Salim Ramji on ESG Investing (Podcast)

s and indexing than Selim Ramg. We pretty much cover everything from passive to active. We talk about E s G as a rising investment class and why black Rock thinks that's gonna exceed a trillion dollars over the next decade. We discuss how the entire fixed income in bond market has moved so aggressively to e t f s from what used to be a bespoke, over the counter, sort

of old school type of Wall Street trade. We also talk about the business of e t f s, how they've grown, how they've traded, and and then most importantly, we went over a variety of things involving governance and what Larry Fink is doing to drive better behavior amongst the C suite. In reality, black Rock looks at E s G as a fundamental risk factor and it's a way to help identify what companies are going to perform better.

It's not politics, but it's risk management. The whole conversation was absolutely a tourtive force about indexing and E t f s. If you were at all interested in wealth management, or passive investing or active investing for that matter, you're gonna find this to be absolutely fascinating. With no further ado, my conversation with black Rocks Slim romj VISs Masters in Business with Barry Ridholts on Bloomberg Radio. My extra special

guest this week is Salim Romjy. He is the global head of I Shares and Index Investments for black Rock. That group runs about four point six trillion dollars in client assets. Salim comes to us with an economics and politics degree from the University of Toronto and a law degree from Cambridge University. Salim rom Jim, Welcome to Bloomberg. Thanks a lot, Berry, It's great to be here. So

that's an interesting background. Toronto to Cambridge University, doing law prior to joining black Rock, you were a partner at McKenzie. How did that transition from consulting to asset management come about? You know, I haven't thought about it in a while. I had worked with black Rock and worked with I Shares for a number of years as an advisor before I joined back with I Shares in two thousand and five.

H and with black Rock had gotten to know UM the senior team around the time of the merger with b G I, and it was back in two thousand and thirteen UM, after I'd gotten to know a bunch of the senior leaders and a bunch of the members of the firm and really liked the culture that Larry had approached me and asked me whether I wanted to join the firm, and after a couple of discussions, I

actually turned him down. He handled it pretty well, and a week or two later area I was speaking at a conference and our late partner, a guy named Charlie Halleck, who had really built the Aladdin business and was the co president of the firm before he died. He came up to me and he said, he said, I heard you turned us down. I said yes, and then he asked me why I was such an idiot. He put it in slightly more colorful terms than than that. But

then he sat me down and explained to me. He answered his own question for about an hour and explained to me why I was such an idiot. And the very next day Larry called back concluded the two of them were in the hoots and I've accepted the offer. So I'd say it was a bumpy kind of pre start, but after a couple of wrong turns that came to the right decision and a blood ever since, ever since that day. That's pretty funny. I suspect you left out

an important adverb. Absolutely absolutely so. So you go from global head of corporate strategy, how do you migrate to E T F and indexing from that? It doesn't seem to be a natural path, or am I you know, misunderstanding that looking in from the outside. Yeah, there was one important beat in between. And you know, I can't say I was. I was the head of strategy for for just over a year, and truthfully, I'm not sure that I had a major impact in that one year

on the firm. But what it was really useful for me was I learned the culture from the inside. I built relationships. I've really learned how the place worked. And you know, black Rock's a unique place, and we're a large public company, but their aspects which feel like a small family run business because we still are run buyer founders. And I think for me in that first year, getting an appreciation of how the firm works and operates and what some of the magic is inside, I think was

really important. The first place that Larry and Rob Pepito had asked me to go after that year was our US Wealth business. In our US Wealth business at the time, this is back in two thousand and fifteen, was really in the early days of bringing together their active investment

teams and their index investment teams. You know, these two groups had kind of grown up as almost warring tribes, and the goal was, how do you bring them together, and how do you re orient the whole business around financial advisors wealth managers principally big fee based wealth managers, which you are well familiar with, and and how do you really re orient the business around helping those clients

build a better portfolio. And so by the time I left a few years later, the US Wealth business became the source of more than half of I shares flows globally, and so I think it was a very natural than extension that when Larry called me up just around two years ago and said it was time for the next move that I went into this role around I shares and our index investing business quite fascinating. So let's talk

a little bit about that index investing business. The index funds more or less have the assets run themselves, but the business of e t f s is anything but passive. How do you describe what your primary responsibilities are overseeing indexing and e t f s at black Rock. You know, one of the luxuries I had when I was running our client areas in US wealth was you always got to assume that everything worked. And in my current role, there's a lot of underlying engineering and precision and making

sure that the whole ecosystem works. So one big part of what our teams do is really making sure that our index exposures whether they're in indexing, in ETFs, in index separate accounts, that they track precisely, that they have great liquidity, that they have great tax efficiency, that we're working with all of our partners across the ecosystem to make sure that they work all the time, and I think that's one huge undertaking in terms of people and

technology and partnership across a broad range of providers. That's one essential part of the role, because you know, we're we're fond of talking about e t s as a technology, and they are. But the thing about a technology is that it's got to work not some of the time, but all of the time. And there's a big first order undertaking to make sure that that happens, both in

the t S and in in our separate account. I'd say the second thing there is really about the nature of e t s themselves, and increasingly they're doing much more than they did, you know, twenty years ago when I sure has first got off the ground that what we're starting to do more and more is not just increase the access of the t f s and and some of the moves that a number of the platforms that announced last year towards commission free trading kind of

certainly helped that, but they're starting to really be much more essential parts of whole portfolios, even beyond market cap weighted indices. So things like factors and things like e s G are increasingly things that take active risk are increasingly becoming part of what e t s do uh and I would say even deeper than that, and we can get into this in a little bit more detail

whenever you want. They're also becoming essential parts of the capital market, and so a real force in terms of modernizing aspects of the bond market, for example, are what ETFs are doing. And so a second really important part is working with our clients and working with our teams all around the world to start to imagine and start to think through all the different ways in which e t s can do more, even well beyond what we already do with great precision across our traditional market gap

wait in indicries. The final part of the job is really just connecting the dot. There's a lot of work that we need to do with our partners in a Latin about making it easier to access et s in the workflow with partners outside of black Rock to really make it easier to access and so it's really just staying alert and staying focused on other uses and other ways in which people are accessing these instruments all over the world. So we're definitely going to get to E

s G and factor investing and FIXT income. But I have to ask one question in about the index providers like SMP and s c I and anybody else who's creating a popular index. How does that relationship work? How does black Rock either say I want that index in an E T F or go to an index creator and say we would like to see something like this.

What is that relationship like? You know, it's a relationship not I guess when I talk about the the ecosystem in vague terms, index providers are one really important part of it, and sometimes it's really accessing intellectual property that

they developed. You know, take your well known broad indices, whether it's uh MSTI and emerging markets or the SMP five or something like that, and being able to use that to be able to make sure that as we're being precise about what we're tracking to, we're tracking to something clients know and respect. And you know, there are other ways in which will work with them around new innovations in e s G, in factors in other areas

as we keep expanding out the ecosystem. But I look at them as important partners, just as I look at exchanges as important partners, just as I look at authorized participants and market makers as important partners, which is that. However, you know, in our process to make high quality ETFs, there are a lot of relationships and partnerships that we need to forge outside of black Rock index Providers being one of them, to really make sure it operates as

clients expect. Quite fascinating. Let's talk a little bit about the fee war for e t f s and indexing. I guess the few war is over. For investors who were evaluating various products, what else should they be considering besides the sticker price? The sticker price is important, and you know, I like to think we've been a leader in as we grow reinvesting a number of our gains

back with our clients. Just you know, as context, over the past six years or so, we've reinvested six hundred million dollars back into the reductions, somewhere around one and a half to two and a half percent of our revenues in any given year. Uh, and we expect to continue to do that as we grow, particularly in our

core series. But beyond the sticker price, there are a number of areas that are, if anything, more important, and I wish more attention was paid to those aspects, even as attention is paid to the expense ratios just I mean, look at taxes. If you think about a taxable investor, just in the United States, a typical active mutual fund has around a hundred and fifty hundred and sixty basis points annually of tax drag inequities and that's a huge

edwin for most taxable investors. And so the tax efficiency of the rapper becomes a really important aspect to what the investor takes home at the end of each year. Liquidity and the ability to get in and out of an exposure relatively easily. That can add anywhere between fifty and a hundred basis points or more of cost at the time of the trade, and I think that's under appreciated as well. And the third piece, which is a cost, is really the cost of not tracking precisely to the index.

We invest a lot in terms of people on technology to make sure we track precisely, but if you veer off by fifty basis points, that's ultimately a cost that's going to the investors. So I think the expense ratio has had a lot of attention, some of the attention we've caused, but I think things like tax efficiency, things like liquidity, things like tracking are even more important financially to investors, and I wish they got the same kind

of focus. I hope they will get the same kind of focus in the minds of investors and those who advise them. Let's focus some attention on some of those issues. I'm not really worried about the tax inefficiency because active managers can make it up with their stock picking prowess, So I don't know if we really have to worry about that. But let's talk let's I'm I'm joking in case people don't realize that, but but let's talk a

little bit about tracking error. How complex is it, especially in some of these really substantially sized dtfs, to make sure that they track precisely with the underlying index. I have to think that's a lot more work than people realize. One of the benefits I would say of having a single technology platform, which we view through a LATIN is the ability to really scale that across many trillions of assets, and being able to bring a degree of precision and

a degree of expertise to it. But but if you look at across our teams who manage our index investing. It's a combination of great technology, it's a combination of that plus incredibly discipline process and there are hundreds of different elements in the process. And our teams, you know, they're rightfully called portfolio engineers because what they're really doing is a it's an engineering task to make sure that

everything works and operates as it should. And it's pretty fundamental element of data science because we're always looking out in the securities markets, looking at our indices, looking at how our exposures track, and and particularly around the times that you have major index rebalances, you know, every quarter or twice a year all around the world. It's just

making sure that that happens precisely. Really defines I think a good quality and a high quality index provider from someone who is a lot less preciser or just you know, not as well engineered. So there's been a lot of criticism of indexing over the past I don't know, twenty years really, since a great financial crisis, we've seen a

lot of inflows into indexing. What do you make of some of the wacky your criticisms passive distorts, price discovery, and that it has this inherent monopoly problem how do you look at those sort of claims. Yeah, look, one is with a bit of a grain of salt. And these have been going on for you know, forty years.

There's an ad that I keep in my office when when we get back to our office, which is from the late seventies, which talks about indexation being an American because you know, no American, but want just staverage returns. And so this narrative around indexation has been around for a while, and in any given period, even in the past few years, I'll see indexation be accused of, you know,

being right at the center of concentrated capitalism. There was a piece a few years ago which accused us of being Marxists, and so, you know, I don't, to be honest, I don't pay a huge amount of attention to some of those kind of fringe theories. What I look at is two things. Look at the facts, and then I

look at our clients. And what the facts say is that in the hundred and eighty trillion dollar marketplace of equity and fixed income securities, indexation in all forms ETFs funds separate accounts were one tenth of that active is about of that total marketplace, and if you look at it from an E t F lens, e t F s or five percent of the equity markets and one per cent of the bond markets. And as we look at things like price discovery, e t f s have

really been a vehicle that's aided price discovery. It's especially true in the bond market. There are a number of third parties. Bank of England published a report a few months ago around this about how e t s aided price discovery, and other third parties have also come to similar conclusions on the facts. But the real thing I look to is our clients. And you know, we now have tens of millions of investors in r E t s and ultimately, if we provide something that's trans parent,

we provide something that's good value. When we provide something that has integrity both in terms of our own produciary mindset and in terms of the engineering, more clients will come to us. And I think that's what really matters, and that's where we really keep the area of our focus. We always look at the facts, but every time we look at the facts on things like pricing and things like concentration, it's kind of the opposite of what has

been speculated about is actually the truth. So it's those two things that are really I try and stay focused on and and some of the fringe theories get annoying from time to time, and but I try and keep a relatively level ahead and look, if the facts say something different, we'll come to a different conclusion that I think we're a long way away, you know, from us reaching some Marxist singularity that some of speculated may happen. Let's talk about an outlier products that's been out there

that's very different than your core products. When when we look at the way some of the oil et F like USO have traded, or some of the VIX products that kind of went berserk a few years ago, how do you educate the public about your core products and why things like those two are really one officer in this case too offs they're not the normal E t

F product. Yeah, I think like the the E t F has now been around for just over thirty years, and I should have been around for just over twenty years, and there now are several thousand E t F and and I think that there is you know, it's time that there was a more consistent way of naming and naming conventions around what appropriately should and shouldn't be called an e t F. For US, we think e t f s are really transparent, rules based diversified investments in

a Body Act fund structure. And you know, we had joined with a coalition about a fid as than other et F providers that accounted for well over the assets of the industry, who felt pretty much the same way that a number of things that fit that description are

appropriately ts. But you know, if you've got a commodity fund, including we've got some commodity funds and things like gold and silver that should appropriately be called a exchange traded commodity because it's different than some of the funds and the fund structures and some of the products out there that call themselves ets, you know, they're really just structured products. And I think that some of the providers that do that should really own that, and if clients or investors

want to buy those, power to them. But I think that having clarity around you know, what is a transparent, rules based diversified investment fund versus what something else, be a commodity or be it like a structured product or a note, I think really helps investors and helps the industry, and so that's I We've been a really vocal part of this coalition, and I think that the time has come and the industry has come of age, that it's worth being able to provide that degree of clarity for

investors to know exactly the type of structure that they're getting into. Quite fascinating. Let's talk a little bit about what's going on these days in fixed income. If you would have told me a decade ago that the Fed would be out buying fixed income ETFs, I would have looked at you like you had two heads. But here we are. The Federal Reserve is buying fixed income products in et F forms. What does that say about the viability of e t f s and their ability to manage? Yeah?

I think at first, just as a disclosure, Barry, the mandate that black Rock has with the Federal Reserve is behind a wall with our financial markets advisory work. So I'm not involved in any way in terms of the FED and black Rocks work there. But if I could just paint a broader context and then answer your quest, and the broader context is this, which is that that fixed income ETFs are now a couple of thousand products and over one point three trillion dollars of assets, and

they've been around for nearly twenty years. And when we look at uses by central banks around the world, they're well over thirty official institutions. About half of them would be central banks that already use fixed income ets in one form of the other. The Federal Reserve is kind of the next and obviously a very significant central bank, but it's joining a group that's already pretty significant size

and in their use of fixed income ets. And when I look at why official institutions, why other asset managers, by pension funds, by insurance companies, so a whole range of institutional investors are turning to fixed income ETFs. You know, they're quite straightforward. They're much cheaper to trade than the underlying bond market. I think the events of February and March and April showed that they were much more liquid

than the underlying bond market itself. I think they also showed that you could get better, more actionable prices in the E t F And they really are an improvement or a modernizing force relative to certain antiquated aspects of the bond market itself. And so for many of these institutional investors. Over the past few years, they've been turning to fixed income ETFs to get cheaper trades, more liquidity,

better prices. I suspect that the reason why the Federal Reserve look to them was actually pretty similar to the reason why other central banks or other big institutional investors look to them, which is that they were transparent, easier way to access the bond market. Makes a lot of sense to me. Let's talk a little bit about that liquidity. In preparing for this conversation, I found a Baron's article that reported h y G the high yield Bonnie TF.

The week of March three, it traded about sixty thousand times a day. The top five holdings in the e t F only traded about five times a day, which raises a really interesting question. Has black Rock replaced the bond trading desk of Old Wall Street. I wouldn't go that far, but let me let me explain two interesting things that have been going on. The second one answers kind of your your question, which is that the first

one is really what's happened? And I think it's happened across you know, a dozen different instances of stress, including the financial crisis in the bond markets. Is that when the bond markets turned volatile, more and more investors turned to e t f s as a means by which

to get good price discovery and good liquidity. And I think in that heightened period of volatility, probably the most significant volatility we've seen since the financial crisis of February and March and April, that the numbers you're citing showing actually what was happening, which is that board investors were turning to the bond ETF in this case h y G. But I could paint you the same example with very similar numbers a week before in LQV, in the treasury market,

in emerging markets, in a whole series of different categories across the bond market of investors turning to e t F in times of volatility. And I think the latest period of volatility made that happen in a much more significant way. And when you dig underneath it, what's what's also happening underneath it is that e t f are part of a modernizing force in the bond market itself, and so whether it's dealers on Wall Street not having to deal with individual bond trades because they can do

it in a basket. For certain low size, high efficiency, high scale bond trades, it's easier to do it through a portfolio trade or ruin with the e t F that the e t F is becoming a way in which certain segments of the market can move to a more electronic means of bond trading, to move to a more efficient way of bond trading, and to really start to modernize aspects of the bond market, kind of like

the equity markets did fifteen or twenty years before. I think the big thing that's changed is that the e t F is bringing this degree of liquidity and bringing this degree of technology that starts to work in unison with how dealers operate, how some of these all to all trading venues operate, as well as how issuers like ourselves operate, to be able to remove some of the more antiquated aspects of the bond market, which which aren't really serving the needs of clients in the way that

they need to anymore. Let's dive a little deeper into that because it's a fascinating subject. In the US equity markets, there are what the joke is the Wilson five thousand is about stocks in the In the bond market, if we include municipal bonds, treasuries, corporates, there are literally countless variations of duration and and it seems like there's millions of bonds. So when we look at the idea of net asset value versus trading price, whether it's for the

agg or or anything like that. You know, with any equity index, everything in it is trading, if not all the times, right. But but when we look at these bonds, you know, so what what does that mean for actually

considering that gap between n A V and price? And how do we figure out in A V when a lot of these holdings trade so infrequently but by appointment only look in normal markets, and we're tracking you know, several dozen measures around the quality of r E t f s, the quality of our competitor ETFs relative to the mark it's in which they operate, and particularly in times when markets are closed or you have certain dislocations in certain markets due to natural disasters or other events.

The bond market those you said is really quite unique, and I think the the important facet of it is that it trades largely over the counter, and I think that the important modernizing aspect of the E t F is all about the E, which is that it trades,

not exchange. And once it trains not exchange, prices become more transparent and access becomes much more widespread, because whether you're an institutional investor that's looking to be able to access the E t F or you're an individual that may be going on to a self directed platform, you're getting access to on exchange prices that in a very broadly accessible, almost democratized way. And I think with that on exchange pricing, what's happening is that it's becoming more

transparent as to where actionable markets are. And if you combine it with the point that you've made it earlier about h y G trading a hundred and sixty eight thousand times in a day, what's happening is that the exchange for the exchange traded fund in moments of stress, is becoming the place in which actionable markets are made.

In normal markets, they track pretty clearly, but in dislocated markets, the thing that's trading many many thousand times in a given day is really where actionable prices are relative to where the best assessment of the pre previous days nav might have been. I almost think about it by analogy is that if you think about this isn't a perfect analogy, but if you think about, you know, you might get

an appraisal on your house. An appraisal on your house is based on the best comparables in your neighborhood and for other houses like yours. But the market for your house is the price at which you buy or sell. And in the case of exchange is and exchange traded funds, people are buying and selling in moments of stress, many tens of thousands of times a day, and that's where they're really becoming the point at which prices are discovered.

And the final point I'd say to this berry is just that this isn't true for every fixed income ETF. It's not even true for every I shares fixed income ETF.

But there are a number of you know, what we looks as flagship or tier one I shares ETFs that are trading on average more than a hundred million dollars a day, and many of these are Most of these exhibit these price discovery aspects UH and we think that that price discovery coupled with the transparency of being on an exchange is really the modernizing force that we're talking about.

And I think that, if anything, the stresses of February and of March and of April in the bond market is accelerating this force because people see how they per formed under stress, and even the skeptics are now becoming some of our becoming our clients in terms of in terms of fixed income ets. Quite interesting. Let's talk a little bit about your boss's letter. Larry Think writes these letters to c e o s each year and it's been one of the hallmarks of his leadership at Black Rock.

What is he looking for from the C suite? Does Does he believe he can cajole c e o s and CFOs into better ethical behavior? What are the purpose of those letters? Yeah? I think now when I look at particularly the letters around we'd issued in January, that the most important thing for me coming out of this year's letter was the notion that E. S. G risks and and he particularly focused on climate risk is an

investment risk. And I think that's a really important and fundamental concept because it's not about cajolling people into certain behaviors. It's just recognizing that for long term investors and index investors are the ultimate long term investors because I can't I'm not permitted to sell the stock if it's in the index. I've got to hold it for as long as it's in the index. So we're the ultimate long

term investors. Uh that that we're thinking about risk reward trade offs for companies and asset classes, and it's about E s G risks in this case, climate risk being an example as really being fundamental to the risk reward tradeoff of investments, or said differently, through research we've done within black Rock, research we've read and worked with with other third parties, it becomes a better way to do longer term investing is through an E S G lens.

And so we really saw it, and Larry really saw it as fundamental to our fiduciary duty to help clients invest and help clients invest mindful of the different risks.

You know, our firm was founded on a principle of risk management, and so just as we look at liquidity risks, just as we look at credit risks, just as we look at geo political risks, we also have to look at E S G engine risks and the practical application of this meant that for our active investors, they integrated E s G risks alongside all the other risks in

terms of the trade offs that they're making. And for index investors or the area that I'm responsible for, what we set out to do was to really increase access through launching the breadth of product offerings in E s G investing, so that investors who wanted to be able to invest through an E s G lens could do so with the t S or with index funds while benefiting from all the efficiency and all the transparency and all the choice that we're able to offer through being

a scale et F and index provider. And so it's really that fundamental peace Perry, which is it's about investment risk that influenced Larry's thinking and then influenced our thinking as fiduciaries. So here's the pushback I hear all the time, and full disclosure, I agree with you. I think that it's a great risk screen. Uh, you'll you'll avoid all sorts of headaches, especially on the governance side. It certainly

looks like a risk management tool. But some of the pushback we've heard, including from the labor department has been this is just social justice warriors and politics and it has nothing whatsoever to do with assets or risk management. How do you respond to that sort of pushback, including when you have the head of the d o L saying I want to consider whether or not we should

allow E s G products in in four oh one case. Yeah, I think the without getting into all the specifics of the d o L proposal in the Big Black Rock, has comm meanted on that separately. I think the fundamental and positive aspect is the notion that for us as fiduciaries, we have to be able to have conviction ourselves and be able to ensure that our clients equally have conviction that these are the right risk reward trade us and we're doing it to be able to improve their long

term investment returns. And so the facts and the analytics and the evidence behind that and our discussions with clients are really going to be the determinants of that. So we're actually totally fine. Was saying the bar should be about value, not just about values, and it's really from that value lens that our whole thesis and and the letter that Larry authored back in January is rooted, So so we have no problem with that is a as a screen, if you will, because it's very fundamental to

how we think about kind of the issue. The second thing that I'd say is that from an index lens, and actually from across all the assets the Black Rock manages, it's not our money, it's the client's money. And so one of the things that from an index lens that we can do within our I shares an index investing is to be able to offer client's choice. And so

that's the reason why we've expanded our product lineup. Part of it was based on the investment thesis, and part of it was based off of the client demand that said, I just want this choice and I want the ability to choose which types of exposures I put my money in. And one of the great things about indexation is that

you can offer that at scale. And so just as context, like a couple of years ago, we had about twenty e t F and index fund offerings and they mostly catered to socially responsible investing, kind of a niche category largely in Europe. Today we have over a hundred and twenty just a couple of years later, and it's really catering to a much more broad and mainstream audience all across the world, in the United States, in Europe, in Asia.

And the thing that surprised me about that has been I always thought demand existed in Europe, but if you look at the you know, just over twenty billion dollars that we've raised in e t F E s G S sets to date, most of that has come from US investors who really just wanted the ability to for a provider to offer choice but still provide it with the same transparency and efficiency and and all the other aspects that they've come to enjoy around E t S.

Let's talk a little bit about those fun flows. For the past i'll call it twenty years, it's been relatively modest. E s G has been historically, it's been a niche product. But black Rock is talking about one point two trillion in global sustainable et F assets within a decade. That's a giant number. We've seen some flows into sustainability and into e s G, but nothing that extrapolates out to one point to trillion. How do you guys come up with a number that emense? Yeah, I think it's two things.

I'll look forward to returning to your show in ten years. If this is if we're still doing podcasts, it's ten years to see how accurate our projections are. But it's really two things. The first thing is just the nature of this client demand. And I've been surprised to the upside. You know, the twenty plus billion dollar number I sided and flows this year. I thought it would be three or four years before we could start to cite those

kind of numbers. But I've been surprised to the upside at the client demand that exists for this particular type of investing capability. So I think that we're tapping into something which is deeper than just a niche, and it's pretty widespread amongst the demand or the latent demand. It's amongst institutions, amongst wealth managers in the United States and in Europe, in in all different kinds of investors looking

to access this. But the second thing I think has been also overlooked, which is that in vexation hasn't been brought to bear in sustainability much at all over the

past several years. And maybe that's because it was such a niche area of investment, and I think part of the demand that we're seeing an ep F form is also coming from the fact that we can offer this type of choice hundred twenty different offerings, that we can offer things that are at a fraction, you know, typically one fifth of the fee of a traditional E s

G active fund. And I think those pieces which have really been driving the E t F business to go from you know, nothing to nearly seven trillion dollars over the past two or three decades, are now being brought to E s G itself, and I think this is fundamental to what I think that the e t F is now doing, which is that it's become a way

in which to wrap different investor disciplines. You know, we we obviously started in market cap weighted indices and that was really the basis of I shares particularly, and developed in emerging market equities. We've expanded into fixed income, which, as we talked about, is a little bit more opaque,

and we're bringing transparency and some modernizing forces. But some of the really exciting things are that we're developing in things like e s G, or in things like factors, or in things like some of our thematic EPFs E t F that essentially take active risk and they deviate from market cap weighted index. But what we're doing is that we're doing it in a way which is efficient, which is rules based, which is transparent, and ultimately we

think that can offer a better deal for investors. And this is just the next evolution that we're not just seeing any t s, but we're trying to lead the charge. Within eye Shares is the ability to do more things, whether it's E S G or factors or fixed in come or thematics. Even as we continue to build out and expand in the traditional market cap way that arenas so. So let's talk about a market risk type et F. Why haven't we seen a bitcoin ETF approved yet? And

is black Rock going to be the first firm? It's a launch one who knows and no. The answer to your question, our general philosophy is we want to get behind things that are long term, that are good for our investors and aren't just the one hit wonders. And there are many things that we have declined to do over the years which could have been commercially successful for you know, a year or several months or so, but

really just aren't what we want to be into. But we are big believers in things like thematic ETFs, and and we did a lot of research in concert with our active investing teams around what do we think are the four or five biggest trends that are going to impact investing for the next decade or two. Things like generational wealth change, things like urbanization, things like the advent

of new and disruptive technologies are examples of that. And we've then developed ETFs that cater to those particular trends. And we've done that first and foremost because we think those are good long term investments for clients that can deliver superior returns over time. And secondly, those are the types of trends that we want to get behind and what we want to be what we want to be

known for. So uh, we we study what other firms do, but you know, there's a lot that others can launch, and and we're happy not to launch because of of our own stance in terms of we want to innovate, but we also want to be able to look our clients in the eyes a year from now, two years from now, three years from now, ten years from now, and be able to say that we put them in a good investment vehicle and not be able to let

them down. So let's combine three things. Let's combine long term with our discussion of fixed income and our discussion of E s G and talk about muni bonds and green bonds. How do you navigate E s G in the fixed income space very carefully? It's a we have launched.

We have launched E s G in fixed income, and but it's a much more complicated set of circumstances, in part because of data and being able to really understand the data well to be able to craft the right set of scores and scores that we believe in, and

we're selective as to where we are expanding. And I think that's one of the benefits of having Black Rock and our whole history and legacy around fixed income is that we've got great active muni investors, and we've got great active fundamental investors, and we've got great teams who were able to really work with and think through some of these problems with to understand what's the right circumstances which to launch um some of these products, versus what's

the right circumstance in which to hold back until the data is better, until the offering is better. So that when we launch, we can launch something that we can stand behind. So, um we are doing more a portion

of the D and twenty products that I mentioned. While most of them are inequities, many of them are also in fixed income and we want to maintain our kind of innovation, but we also we also want to do it only when we feel we can really underwrite the true integrity and quality of the products that we offer. So so you mentioned active, what sort of demands is black Rock seeing from investors for actively managed e t s? And I know to some listeners that might sound like

a contradiction in terms, but it isn't necessarily. So yeah, we're certainly seeing a lot of supply starting to starting to brew. I don't think you know we goes by, but you know, see a new filing from UM UM some manager look, I I'd sort of say, including us. And we've launched one or two truly active e t f s already. We've done it under the black Rock brand to make the distinction clear, and we obviously have plans to to expand. But what I'd say is that

is two things. First, when you look at e t s through the lens that not actively managed but what takes active risk, so things that deviate from a market capuated index like factors or e s G or thematics. We already are the largest and the fastest growing active risk taking e t F firm. We've got over two hundred billion dollars in those categories. Those are growing at a very nice pace, and we're very optimistic that that

will grow significantly into the future. When you look at actively managed e t F s, I think the perspective to keep in mind that the e t F itself isn't some magic pill that solves problems. That if you solve all problems. If you've got a underperforming expensive active manager in a mutual fund and then you put them in an e t F, you then have a underperforming, expensive actively managed ETF. And so it's not some magic

that's going to recreate things. Certainly our efficiencies to the rapper, there certainly are areas about it that are compelling, But I think that the real test is going to be twofold one, do the active managers deliver in this rapper or not? The evidence from the mutual fund part of the industry has been I think you could say mixed. And second is active management willing to tackle the fundamental thing,

which I think is fees. And when you look at it, at least in our own analysis, active management on a growth basis, you know, many firms do quite well. It's just that after fees is when you get the real underperformance. And so our own conclusion from that is that too many active managers are charging too much money for what it is that day deliver. So it'll be interesting to see if they really tackle that from a fee perspective in the context of the e t F wrapper or not.

I think could of course do that in the mutual fund wrapper at any given time. They've chosen not to. But I think those are those are really the fundamental issues. The et F is just a rapper. We think it happens to be better than the rapper that was invented, but it doesn't solve all problems. It just helps bring greater efficiency and greater transparency, which benefits certain aspects but not every so. So, since you brought up fees, let's let's talk a little bit about that. We've been seeing

an ongoing price war for for a long time. Where do you see I shares pricing heading towards let's say five years from now, slightly lower, meaningfully lower. At what point does pricing stabilize? And let me just add, I don't think anyone is really looking for free as we've seen with free trading turns out to be a little more expensive than than people expect. So in terms of greater efficiencies and greater scale, where do prices end up going to over the next five years. Yeah, Look, i'd

say one thing, actually two things about that. Well, one thing we've been pretty public and vocal about. I think the other piece we've tried but will try and be more public and more vocal. The first thing is just

from our own perspective. You know what what we see in terms of pricing, and I think in this case you're talking about the expense ratio of the funds itself, is that there there are a segment of clients who are very sensitive to the tr and many of those clients, if you change it, they will invest more money with you.

And that's what we found over the past five years, over the past three years, over the past year, and that's why we've made the investments that we have over the past number of years that I mentioned, the six d billion dollars, and that's why we've been pretty public that you know, every year we intend to reinvest another one point five two point five of our revenues, so call it another hundred million dollars within pricing, so that the benefits as we grow also accrue to our fund

holders as being a real benefit of our scale. So that's kind of one lens to look at it through. I think the other lens, which sometimes is less appreciated, is just all the different segments in which we operate within I shirts, there's one segment which is defined by our core, which is really that price sensitive segment, and that's important to us. That's where a lot of our

pricing action has been concentrated. But in areas like fixed income, particularly those fixed income instruments that are outside the core, what clients really care about is they care about the liquidity, where they care about the bid offer spreads, or they care about other aspects of cost, which, as we talked about earlier, are often ten times is important to their

total cost of what they own. And if you think about things like fact ers or e s G. Or thematics, what clients are really coming to us and those exposures for is a means to outperform, but for a very low thing. And so when they look at us in factors and when they look at us in E s G, they're often looking at us because we're a bargain, because we're off what they were paying a active manager in terms of fees to deliver that out performance. And so

I think it's important to understand that full set. I won't bore you with their two other segments, and um that I didn't talk about precision instruments being among them, but I think we operate in all those different segments with very different segments of clients, from d I Y self directed investors all the way through to other active managers as well as the biggest segment being firms that

you well know, which is large discretionary wealth managers. And so each of them have different factors that they look at in terms of price, tax, efficiency, tracking error, liquidity, and just the underlying quality and the ability to deliver that quality at scale, and that all goes into the formula round. So I know I only have you for a few more minutes, so let's jump to our speed. Rounds are are questions that we ask all our guests to get a little more insight into who they are.

Let's let's start with under lockdown. What are you streaming these days? Give us your favorite either Netflix or Amazon Prime or podcast you're listening to. Tell us what's keeping you entertained while you're sheltering at home. You know, I've been watching a it's kind of an obscure TV show. It's called Kim's Convenience. It's about this family up in Canada, which is where I grew up, that runs a small

convenience store. And my dad used to run a small convenience store and I used to work at it when I was a kid. And so that's my kind of if you will, comfort food TV that I've been watching. It's a great show, but I think it's more any other people who up in Canada and worked in the convenience store would love it. So I may not have broad appeal, but for me it has a lot of comfort appeal for sure Canadian convenience store workers. So so tell us about your mentors who helped shape your career.

You know, gosh, there's been so many people along the way. Charlie Halleck, our late partner saved me from not just saved me from making a real career mistake. But I think was also in the couple of years that we worked together at the firm before he had passed, was both a really important mentor and at times a really

harsh critic. And I think some of the things that people sometimes misunderstand about mentors that you know, they think mentorship is just being a good cheerleader and a good supporter. Sometimes mentorship is really about tough love. Charlie, for me, was very much about tough love. But he really became a really really important guide for me to really understand Black Rock, to really understand how it worked, to really understand some of the genius of the firm that a

relative newcomer might take years and years to appreciate. I got a crash course in a couple of years through Charlie that you know, I will certainly always be grateful for, along with him, of course, correcting my career with his own blunt style when I had mistakenly turned the firm down. That's tell us about some of your favorite books. What what are you reading now? What have you enjoyed reading?

You know, I was reading a little bit earlier on what i'd call a bunch of disaster and despair books. My wife thankfully taught me out of it, because there's a whole genre about, like The Twilight of Democracy is one, which is actually really good book. But I've now moved to reading a biography of Wellington which looks to be very good. And I'm also reading a book called wolf Hall that I have owned but haven't read, And so I'm using this to make a dent in both of those.

Of a big gang will file in case you have a guest, but we'll fall at Wellington kind of a bit better, and at times at least the Wellington piece can be uplifting, quite interesting. What sort of advice would you give to a recent college grad who was interested in a career in either wealth management or indexing or E T S. I think the important thing is each of those industries, right, So just take wealth management, which you are very familiar with having built a firm, or

asset management. They're going through vast changes, and I think that you know, it's all great to talk about change in the abstract real time, it could be painful and it can be challenging, and so I think they're really

exciting industries. Their industries that I've been part of for a few decades, two decades, but but I think for a new graduate, it's really making sure that one they're up for that and two that they really love client service, because whether you're a fiduciary wealth manager or whether you're a fiduciary assid manager, you've got to be comfortable with

the notion that you're here to serve the client. But it isn't your money, it's theirs, and you've got to get joy out of that aspect of it, which I think is inherent to both of those businesses as much as you know constant radical changes as well. And our final question, what do you know about the world of indexing and ets today that you wish you knew twenty years ago when you were first getting started in this field.

So I'm going to give you a boring answer to this one, very which is that in the late nineties I was a very unsuccessful occasional day trader and I had a good run up and then it all ended in tears around the late two thousand and two thousand and one. It took me away from the market, was shy about the market for a few years after that, and I think that the thing that I wish I knew,

it's just the importance of staying invested. Now, that's a boring and reliable answer, but I am the beta guy, so you believe in boring and reliable over the long term. And but it really has paid off. And and just so, the thing I wish I knew was that I'd stopped worrying about kind of timing the market and I just really focus on staying in the market. And for investors like me, and I think for many investors, we were

able to take a long term view. That's probably the soundest and best way to build wealth over the long term. You know, I totally agree with that answer. Thank you, Silim Ramje for being so generous with your time. We have been speaking with Silim ramg the global head of Eye Shares and Index Investments for black Rock, which his division runs about four point six trillion in client assets. If you enjoy this conversation, be sure and check out

well our previous podcasts. We're up to about three fifty. You can find that at iTunes, Spotify, Google podcast Us, Stitcher, Overcast, wherever your final podcasts are sold. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net. You can check out my weekly column at Bloomberg dot com Slash Opinion. Sign up for our daily reads at rid Halts dot com. Follow me on Twitter at rid Halts. Be sure to give us

a review at Apple iTunes. I would be remiss if I did not thank our crack staff that helps put these conversations together each week. Tim Harrow is my audio engineer, Michael Boyle is my booker. Slash producer. Ticob Valbrun is our project manager. Michael bat Nick is our head of research. I'm Barry Rid Hults. You've been listening to Master's Business on Bloomberg Radio.