentially take active risk. They deviate from market cap-weighted index.
But what we’re doing is that we’re doing it in a way which is efficient, which is rules-based, which is transparent. And ultimately, we think that can offer a better deal for investors. And this is just the next evolution that we’re not just seeing in ETFs but we’re trying to lead the charge within iShares is the ability to do more things whether it’s ESG or factors or fixed income or thematics. Even as we continue to build out and expand in the traditional market cap-weighted over this.
RITHOLTZ: So, let’s talk about a market risk type ETF. Why haven’t we seen a bitcoin ETF approved yet and is BlackRock going to be the first firm to launch one?
RAMJI: Who knows and know the answer to your question. Our general philosophy is we want to get behind things that are long-term, that are good for our investors, and aren’t just the one-hit wonders.
And there are many things that we have declined to do over the years which could’ve been commercially successful for a year or several months or so, but really just aren’t what we want to be into. But we are big believers in things like thematic ETFs and we did a lot of research in concert with our active investigating teams around what did you think are the 45 biggest trends that are going to impact investing for the next decade or two, things like generational wealth change, things like urbanization, things like the advent of new and disruptive technologies or examples of that?
And we’ve then developed ETFs that cater to those particular trends. And we’ve done that first and foremost because we think those are good long-term investments for clients that can deliver superior returns overtime.
And secondly, those are the types of trends that we want to get behind and what we want to be — what we want to be known for. So, we study what other firms do but there’s a lot that others can launch and we’re happy not to launch because of our own stance in terms of we want to innovate but we also want to be able to look our clients in the eyes a year from now, two years from now, three years from now, 10 years from now and be able to say that we put them in a good investment vehicle and not be able to let them down.
RITHOLTZ: So, let’s combine three things. Let’s combine long-term with our discussion of fixed income and our discussion of ESG and talk about muni bonds and green bonds. How you navigate ESG in the fixed income space?
RAMJI: Very carefully. It’s a — we have launched — we have launched ESG in fixed income and but — it’s a much more complicated set of circumstances in part because of data and being able to really understand the data well to be able to craft the right set of scores and scores that we believe in.
And we’re selective as to where we are expanding. And I think that’s one of the benefits of having BlackRock and our whole history and legacy around fixed income is that we got great active muni investors and we’ve got great active fundamental investors and we’ve got great teams who were able to really work with and think through some of these problems with to understand what’s the right circumstance of which to launch some of these products versus what’s the right circumstance in which to hold back until the data is better, until the offering is better so that when we launch, we can launch something that we can stand behind.
So, we are doing more a portion of the 120 products that I mentioned while most of them are inequities, many of them are also in fixed income and we want to maintain our kind of innovation, but we also — we also want to do it only when we feel we can really underwrite the true integrity and quality of the products that we offer.
RITHOLTZ: So, you mentioned active, what sort of demand is BlackRock seeing from investors for actively managed ETFs? And I know to some listeners that might sound like a contradiction in terms, but it isn’t necessarily so.
RAMJI: Yes. We’re certainly seeing a lot of supply that’s starting to (inaudible). I don’t think a week goes by that that you don’t see a new filing from some manager.
Look, I should have said including us and we’ve launched one or two truly active ETFs already. We’ve done it under the BlackRock brand to make the distinction clear, and we obviously, have plans to expand.
But what I’d say is that it is two things. First, when you look at ETFs through the lens of not actively managed but what takes active risk? So, things that deviate from a market cap-weighted index like factors or ESG or thematics, we already are the largest and the fastest growing active risk-taking ETF firm.
We’ve got over $200 billion in those categories. Those are growing at a very nice pace and we’re very optimistic that that will grow significantly into the future.
When you look at actively managed ETFs, I think that perspective to keep in mind is that the ETF itself isn’t some magic pill that solves problems that if you solve all problems. If you’ve got a underperforming extensive active manager in a mutual fund and then you put them in an ETF, you then have a underperforming extensive actively managed ETF.
And so, it’s not some magic that’s going to re-create things. There certainly are efficiencies to the wrapper and there certainly are areas about it that are compelling. But I think that the real test is going to be twofold.
One, do the active managers deliver in this wrapper or not? The evidence from the mutual fund part of the industry has been, I think you can say mixed.
And second, is active management willing to tackle the fundamental thing which I think is fees. And when you look at it, at least in our own analysis, active management on a gross basis, many firms do quite well. It’s just that after fees is when you got the real underperformance.
And so, our own conclusion from that is that too many active managers are charging too much money for what it is that they deliver. So, it will be interesting to see if they really tackle that from a fee perspective in the context of the ETF wrapper or not.
And they could, of course, do that in the mutual fund wrapper at any given time. They’ve chosen not to. But I think those are — those are really the fundamental issues. The ETF is just a wrapper. We think it happens to better than the wrapper that was invented in 1924 but it doesn’t solve all problems, it just helps bring greater efficiency and greater transparency which benefit certain aspects but not every aspect.
RITHOLTZ: So, since you brought up fees, let’s talk a little bit about that. We’ve seeing an ongoing price war for a long time. Where do you see iShares pricing heading towards, let’s say five years from now? Slightly lower, meaningfully lower? At what point does pricing stabilize?
And let me just add, I don’t think anyone is really looking for free. As we’ve seen with free trading, it turns out to be a little more expensive than people expect. So, in terms of greater efficiencies and greater scale, where do the prices end up — going to over the next five years?
RAMJI: Yes. Look. I’d say one thing — actually two things about that. One thing we’ve been pretty public and vocal about, I think the other piece we’ve tried, but we’ll try and be more public and more vocal.
The first thing is just from our own perspective, what we see in terms of pricing, and I think in this case you’re talking about the expense ratio of the fund itself, is that there are a segment of clients who are very sensitive to the TER (ph) and many of those clients, if you change it, they will invest money with you.
And that’s what we found over the past five years, over the past three years, over the year, and that’s why we’ve made the investments that we have over the past number of years that I mentioned, the $600 million and that’s why we’ve been pretty public that every year, we intend to reinvest, another 1.5, 2.5 percent of our revenue, so call it another $100 million within pricing so that the benefits as we grow also accrue to our fundholders as being a real benefits of our scale. So, that kind of one lens to look at it through.
I think the other lens which sometime is less appreciated is just all the different segments in which we operate within iShares. There’s one segment which is defined by our core which is really that price-sensitive segment and that’s important to us, that’s where a lot of our pricing action has been concentrated. But in areas like fixed income, particularly those fixed income instrument that are outside the core, what clients really care about is they care about the liquidity or they care about the bid-offer spreads or they care about other aspects of cost which as we talked about earlier, are often 10 times is important to their total cost of what they own.
And if you think about things like factors or ESG or thematics, what clients are really coming to us in those exposures for is a means to outperform but for a very low fee. And so, when they look at us in factors or when they look at us in ESG, they’re often looking at us because we’re a bargain, because we’re 80 percent off what they were paying a active manager in terms of fees to deliver that outperformance.
And so, I think it’s important to understand that full set — I won’t bore with you — there are two other segments and — that I didn’t talk about, precision instruments being among them, but I think we operate in all those different segments with very different segments of clients from DIY self-directed investors, all the way through to other active managers as well as the biggest segment being firms that you well know which is large discretionary wealth managers.
And so, each of them have different factors that they look at in terms of price tax efficiency, tracking error, liquidity and just the underlying quality and the ability to deliver that quality at scale and that all goes into the formula around it.
RITHOLTZ: So, I know I only have you for a few more minutes. So, let’s jump to our speed round, our questions that we ask …
RAMJI: Sure.
RITHOLTZ: … all our guests to get a little more insight into who they are. Let’s start with under lockdown, what you streaming these days? Give us your favorite either Netflix or Amazon Prime or podcasts you’re listening to. Tell us what’s keeping you entertained while you’re sheltering at home.
RAMJI: I’ve been watching a — it’s kind of an obscure TV show, it’s called “Kim’s Convenience.” It’s about this family up in Canada which is where I grew up that runs a small convenience store. And my dad used to run a small convenience store, I used to work in it when I was a kid.
And so, that’s my kind of, if you will, comfort food TV that I’ve been watching. It’s a great show but I think it’s more — any other people who grew up in Canada and worked at a convenience store would love it. So, it may not have broad appeal, but for me, it has a lot of comfort appeal.
RITHOLTZ: That is niche, for sure.
RAMJI: That is niche. That is niche.
RITHOLTZ: Canadian convenience store workers. So, tell us about your mentors? Who helped shape your career?
RAMJI: Gosh, there’d been so many people along the way. Charlie Hallac, our late partner saved me from — not just saved me from making a real career mistake, but I think was also, in the couple of years that we worked together at the firm before he had passed, was both a really important mentor and at times a really harsh critic. And I think some of the things that people sometimes misunderstand about mentors is that you think mentorship is just being a good cheerleader and a good supporter, sometimes mentorship is really about tough love.
Charlie, for me, was very much about tough love but he really became a really, really important guide for me to really understand BlackRock, to really understand how it worked, to really understand some of the genius of the firm that a relative newcomer might take years and years to appreciate. I got a crash course in a couple years through Charlie that I will certainly always be grateful for along with him course-correcting my career with his own blunt style when I had mistakenly turned the firm down.
RITHOLTZ: That’s great. Tell us about some of your favorite books. What are you reading now? What have you enjoyed reading?
RAMJI: I was reading a little bit earlier on what I’d call a bunch of disaster and despair books. My wife, thankfully, talked me out of it because there’s a whole genre about like the “Twilight of Democracy” is one. It’s actually a really good book.
But I’ve now moved to — I’m reading a biography of Wellington which looks to me very good. And I’m also reading a book called “Wolf Hall” that I have owned but haven’t read. And so, I’m using this to make a dent in both of those. I’m a big anglophile, in case you haven’t guessed, but “Wolf Hall” and Wellington kind of a bit better at times, at least the Wellington days, can be uplifting.
RAMJI: Quite interesting. What sort of advice would you give to a recent college grad who was interested in a career in either wealth management or indexing or ETFs? I think the important thing is each of those industries, right, so just take wealth management which you are very familiar with having built a firm or asset management. They’re going through vast changes and I think that it’s all great to talk about change in the abstract.
Real-time, it could be painful. And it can be challenging. And so, I think there are really exciting industries. There are industries that I’ve been part of for a few decades, two decades, but I think for new undergraduate, it’s really making sure that, one, they’re up for that, and two, that they really love client service because whether you’re a fiduciary wealth manager or whether you’re a fiduciary asset manager, you’ve got to be comfortable with the notion that you’re here to serve the client. That it isn’t your money, it’s theirs, and you’ve got to get joy out of that aspect of it which I think is an errand to both of those businesses as much as constant radical changes as well.
RITHOLTZ: And our final question, what you know about the world of indexing and ETFs today that you wish you knew 20 years ago when you were first getting started in this field?
RAMJI: So, I’m going to give you a boring answer to this, Barry, which is that in the late ’90s, I was a very unsuccessful occasional day trader and I had a good run up and then it all ended in tears around the late 2000 and 2001.
It took me away from the market. I was shy about the market for a few years after that. And I think that this thing that I wish I knew was just the importance of staying invested. Now, that’s a boring and reliable answer, but I am the beta guy, so I believe in boring and reliable over the long term and but it really has paid off.
And just, so the thing I wish I knew was that I’d stop worrying about kind of timing the market and I just really focus on staying in the market. And for investors like me and I think for many investors who were able to take a long-term view, that’s probably the soundest and best way to build wealth over the long-term.
RITHOLTZ: I totally agree with that answer.
Thank you, Salim Ramji, for being so generous with your time. We have been speaking with Salim Ramji, the Global Head of iShares and Index Investments for BlackRock which his division about 4.6 trillion in client assets.
If you enjoy this conversation, be sure and check out all our previous podcasts. We were up to about 350. You can find that at iTunes, Spotify, Google Podcast, Stitcher, Overcast, wherever your finer podcasts are sold.
We love your comments, feedback, and suggestions. Write to us at mibpodcast@bloomberg.net.
You can check out my weekly column at bloomberg.com/opinion. Sign up for our daily reads at ritholtz.com. Follow me on Twitter @ritholtz.
Be sure to give us a review at Apple iTunes.
I would be remiss if I did not thank our crack staff that helps put these conversations together each week. Tim Harrow (ph) is my audio engineer, Michael Boyle is my booker/producer. Atika Valbrun is our project manager. Michael Batnick is our head of research.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
