Bloomberg Audio Studios, podcasts, radio news. This is Masters in Business with Barry Ritholts on Bloomberg Radio.
This week on the podcast, I have yet another extra special guest. Zach Buckwold is chairman and chief executive officer at Russell Investments. They run about three hundred and seventy billion dollars. I found this to be a fascinating conversation. Russell has been at the forefront of a number of really interesting innovations indexing and outsourced CIO and smart beta. They were way ahead of the rest of the investment world.
Now they're putting together really interesting active portfolios, including private investments. They work with both wealth clients as well as institutions. You may not know Zach's name, but he's got an appolutely fascinating background at Blackrock, Morgan Stanley and Lehman Brothers. I thought this conversation was fascinating, and I think you will also with no further ado, my conversation with Russell Investments Zach Buckwald. Zach Buckwald, Welcome to Bloomberg.
Delighted to be here, Barry, thanks for having.
Me, Thank you so much for joining us. I spoke to your predecessor about three years ago, right after the pandemic. But let's start talking a little bit about your background. Undergraduate bachelor's degree at Harvard, what were you studying.
I studied English, So this was not on the docket that I was going to have a career in finance.
Not the plan. Huh. So you come out of school in ninety six, what was your first gig?
So out of school, I applied to law school, not sort of knowing where I was going, and I decided to have a little break before I went back to school, and I got recruited by Lehman Brothers. So I spent two years working in structured finance at Lehman Brothers.
And it became apparent to me right away. I didn't want to become.
A corporate lawyer because I worked with lawyers and that was that was not the job for me.
But I had a knack for it. I enjoyed it.
I always liked math, even though I was an English major. And you know, you can find other ways to put your writing and your reading acumen to work as well.
And I'm going to say late nineteen nineties, nobody had any clue what was coming. A decade later.
Not at all. Now.
Lehman Brothers was a great place to start my career, but after two years I went to Morgan Stanley and that that's how I think of the beginning of my career because I spent ten years at Morgan Stanley. I was very invested in the firm and the firm was
invested in me. I learned about, you know, the capital markets top to bottom, and I had a career there that took me from you know, from a starting associate role to running a business that became a CLO business, which now is like a real, you know, really important part of capital markets.
What were your titles there? What'd you do there?
Yeah?
Well, I started as an associate with within fixed income. I you know, I was in sales, I was in trading, I was in structuring. I always worked within the credit derivative space, and then ultimately credit derivative started getting wrapped up in different ways and I worked on the COLO platform, and Morgan Stanley had a leading COLO platform that by the end of my time there, I ran. And that was about you know, I think about the role that clos play in the you know, in the in the
markets today. It's an enormous origination function that helps you know, finance a lot of corporate America.
John Mack was CEO at the time. Is that right?
So I was there for Phil Purcell and I was there for John Mack.
Wow, those are two legends in the industry. What inspired you to head over to Blackrock?
I went to Blackrock with the guy that I was working for at Morgan Stanley, and we created a business that was essentially an advisory practice. This was two thousand and eight, and Blackrock was hired to work on a lot of these situations that were, you know, at the start of the crisis. So we worked with the Federal Reserve, we worked with the Treasury, a lot of the big
financial institutions that had you know, problematic portfolios. And Blackrock was very well positioned as a byside firm, as a company that sort of hadn't underwritten a lot of like the problematic derivative.
I mean they did. They even have an investing banking division back then.
Know, I mean we called it advisory, but essentially it was like an investment banking function. I mean it was really consultative, providing advice, running portfolio analytics, thinking about you know, if you can separate like the liquidity crisis from the actual credit risk and and sort of the expected cash flows on these securities, what could you expect to get back And we, you know, we created a roadmap for the government on how to invest in these securities that
they took away. You know that they essentially backstopped from these big organizations and tried to create a roadmap to bring them back to part to repay all the tax payers with interest. And in almost every respect over time, the government was successful in doing that, and Blackrock really
played a very special role in creating those roadmaps. And you know, it wasn't what I would think of as like a highly profitable business, but in terms of like the are that was created around Blackrock as being like a solutions provider, you know, sort of a force for good in the world. That's what we did, and it was a it was a it was a great role for me.
I recall that era that Blackrock essentially you had become the streets bond death. Like every brokerage firm used to have a fairly substantial bond desk, and it seemed like Blackrock has just sucked up all that paper and all those traders.
Well, that sounds like an HR strategy, and I don't I don't know that I had any anything any part of that. But there was a lot of talent, for for sure, and there continues to be a lot of talent.
You know.
Some of those you know, some of the folks that worked on those, you know, and those assignments are essentially running Blackrock now. And it was you know, it was the consultative nature of thinking about you know, think about the challenges, how we can create solutions those challenges, think about the aspirations and the ambitions. And you know, that doesn't just apply to workout situations. That applies to all,
you know, kind of all the clients. And it's something that I've tried to import, you know, in to my current role at Russell.
So you're there for fifteen years, eventually you become head of their institutional business. That's that's a two trillion dollar silo, and you also helped establish Blackrock Retirement Solutions. Explain what these groups do.
Yeah, So after after the consulting practice, I wanted to run the insurance business at black Rock that was a two hundred billion dollar business at the time. A little sleepy, not you know, what I would say is like a growth center, and it was housed with the business itself, was housed with true insurance experts, asset liability experts, people who really understood like the nuts and bolts of insurance companies.
And I did not have an insurance background.
And you know, for the first year, I had an insurance guy sort of stapled to me every time I went to a client and make sure I didn't get out over my skis. But you know, but you know this, being an outsider sometimes can actually really you know, help you think, think externally about some of the things that might be impacting the clients, the industry, of the sector,
the business itself. And early on when I was in that role, we ran an analysis of the whole US and insurance industry, every company that was bigger than a billion dollars of general account assets, and we asked ourselves the question, what are some of the external factors that could impact these companies that they might not be expecting or prepared for, and where could black Rock play a role in helping.
Them deal with those kinds of challenges.
And we came up with seven situations Barry that we thought we're going to have like seismic type impacts on the companies, and four of them happened, and in three of those cases Blackrock went on to play a really big role and run the general accounts and that was more than one hundred billion dollars of assets, and we
put on another hundred billion dollars along the way. So that was the case where the business started growing like very meaningfully, and I think Blackrock sort of paid a lot of attention to that and realized, you we could play a bigger role with these insurance companies. They're going to do a lot more interesting things than just invest
in you know, sort of high quality fixed income. Over time, you also had some interesting stuff happening with Apollo and a theme they were kind of remaking the model a little bit. And Blackrock, you know, pays a lot of attention to what's going on in the in the outside world.
And we grew the business.
To say the very least, what are they twelve thirteen trillion dollars now in assets.
It's a good business, to say the very least.
So ten years of Morgan Stanley, fifteen years at Blackrock, what lessons did you take from those experiences to Russell investments.
Yeah, Well, first and foremost, it's all about the client, and if you lose sight of that, understanding what the client is dealing with, their challenges, their ambitions, their aspirations. Being a consultative provider, if you start from a push out like here are the products that I have, Here are the things that I've done before, it almost never works. And it also that's not the age that we're living
in today. The age that we're living in is how can I help you achieve the outcomes that you're trying to get to. How can I anticipate some of the challenges that you're going to experience, How can I help you learn from some of the things that I've seen in the sector or the industry. And you start from there and it builds a foundation with the client that is just sort of irreplaceable. So that's I mean, that
was one really important learning. Now, I came into Russell because Russell had like, first of all, it's a ninety year legacy.
Thank you for starting with.
That nineteen thirty six. That's a lot you're coming up on a century soon.
Yeah, exactly. I'm really proud to run.
I'm the eighth CEO by the way of in ninety years of Russell investments. I mean that's so for US asset manager's and I think about the things that Russell has done in that time, Barry, I mean, it's been a real innovator and category creator. Everybody knows the Russell indexes, which were you know, sort of cultivated and innovated in all sorts of cool ways, and we all have it in our pensions in our four to one case. Uh, you know, Russell was the original pension investment consultant. We
created that categoryus. Russell was the original o CIO and we're still a leader.
In O CIO.
These are these are really you know, sort of important categories that have a big impact on the investment ecosystem. And what was what was special to me about Russell and the reason I wanted to join is Russell's approach to doing all of these solutions is it's entirely open architecture. So the view is we build and implement portfolios at Russell, which is you know, something I worked on at Blackrock and to some extent and Morgan standly two.
But the idea is we use best of.
Breed managers and strategies from around the whole investment universe. So if I put together an O CIO portfolio at Russell, I'm building you know, fixed thing commandager, you know, the best quality fixed thing come managers, the best private assets managers, the best cash and so on, and best index products. You know, we can kind of it's it's we can
kind of go everywhere within the ecosystem. And that was a model that I was very excited about because it became more about like thinking through the lens of what the client is looking to achieve and how can I use all of the tools and the ingredients available, as opposed to sort of a set, you know, set of tools that I that I had at hand from the company that I worked for.
Really interesting. We're going to talk about pensions oci. We're going to talk about a little later. I didn't realize this till I started doing my homework. Russell is effectively credited with inventing smart beta. I mean, who knew that. I think of a couple of other firms as taking the leadership in that recently, but forty years ago, you guys were on the on the cutting edge of that. What is it like running a firm that has a
near century long legacy. How does that affect how you think about risks and opportunities.
Yeah, I mean the legacy is a wonderful thing, but you know, you can't rest like we all know, we can't rest on our laurels. It's you know, the job for me is to make sure that I'm taking sort of the best parts of the history and the legacy, the innovative spirit, all these cool things that we've done, and then evolving them for the world that we're in today. Our mainline business, we have we have sort of two
central businesses. It's o Cio and its model portfolios that we do on the retail side, which is essentially the same kind of ideas of the institual business, building great portfolios and implementing them. Ninety percent of our business is those falls into those two categories.
What I need to do today is make sure that I'm using.
All of the tools available so as the market moves from you know, active products to passive products, as the market starts integrating private assets with public assets, all that is part of our portfolio today. And so the goal, you know, as the leader is to make sure that the strategy is incorporating We're open architecture it's truly incorporating the entire ecosystem into the into what we build for our clients.
I want to get your feedback on a quote of yours I found in my in my homework quote financial security is a central challenge for this industry. How did your experiences at Blackrock, at Morgan Stanley, and way back when at Lehman Brothers, how did it affect your concept of financial security?
Financial security and retirement security especially. Took me a little bit of time to hone in on Barry. I mean, I think back to my years at Morgan Stanley, and you know, the job there was very much about sort of like finding the arbitrage in the markets. It's where can we make money on as a sales and trading function, and we help clients along the way, you know, by delivering the products and the services that they want. But first and foremost it was about the investment bank.
And that changed for me.
I had a review with my boss at the time and she said to me something that she meant as a compliment. She said to me, Zach, you can really
smell the money. And I went away and that was not the legacy that I wanted from my career, and you know, I moved to Blackrock shortly after that, where I was helping you know, the government, the tax payers deal with like really critical issues, like really big, thorny problems that we're going to have an impact on, you know, on the quality of life of the people in this in this country. And it was a complete reset of
my perspective. You know, now we build portfolios at Russell, but you know, if I'm working for a pension or four one K or an insurance company, at the end of the day, I'm serving individuals. I'm helping them, and we don't lose sight of that. I'm helping them have a secure retirement.
Now.
By the way, they have to do their part too, because it's also about you know, saving early, contributing, making sure that you're you know, learning about the plan and making the right decisions. But the role that we play within the industry is a make or break in terms of whether they're able to whether they're able to achieve that. Now you also have something going on in the background that's that's going to have a very big impact in the next couple of decades with retirees in America, and
that is that really the risk has shift. It now the retirement security risk has shifted from you know, organizations like the companies and the.
Government companies in defined benefits to define content.
Defined contribution.
Right, so the standard model, the standard pension model, is shifting to the four to one k. And today still about half of retirees have access to a pension and that plus UH plus social security more or less gets the job done. But in another decade it's going to be less than a third, and in another two decades it's going to be very little at all. So that means that now the four to one K is the staple that's going to you know, result in a secure,
comfortable retirement or or not. And you know, the big challenge with a four to one K is that the risk of saving, investing and also decumulation, taking that pot of money and knowing how long you know, the longevity risk, knowing how thinking about how long you're going to live and how to allott it over time. All that risk will now be borne by the individual. And we have not fully processed that. And the you know, within within
the country that this is a crisis that's coming. People aren't prepared to own that responsibility and the system today isn't set up in such a way that sort of the decisions are very easy to you know, to make. The onus is really still on the individual.
So that's really fascinating. How does that affect what you see within your role as CEO at Russell Investments.
Yeah, well, thanks Berry.
Our whole mission is built around helping people achieve financial security, and we do that on the institutional side by partnering with corporate sponsors and helping to ensure that the plans that they're putting in place and the role that they play through matching, through providing lifetime income, whatever the set of benefits are is going to be, is going to serve the participants in the way that we think is going to help them. Have you retire with confidence and
with security. But as the you know, as the machine shifts and it moves more toward a four to one k and then you know, a lot of folks end up with a nest egg that they have to manage on their own. The goal is to make sure that on the wealth side we also have sort of the right kinds of products and services and solutions that help them, you know, understand income, help them understand accumulation, help them
get the right diversification, help them get fair fees. I mean, the goal is to make sure that we're really delivering sort of a set of products and services that's going to allow them to live the kind of retirement that they all they'll hope for.
Really really interesting. So whenever I talk to people about Russell, everybody knows the Russell two thousand. The question is what does Russell do? How do they make money on? They must do something more than the Russell two thousand. Tell us a little bit about the different business lines at Russell Investments.
Sure, so the index business is now owned by a London Stock exchange and they do a magnificent job with it. And we still have a little bit of the you know, the aura. Every time I'm in the elevator, I see the advertisements for Russell and I think.
I didn't have to pay for that ad. We get the benefit.
The business is predominantly an it's an active asset management business, and we really have one main function barrier. It's about building and implementing great portfolios, and we do it for institutional clients and we do it for retail clients. So building the portfol folios is really about sort of portfolio construction. It's strategies and managers. For ninety years we've done manager
research at Russell. We have, you know, a huge team of people now is augmented by AI and technology helping us look at sixteen thousand different managers and figuring out we invest with about two hundred and twenty five of them, you know, figuring out which managers and strategies we think makes sense in the different portfolios we create. And then the implementation is one of the coolest parts because that's we actually do the investing on behalf of the managers.
They typically give us model portfolios, and then all the things around the portfolio that can be very incremental. It's the transitions, it's the hedging, completion, exercise completion mandates, overlays and you know, those things can be alpha generative, they can be very important for risk management. You can add a values overlay for clients and so it's a full portfolio delivery at the end of the day.
Coming up, we continue our conversation with Zach Bufwold, Chairman and CEO of RUSS Investments, discussing exactly what Russell Investments does for its clients. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Ridolts. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Zach Buckwald. He's chairman and
chief executive officer of Russell Investments. The firm was founded in nineteen thirty six and runs about three hundred and seventy billion dollars. Zach joined Russell in twenty twenty three, coming from his previous career at Blackrock. So you mentioned you're researching sixteen thousand different managers and internally you're generating just a fire hose of data. How do you analyze that? What value is that data to the firm?
Yeah, the data is everything, and we have we do have a you know, historical trove of of data, but it changes quickly. You think about how quickly the uh, you know, the investment ecosystem evolves, and you know, managers have strategies that make sense on one day and then things change and those strategies don't make sense. So it's it really has to stay current even though we you know, we certainly value that the historical data and performance and
use it. We start with sixteen thousand and the first layer is largely technology driven, so it's uh, you know, we have huge feeds that take into you know, that that take in and analyze all of the available information that's provided to us by managers directly and also that we can find out there in the in the public domain.
When you say managers of these mutual fund managers, ETF managers, private managers or all the.
Above, it's it's all of the above.
I mean, typically because of our size and scale, we don't we don't invest in a ton of.
Direct like uh, shared products.
We do much more sort of separate accounts, and but we do invest in mutual funds, we do invest in ETFs or index products where that makes sense and that can help, you know, drive down cost or you know, help with the diversification. But the managers is for the active strategies and active represents. I'm going to guess probably eighty five percent of the assets and that that we manage overall. Remember we're using different active strategies as the
building blocks to create these portfolios. So predominantly it's not Russell managed. Although you know, we can talk about the smart beta that you brought up predominantly. These are externally managed strategies that we bring together and then we collapse the whole thing together in one portfolio, and we look enterprise wide because you might have you know, three active equity managers and they're not paying attention to what the other ones are doing, and so you can end up
with outsized positions or underweights. You can end up with, you know, people on opposite sides of trades, and we look to you know, to correct or make adjustments where it makes sense.
So you guys were very innovative then helped create the concept of outsourced. Chief Investment Officer O CIOs tell us a little bit about that business line, who are the clients and how much assets does that run?
Yeah, so O CIO represents the lion's share of the three hundred and seventy billion that we manage. And it's a fast growing segment, not just at Russell, but it's growing because a lot of companies are outsourcing their pensions or their fo one kes to you know, folks that live and breathe the markets and that think about retirement security like we do all day long. So, you know, a typical day at Bloomberg might have one top story about a big corporate, you know, big US corporate that's
chosen to outsource their retirement portfolio. Now, we work with a lot of in house teams as well. We help by bringing in any of those implementation services like transitions and hedging. We do that for a lot of a lot of companies that have internal teams, but sometimes sponsors decide to you know, to hire retirement experts to run their to run their retirement portfolio, and that's when they
would bring in an source chief investment officer. We're a top five provider and it's some of the big you know, the other big asset managers that that also provide that. We're the ones who do it with an open architecture framework. So the goal is not to have Russell run the whole portfolio. It's to bring in best of breed managers and to bring those together.
Huh really really kind of interesting. When you talk about hedging, are you hedging equity, hedging, fixed income? What is the hedging business? Like?
Yeah, it can be all of the above, also foreign currency, you know, it can be hedging individual sectors. You might have a sponsor that's in the technology sector and they feel like they already have enough exposure to technology, and so you can you know, make some adjustments to the portfolio. That way, you can also build in a values orientation for you know, organizations that have a particular view of the world that they want to express in their investment portfolios.
So let's talk a little bit about smart beta, which Russell helped pioneer in nineteen eighty five, way before your time or my time for that matter. Is this still something that's a key part of what you're doing.
So we still have a strong footprint within Systematic Barry and you know, Russell manages on average between ten and twenty percent of the portfolios that we look after, and Systematic typically is within that that ten to twenty percent. We use it not to make you know, credit decisions or stock picking decisions like that's not our game. That's why we hire external managers who are true experts in that.
We use it to like round out the portfolio, to make adjustments to make sure that the portfolio is complying with why the client hired us or whatever their investment you know, their stated investment strategy says. But smart beta is you know one of the many places where Russell was an innovator, and you know, these things can sort of take on a life of their own as the as the industry adopts those practices.
We mentioned artificial intelligence earlier. Tell us how you're using AI and either risk management, portfolio construction, or just data analytics.
So, Barry, we have a list this long of sort of you know, desired use cases that we're working on for AI. And I think we're still in early innings here, but the kinds of things that we use AI for today very effectively, are more task oriented. We know, we have it fill out our RFPs, we have it build pitch decks, we have actually we use AI to you know, read five hundred page filings, you know, which we used to have a human being do back in the day,
and it's very effective at that. The real goal for you know, for this company is that I want AI to actually help us with investment insights, with manager research insights. That's going to actually drive performance at the end of the day. And I think we still have a fair amount of We're making progress, but I think we still have a fair amount of work before before that happens.
But you know, that's the.
View we're having you know, having a portfolio where we look after sixteen thousand different strategies and managers. We're starting from a place where we be as you said, we have troves of information, of historical information that we're relying on, and that we're using AI to sort of help build out that framework.
So I'm always fascinated by you know, the old joke is no one's ever seen a bad back test, and AI and those sort of things are only capable of looking at what's already occurred and built into all of those back tests and to some degree, built in to AI is that the future is going to resemble the past. How do you navigate around that? Because sometimes the future doesn't resemble the past. Just look at AI and how it's changing so many aspects of various businesses.
Yeah, well that's a place where you know, I'm still pretty optimistic that there's an enormous amount of value creation to come varry because the you know, what we've seen from AI so far, at least how it's how it's shown up in terms of you know, in the market performance has been almost entirely Harvard in the technology sector.
It's where you know, sort of where AI exists what we have seen yet is all the other sectors that we know are going to be sort of enormously impacted by the proper use of AI, the creative and innovative use of AI. So you know, you see a little bit of it in like healthcare and life sciences, but you know, logistics and shipping and consumer goods and investments, asset management, they're all going to get transformed by AI
because it's changing things. And you know, this is where I'm really optimistic that we have a lot more room to run in the markets today, is because you're still not seeing like all the you know, the potential and the benefits of AS showing up in some of these you know, what we think of as sectors that are peripheral to technology, but you know, in truth, technology is like critical to how we you know, how we all exist.
Makes makes a lot of sense. Let's talk about private markets. How can Russell Investments help their clients access private markets? Between AI and privates, those are probably the two hottest topics we've been talking about this year.
So privates represents at seven percent of the portfolios that we manage. It's heavier in the institutional portfolios. It's lighter right now. Within wealth portfolios, there's a lot more growth
that's that's going to happen, especially in wealth. I think the average wealth clients something like one or two percent of their portfolio outside of their real estateholdings about one or two percent in privates, and that number is going to grow and should grow, right because this is a really important source of return and risk diversification, and if you rely on the historical precedents, it's been an enormous outperformer writ large and so you know, kind of delivering
you know, access is a it's a very important function that we do at Russell, but also that we work with our financial advisor partners to figure out the best ways because it's you know, how you deliver privates to to institutional investors is different, right There's tax considerations and reporting considerations, liquidity considerations that all need to be considered with individuals. So we're trying to do this, you know,
really judiciously. Within wealth portfolio is wealthy people, wealthy families. There's a lot of room to run here. You know, I'm being extra cautious when I think about you know, sort of four to one k's or you know, four to one k graduates, you know, middle class people nest eggs, because that's where you know, I think about are these appropriate investments? Do they help with financial security? Can you get your money back when you need it? Are the
fees you know fair and appropriate? And and so I think you need to be extra careful with with the you know, sort of true working people, working families and their retirement nest eggs. But wealth or at large, there's a there's a ton of room for private markets.
So you mentioned seven percent. Where could this possibly go? Is this ten percent, fifteen percent, twenty percent. I've heard people say sixty forty is out, it's now fifty thirty, twenty or whatever the numbers add up to.
I don't know where it gets to.
It's certainly going to be north of seven percent, you know, I think it's I think you have to think not only about what's appropriate for the portfolio. Is listen, if you do a backward looking analysis of private equity and private credit, you know which I outside of you know, specific real estate investments that people choose themselves.
Those are like the two biggest food groups.
If you run an analysis of what those investments looked like over the last twenty years, Arry, it's going to be different than what you're going to get in the next twenty years for a lot of reasons. But you know, I'll tell you from my personal perspective right now. You know, in the last two years, my vets office has been
bought by private equity. My landscaper, my garbage collection, my dentist, they're all owned by private equity now, and you know, they're doing these roll ups and there's lots of efficiencies to be created on bringing these you know, these practices together. But you know, that's a pretty different investment than buying a company, right and making a company better and selling that company, which historically is you know where where private equity made its name and its reputation and the return
stream that we've seen. So, you know, another thing I think about is how am I going to make sure that the risk and return profiles I'm putting into these portfolios that we can you know, reasonably predict what they're going to look like, and that we can manage them, you know, sort of appropriately, given that the asset pools might look a little different than what you know, what we were investing in ten years ago.
Really really interesting. So let's talk a little bit about some of the things that are going on in the market today. Fee compression has been a giant factor really since the financial crisis. You recently decided to reduce some of the fees on your flagship fix income products. Tell us a little bit about what drove your decision and what are you thinking about in terms of fees generally.
I mean, the governing presept barrier is always to make sure we're providing value to the clients, and you know, we do that by charging a fair and appropriate fee for what it is we're doing. If I'm going to focus on anything, it's less about what's the fee that I can charge and more about making that I'm invaluable to these clients and that we're really, you know, helping them achieve their goals. When you the truth is, when you do a great job for the client, the fee
almost becomes not an issue. Now, having said that, we have some businesses that are scale businesses and that I compete with, you know, with other good providers, and I have to make sure that we're staying competitive, so we're not in any way immune to feed compression. But you know, but if you can provide a really good value proposition.
It's not such a big deal.
So this has been an ongoing factor in the industry, particularly for active managers, and Russell is primarily an active manager. Are you seeing any changes in this trend globally? I mean it started very much in the United States with with entities like black Rock and especially Vanguard, your global firm. What does this look like overseas?
Yeah, fee compression in our space is you know, it comes through in different ways globally. O CIO is the place where we've been sort of most susceptible to, you know, to feed compression. Barry, and you know, if I think about who we compete against, the landscape has changed for us over the last ten years. You know, ten years ago, I competed largely against like the consult the traditional consultants, and we had a very different offering. We actually implemented
the portfolio. We weren't just doing manager research sort of on paper. We were actually trading the portfolio and you know, doing the risk management and the overlays and the completions. Things that were a very big value add and we were unique in that respect. And then along came the really big asset managers that saw Ocio in part as sort of a distribution function. You know, if I can deliver the entire portfolio, I can put a lot of my own underlying products into that portfolio.
And by the way, that can be a great business for you if you have.
But that's a closed architecture. You guys run a very open architect.
We run a completely open architecture, and we're unique in that it's true open architecture. Eighty plus percent and sometimes one hundred percent of the assets come from third party managers, but we still have to compete against organizations that are running their own version, which might be closed or semi closed.
And you know, if you have a whole lot of underlying products you're putting into the portfolio, it gives you a lot of leeway to change the fee or to compress the fee at the ocio level because you're making money in all sorts of other ways. Russell doesn't do that. So it does mean that we were susceptible to some of the fee compression, and our fees have narrowed. But the way I see the solution here is just to make sure that the value proposition that we're offering.
The way we go about building in.
Ocio, the costs that you know, it takes, the human capital that's required. You know, we put over one hundred million dollars into our technology system that allows us to build these open architecture portfolios. When clients understand what it is that they get from us, paying a slightly higher fee doesn't seem to be a big deal.
What about the private markets that we're looking at. We were talking about private equity, private credit. First, is it possible that those sort of things can be indexed? And then second they've always been priceier than public markets, always started seeing fee compression along those lines.
Yeah, so we haven't seen a ton of fee compression. I mean, those are cases where I think the value proposition is crystal clear, and you know, the high performing managers can charge higher fees or substantial fees because they've really delivered, and in general they continue to deliver. I think if they stop delivering and or you know, and we start seeing what look more like public markets performance, or even weak public markets performance, it's going to be
much harder for them to charge those those fees. But that hasn't happened yet, you know, especially within private credit and private equity there's been you know, real out performance, especially at the top of the heap versus the public markets, so it becomes easier to justify those fees.
It makes a lot of sense. So let's let's venture into the world of public policy a little bit. You've proposed national account programs to help young people start investing early. The most some big bill that passed in this administration has these accounts for babies. Every kid that's going to be born is going to get what is it, fifteen hundred or three thousand dollars, I don't know what it's number, one thousand dollars, A thousand dollars, all right, better than nothing.
But where do you see these sort of programs going. And if you start investing at age one day, what potential compounding can we see fifty seventy five, one hundred years later?
Now you're really talking my language. When Trump was elected, I wrote a piece that we put into Barons that Baron's published, saying that we should give a thousand dollars to every kid in America and open an investment account and let them actually learn about the power of compounding, because it's different when you actually own the assets and you know when you get people an investment account, you can find lots of ways to create some education, you know, investment education that goes along.
Let me just interrupt you because it sounds like a lot of money. There are three million kids born a year. It's three billion dollars, yes, which to way thirty one trillion dollar economy and a six or seven trillion dollar government spend is surrounding out.
It's nothing in the grand scheme of things.
And you know, you know you're onto something because it got actually got criticized by both the right and the left, and the right said, oh, this is another entitlement program. Anyway, we put this thing into barons, and to my surprise and delight, it ended up in the big beautiful bill and it actually got.
Actually passed, It passed and funded, right became.
Legislation, and you know, Treasury is working hard now thinking through you know, the implementation, and we're helping along the way. It's it's an awesome program because fundamentally, what it does is it makes investing universal. You know, all these families in the United States that think that investing is not for them or they never had any exposure to it, and that's by the way most of America right now, to the extent they have, you know, have a kid,
they are going to have an investment account. That that's you know, there is a there's one thousand dollars to kickstart it from the government, but there's going to be lots of avenues for families to make continued contributions, for employers to make contributions, for philanthropies to make contributions over time on hopefully a tax advantaged basis, and folks are
going to see the way compounding really works. So it's not the one thousand dollars contribution, which, as you said, is kind of a drop in the bucket at least as it you know, as a burden on society. It's the it's you know, what can you pull together from all of the different constituents that are going to want to contribute to a program like this. So we're we're really excited, and you know, I think that ultimately, I
hope this will dovetail with retirement security. You know, you said it when when you ask what can happen in fifty or seventy five years. I think initially, you know, the thought is these might help fund college education and by the way with a little bit of contributions. On an ongoing basis, it will fund a college education with
the compounding. But over time, there's six or seven of these programs, and eventually, you know, maybe we can pull them all together and create a national program that actually funds people's retirement.
Coming up, we continue our conversation with Zach Buckwald, he's chairman and chief executive officer of Russell Investments, discussing the state of markets today. I'm Barry Ritolts. You're listening to Masters in Business on Bloomberg Radio. I'm Barry Ridholts. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Zach Buckwald. He's chairman and
chief executive officer of Russell Investments. The firm was founded in nineteen thirty six and runs about three hundred and seventy billion dollars. Zach joined Russell in twenty twenty three, coming from his previous career at Blackrock. I'm a fan of using milestones as an excuse to give some sort of a gift. You can see sweet sixteen's or kid turns thirteen, or whatever it is. Grandma and grandpa write
a check and put it right into their account. Here's some Eli Lilly, or here's some whatever SMP five hundred. Knock yourself out, and that's going to just appreciate over the next X number of decades. It could really make a substantial difference in the retirement of people who have yet to even be born.
It's absolutely true. And by the way, it's investing in the US stock market.
Right, so I'm assuming the S and P five hundred would count. And any of the Microsoft or Lily or whatever, Apple, Amazon, whatever big tech company you're enthusiastic about, I would recommend a broader, more diversified approach than a single stock. I mentioned Lily because I just know a friend just put a bunch of Lily stock in his nephew's account and I'm like, oh, what are you doing there for. He's like, just doing a transfer. It's tax free and don't have to worry about it.
Well, I'm not a stock picker, but but Lily's a great company. Having diversified exposure in these in these accounts is the way to go. And you know, listen, a generation ago, Barry, the version of that was not so much Lily stock. It was very typically a US Treasury bond, right, that's what you got when you turn thirteen or sixteen or had that milestone birthday, and a Treasury bond.
In the long term, you know, you'd rather be in the stock market.
You get you don't want to two and a half percent I had above inflation. That doesn't excite you.
I'd rather have the long term return of the S.
And P for sure, especially if it's a new born or even a teenager, their investment window is sixty seventy years.
That's exactly right.
And the trick here is you have to get people to actually understand because that's sixteen year old. When they're twenty two, they're going to get a job that's going to have a four to one k and there I have to understand, why am I taking six percent out of my you know, out of my paycheck when you know, my starting salary might not even be enough to get you know, to pay my rent and my other bills.
Why would I want to do that?
And they really, if they understand the power of compounding and the long term implications of that, they're gonna they're going to buy into it.
I really didn't think about my four oh one K in televis in my thirties, Right, But if I actually had money put in account when I was born, by the time you're twenty five, you're going to see some impact from compounding.
One hundred percent. Well, I'm not too worried about you, Barry. Well, I'll be all right, You'll be you'll be all right. But you know, but think about all those folks that don't you know, the average income in America is still seventy thousand dollars, right, all those folks that don't have access to uh to investments, and they're not thinking about am I going to be able to make my contribution at age twenty two, because they're thinking about can I can I.
Pay my rent?
Afford to pay my rent?
Right, the bottom half of the economic strata in this country, And we're having this conversation on election day in New York where it looks like at least the leader up up until today has been someone who describes themselves as a socialist and has made affordability their their key campaign theme. This is going to be an ongoing issue, especially for the bottom half of earners and savers.
That's right. We're not a political organization at Russell.
But I do concur affordability is the issue, and I think it's not a left issue. I think it's an issue for everybody, almost everybody in this country, and we're going to be hearing a lot about it from all sides.
You know.
I wrote a piece after the Baby.
Accounts, which they call the Trump accounts, by the way, after that became part of the legislation, I wrote a piece that The Washington Post published that essentially described what these accounts are and the impact that it can have in terms of helping to educate our population about the power of investing and compounding.
And it was very interesting to see the commentary.
You know, when you publish something in the journal or you get a lot of you get a lot of comments, and by and large, the vast majority of the comments said, why wouldn't you just write us a refund check, which is what we got during COVID, by the way, like stimulus type checks.
And it was the opposite of the point that I was trying to right.
We don't want you to spend this, we want you to save this.
I have to say it again to understand what the difference is from a savings account or a treasury bond and versus investing it into the markets and getting to see long, long term compounding. So it was honestly, it was a little bit of a refresher for me that we have a lot of work to do to help people understand why a program like this can actually help them.
As someone who's been writing in public for nearly thirty years, my best advice to he is simply never read the comment. There was a golden era of blogs and like the early to mid two thousands where the comments were these like fantastic communities. All of that is kind of migrated to Reddit. If you want to see lightly moderated, intelligent debates with some nonsense and is thrown in along the way, that's that's what's left of that sort of issue. I think even YouTube used to do a better job at
moderating the comments. The spam and the bots still slip in every now and then.
It does give you a perspective on what's on people's minds, though, even though some of the comments are like unhinged, you can tell like what's coming through what what are people's you know, fears and worries and concerns. If you can, if you can read it through the you know, the craziness.
Yeah, you have to. You have to fight your way through it. It's kind of fascinating because I'm going to just digress for a moment. We all are subject to these cognitive errors and these behavioral biases, and and it very much shows up in people's portfolios and the decisions they make. I wake up on a daylight today where Nasdaq is down one and a half percent, I know I'm gonna see a bunch of emails. A told us to stay long, and look, we're down one and a
half percent today. I knew I should have gotten out of the market. So what are you talking about? We're up seventeen percent for the year, and then Nazdek's up twenty three percent. This is the price of admission. You have to deal with some volatility.
I mean this is a place, by the way, where technology has not actually served people in their retirement portfolios. Because if you can pull up your phone and in three seconds, you know you work as a teacher or a nurse or whatever, and you pull up your phone and in three seconds you see your portfolio is down one and a half percent, and at some level it flips a switch and you think my portfolio is in
trouble or I should sell. Like that's how you get to really bad decisions because we all you know, we all know long term like if you're men, if you're.
Do we all know that, because I'm not sure everybody does, and there's such an inherent bias towards action. Don't just sit there do something right that that just seems to be human nature.
It's anathma to how you're supposed to manage a retirement portfolio. Though, by the way, you can make adjustments over time, but the goal is not to pull out when you think the market is going to be down. We all know that the bounce backs, by the way, happen faster and
stronger than ever. I mean, you think about like what the bounce back looked like during the financial crisis of during the dot com bus, it took years to bounce back, and then you think about COVID or even April or Liberation Day, Right, the bounce back happened a week, yeah,
almost instantly and stronger than before. So you know, this is a case where the phone really does not help you, right, if you're going to make a decision to pull out because you see something going on in the markets on an off day, and you know, as we're as we're thinking through how to implement new programs like the Trump accounts. You know, my goal is you want to have like lots of transparency, but you don't want to make it
easy for people to make bad decisions. You have to help them make good long term decisions.
A little bit of choice architecture that prevents those sort of things. Last question before I get to the standard questions, we ask all of our guests, what do you think investors are not talking about but perhaps should be What the important overlook topics, assets, geography, policy, whatever that that should be getting a little more following.
Yeah, well, Barry, I'm still really positive on AI and how much more room to run we have. You know, there's been so much to talk about about how we haven't seen a broadening in the markets. You know, most of the value capture has happened within the technology industry. But you know, but I think every sector is going to be transformed. Almost every sector transformed by AI as much as it was by by the Internet, and we
just haven't seen that come through yet. But I can tell you every company that we invest in is thinking about this and working on it behind the scenes, even if it's not showing up yet in their in their quarterly earnings reports. But it's all happening, and you're going to start seeing by the way, you'll see winners and losers both, you know, sort of specific companies and sectors.
But there's going to be enormous amounts of efficiency gains and enormous amounts of you know, sort of value creation that happens as a result of that. And I don't think it's going to be a straight but I do think it's coming shorter term rather than rather than just longer term.
Back in twenty nineteen, I interviewed Joe Davis, who's the chief economist at Vanguard, and they had this fascinating research report. Eventually it became a book that all technological innovations take place in two phases. The first phase is kind of what we're experiencing right now in AI, which is wild prices, a couple of everybody knows a handful of companies very boom boom, like some people have been too many. A
lot of people have been calling it a bubble. The second phase is where the value creation spreads out to the rest of rest of the market, rest of the industry, rest of the economy. I see it the same way you do. This is just going to make all of us more efficient, more productive, more profitable.
Right, That's exactly how I see this playing out. And you still have to pay attention because you know, we all remember during the first the first dot com phase, before every company started incorporating the Internet into its business strategy and its operations, they were winners and they were losers, and and the winners are still around and there, you know, they essentially, you know, run global commerce today and the
losers went away. We're going to see some of that across sectors, and you know that's something that investors need to pay close attention to. But you know, writ large, I see a lot of value creation.
Huh.
I'm always like to hear that sort of stuff. So let's jump into our favorite questions that we ask all of our guests, starting with tell us about your mentors who helped shape your career.
Sure, I had a great mentor at Blackrock, a guy called Mark Mcomb who's a vice chairman of the company, and he put me into a couple of jobs, and he nurtured me and supported me. But he also he encouraged me to, you know, think like the outsider that I am. You know, when he put me into the insurance job without having an insurance background, he sort of said, bring you know, bring all the capabilities and the perspective that you have from all the other things that you've
done and that you know, really helped us. I think like an external provider and grow that business. By the way, I'm a I'm I'm a gay guy in finance, So I come at it from a from an outsider's point of view kind of looking in and and that has informed just about everything that I do at you know, at Russell and and before that is thinking about what's working, what isn't working, What do I think we might be
able to do better? What have we not you know, the question that you asked, what are people not talking about? What have we not asked about? And that's you know, often my my starting point. And I think if I had come in with the insider status, it would have been harder for me to take that perspective.
That's really interesting. It's affected your perspective. You see the world both as a participant but also an outsider.
Yeah, that's right.
And you know, this is the first time I've been to Bloomberg in a couple of years. But when I when I took the job at at Russell, even before i'd started, Bloomberg invited me to come speak at a conference. And I was, you know, flattered and excited. And then I learned it was their diversity conference and I was the gay CEO, and and I said, invite me back five times to talk about investing in retirement, and on the sixth time, I'll come talk about diversity.
Huh, that's interesting. You know in all the research we do that did not come up in anything. It's not it's not anything that bubbles up to the top of search. Although the old joke is if you if you want to hide something, disclose it at the end of an hour long podcast. Now, no, I'll hear it. But you know what it's like with all the YouTube there's a drop off. But I always find that that amusing. Let's talk about books. What are some of your favorites. What are you reading right now?
Yeah, so I read a lot of fiction, like you know, Kormick, McCarthy and Tyler. I'm reading a book called The inheritance right now, which is like a family drama. It's an escapist for me to get away from. I don't read a lot of finance books.
I'm the same way every now and then something will you know, come across that I have to read that's finance related. I have a big stack of fiction waiting to go on vacation with me next month. Let's talk about streaming. What are you watching or listening to? What's keeping you entertained? It's either on Netflix or Amazon or whatever.
Yeah, it's all toddler fair right now. I've got two three year olds in the house, so we've got twins.
Twins.
Yeah, it's you know, all full time Moana and Frozen and Daniel Tiger, bubblegup bees that sort of stuff.
Huh so, so a lot of Moana. That's that's my idea of a nightmare.
It's just Mowana's pretty awesome.
Actually the first three times you see it.
The first three times, and Frozen about twice.
So our final two questions, what sort of advice would you give to a recent college grad interest in the career in either finance or investing. H What would you tell them?
Yeah, first, like, you know, be yourself, like we look for people at Russell from all different kinds of backgrounds, not just economics or finance background. Study what you want to study, do well, and you know, be committed. But you know, if you come at it from an outsider's you know, stay or point of view and embrace that that's you know, this is a world where we want
folks that have different kinds of backgrounds and approaches. You know, I studied English Barry and one advantage that that actually gave me early on in my career was that I knew how to write. And you know, you think about how much of our of our business is done through writing, through email and other ways.
Everything you write, this is the advice.
Now, everything you write is a reflection of you, and it can come up and you know, something you put down on paper can come up again and again in all sorts of different ways.
We all know that when you put something on.
The Internet, it lives forever, truly, and you know your careers are long. You want to make sure that you're you're properly reflecting the image that you want to create.
Good advice And our final question, by the way that advice applies not only to writing, yes, but my wife is a recently retired teacher and she used always one of the kids. All the stuff you're putting on Facebook and Instagram and TikTok, be aware the colleges you're applying to are looking at that, and the jobs you're going to apply to they going to find that, especially as you work your way up up the corporate ladder, that stuff never goes away.
That's right, And now I'll give you a counterpoint. You know, we do three sixty reviews at Russell and sometimes you know, people that are relatively new in their careers, twenty five or twenty eight year old will write a review on somebody that they work for a couple levels up that I read. And when I read a review that somebody has put a lot of thought into and there's some you know, praise and constructive criticism, how to make things better?
I say to myself, this person would make a good manager, and I think about how can we use them in other places in the company. So it's not just about like when you're writing about avoiding the things that you don't want out there in the world that can harm you. It's also making sure that you're putting the time and the effort into writing things that are really going to help you.
Really really interesting observation and good advice for people just entering the workforce. Final question, how do you know about the world of investing today that would have been useful thirty years ago when you were first getting started.
I wish that thirty years ago I had the confidence to know that, you know that as an outsider, as a gay person, as an English major, someone coming at it from a different background, that I could make it in this business, that I didn't have to constantly think about how am I going to prove myself, but just by being a good, productive contributor by raising my hand, you know, and showing a little bit of ambition, by
finding ways to help that that can be enough. And sometimes that being an outsider can actually be a good thing. You know that it can help you re underwrite situations and come at it from a different angle. And if you know that and you're confident in it and you use it to your advantage, it can really help you in your career. I figured that out along the way. It would have been helpful to know when I first started.
Really really fascinating stuff. Thank you, Zach for being so generous with you your time.
We have been.
Speaking with Zach Buckwald. He's chairman and chief executive officer of Russell Investments. If you enjoy this conversation, check out any of the five hundred and eighty nine we've done over the previous eleven years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts, And be sure and check out my new book How Not to Invest The ideas, numbers and behavior that destroy Wealth and How to Avoid
Them at your favorite bookstore. I would be remiss if I do not think the correct team that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my producer. I'm Barry Ridolts. You've been listening to Masters in Business on Bloomberg Radio.