Yahoo Finance anchor Julie Hyman sat down with Franklin Templeton President and CEO Jenny Johnson at Exchange: An ETF Experience in Miami on April 13th, 2022 to discuss Franklin Templeton’s experience as both an active and passive ETF manager. (Video courtesy of Exchange: An ETF Experience.)
Video Transcript
JULIE HYMAN: So welcome everybody. Welcome to Jenny. And I’m going to dive right into it and talk about the role that you guys have played in ETFs in the ETF business since that’s why everybody’s here. Franklin Templeton’s first ETF was in 2013, and then you introduced another line, the Libertyshares line up, in 2016. And obviously, there were some people who had been in ETFs for a long while before that.
So what was then the trigger, the thing that flipped your switch to get in? And then how did it affect that timing? How did it affect what products you guys decided to offer?
JENNY JOHNSON: So in 2013, we did it as a fluke. It was a short duration. And it was– you guys may remember back then they were talking about capital requirements on money market funds and things. And we were like, that’s going to kill money markets. We should do some other– well, why don’t we learn ETFs?
And I got to tell you, we did not understand it at the time. Because we didn’t understand this thing called capital markets function. We just thought you kind of launch it like an ETF. So it floated around for a while. And then we realized, wait a second, there’s a whole group of advisors that just sell ETFs for a variety of reasons. And while some people said, oh, you’re late going to ETFs.
The reality is, and to this day, active ETFs only represent 4%. So we came out immediately with a passive lineup, which I’ll talk about in a second, multi-factor smart beta, and active which were both multi-factor and active were very new at the time. We were really some of the first moving into that space. And the only reason we did passive is because we think passive is it’s like driving a car with no safety features and barely have a break.
So it should be really cheap. And there was obviously pricing arbitrage. We’re 40 to 60 basis points cheaper than the other passives out there. And we just said, you know what, let’s just go out there and make beta cheap like it should be.
JULIE HYMAN: How do you do that? How do you make that work for you? How do you make sense for you in terms of the bottom line? Or do you view it as something to get people in the door?
JENNY JOHNSON: Well, so we definitely viewed it as something to get people in the door and to show our commitment. To be honest, we’ve been a little bit surprised that people are willing to pay 40 to 60 basis. We thought, oh, this is going to be a no-brainer. It’s passive. And so it surprised us. We’re now finally years later getting traction there, but it was a little bit of surprise. But it was really about making sure that the message was we’re here to stay in the ETF space.
We think it’s an important– as an asset manager, we look at our intellectual property as essentially in our capabilities as what our investment teams are able to do. And then we want to be agnostic to the vehicles that we deliver it in. And so we want to deliver whatever is appropriate for the client, and there’s just certain distribution really financial advisors and RIAs and others and some institutions that prefer an ETF as a way to receive that investment capability.
JULIE HYMAN: And so if your investment strategists are your superpower, so to speak and what set you guys apart, where are your areas of strength in ETFs right now that you want to see get bigger?
JENNY JOHNSON: Well, I think there’s huge opportunity in the active space for that to grow. And obviously, fixed income is a big one right now that we’re seeing some growth. But I actually think on the equities, you’re going to see it as well. Again, it’s 4% of assets. But at 12% of flows. So I think that people are starting to recognize, we’ve had 12 years of just massive central bank intervention where money’s essentially printed out there, and interest rates were zero. Where are you going to put your money? You put it in the equity markets. Equity markets all boats float up. And we all know in momentum markets, passive tends to do better. Now, introduce an entire rising rates, inflation, supply chain demand question, you could potentially have stagflation. That’s when you need active. And so we think that it’s a real opportunity for active to shine now.
JULIE HYMAN: So again, to take a step back here. So you’re talking about the passive funds that you have that you price lower. You’ve got the active share. I believe the product offerings are still about half and half, if I’m not mistaken. So how do you see the two working ? together? How are they working together for you at Franklin? How should they be working together for an investor?
JENNY JOHNSON: Yeah. So there’s different ways that people use ETFs. So one is you can have a multi-asset ETF that people will just say, oh, this will be my income solution. And I prefer to receive it and it represents my entire portfolio, or it can be a model portfolio, and it could be a sleeve, or you can have a very active macro investor who says, hey, I want exposure to Brazil right now.
So I want to just get exposure. What’s the best ETF to give me exposure? I don’t need to pick and choose which stocks in Brazil I have exposure to, or say the UK, or whatever. And so it just depends on how we want to either be the building blocks or the end solution depending on whatever the client’s needs. And we just want to have optionality for clients.
– And you mentioned Brazil. You guys do have some strong offerings in the various countries. So how do you think about how people should be viewing those right now, especially given there’s a few things going on around the world?
– Yeah I think it’s a time where we’re all looking at it and saying, well, actually country investments– I just had somebody come to me and say, wow, we talk about Russia and Ukraine. What about China? How do you think about China? Some are very positive on it, and some are very, very negative on it with the current lockdowns. So again, I think of those as a way to express whatever your conviction is from an investment standpoint.
And all you’re doing is talking about exposure as opposed to– I believe in particularly in emerging markets, we see this. Active management in equities in emerging markets outperforms. But if you’re just trying to get quick exposure, especially to people who tend to be macro investors and trade in and out, then just a passive quick country ETF is a great solution for that.
JULIE HYMAN: Do you expect most of your growth to continue to come on the active side of the business?
JENNY JOHNSON: So I would like to say– listen, we aspire to hit $50 billion in the next three years in ETFs. We’re about $13 billion now. I think as we’ve gotten traction on the passive, there’s going to be just, at some point, when each of these has a certain scale, it’s hard to ignore the differential with what the alternative products are, and we’re seeing that. You’re starting to see bigger and bigger tickets there.
I do think that there’s a possibility that we hit that kind of hockey point on the passive side, where we’ll see accelerated growth there, because it’s just a no-brainer. But I would like to see and I think– because I’m passionate about active. I think that there’s value that is added in active management in both fixed income and equity. I would like to see more growth in those, and we have a couple of billion dollar fixed income ETFs. And I think in this– like I said, in this environment, I think active is going to continue to outperform.
JULIE HYMAN: As you pointed out though, sometimes there’s a differential between the quality of the offering or the price of the offering in the case of the passive and the adoption of the offering. And so when you’re talking about going from $13 billion in assets to $50 billion in assets in the ETFs, how do you get there? Besides talking to folks like this, who you want to look at the stuff, what’s the plan for and the roadmap for how to get there?
JENNY JOHNSON: It’s funny. In asset management, I’m telling you like the investment people probably represent about, I don’t know, 8% of the industry. And they actually wonder what the other 92% do. And in many ways, it’s a lesson for us on distribution, which is we made sure we got the investment capabilities right on the ETFs. We assumed you could apply your traditional mutual fund, say, Salesforce into an ETF. But the reality is the buyers of ETF, in many cases, are different.
And so we’ve had to go through the process and think, all right, we’ve got to retool and rethink about insuring. Because I always say it’s 50% of the game is making sure we are structured from a support and a distribution to be able to support those products. And I’m not sure we did it great initially. I would also– the same thing goes for alternatives. I’m passionate about alternatives ultimately coming into the retail channel.
But it’s a little bit of running with scissors. We’re talking about very illiquid asset classes and a risk to the average person who may need their money. So finding the right way to do that and the right investment vehicles as well as strategies is really important. But also, what we’re learning is having the distribution support to be able to sell those types of products is different than the traditional way that you had to do it.
And to be honest, I’m not sure that everybody has figured it out, particularly on the alternative side. So we’re all right now, I know it, because talking to my peers, there’s kind of a mad scramble to figure out how to do this.
JULIE HYMAN: And also talk to me about how it fits into the overall Franklin wrapper and business. Because we talked about $13 billion now $50 billion goal, $1.5 trillion is what you guys currently have as your AUM. So how do you think about the importance of ETFs as a growth engine, as a marketing tool for the company and the role that it plays?
JENNY JOHNSON: Look, as I said, I think that our job is to be agnostic to the vehicle and pick the best vehicle for the situation. And the reality is an ETF versus a mutual fund– listen, why were mutual funds seemingly more expensive? Well, there was a lot of distribution and services fees embedded in a mutual fund that are not embedded in an ETF. ETFs are sold by fee-based advisors in the high net worth space.
And so a mutual fund seemed expensive. It was almost like double dipping. We don’t mind having the same investment team do mutual funds as well as ETFs. Our DynaTech has been our big innovation fund. It’s a phenomenal fund. But when we launched the ETFs, we did thematic, genomics, AI, e-commerce. We picked thematic ETFs. But it’s the same investment team who provides the research to the mutual fund. So again, and I think CITs, Collective Investment Trusts on the retirement side didn’t really– they weren’t that big 10 years ago.
Now, they’re a huge percentage of that. So it’s being flexible. I think tokenization is going to massively impact what types of products can be brought to market and what actual investments can be included. So I think that the way I view it at Franklin Templeton is our job is to make sure that we’re staying on top of whatever those vehicles are to deliver our capabilities and ensure that they’re the best offerings for the client.
JULIE HYMAN: I want to come back to tokenization, but just to move off of that for just a second. You guys have done some big acquisitions. Legg Mason was one of the biggest ones, not just for you guys, but for the industry also. You’ve done some alternatives. You’ve done indexing, some other areas. Where do you still see gaps that you want to fill or areas that you want to enhance through maybe making some acquisitions?
JENNY JOHNSON: So we looked at acquisitions in three areas, either it was going to fill product capability. I’ll say product capability. It was going to fill a geography. Maybe we had that capability, but we didn’t have a geography. Example, we bought Benefit Street Partners, which is a private credit manager. They’re a $32-billion US private credit manager. You go to Europe, they don’t want to buy US private credit. They want European private credit.
You go to Asia, they don’t want US. So that’s filling in a geography of a capability that you have. And then finally, one of the things that Legg Mason did for us is we had been 75% retail, they were 75% institutional. It just diversified your client base, so filling that in. But I feel like we’re pretty good there. So they’ll usually be capabilities or geographies.
JULIE HYMAN: And then bring that back to ETFs for me and how that then can inform your ETF capabilities or would you even be looking to buy more product?
JENNY JOHNSON: Well, So take Legg Mason, it’s actually doing really well right now, our low vol, high dividend. So I want to be in the equity markets, but I’m going to take a little risk off the table is like Legg Mason product. So whether it’s ClearBridge, Brandywine, Western, or Martin Curry, they all have ETFs or are in the pipeline to have ETFs. So again, it’s taking that capability and saying what is appropriate to deliver through an ETF?
JULIE HYMAN: And then how do you figure out if that acquisition has worked? Or how do you figure out if it measure the success of it as you’re digesting all of these various buys?
JENNY JOHNSON: When we did the acquisition, we were trying to fill in certain things. And we achieve those, which was certain gaps in our product line. Core Plus Fixed Income was a massive gap at the time. It was the largest asset class as far as flows. We knew we wanted to grow in alternatives. Clarion Partners is unbelievable. I’d put them up against BREIT any day. And they’re a $72-billion real estate manager.
So we gained the products. And as I mentioned on the client side, what has been really interesting is the infusion of talent. So just getting an outside– Franklin tends to have very long tenured employees, and so getting some infusion of outside talent. I think in bringing the two firms together has been really great in a time with an industry that is changing so quickly that you have to make sure that you’re continuing to feed yourself in how you’re thinking.
You’re constantly– and I worry because I think right now, I say to people, I’m less worried about my competitors and I’m way more worried about the startup that’s coming along in a fintech. Or honestly, venture capital, private equity, I think they’re being very aggressive in trying to move into traditional asset management. So you’re bringing in talent. And then the key is in this business, there’s going to be massive investments in technology, AI data.
Data is really, really expensive. To be an active manager, you have to be exceptional at being able to understand non-traditional sources of data to gain insights. That’s expensive to do. Collaboration amongst our investment teams, we think that’s a strategic advantage. So we just had when– example, when COVID hit, you may recall that US treasuries, the most liquid asset class in the world, froze up for a day. We were able to pull together the CEO of Western Asset who’s talking to Treasury Department because he’s so wired in their, Benefit Street, our private credit, our three macro managers, our global fixed income on Franklin and get them in there and talking about what they’re actually seeing in the different tiers of credit.
And to prove the point is whether it was valuable, about six weeks later, we were doing the call initially daily and then it became weekly. I said, look, I hate doing calls just for the sake of a call. Why don’t we turn this into a event driven call? And the head of Western said, you know what? This is incredibly valuable to me. I’d like to keep it up for a while. Same thing, Russia and Ukraine, we’re able to pull in experts from across our groups to understand from a commodities, from a technology, the neon gases and the gases and how do they affect the chip making.
It’s not something a lot of people talk about. Nickel, how does it affect batteries? Not just oil, gas, wheat, and corn. There’s a lot of other factors in there. And being able to get experts from various teams coming together, opening it up for investment teams to hear about, to submit questions, I think is a real advantage. I think there’s any other firm that has the ability to pull that kind of fundamental capability together.
JULIE HYMAN: I know that you are passionate about innovation, technological innovation. You’ve mentioned– you’ve alluded to a couple of times. And I want to talk more about that, especially since you also said something I thought was interesting, which is that people who go to Franklin tend to stay at Franklin for a long time. So if you are looking at technological innovation, where are you getting that from? Are you acquiring? Are you hiring people to come up with new ideas? And then whether you’re talking about tokenization/blockchain, digital wealth, AI, how is that being integrated into the business?
JENNY JOHNSON: So I think a couple of things. So fortunately, we’re headquartered in the heart of Silicon Valley. So we actually have a great location for that. About five years ago, opened up an incubator. We’ve done digital wallets. I hate crypto, crypto wallets and digital wallets. We have fractionalized farming in there that’s been technologically driven. All of them are companies that we think can be disruptive for asset management or financial services, because we want to stay on the forefront of that.
That led us to opening a venture capital fund as well as we’ve had the first mutual fund approved with a blockchain mutual fund. So think about– I can’t say stablecoin because that’s in the crypto world. Ours is a regulated mutual fund, but it’s on the blockchain. And that led us into managing nodes for people. Led us into launching our own venture fund. You have to stay on top of– and if you tell people you’re going to invest, they’ll come to you.
Now, we worry about the ability to keep up in the case of blockchain. And so we’ve launched, with four universities, contests. Two in the US, two in Poland, where we’re basically saying to college students, hey, you want to launch a company in blockchain? We’re going to have a contest. We’re going to fund the winner. And oh, by the way, we suddenly get skilled people to do programming in blockchain. My goal as CEO is to spend 30% of my time focused on disruption to the industry.
JULIE HYMAN: And to be clear, you don’t hate crypto. You hate the word crypto. Is that what you’re saying?
JENNY JOHNSON: I hate the word crypto. I’m a big fan. I actually think that people underestimate. So the prior speaker, every conversation–
JULIE HYMAN: You should’ve seen her backstage, by the way, you guys. While Matt and Dave were talking, she was talking at the screen. She had a few thoughts.
JENNY JOHNSON: Well, because here’s why. Every conversation about digital assets goes down the rabbit hole of Bitcoin. Bitcoin is like a piece of art. You and I agree it’s worth X. It’s worth X. And I went from but any day, it can be worth zero. But talk to somebody who lives in Israel whose money was taken by the government, and you’ll hear them why they want to leave some amount invested in Bitcoin. You talk to– I was in the Middle East soon after the war in– Putin launched his war. And honestly, they were incensed by the fact that the US would take Russian reserve dollars.
So you’re going to start to see countries saying, you know what, not sure this dollar thing, it could become political. I got to park it somewhere. So I do think there’s something there. However, Bitcoin is the biggest distraction from the greatest disruption that is happening to financial services. And I’m just going to leave you with two thoughts and why you should care about it. It is going to disrupt how money is raised and invested in equities.
So Web 1.0 was think about it as read it. It was like a billboard. Remember, you put up your website, for those old like me. You put up a website and you just left it there. And then Web 2.0 became write it. It came transactions. Let’s communicate to each other. Web 3.0 is read it, write it, and own it. Because blockchain’s going to enable– because technology can enable with smart contracts a different level of ownership.
Two examples. Today, if you Google, you would agree that there’s some economic value that you bring to Google. And they capture 100% of it. There is a very poorly executed search engine leveraging blockchain where when you use them, you get paid in their coins for, let’s say, I don’t know what it is, but let’s say it’s a third of the economic value. Suddenly, you’re starting to own a little piece of what you bring to it. It’s the social environment of it.
Another example, there’s a company called THETA TV. THETA TV wants to be the fastest streaming service out there. When you watch THETA TV on your device, you are agreeing to allow them to cache, you’re basically allowing your device to becoming part of their infrastructure. They cache the content. And then when Julie wants to watch it over here, boom, it goes to her. All it has to do is leap from my device to her device. And they pay you in TFUEL.
Ethereum– it drives me nuts that Ethereum trades like Bitcoin. And I thought his explanation of risk assets was a good one. But Ethereum is like when Steve Jobs came out with the iPhone, we all thought was, hey, this is pretty cool. I’ve got a phone. I got GPS. I have a flashlight. I have music. Well, this is great. What he understood that what Apple was doing was they were unlocking the imagination of the people and providing a platform to do it. That is what Bitcoin or that is what blockchain is doing.
And so when we talk about tokenizing alternatives or we talk about democratizing alternatives, a phenomenal way to do that is leveraging blockchain. Because imagine if I owned the Empire State Building, I can sell it to a million people. Today, if I did that, each one would have to get sign off from everybody else. Because that would be in the rules, and I’d have to go to a title company. But imagine if all that’s encoded in the smart contract and the token.
JULIE HYMAN: So Jenny, what does Franklin do? How do you get a piece of that? What are you–
JENNY JOHNSON: Well, so one is I really want to understand it. But here’s what we’re doing. So we have the tokenized money market fund. We’re a node validator. You remember it’s a distributed ledger. So you have independent nodes. Why will governments want blockchain? One, I can tax you because I know who you are. And two, it’s better from cybersecurity. Because while I run my node, there might be 19 other people who run the node, all with an independent cyber environment.
So if Russia wants to come in and breach mine, they have to figure out who the 19 are and what their architecture is, which makes it much difficult to do. So we run– and by the way, we get paid to run nodes. So we run nodes. We have some strategies that we have seeded. We think eventually, when this becomes regulated, that your clients will want to have some allocation to it. So we want to have ability to have a well-managed active crypto portfolio. We buy loans that are generated on the blockchain. So we’re doing a few different– and we have a venture capital fund.
JULIE HYMAN: There’s a lots more I wanted to get to, which we’re not going to have time to. But I do want to ask one provocative question that came up on the screen in our last two minutes. Somebody asked, if mutual funds are eventually going to go away to be replaced by ETFs.
JENNY JOHNSON: So I think that there will be a place for mutual funds. But they will not– and why do I say that? Look, there’s no question that the tax inefficiency of mutual funds exists versus an ETF. But the reality is on the active side, I’m pretty sure transparent active is what has won. There are certain strategies where transparency could hurt. If you’re running a small cap fund, you can’t tell the world where– as you’re building a position. There’s just not enough there to do. So there will be certain strategies where it’ll be better to have it in a mutual fund.
But it will certainly– I think honestly, SMAs, Separately Managed Accounts, direct indexing, all of those become a bigger part of the solution. ETFs and mutual funds will just shrink, but I don’t think they go away.
JULIE HYMAN: All right. Jenny Johnson, CEO of Franklin Templeton. Thanks so much guys. Thank you, Jenny.
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