It’s Too Late For Smaller Asset Managers To Scale Up

one after another after another. The latest UBS is looking to possibly buy another asset manager, either in the US or Europe in order to get scale. And this raises a question what is the right size for an asset manager in two And we have someone who's going to answer that question with precision. Eric Baltunis has the answer. He has all the answers. He's been predicting this for a while. Eric a senior et f analyst for Bloomberg Intelligence. So Eric, what do you make of this UBS announcement

and how big is the right size? Uh? Well, look, this is not a surprise to me, and I'm not sure that the right size the way I've always seen it is. Look, I mean, the data is there of the net cash that's invested in funds goes to products that charge less than twenty basis points UM, and that goes to less than ten So who's holding those funds is Vangarden black Rock. They're taking in two thirds of all net dollars invested in the United States. So this

is only going to get bigger. The reason hasn't been bigger yet is the market performance growth has built the assets up of some of these people who have seen organic outflows. But I would imagine after a bear market, you could be looking at something more kin to the airlines. You know how there's like three big airlines that control about of the market, and then you have UM, you know, smaller airlines like Alaska Air or something that does local trips,

something more exotic. I wouldn't be surprised if you see the middle just clear out and get consolidated. So just like other things that grow big, right other industries, Uh, there's three or four big ones, and then there's a lot of little ones that do specialty things. In that case, I think UM quants, hedge funds, alternatives. Uh, there's this

emerging market specialists UM. And we were actually talking to John Bogel for the podcast we do called trillions shameless plug um And he said, actually, consolidation is probably gonna happen,

but it won't be enough. He thinks a lot of these firms are going to have to convert to Vanguard's mutual ownership structure to survive, because and I'll tell you, even some of these ones that do consolidate and lower their fees, it's almost feels too late, you can tell, because the flows still are largely going to two companies, black Rock and Vanguard, even if another firm might go a little cheaper. Eric, is this a race to the bottom. Yeah,

and we're here. I mean Fidelity wanted, which is ironic because Fidelity they offered, they offered that. That was why that was such a Yeah, Fidelity an ounce that they're going to offer index mutual funds for a fee of zero. Now keep in mind they already had index mutual funds that charged one point five basis points. So it's a formality really, but the symbolism of going to zero, it was it was almost like a climax. We've been building up to this point for fifteen years and now we're here.

But let's face it, you can get a whole portfolio of everything you want for a combined fee of under five basis points at this point, so it's already basically free and that's where all the money goes. So you said that for big asset managers that just now are trying to really plow in and compete with the black Rocks, uh and the Van Guards, it's too late. What does that mean? Does that mean that they're going to be acquired, go out of business? You know, I don't know, probably acquired,

probably merged with other companies. I think. You look at Investco, they've been doing a lot of acquisitions. It has brought them up to Oppenheimer Appenheimer UM. But the active mutual fund space is alive and well remember active mutual funds have two thirds more as sets then passive. The reason, though, is not the problem is organic growth, market returns. The markets of what in five years, so all the assets have more than doubled for these active mutual funds. So

they're getting paid. You know, the revenue is great right now. What these people are starting to see is the writing on the wall. If the market stops being a money printing machine for you is an active mutual fund and you're down to organic growth, you're in trouble because there is no organic growth. Plus you're probably gonna have panicked

investors pulling out anyway. So I think that's sort of what they're trying to prepare for, is when a bear market or a market that's more flat makes organic growth more of a big deal. They're like, well, we're in big trouble there because really only two or three firms taken all the money. What are we gonna do? And I think that's where you have them trying to figure out what it's going to look like. Eric. Does this then create a situation where the companies behind these ets,

whether it's Vanguard or Black Croc, they become utilities. Yes, some people have talked about that. Someone actually had said that the government long time ago, should it just come out with a couple index funds for the regular public and just charge nothing. Vanguard kind of did it for him. Vanguard. Look, Vanguard is kind of utility. We gotta remember, Vanguard is owned by the investors. It's like a co op. It

is a it is a whole different animal. Credit union. Yes, it's like a credit union, and so it doesn't have a profit motive. So it is almost like a utility. And Vanguard takes in the most money of any asset manager every year, uh, you know, for the past five years. So it is affecting the other companies. That's why I called it the Vanguard effect is the real story. Vanguard's a story, but the real story is the effect that's

having on everyone else. Okay, but not all markets are investible through index funds, and that's what we're seeing with PIMCO and other big gas managers trying to get more into direct lending and alternative credit, alternative credit and equities and other strategies. And I'm just wondering, I mean, is that the future, especially given the fact that the private markets have been growing much more quickly than the public markets. Yeah,

it could be. However, I have noticed this trend, and because i've especially in the fund world, there are places Vanguard doesn't have a fund. What you've seen, though, is people copy them. I call it they you know, like this, like Goldman Vanguarded Factor Investing. They came out with an et F form nine basis points. Now Vanguard was nowhere to be found. They just saw what Vanguard was doing

copy them. So I would not be surprised if you see people vanguarding private equity vanguarding hedge funds, but how do you how do you vanguard a strategy that owns a liquid stuff. Well, you just charged less for the exposure. So let's say you're a private equity fund. You could just charge half of what people are charging on the market. And you're realizing that you're tapping into this cost obsession,

which isn't just for index funds. Advisors are feeling cost obsession to the biggest trend of our day is high cost to low cost. Active to passive is debatable. There are other trends that you see, you know us from merging markets. High cost to low cost seems to be the thread that that combines everything, and I do think

you'll hedge funds are already under pressure. Some of them have already started doing fee rebates, offering it for free because the Vanguard effect goes beyond what Vanguard even offers. Just go ahead, give a ten second shameless plug for Trillions. Trillions is a podcast to deal with Joe Webber, the editor of Business Week. It's on E t f s and it's aimed at the regular retail investor. We try to simplify and make this stuff fun trillions. It's a

great podcast. Thanks very much. Eric Baucun is our senior et F analyst for Bloomberg Intelligence, and you can follow Eric on Twitter as we all do at Eric Baltunas. Our topic now is Facebook, with the shares up a little bit more than five per cent. Our guest is Mark Douglass. He is the chief executive of steel House. Steelhouse is an artificial intelligence driven self service advertising software company. We're gonna find out what that is after he tells

us all about Facebook, which is an advertising company. What did you make of the results? More? Um, I think that I'm surprised, let me say a different surprise of stock is up so much. But I think that people were very worried about Facebook engagement is really down. But Instagram is just doing phenomenally well right now, and that's that. I think that's what everyone's excited about. Well, let's home in on exactly what you started with that you're surprised

that the shares are up as much as they are. Why. I mean, you just look at your friends, you look at your own usage. I just don't see people using Facebook as much as they used to and So the core Facebook platform seems to be declining, and I think investors are basically overlooking that because of the excitement around around Instagram. But I think that excitement is well warranted, but it seems slightly premature. Why is there such a

popularity for Instagram? Do you believe, Well, Instagram, it's all about stories. Facebook basically copied stories from Snapchat and Stories just to make sure it's clear, is just basically streaming your life just wherever you go, whatever you do. Last night alone, that made five five Instagram stories while it was out, and stories are really popular and engagement on them, meaning how much time people spending you doing it, is just phenomenal. And so there's a lot of excitement about

how that's essentially going to rescue Facebook. Let's talk about the idea that Instagram is growing rapidly and really is the heart of Facebook at this point, whereas Facebook is losing users. You know that my children do not use Facebook, and you know they do use Instagram. I'm just wondering, is the valuation of Facebook appropriate given the fact that

its future is Instagram and not Facebook. Yeah, and I think the um investors are betting that that Facebook will figure out how to monetize, how to advertise against Instagram stories. I think that's a good bet. I think, frankly, Facebook is kind of sandbagging how easy it's going to be to to advertise against stories or to increase the average sizing on stories. So investors are excited about it. I think consumers excited about the feature. Investors are excited about

the money and so. And the money is going, it's going to follow. It's over a billion users. And we say engagement. I'm talking hours a day people spending on Instagram. A lot of people are spending on Instagram. Now, the Instagram story can be tied this to the fashion industry. Um, Instagram stories are popular with fashion, but more importantly that just popular. No, I understand, But I'm trying to figure out how do they make money? Well, within the stories,

some of the stories or ads. You click on a lot of those ads, Um, you swipe up on them. Yeah, and it's about discovery. You see products you might not have noticed before. Um, you see you're basically discovering new products. And there's actually a lot of interesting things in there. I have to wonder you talk about hours spent on Instagram. We're already talking about the use of data and addiction to technology. When with respect to Facebook and Twitter, what

about Instagram? I mean, how concerned are you about some kind of backlash that could reduce growth materially. Well, here, here's actually bring up an interesting point in terms of data. They answer to questions. So one is Instagram doesn't have the data that Facebook has. You don't write on Instagram, you only post, you post photos, you post videos. There's not a lot of data associated with that. On Facebook, you actually can type, and so they learn a lot

about you. But the the the the engagement, meaning how much time people are spending, seems to overcome how little data is on Instagram for consumers concerned about data, it's actually a good thing. Well except that there's facial recognition, their ways to sort of use images as data. Yeah, I mean they can tell who you're you're in a photo with for sure, they have over two billion people in their database. But the if you wanna you know,

they have to guess. More like, if you want to go after motorcycle enthusiasts, you have to just notice that they can have algorithms that know this. There is a motorcycle in the photo, it's not like you're typing the word motorcycle is just not happening on Instagram. It's different, but the the user engagement is just so much higher. So if someone were to come to you and say, oh, I have a hundred thousand Instagram followers, that's a good thing. Um,

that is a good thing. But it's that that's different. Like in other words, their bloggers who have audiences, they'll send out a post and they will attract interests. I don't think that's where the real money is being spent. There's just not enough volume there. The real volume is just within the stories. If I posted five stories last night alone too, so far today Facebook can throw one

or two ads between my stories because the content is free. Yeah, the content is free to Facebook, and the more content, the more ads they can run. Although I have to wonder because with respect to Facebook, one reason why people liked it so much was why advertisers liked it so much was the data they could understand how to pinpoint consumers based on their interests. How does that equation change if the data isn't as easily accessible in Instagram? Yeah,

so what likely is what's likely happened? Now, let's go to advertising, which is a business. I know, well, if the quality of the data is lower, chances are the ad rates are lower. So to make up for that, they make up literally make up for it in volume all the people posting stories. They'll be there's more volume to monetize, but probably at lower rates. And that's the case right now. The rates on Instagram are a bit

lower than they are on Facebook. As an expert in the world of advertising, could we just shift to Google and alphabet for just a moment. I want to get your thoughts on YouTube and being able to turn that into an ad sponsored moneymaker. Yeah, I mean, I'm not personally bullish on YouTube. I don't see um a lot of advertising demand on YouTube from our customers. Our customers are a lot of large hundreds and hundreds of large retailers. UM YouTube is kind of sitting out in the middle

of nowhere. Right now. You have connected television for monetizing TV digitally, and now you have social to monetize. You know, we were just talking about Instagram. YouTube is neither of those, and it doesn't have a lot of data, and it's kind of I don't I don't see a lot of growth from YouTube as they exist right now. Just real quick here, do you see regulatory headwinds for UH for Instagram or do you think that they're much less because of the data component here? Um, I don't see much

regulatory um headwinds for either Instagram or Facebook. I think GDPR, which is the Global Privacy loil the EU is kind of the gold standard for privacy laws. It's relatively strict, and the companies are already figuring out how they accommodate it. I don't see more anything stricter than that coming in the United States, So I think it's already priced in. I think it's already been dealt with and and consumers

are also pretty blind to this stuff. You know, once you get these laws that go so far, consumers at a certain point don't care. At the end of the day, consumers are dumb. Him that seems to be the Well, that's just play. That's not what he's saying. I'm absolutely butchering it. Happy Halloween. Mark Douglas, chief executive of Steelhouse

talking about advertising. He was not saying that consumers are dumb, just that people are willing to give up their freedom with respect to being tracked in order for free access to all of these social media websites. That's absolutely a fair exchange. I'm Lisa Brownwood's butchering comments and this is pim Fox and this is Bloomberg. The topic now is

China and it's slowing economy. Here to tell us all about it is Michael Mike McDonough, chief economist Financial Products for Bloomberg LP, and he joins us here in studio. All right, Mr mc on a, how bad is it in China. It's it's worse than I think the government officials had been anticipating, but it's not not necessarily because of the trade war. I think that's the important thing

that the distinction here really. Um, what you had happened was you had the government undertaking a deleveraging agenda, which was on the surface working fairly well. You had some debt ratios going down, interest coverage was going up. But the problem was, Uh, the parts of the economy that really needed funding that would help boost growth, we're having issues getting it, primarily because these guys were being funded by the shadow banking sector, which took the brunt of

the deleveraging agenda. And meanwhile, UM, areas of the economy that we're a little less productive, but still needed still needed debt to roll over their old their old debt, we're getting it. So what this cause was a sharper slowdown than people had been anticipating. And then you throw on top of that what's happening with the trade war, which hasn't really bit yet, will really start biting in

twenty nine, Tina, and it's a problem. Well, okay, But then I guess this raise is a really important question because this morning we're getting news that China is considering adding even more stimulus, and we have seen signs that they are re leveraging in order to stave off some of the declines and the weakness that we've been reporting on.

My question is if they saw deleveraging is so important that they actually went ahead with it, even though they knew it was going to slow the economy, what is the consequence going to be of them adding more debt

to the already chinormous debt pile that China has. Well, if your choices continue deleveraging and have growth slow more meaningfully than you wanted to and far further below the official government target or stability, with some leverage at least short term, you're gonna go with stability, right, So I think you're certainly going to see more action from the government to spur growth. I think that some of it, a lot of it will be through um spurring infrastructure

investment in some smaller cities. They need it, you know, they there we Yeah, actually if it needs to be very targeted. But if you think about it, you know, China's urbanization rate is about if you look at most developed countries, it's closer to so there is more room, but it needs to be done smartly, right. I think

what caused the problem with the debt. The thing that really catalyzed it was during the two thousand and eight financial crisis when the government did a pretty big stimulus package, and that stimulus package was distributed through a broken capital transmission mechanism. So what that meant was and really short banks were guaranteed a three hundred basis points spread no matter who they lent to. So basically large s o

s who didn't need money got it. Uh this late they don't enterprises, yes, uh, And this led to help fuel the overcapacity that we saw. The real estate sector was helped immensely. Uh. This led to the overcapacity on that side of things. So it's it's more they've they've done a lot to modernize the financial sector since then. It's not done, but they've done a lot, so it's not as broken. So it's trying to get the funds

to the right areas. And I think another thing they want to do, as I mentioned, the sectors that really would would be boosting growth are are some of the private sectors and technology, healthcare, some of the consumer stuff. So trying to get those companies funds. Uh. So it's a balancing act. But the deleveraging agenda is shelves for

now for sure. I think that's gone for the time being. Um. And you know, one thing to keep in mind, we may get a little bit of a false positive on China growth because you could see exports surprised to the upside again before the end of the year because if you look at what tariffs are in place now versus what could be in place next year, it goes up pretty substantially. So people want to front run that. You know, people want to buy Chinese products now before the cost

goes up. So um, that's why I say you might not really see the bite until twenty nineteen, So that's something they want to They're gonna want to get ahead of the real risk though, if if you want to be worried, is what's going to happen with capital flows? Um, there's there's a lot of debt that needs to be

rolled over in China. So if you start seeing like you did in strong out capital outflows from China, that could be rather dangerous, and that is certainly something the government is going to be keeping an eye on and try to get ahead of. Here's a quote from the economics professor who oversees a survey that is sort of like our p m I survey in China. The quote is, foremost business has never been worse. What do you make

of that? And if you are predisposed to invest in China, isn't it better to invest now than it was a year ago? Well? I think that, you know, like I said, that de leveraging agenda has hurt a lot of companies ability to uh raise funds and it's also made it more costly. So if you're running a business that's certainly isn't great. Uh, it's better if you're an s OE

for for for state and enterprise for certain reasons. And then if you look at the current outlook, right, you have the US threatening wider tariffs, uh you know, and you you you you not sure what's going to happen with this whole U. S. China relations, which is one of the most you know, the most important bilateral relationship in the world world. Right now, that gives you a lot of uncertainty because you're also seeing consumer spending slowing a bit in China, right This isn't just weakness in

one isolated area. It's a slowdown, you know, broadly speaking across the economy. So I could see why people might be pessimistic in China US with especially with the added uncertainty of what happens with those US China relations. And of course, just sort of speaking to your point about the concern about capital outflows, We're looking at the U n which is currently the weakest versus the dollar since

two thousand and eight. So this is sort of the concern, right, is that the more people withdraw money from the economy, the weaker the currency, which just escalates from the problems. Mike, We're gonna have to have you back, because it's always incible to speak with you, Mike, McDonald, chief economist for financial Products at Bloomberg LP here with us talking about

China's planned additional stimulus really interesting. At short run, it makes a lot of sense for China to be adding stimulus, but in the long run they still have to deal with that debt overhang. General Motors reported earnings this morning that we're better than expected, shares popping by more than seven percent. But the question is what can we expect later in the week when we get US auto sales which are expected to slip into negative territory for the year.

Joining us now to talk about that as Alan Baum his principle of Bauman Associates in West Bloomfield, Michigan, and Alan, thank you so much for joining us. So how much of the bad news is already baked in to the auto sector. Well, I think that what we're going to see going forward um is a decline on the macro side, if you will. Obviously, we've got problems in the overall market in both UH the North American and Chinese markets, and so GM's results today, we're in fact kind of

a tale of two cities. And what I mean by that is they controlled what they could control very well. That their own business. But as I say, the piece going forward is is more difficult. Alan this is because GM is what selling trucks and sport utility vehicles and those are higher margin products. Yes, and it goes beyond that. They're holding incentives UH in line. UH their inventory of product is low, which obviously helps in terms of the incentives.

But they're going to changeover right now to their new pickups, which obviously are are profitable. But what they've done is they've they've kept the loss of product to a minimum by because of their multiple plants, they can keep producing some of the old while producing the new and and UH not having the tremendous drop in volume. Because of course revenue is what keeps them them moving forward, and they were able to do that to keep that from

declining dramatically. So he's done an excellent job. And of course a few minutes ago they it just came out that they're announcing buyout of their UH salary staff, so they're obviously looking to keep expenses in line as well. So and all around positive report for them. We are not all around. It is a tale of two cities, but they seem to be bearing with the decline in auto sales. This here better than some of its peers.

What are you going to be looking for given the sort of diverging market, with truck still being hot and sedan's not. What are you looking for in tomorrow's auto sales numbers? Well, I think we'll have a drop, and the drop is somewhat misleading because we had a year ago we still had recovery from from hurricane sales. Um. But it is a decline we are seeing. Uh. The retail sales are holding on reasonably well, although in the new year I expect that to decline as well. We've

obviously got increasing uh interest rates. We've got to decline from the impact of the tax cut, which I would argue was still pretty modest with respect to the auto market. And the auto market has been declining the last couple of years, not terribly by any means, but it's been ahead of the economy. In other words, the economy has done better uh than the auto market. Um. But the automakers have done a good job, as I say, of holding the the cutting of holding the incentives off, which

would would cut into profits. That's gonna obviously get harder as volumes decline. What do you see for the future of GM's Cadillac brand in China. They've done reason that they've done very well actually um but again and they certainly have done better than than Lincoln UM and uh starting to catch up to the Germans, who have a

very strong position in China. The obvious problem is if there's an overall decline in the Chinese market, which is we're expecting, does it affect the high end or is it more at the uh, the broader, lower cost part of the market. Uh. Again, it's it's such a competitive market at the high end. As I say, cadillacts a good job, but it's gonna be hard to keep that

going at the same rate. So, Ellen, I'm wondering. A lot of people are talking about how the more that the Federal Reserve raises interest rates, the more challenging challenging it's going to become for US automakers. What's your take on that. Basically, the idea that it's going to get more expensive for people to finance their auto purchases. Well,

and that's obviously true. And and the other problem, of course, UH, is that who buys new cars um and and and generally it's the upper middle class and the and and rich richer people. UH. That is by design of the automakers. The automakers are thrilled with that because they can sell higher end products, which are of course more profitable. The good news with respect to interest rates is those people are less affected by the increase in interest rates because

of course they have the higher income. Of The bad news is there's a limit on how how many cars

those that part of the market will buy. Alan is there a limit on the average selling price of a vehicle right now it's about thirty six thousand dollars for the quarter for you know, automobiles like the Chevy Tahoe and and of course that's because of the swing towards UH pick up UH crossovers, even in the in the luxury segment, because crossovers are of course across the board, but increasing throughout the market, including high end and sport

utilities to a lesser degree. Um. The decline in car sales is of course the key UH air indicator of why the those numbers are going up. And as I say, the automakers are certainly on board with that. Again, we get to this point where the the mountain up demand has certainly been satiated because it was two thousand nine when we boughtom there uh, and we've had a long time since then. So it will be increasingly difficult to overcome that macro impact as the market as a whole

starts to trend down. Thanks very much, Alan Baum, auto analyst principle at Bauman Associates. Shares of general motors. They are higher right now by seven and a half percent. You're listening to Bloomberg Markets. Thanks for listening to the Bloomberg P and L podcast. You can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo. It's one before the podcast.

You can always catch us worldwide on Bloomberg Radio.