The Real Move Is From High to Low Cost Funds, Kapoor Says

Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Now, however, I'd like to go to Canal Kapoor, who is chief executive officer of morning Star, which oversees more than two billion dollars of assets and is well known for the analytics that it provides surrounding asset managers and two investors. Kunal, thank you so much for joining us. I feel like you're uniquely positioned to have a good perspective on the

shift in asset management from active to passive. Can you give me a sense from morning Stars perspective, how has this changed your business? Yeah, well, good morning, first of all, and thanks for having me join you. You're right, obviously we're seeing some season like shifts in frum says or the move from active managers two passive managers. And you know my view on this, and I think this represents a lot of you two is that while it's been cost in that fashion, the real move is from high

cost offerings to low cost offerings. And much of what you're seeing, at least in the active space today in in in what i'll call the retail area is UM you know, typical of what you saw in the institutional space over the past three decades. So at some level it was inevitable that he who were going to come down. And you know, the asset management business, if you look at the historical performance of a lot of the publicly

traded asset managers, our life has been good. You know, you've been looking at over forty percent, which in any other industry is almost unthinkable. And I think, you know, margins are probably coming down, you know, more to sort of the twenty percentage level. Uh, it's kind of more typical. So still good businesses by far um as as opposed to be in great businesses. But what I will say is, you know, for Morning Starts perspective, UM, ultimately we are

focused on serving investors and helping investors. And you know, today's investors asking for different things. They're asking more for Portola solutions, they're asking more for multi assets solutions, they're asking more for help navigating some of their regulatory challenges

that they're seeing. And I would just also just add that finally, most investors are just in a better place than they were ten fifteen years ago, given that there's more choice, given that there's little fees, given that the quality of advice is going up. So as much as things are changing, there's always plenty opportunity to help investors and you know, get them to the outcomes. Were hoping for one thing that you said what I thought was compelling.

There's a focus on low cost rather than high cost funds, and h some Bloomberg intelligence analyzes have shown that money is flowing to low cost fees UH low cost funds and out of high cost funds regardless of performance. So UH, in a period like that where there is the singular focus on low cost of funds, does morning Star find that people are less willing to pay to understand better the background of the asset manager that they're investing with because they're just going to go to an e t

F for some kind of passive fund. Anyway, I wouldn't say that the reality is even in the passive arena, the platora of options today are pretty meaningful. UM. I think you know, if in fact you're compared the number of publicly created stocks to the number of indexes that

have been created in this country, to tractors and things. UM, I think there are more than a million nexes and obviously you know, the number of public stocks is um in the thousands, and so that just kind of gives you a sense of the fact that the choices are still overwhelming, and the reality is that most investors still want help. Um, they just wanted at a lower cost.

And you know, my view here is that lower costs actually should increase interest that you know, investors maybe who had less interest in the past, and we were inclined to invest in. So for us, it's meant UM, you know, doing even more as it pertains to what we call decision outsourcing, which is where people choose to outsource the money management, and particularly in the financial advisor space, Morning starts doing more and more UM to work and help

advisors meet that need. You know, one thing you said really stands out to me at there are thousands of indexes and not as many stocks. This concerns me. Does it concern you? Yeah? I think it does I mean many ways. You know, some of us the explosion of products,

leverage products, very narrow niche indexes. It's sort of reminiscent of what you saw when you have to tech media telecom bubble, where people were just trying to find slivers and a lot of what our term is, you know, the shenanigans that went on in the mutual fund industry in the late ninety nineties and the early part of the century and then kind of got fleshed out, I think have sort of shown up in the E t F world. So there's a lot of good ets, but there's a lot of dangerous cts as well, and I

think investors obviously just need to be cautious. I also just kind of point out that m you know, inexpervitors continue to maybe on the pure data side, the prices indexing is probably so high then it needs to be intact. Morning Star has an initiative called the Open indextrog Initiatives where we've made are data indexes available at no cost and banking practises, um you know, to ask managers because we do feel like that that's an unnecessary cost that

they have to take today. No real quickly do you think that the that the shift toward passive is slowing and that the pendulum is moving a little more to active. The data does not suggest that today. It certainly seems like the momentum in passive continues to be very strong. Um But what you're seeing that I think is more heartening is that active managers are I think, more aggressively luring their fees and really thinking through how they can

more directly have a compelling offering to investors. So, at the end of the day, if you're an active fund, you do need to earn your keep, and I think what you're seeing is that more and more active funds are starting to really try to answer that question. I remember that, you know, people used to say that funds have sold and not thought. I think that that's not the case anymore. Thank you so much for joining us.

Kuna Kapoor is chief executive officer of morning Star, which is based in Chicago and oversees two hundred billion dollars. I want to bring in Doug Barthwick, Managing director and head of ex at Chapeling and Company. Doug, I appreciate

you coming on. You know, there's been a lot of focus on the dollar, which has fallen to the lowest against a comparable piers since November eighth, since the election, And there is a lot of discussion that this is the direct result, that this is basically a proxy of the U S is stock falling. I mean, if this is basically essentially the same thing and that the dollar could be treated that way, do you agree, is that

is the political turmoil really what's driving the dollar today? No, I I dis tree completely, some poor a lot of cold water on that argument. Please go on. Ever since Trump came into power, he's talked about a week dollar, and he's talked about how he's wanted a week dollar to renegotiate trading vents. For example, today there is discussion coming out of the Department where they talked about linking

currency manipulation and making a currency clause soon after. So, the president has been talking about making the US more competitive and one of the ways he wants to do that is by having a weaker dollar, and we've just seen that against surplus currencies really since he's come into into office. And so the move that we've seen today, people have talked about the shocking moves and the markets. So you know, the year, dollars up forty pits, so

that's less than half a percent. Certainly, dollar ends come off, but I think that's because it's really been very well been the last few days, and now we're sort of, uh, it's happen a little bit of a more reaction because stock and the stocks are off. Even in the stock market, you're talking about one point three pullback. But a weaker dollar has been in this administration's interest for quite some time.

He's discussed that number of times via tweets, are certainly in speeches, and so it makes sense you see the dollars start to weaken, certainly against surplus currencies, although the timing is uh, pretty uncanny. I mean, basically, as the turmoil has built, the dollar has sold off, and people are saying, and it's not just the dollar, right, You've seen yields fall and treasury prices increase, and you've seen

stocks fallen. Basically, this is the deflation of the trumsflation trade. Basically, people thinking, well, perhaps President Trump can't get his agenda through as as well as possibly we believed a couple of months ago. Do you think that that's a valid argument. No, I think that's really fitting Trump News into what people

already think about valuations. When you think of the valuations of the stock market, I think every single guest you've had on over the past two months has talked about how the U S. Stock market is very over bud

against any metric. When it comes down to the pricing in of a June hike by the Fed, I think a good number of is we're arguing that that made little sense given that the growth trajectory in the U S ins have stalled in the first quarter, and also given the inflation in taking up as much as possible. So you know, we were pricing a chance of June

hike just a couple of days ago. Certainly it's come off since then, but I think that there's been a supreme excitement or an exuberance in the fixing on market and in the equity market that is now being priced

back to more of a realistic nature. Uh just want to remind listeners that we are awaiting comments from President Trump, who will be speaking to the U. S. Coastcard Academy at their commencement ceremony in New London, Connecticut, and he is currently receiving a salute end We will bring you his comments when they come, so, Doug, how far can this dollar sell off go? At what point will it have exhausted itself? Are we back to a more realistic view of the economy and how much it can possibly

pick up? Well, I think that if we were to look at a repricing of the dollar for trade reasons, I think you're looking at move in the euro orcent move lower in the dollar now that you could see then the euro trading around at one thirty level. Remember we were at one six back and had a number

of years ago. And if the Fed was to turn around and say, you know what, we've been wanting to aggressively raise rates, but now we realize that the economy is not growing as fast as as we would expect, then I'd expected you'll start to drop in the US at the same time as the e c D. It's talking about removing the um accommodation, its support from both sides.

So in other words, you're saying that you could see the euro increase by twenty versus the dollar, or if you want to look at the flip side of the euro, the US dollar could uh decline or depreciate another twenty percent versus the euro in that situation, Yeah, I think that would make absolute time chap. That's that's pretty fascinating. Basically, you're saying that people ratchet back their expectations for growth in the US just as Europe continues to gain speed

and possibly starts to extricate itself from its stimulus program. Certainly, but the number of international organizations that have also said that the US dollar right now has been training around, has been over valued. When you look at the Treasury Secretary comments, he's talked about certainly a strong dollars in US interest but that's in the long term and the

short term. He said that it is not necessarily in the US interests, and and there's also been discusnment how it's not that the US dollars is strong, it's just other currencis of being a little bit too weak. And so we think that the tide is certainly on the move for a weaker dollar, and we think that that's

what we're seeing right now. So how much can the weaker dollar lead to stronger emerging markets because we've been talking a lot about developing markets and whether the rally in both the currencies as well as the stocks and bonds have has gone too far, and I have to wonder, you know, if the US is slowing down or certainly not as robust as people had expected, then wouldn't that

eventually be in negative for emerging markets? Well, well, there's the flip side there that then a strong dollar is negative for emerging markets because the emerging markets issue a lot of their debt and dollars. As the dollar gets too strong, emerging markets can't afford to pay back their debt and so they run into extreme difficulties that you

saw in the agent crisis. Now on the other side, if the dollar starts to weaken, then the emerging markets actually start to strengthen versus the dollar, and that's actually quite positive for them because obviously the dollar debt becomes more manageable for them. And you're already seeing you know, you see witness in the US equity market today and you see dollar max move lower, the mexing pace was rallying today as opposed to weakening. Then that sort of

tells us is more of a dollar move than anything else. So, Doug, do you think that we've seen full capitulation for all the dollar bowls that we're heading into this year full on expecting the dollar just to rally. You know, there's been i'd say over the last three months, you've seen people throw in the towel and their parity comments that they always expected that you're to go to parity. Uh so,

certainly the twell has been thrown in there. You're seeing now a lot of funds that our momentum followers start to go along to euros, supposed to short the euro. And I think that if you look at the futures now you have guys going long euros and s puch a short year. So I think that's certainly the trade is now. It was very overcrowded to be short to euro. I think it's now starting the markets getting more comfortable being long euros and being short to dollar. And I

think that's going to continue. You know. I gotta say, Doug, it's really interesting to me to watch these moves and people saying it's all because of the turmoil in Washington, and part of it is that we're not getting new data. We're just sort of, you know, facing the facts a

little bit more. I understand what you're saying that basically this isn't uh, this isn't the turmoil in Washington bleeding into markets, but to some degree, Uh, it's sort of forcing people to at least face the data that's coming out that might not support the same kind of refleation. No, Look, the turmoil in Washington was really affecting the data that I don't think you see stock markets just off their highs and that that's really where we are right now.

So I think there's turmoil in Washington and that creates a very full news cycle, but I'm not sure that that's been bleeding into equity markets or into think or eating currency markets quite as much as it's bleeding into the news cycle and taking up the newspapers. So which cross are you watching the most carefully? I'm looking at, Uh, I'm looking at the end that the new Haven right, which is up more than one and a half percent today. What are you looking at? Yeah? I think Dalian is

very important one to look at. But really, any any currency that has a surf plus versus the US is one that I would expect to see more strengthened. And so Europe had the surplus for Germany for sure, Japan does, Canada does. In Mexico and you're seeing dollar mex continue to move lower. You're seeing dollar cat continue to move lower, do Euro move higher and Dolly move lower? And I think we're continuously moves like that. Thank you so much

for joining us. Doug Barthwick, Managing Director and head of f X at Chack Delane and Company, commenting on the decline that we've seen in the dollar. It's been the biggest three day move in a couple of months, and you are seeing the lowest levels since the November election. We want to take a moment to let you know

about something new from Bloomberg. Starting right now, you can use our io s app or our new Google Chrome extension to scan any news story on any website, instantly revealing relevant news and market data from Bloomberg and other sources related to the companies and people you read about. So no matter where you're reading the news, you can bring the power of Bloomberg's news and data with you.

It's pretty amazing. Download our Io s app or search for the Bloomberg extension on the Chrome Store to try it out. Learn more at Bloomberg dot com slash lens. Well, there has been a lot of discussion since well, frankly over the past week about at what point the allegations against President Trump rise to an impeachable defense? With us to give us more perspective on what the standard is, I want to bring in Andrew Martin, who's legal editor for Bloomberg News, who joins us here in our Bloomberg

eleven three oh studios. Andrew, thank you so much for joining us. So let's just first get in there with what is an impeachable offense? And at what point does anything that President Trump is has alleged has allegedly done rises at I mean, frankly, I've had so many competing essays by different legal scholars saying it does, it doesn't. Where do you where do you weigh in on this? Well? Um, there is widespread disagreement. Let's start with whether or not

there was a crime committed. Um, and I think um, the issue there is to prove that there was an obstruction of justice charge. They have to prove that he had corrupt intent. Let's just let's just be clear obstruction of justice by trying to encourage trying to encourage former FBI director Jim Comey to not investigate uh, Michael Flynn

or anything else related to rush correct exactly? You know, this this story that emerged yesterday that that Comy kept notes of his conversations and in those notes he said Trump asked him to stop the investigation of Flynn. UM, you know, to prove that that's actually abstruction, an obstruction of justice criminal charge, UM, prosecutors would have to show that that Trump had an intent to a corrupt intent. In other words, he was trying to protect himself. And

that's a very high bar. UM. You know, you could argue some some have argued that his previous uh tweets, his firing of Comy, would would would add to that. But UM, it's a difficult thing. You basically have to get inside Trump's head. And while he's provided some of that through his tweets. UM. I think a number of legal scholars have said, what what's available now, UM isn't enough to rise to that level. Now. Impeachment is a different thing altogether. UM, there's a lesser standard for um.

What it takes to impeach and presidents. Um, it's high crimes and misdemeanors. And ultimately what that means is whatever Congress decides it means. So UM, you know, UM, it's it's it's it's part judicial part political UM, and the fact that now there's a Republican Congress suggests, UM, the bar would be extremely high unless public opinion changes to such degree. Have to change a lot, have to change

a lot. Now, you know, at the midterm elections, if the House of Representatives, uh, if the political makeup change, that would you know, you know the likelihood of an impeachment charge would would increase as well. But UM again UM, you know, high crimes and misdemeanors is vaguely worded. UM. So it ultimately, UM is up to Congress to decide what exactly that means. You know, the news cycle is moving so quickly that we've moved on to the memos

that for me. FBI Director James Comey wrote before we fully hushed out the alleged league that President Trump right, it does that basically that there was the allegation that President Trump gave information to the Russian Foreign Ministry in his meeting with him. Uh that could potentially compromise a key person of intelligence that gives intelligence to the U S and a key cooperator which also was allegedly UH

from Israel. It's hard to keep up with all of this. Um, could anything in there fall into an impeachable offense or something that could be criminal. Even if indeed President Trump compromised an intelligence that's certainly not criminal because as I understand that the president has the right to declassify information as he likes. Now, UM, you know, I think that the founders UM didn't sort of anticipate somebody doing it

just by mistake or just sort of bragging about something. Um. Although we again we don't know what the president's intent was and divulging this information, but again he has the authority. Did he classified whatever he wants? So UM, definitely not a crime. But again in terms of impeachment, UM, if there was a decision that he endangered American interests, that he endangered a key source, UM, I would think that

could be part of an impeachment. Again, it's up to Congress to decide how to how to frame those charges if they were to proceed. Is there anything that a president could do that would force impeachment on a faster timetable away from the political process, Well, UM, yes, UM, I think if there are clear evidence of crimes committed, as there was in Watergate, for instance, UM, I think that would definitely UM speed up any kind of impeachment process.

You remember, I mean there has been all kinds of UM comparisons here to Watergate and and Nixon and the smoking Gun memo, which I wrote about yesterday, which is by the way, fascinating reading UM in the in the

current context. You know, the distinction here is UM. By the time uh, you know, impeachment proceedings were begun against Nixon, you know, there are actual crimes that were covered up in the background, and and as of now, you know, you could argue that um, Trump has has his behavior has been a radic or or that he's made some you know, incredible mistakes or whatever. UM. But as far as we know, there hasn't a crime, even even in

the Russian investigation. You know, UM, we have no idea if there's crimes committed and um as uh you know, again, as you point out early, I've read so much I forget where I read this. But even if UM, Michael Flynn didn't register as a foreign agent, which is uh uh you know, a crime, I mean, it hardly rises to the level of impeachment of the president. I think.

So well, just to sort of give a quick refresh, or what was the crime and Watergate, Well, there was a bunch of crimes on water but one was you know, they broke into burglars sent by presidents paid by the president's reelection committee, broke into Democratic National headquarters. Um. And then you know, the real crime was the cover up that followed. UM. So UM. Yeah, I mean it's just as interesting sort of look back, but I think that it's important to sort of recognize that there hasn't really

been a crime here. So any kind of negotiation over impeachment of discussions over that really are more political than anything else right now. So far, and again, you know, for all the fascination with this Russia investigation, and it is fascinating, Um, there's so many questions that are unanswered about it, um, particularly at you know, at what level if any um Trump's um associates, you know, coordinated with Russia.

We have no idea. UM. And again with the exception of the fact that Michael Flynn did not register as a foreign agent. UM. You know, he hasn't been charged for that. So UM. Right now, there's there's no crimes and there may be none beyond that. So UM. Anyway, I have a feeling that we're going to be talking more about this. And I have a feeling that this is not an issue that's going to be going away anytime to you know, twenty four hours from now, things

can be entirely different. We have no ideas. I have a feeling that they will be. Andrew Martin, thank you so much for joining us. Andrew Martin is legal editor for Bloomberg. Talking about the legal standards UH that a president's actions would have to rise to to merrit either impeachment or conviction of a crime. And right now, as we were saying, President Trump's actions are not criminal, UH, at least in any way that people are currently aware of. UH.

And so it makes impeachment that much more political. Right now, I am pleased to bring in Serena us a theory of Vedantah. He is director of research at the Jerome Levi Forecasting Center. UH. And you have come out with a recent forecast that I thought was very compelling talking about how despite all of the turmoil that we talked about incessantly, the outlook for the U. S economy has actually gotten much clear. Can you explain, yeah, thank you.

These You know, if you if you circle back immediately after the election, you know, the big thing was one of the policy changes that are going to be there. You know, there was trade policy, that is tax policy, there is infrastructure, you know, everything was up in there, and how much was going to happen in two thousand seventeen. Um, what's become clearer now is that much of trade policy is uh, it's it's it's shelf for now, at least,

I mean something really disruptive. You can have moderate ones um. And there is not going to be any real tax policy that's going to be done this year that's going to take effect this year. Um, most likely something will at the best we'll get some tax reform or a tax package later in the year that will start taking effect from two thousand eighteen. So, in so far as two thousand seventeen outlook is concerned, you know, we have

some clarity in that regard. There is still a slim chance that we might pass something in the middle of the year that takes effect with retroactive effect, but very very unlikely. So in other words, you're basically edifying this idea that the trumpflation trade is over, that the Trump pump should probably disappear, And then the question is what

should markets look like without these inflated expectations. Well, you know, there's still the possibility that they will pass tax cuts for two eighteen, but I think it's a narrow range um, and you thought that it was not that big of a tax cut. In other words, the prediction, and I believe your your prediction was one that is that's right, not some of the much higher, not much higher numbers

that we were being bandied around. That is absolutely right. So, but that will still be a help and maybe the economy starts to look a little saggy. You know, a hullion dollars will be certainly of some help. So, but I thought it was interesting also in the outlook that you talk about emerging markets, equities and credit and you talk about how that looks overblown. Well, you know, the credit part of it certainly looks overblown. But that's what

is happening. In the fixed income world. What you're seeing is because the yields are so low in the developerl there is still enormous pressure to searching. When things look relatively stable and tranquil, people come out of their foxhols and they're looking for yields um. The equity world, on the other hand, is slightly different because the returns in the US have been pretty good. I don't think there's still such a clamor to move to the emerging markets.

So what you see is a big disconnect between if you look at the e M high yield with respect to US HIG yield, you know, the spreads have narrow dramatically, but ems in relative to SMP have not rallied that dramatically, you know, So there's still I've actually been struggling with this idea. So and I was reading through your forecast and you said that your treasury holdings are currently about half of what they were before the election, and you're

going to maintain them at that level. And otherwards the expectation that yields will continue to rise. Uh if the if the idea is that inflation is not going to pick up meaningfully compared to where it was expected to. Uh, you know a couple of months ago, why wouldn't e M continue to rally That it's the same kind of low rate environment that would drive people back into EM. Absolutely, there are there are two things that are that are driving the e M. One is well, the trumflation is gone.

There is still the sense that e M s are in the midst of reflation, you know, so there are and of course the dollar and the FT, I mean the dollar weakness in the FED is also helping. So what is a financial aspect of it and and the flows coming into em. The other is the economic angle, which is that e M s are okay, e M s are out of the woods and they're coming back. That part of it is going to be disabused, that notion that there is a sustained them recovery going on.

In other words, they're not out of the woods. They're not recovering so quickly. Yeah, people are perhaps a little too optimistic developing markets, which markets in particularly talking about the MS outside of China because China so much of it is depends on their own policy. But the MS outside of China are just being being driven by the

events in the rest of the world. In particular, there's a global inventory cycle that that that we had from late last year and to the big beginning of this year that is helping the e M s. So can you explain so, So, if you look at last year the global inventories coming into two thousands sixteen, there was a moderate liquidation um and from the middle of last year they started building up, especially the US but also Ena.

So the building up of inventories by the U, S and China was trigger a global inventory up cycle intert stuff of everything E. And the more that they build up, the less they'll have to import later, that is right, that is later. And and because this is not a sustained inventory cycle, beven not. We didn't have a severe liquidation like like like from a recession. So you know,

it's more or less done. You can see it already in the SM trending down in the US, and and the regional freed manufacturings which are you know even more timely they're coming down, uh, and freight indicators you know, the railroads. So but this will all the idea being that this will all kind of feed into emerging markets because the developed markets will be importing less as their inventories.

That is fascinating perspective. Thank you so much for coming in screen of us theory of a Dan three yes, thank you, yes, as the director of research of the Jerome Levi Forecasting Center joining us here in our Bloomberg eleven three oh studios talking about how the economic out look for the US hasn't changed all that might much despite all the drama that we have been hearing about in Washington, d C. 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