ETF Edge - IPO's, China's Star Board & The Fidelity Magellan ETF

Episode Date: September 28, 2020

CNBC's Bob Pisani spoke with Deborah Fuhr, founder and managing partner at ETFGI, Kim Arthur, president and CEO of Main Management, and Tim Seymour, founder and chief investment officer at Seymour Asset Management. They discussed the most powerful trends driving global ETF flows this year and the IPO market heating up, how Ant Financial could impact investing in China as more large Chinese funds launch ETFs tied to the STAR 50 Index; the first index tied to Shanghai's star market. In the 'markets 102' portion of the podcast Bob talks about companies rebranding active mutual funds as ETFs. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things exchanged traded funds, you're in the right place. Every week we're bringing you interviews and analysis, and we're breaking down what all this ETF business means for investors. I'm your host, Bob Pisani. Today on the show, we'll talk about the most powerful trends driving global ETF fund flows this year and the IPO market, notably heating up. And how financial could impact investing in China as more large Chinese funds launch ETFs over there. that are tied to the Star 50 index. That's the big index that's tied to Shanghai's star market for big tech IPOs. Here's my conversation with Kim Arthur, CEO of Maine Management, with Tim Seymour,

the founder and CIO of Seymour Asset Management, and with Deborah Fuhr, she's the founder of ETF Global Insight. Deborah, tell me what is, what stands out to you as the biggest ETF trend so far this year? It's great to be here. So I think one of the biggest trends is the fact that ETS really busted the myths that they were able to handle the significant volatility in inflows and outflows during March and April. I think from there, what we're seeing is a significant increase in the number of investors using ETS. So we see that there's nearly 6,000 institutions that hold just about half of all the ETF assets in 62 different countries. And when we look at where the money is going, I think we can see fixed income year to date has globally taken in 160 billion of net influence. up from 148 last year. The Fed has clearly given a good signal to people that ETS, fixed

income, high yield, and investment grade are good investments. We've also seen equities where investors are looking for themes to play post-pandemic. So that would be ESG, technology, health care. We're also seeing active, non-transparent. We have 15 new launches this year, gathering about 500 million so far. And gold has clearly played two. different views there for investors. There are 49 billion of net inflows. Some see it as a safe haven. Others see it as a potential and hedge against inflation given all the stimulus going into the markets. Yeah. Yeah. And Kim, does she brings up a very good point here, Deborah, that the volatility that we've seen has not resulted in any dramatic problems with the ETF business overall.

You deal with a lot of investors. Does the fact that the ETFs, the fact that the ETFs, business again and again has handled about a volatility very well, even in bond funds, thinly traded high-yield bond funds, for example. Is that making institutional investors even more comfortable in using ETFs as investment platforms? Would that account for the fact that we're still seeing assets under management continue to increase? Yeah, Bob, I would definitely agree with that. I think historically here, going back every time that, we've had a volatility spike or disruption in the market. For the last 20 years, ETFs have done a phenomenal job.

They've done exactly what they're supposed to do with the price discovery. There's liquidity on both sides. It's not like the old days when you pick up a phone and try to call a dealer when bids were fading and the phone would just keep ringing and ringing and ringing. So they are doing exactly what they're supposed to do, That's definitely why we are seeing institutional involvement continue to increase, like Debra mentioned, with the 6,000 holding half of them. And high-net worth individuals continue to move into them aggressively, too. Yeah. And Debra, just a quick comment, very quick on ESG. We keep seeing money pouring into ESG.

It's really a sub-asset class by itself. And yet we've seen some pushback recently in the U.S. Some people arguing that investment firms or advisors should not be pushing people into what are essentially ideological ideas. But that hasn't slowed down the money flows into ESG, has it? It hasn't at all. And I think part of the difference is if you look at Europe, you see that the regulator are actually encouraging the asset owners pension funds to invest along these ideas. And we are seeing that it's not just it's clean energy. It's social movement. So I think what happened with COVID, where we saw the climate really improved. We saw that social diversity matters. And we're seeing that some of it is thematic in the way people are investing.

But I think the important thing is that companies that do better in terms of the way they treat their employees, in terms of governance, actually over the long run, perform better. So it's not doing good to give up performance. You actually can find that these are tenants that are very important to have companies that are going to do well over the long term. Yeah. I want to move on here because we're having another busy week for new issuances for IPOs and direct listings this week. I want to take note of that. We've got nearly a dozen new listings coming, including direct listings from Palantir, which is a data management firm and from Asana, which is coming out this week. They're a work management platform. Kim, I wonder if you can comment on this. The IPO ETF is at a historic eye today. It's up 68%

so far year to date. It's got finally attracted 200 million in assets under management, which is a pretty nice threshold to pass. It's taken several years to do that. What's behind all of the sudden IPO rush? Yeah, Bob. I think it's the push for where the puck is moving for leading edge technologies and disruptive technologies. Obviously, Airbnb and DoorDash. I look at my thought. who's 83 years old and he did not know what a DoorDash was before this virus. And now all of a sudden he's one of their, you know, biggest, biggest proponents. So it's clearly where the puck is going. I think what's interesting, too, is there's still a huge pipeline of these deals here.

491 unicorns with $1.5 trillion in aggregate market caps on average of $3 billion. dollars. That's a lot, a lot of deals that are teed up. And as you mentioned, these direct listings like Palantir. One thing I well mentioned on Talentere is if you look back six years ago, Bob, when they did a round of financing that was probably at about an $8 billion range or level at that point, because it's taken them so long to come out public now and these doing six years, there's been about 28% dilution that's happened during that time. So there's now, going to be a billion nine shares outstanding instead of the billion five. But still, where these things are going, one other thing that I would just mention, too, is, again, you had 900 IPOs in

1999 and 2000. If this year, if we get to 170, then last year, this year combined are only about one-third, a little over 300. So there's still a very robust appetite, and given what's going on. There's still a lot more that can happen. Right. Tim, let me bring you in here. We're talking about the spate of IPOs. One thing that's quite amazing to me is how the ETF business has been able to capitalize on whatever trend is happening. We already have work from home ETFs that are out there. They seem to capture, it's a perfect vehicle for capturing the zeitgeist. You can call it whatever you want to call it, invests.

by trend, if you want to. I've heard some people say that, but it really is quite amazing. And you can see how some of these names, like Zoom, Moderna, Peloton, CrowdStrike, they're in a lot of these ETFs that are out there that are on disruptive technologies. So they're beneficiaries of, in a way,

in a perverse way, of the whole COVID movement. And the ETF business has benefited from this. And again, it's rather perverse, but that seems to be the case. case. Well, it's not surprising at all that the ETF industry is able to adjust and adapt and find thematic investments and present them in an efficient way for investors. That's kind of the ethos of what's been going on. And as you look at the trends we're talking about here on the show and some of these IPOs and where they're positioned within the economy, you know, the IPO can certainly be there to look at the tailwind of IPOs overall that we're all discussing as a function of liquidity. It's a function of really markets that are reaching out and grabbing risk at a time when maybe they should or should not be, but the performance of IPOs are largely in a very strong environment. There's been other times when they have not been.

And in fact, investors need to be very careful when they're even in investing in an ETF that's exposed to IPOs where they're investing in these IPOs. A lot of these IPOs may have done great on day one or day two, but really underperformed for the next three to nine months. Look at Moderna. Look at Uber. I mean, Uber's underperformed the S&P by 25% since it came to market. So it's investors really need to understand if they're investing in an ETF that gets exposure to the IPOs. How active is it? And really, what is the strategy? But finding thematic ways. And so whether it's cloud or whether it's, you know, online and e-commerce or whether it's, you know, different types of online security, the ETF world, that is why

ETFs are so popular because it allows investors who can get thematic exposure. And this is a perfect time for that. Yeah. And Deborah, I wonder if you get your thoughts on this. What's amazing to me is just catching that wave is there were SPAC ETFs have been announced now. We know SPACs are really big, alternative ways to go public this year.

And sure enough, there was a SPAC ETF announced. We've had companies that are putting SPAC SPAC companies into their ETFs before deals are even completely consummated. So it seems like ETFs are becoming a sort of vehicle for quickly maneuvering ideas. We call them generically them them thematic ETFs. Do you see any overall trends happening in this besides the obvious fact we've got robotics and work from home and now SPAC ETF that's coming? I think everyone in the ETF industry is quite innovative. So they're looking for ways to provide exposures that people, want. So there's a lot of smart people who are trying to come up with new types of indices and new

types of exposure. So yeah, I think you're totally right. I think right now there's a new filing. So there's five SPAC products that have been filed. So yeah, any opportunity to bring out a new idea that would be a theme for people to invest in is clearly where the industry is focused. Yeah. And that SPAC, Ethiopia, the one that I talked about a couple weeks ago, SPA-K, not out yet, but filed but not approved, so keep an eye on that. I want to move on and talk about China. We've seen several large China fund companies launching ETFs that are going to be tied now to the Star 50 index. This is this new index that the Shanghai has got for the newest, hottest technology names, which would include and financial likely coming in October. So what's interesting about this, guys, is several China funds have announced they're going to launch these ETFs, but that appear,

for the moment to be only available to mainland investors, not investors outside of mainland China. And Tim, you know, you got to think about this. This is some of the biggest tech names you never heard of. I think you used that phrase are going to be potentially in this. And I guess the question is, is this good or bad that outside investors can't get in on things like potentially and financial being in one of these big ETFs? Is this good news or bad news that they're sort of restricting these ETFs initially? Well, it's unfortunate. And I think one of the issues that China has faced with a lot of their markets and inclusion in global indices, although they're doing this and they've been doing this with their fixed income markets and they've been doing it with their commodities markets,

but the ability to have enough liquidity and enough access, it's one of the things that China is very focused on, and it's how they continue to up their weightings in the MSCI. They know what kind of the benchmarks for them are. But as you're saying, a lot of the, The Star 50 is either locally listed or Shanghai or Hong Kong. And to the extent that some of these names and financial will be listed in Hong Kong. And it does give a lot of global investors who, through whatever platform they invest through, access to Hong Kong stocks is largely prevalent. So the point simply about the size of the opportunity for China tech and where U.S. investors should be exposed. When I say these are some of the biggest companies you've never heard of, I'm talking about Netis or 10-cent music, which is bigger than Spotify, if you look at their total audience.

The sheer size and financial is going to come to market and be bigger than almost every other financial company in the world. Other than, and certainly in payments, it's going to be a smaller company than Visa and MasterCard, but it won't be that far off of where J.P. Morgan is, and it'll be bigger than Bank of America and PayPal and all these other names. So the size of the market, the size of the opportunity, the ability to replicate trends we've seen over here, U.S. investors should stay focused on this because, you know, arguably 10-cent and Alibaba are two of the most important tech companies in the world. And there are a lot of other companies that are coming to market over there every single day, and U.S. investors should stay focused. Yeah. I want to ask Kim, your thoughts on a small topic that really caught my eye last week. Fidelity Magellan Mutual Fund is legendary. It was run by Peter Lynch up until 1990, probably one of the greatest investors of all time. But they announced they're going into an ETF format. Now, I thought this was amazing because it's going to be an active non-transparent format because, you know, that makes sense because they're actively managed.

But like almost all funds, this Magellan Fund has notably underperformed the S&P 500 for many years. So I guess, Kim, am I trying to stress too much? is this, this is another sign of capitulation. Here's a very, very famous fund that's basically saying we're going to go to an ETF format, although we're going to try to keep doing it in the active, non-transparent format, so we're not going to reveal exactly what we have. Am I trying to make too much of this? I just think this is another one of those capitulation moments by the mutual fund industry

into the moving into the ETF format. No, Bob, I would totally agree with you. This fund's been out there for 57 years, and it's definitely not the fund that it was when Peter Lynch was running it. And like you said, it's underperformed. It's benchmarks. It's probably most of the underperformance is from the 77 basis point B that it charges. But I think, as Tim and Debra have mentioned here, what's happening is if they were to come out and say, hey, we're reconstituting this, and we are now going to be a thematic innovation strategy, not just growth,

but we're focusing in on where the puck's going, on innovation, on great themes. Then you could maybe say we're going to go ahead and give this thing a second derivative life. But to just go ahead and change the wrapper and still have the same underlying kind of benchmark growth, less your cost, does not really – doesn't really excite. and probably shouldn't excite people. I don't think it does. But Deborah, still, it is a sign active, non-transparent is having a moment here this year,

and they are going to pull funds out of mutual funds and into the ETF format, even if it's essentially the same thing, there will be lower costs and there will be more tax efficiency. So to that extent, it's a good story, isn't it? Or am I looking at this the wrong way? No, I think you're totally right. I think ETS are more tax-efficient.

are more tax efficient than mutual funds, and they're less expensive to run than mutual funds. So there should be some real benefits for the investors. And clearly, if the fees are less, performance gets better. Yeah, I agree with that. Okay, guys, thank you very much. Now it's time to round out the conversation with some analysis and perspective to help you better understand ETFs. This is our Markets 102 portion of the podcast. They will talk about companies rebranding active mutual funds as ETFs. My producer Kirsten Chang joins me. Bob, Fidelity made news late last week by announcing it would be repackaging its famous Magellan Mutual Fund in an ETF wrapper. Can you explain exactly what that means, how it works, and what the broader implications of that might be for the future of active, non-transparent ETFs, which is something we've talked about before.

Do you expect this trend to keep growing? Kirsten, this is one of those little announcements that don't sound like much, but I think are really an indication of what's going on, what the real trend is. So the Fidelity Mutual Fund is a legendary fund. It was run by Peter Lynch, one of the possibly greatest investors of all time. Now, he left that fund a long time ago in 1990, but it still resonates with his imprint. It's an actively managed fund. It's going to be going into an ETF format. They'll keep the original one, though it is going into an ETF in the form of active, non-transparent format.

Now, what that means is they are not going to reveal exactly. what they're owning on a daily basis. You only find out essentially on a quarterly basis and that after they have taken positions. Now that makes a lot of sense. This is actively managed and active non-transparent funds are having a little bit of a moment right now in ETFs. But a couple points here. Like almost all active funds, this famous fund, the Magellan Fund, has dramatically underperformed the S&P 500 and has seen outflows essentially for many years. So this is a sign of the the times. Here it is one of the most famous actively managed funds in the world that's essentially announcing that they'll be doing a ETF format. Now, what they're looking for is the same thing

everybody else is looking for. The mutual fund business is losing assets because ETFs charge lower fees and generally, not always, but generally are more tax efficient than their mutual fund brethren's. The people who manage the mutual funds, the active managers, are trying to figure out a way to do all this active management in an ETF wrapper. It's going to cost them. They're going to generally have to charge less money, but anything they can do to sort of stave off the losses. And since money's going to ETFs, the hope is active, non-transparent ETFs will somehow stem the losses. My attitude of this is very simple. ETFs are a better format. However, if you're a mute, If you're a mediocre mutual fund, you are not going to suddenly turn into a stellar, actively managed

ETF. You're still bringing the same investment, same ideology along with you. If you've underperformed for years, the chances are you're going to underperform even if you're an ETF. So that's my main point to everybody else. To the extent that they can keep costs lower, I think that's terrific. I expect the trend to keep growing, active, non-transparent ETFs because the industry, the mutual fund industry, has got a lot of money. And it's slowly but surely seeing outflows. With that said, it's amazing how sticky this business is. People tend not to move their money around. They stay with funds that will charge them 1%, 1 and a quarter percent for years and years, even though if someone spent 10 minutes to them explaining, you're not outperforming, and you're getting charged a ridiculous.

fee and effectively you're not doing very well compared to everybody else. If somebody spent 10 minutes explaining to this to a lot of people, they would pull the money out. But most people, it's amazing how little attention a lot of people pay. I've said before, not facetiously, that people spend more time trying to figure out who's going to win the Super Bowl than they do about how their retirement money is going to go. People find finance very intimidating, and they tend to leave it up to so-called experts who tend to overcharge them. So this is one of the reasons that I've been so involved in the ETF business and so very much behind the trend because in the long run, it saves money even for people who are not very actively involved as investors. Long-term,

it's lower costs. So there's a trend to keep an eye on. And when you see, you know, something like Magellan going into an ETF wrapper, that's a sign of the times. That's it for today. I'm Bob Bizani. Thank you for listening. And make sure you tune in next week. And in the meantime, you can tweet us your questions or topic ideas at ETF Edge, CNBC.