I’m back to enjoy what’s left of the Australian summer after three weeks in the US. It was a busy trip: Los Angeles, Fort Lauderdale, Tampa, New York and Boston. Boston was -10C the day I left. I learnt a lot, met some great people and broadened my horizons.
The Inside ETFs conference an interesting experience. The size of the event – 2400 people spread across 3 floors – was larger than anything else that I had attended.
The event was part conference and part trade show. The conference sessions featured a handful of excellent speakers and a fair amount of product push thinly disguised as continuing professional development.
One of the key themes that stood out was the impact of technology in commoditising many of the daily activities that investment professionals perform. This creates both risks and opportunities for investment professionals.
The risk is that advisers and fund managers get replaced by technology. I saw some of this technology in action and its powerful stuff.
For example, a Registered Investment Advisor (RIA) in the US can administer a client account for around 25 basis points, less than it costs many small and mid-sized superannuation funds in Australia. That’s for an individual account, with its own asset allocation, rebalancing strategy, Environmental, Social and Corporate Governance (ESG) rules and tax optimisation; not a one-size-fits-all pooled vehicle.
The opportunity is that investment professionals are free to spend more time on delivering greater value to their clients. One of the value-added services that kept coming up in the presentations was the idea of behavioural coaching, something that I’m a big believer in.
A few thought-provoking presentations aside, I found the most value in conversations with people at the booths and stalls in the tradeshow. While conference presenters were talking about the need for behavioural coaching, the staff at the trade stalls were promoting all manner of thematic ETFs.
Want to invest in blockchain-related companies? There’s an exchange traded fund (ETF) for that. Think obesity is a problem? You can invest in an ETF comprised of biotech companies researching treatments for obesity. Excited by the potential therapeutic uses of cannabis? There’s an ETF for this too. Got a hunch that streaming is the next big thing to hit the music industry? There’s the Quincy 100 – a digital music ETF promoted by Quincy Jones.
I asked the staff manning the stalls: “Who buys this stuff”? They explained that RIAs are asked by their clients for ways to invest in these themes and so they come to ETF issuers asking them to create new products.
I’m not sure how this squares with the notion of behavioural coaching. It looked a lot more like enabling the client to do whatever they wanted. Yes, it’s the client’s money and they should be free to invest it as they like. And yes, if an RIA doesn’t follow their wishes then they’ll find one who will.
Fair enough. But clients and advisors need to remember that there are strong incentives for product issuers to take a punt by putting together ETFs with little thought paid to diversification, fundamentals, liquidity or valuation.
For example, a product issuer at another stall explained that approximately 300 ETFs die every year in the US. They die because they fail to attract sufficient assets. It takes as little as a few million dollars and a few months to issue an ETF. Consequently, issuers are incentivised to try and pick the latest fads, create products and if they don’t work, move onto the next idea.
The key lesson is caveat emptor (or “buyer beware”). I’m a big user of ETFs. As an investment vehicle, they are probably superior to mutual funds in many applications. That’s why my last post recommended that more active fund managers should consider offering ETFs.
That said, the rush to issue new products will result in a lot more good and bad ETFs becoming available. And buying these ETFs based on a story increases the risk that investors won’t really understand what they own.
There was a palpable feeling that issuers wanted to be the first mover in a new thematic. For example, the “transformational data sharing”1) ETF: BLOK. It launched on 16 January 2018 with only a few million dollars in assets. A few weeks later, it now has over $157 million in assets under management and daily trading volume of over 25 million shares.
The first ETF in a niche generally goes on to become the Xerox (photocopiers) or Hoover (vacuum cleaners) of its category. That is, it attracts the most assets and has the best trading liquidity.
With a management fee of 0.70 per cent for a niche ETF such as BLOK, it’s not hard to see why issuers are racing to be the first to market.
The Inside ETF conference wasn’t the only highlight of my trip. I was lucky to record two fantastic podcast interviews. The first was with a very famous asset allocator known for his study of bubbles and his seeming imperviousness to career risk. We talk about emerging markets and his widely publicised hypothesis that we’re in a late stage blow-off rally in equities (that’s a big hint).
The second interview was a fascinating insight into what it was like to be a young woman on Wall St almost sixty years ago. For example, I was shocked to find out that women were not allowed to use the lunch room at the New York Stock Exchange! We also discuss how technology has changed investing. This is an episode that you don’t want to miss!
The Columbia Student Investment Management Association conference in New York City was a definite highlight. Unfortunately, it was a closed session, so I can’t go into details. It was very interesting to hear from some of the best hedge fund managers such as Seth Klarman, Joel Greenblatt and Paul Hilal discuss topics such as:
- Developing an investment process
- Building an investment team
- Activist and special situations investing
- Value investing in a world of rapid technological change
The last topic – value investing in a world of rapid technological change – is something that I’ll be discussing shortly with another very special podcast guest: Jason Zweig. Jason is a Wall St Journal reporter, blogger and author of one of my favourite investment books: Your money and Your Brain.
Jason is also a keen student of Benjamin Graham, providing the updated commentary for the most recent edition of Graham’s investment classic: The Intelligent Investor. I’m looking forward to asking Jason how he thinks Graham would have met the challenge of technological change.
1) Or Blockchain. The U.S. Securities and Exchange Commission told the issuer to change the name to remove the word ‘blockchain’ amid fear that the word could make the ETF’s share prices soar. https://investorplace.com/2018/01/blockchain-etfs-blok-blcn/#.WoEXa6iWaUk