ASSET MANAGEMENT IN THE ERA OF CONTINUOUS CHANGE

Columbia Threadneedle Investments

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[SUDHIR NAIR]

It's a beautiful day. It's Marathon Monday. And what better day to talk about our industry, which on any given day can be described as both a marathon and a sprint?

Ted, you've been the CEO of Columbia Threadneedle Investments for over a decade and have been with the firm since 2001. You've seen a lot, including financial cycles and a pandemic. How have you seen the asset management industry change over the last 20 years?

[TED TRUSCOTT]

There are so many changes over the last 20 years, and I'll probably group them into a couple of different places. We'll start with technology because it's so important and part of our topic here. But when you think about technology, the first thing that I point out is, is that, you know, you've got technology that has allowed for the evolution of vehicles in our industry.

So, the mutual fund is no longer the preferred, if you will, vehicle to deliver pooled asset management. You've got other factors in play, like ETFs, active ETFs, SMAs, personal indexing, fractional shares. There's just been a lot of development. A lot of it is in some ways a symbiosis between both technology and, of course, operational infrastructure that goes along with it.

And so clearly that's been a huge development. And I think it's going to continue to evolve and, quite frankly, make things better for the investor as we go along. More choices, more vehicles by which they can access those choices. And that's terrific.

But what I'd also say is the industry's changed a lot just because it's gotten to be a much more competitive situation and the performance has never been more important. And that's exciting, by the way. That's not something we shy away from. It's something that we get excited by. It just points to the natural evolution of the industry through time. So that's been a big change as well.

And I think those two are the dominant themes, but people have had to be flexible and adaptable here, Sudhir. You pointed it out. We've been through one financial crisis and a pandemic. I think that's about enough for 20 years, don't you?

[SUDHIR NAIR]

Something tells me we're not done yet, but let's fingers crossed. What about clients? How have clients changed over that period of time?

[TED TRUSCOTT]

Clients, I think, have availed themselves of a variety of choices, and clients have, both through financial guidance and through institutions, become in many ways more demanding. They've always been performance sensitive, but I think they've become more demanding. I think they've become more price sensitive, quite frankly.

And I think that they know that there's a wide variety of choices out there, which heightens the competitive game. At the end of the day, clients know that they probably have two or three very viable choices when they're looking for somebody to manage money for them, and they're going to take advantage of that situation.

I think the client has won for the last 20 years, and we celebrate that. We're all about the client, you're all about the client. And it's exciting that that is the case, but it just makes the job harder. And again, we don't shy away from that. We're competitive. We're very happy to rise to those challenges, but it has definitely made the game tougher.

[SUDHIR NAIR]

Expectations continue to go up. I completely agree. So, you've built a thriving and successful business, both organically and through some of the industry's most innovative and largest acquisitions. What would you say has been the secret sauce throughout Columbia Threadneedle's transformation, and how you've led it to be one of the leading global asset managers?

[TED TRUSCOTT]

Well, first of all, thank you for the compliment. Look, at the end of the day, culture is extremely important. So, we have really emphasized a couple of things, and I'll talk about that both within the context of an acquisition and then the context of just how we try to operate ourselves.

In the context of an acquisition, we've always sat down and made the tough choices, but the necessary choices. And we've tried to make very fair, clear, and quick decisions when we've done acquisitions. And I think that's been very helpful to us. And then on the cultural side, we have emphasized working together and a global mindset.

So, the working together piece is we work for and with each other. We're all in this together, and we need to cooperate, we need to share information seamlessly. And that global mindset—and we have four cornerstones that underpin our business. But global is a big piece of that. And embedded in global is number one, if we share our ideas around the globe and let the information get across the entire complex seamlessly, we're doing a better job for the client.

The second thing is, is that we don't think that any one region has a monopoly on any ideas. So we want to make sure that we act in a global way. The client sitting at the center of the room and then benefiting from a global environment has really benefited us.

And finally, most of our people, the vast majority, check their ego at the door. We have really never celebrated a star system. We would much rather have a team system. And we hire in this image. But culture matters. I think you know this as well as anybody. Culture matters. And an asset manager, it's human capital. We need a good culture in order to hang together and serve the client well.

[SUDHIR NAIR]

It's definitely all about the people. I know that firsthand. There's a tension in our industry. And to be honest, our industry hasn't always been the best in terms of thinking through efficiencies and streamlining processes. Now, obviously, over the past decade, there's been a real thrust there to improve, and I think we're making great progress.

But how do you think about the balance between folks on your team, leaders within your business wanting to do the next new thing, and considering that innovation, versus really focusing on scale, process, efficiency, things that might not be the most interesting, exciting, but at the same time, you know, really affect the bottom line and how you service your clients?

[TED TRUSCOTT]

That's a great question, Sudhir. And I think in some ways the market is helping us answer that question a little bit. So, you're absolutely right that what we can affectionately just refer to as the operating side of the business has in many ways not taken front and center for a lot of asset managers.

Let's face it, a lot of asset management companies got started with either some very bright investment people or some very bright sales people or a combination of the two, and the back office was left to be the necessary piece of what had to be done here to fulfill obligations to retail and institutional clients.

We've certainly gotten very serious about what our back and middle office look like, and there are a lot of reasons for that. But having an operating platform that can get ever more efficient is going to be hugely necessary because of some of the trends we talked about earlier, namely the evolution of vehicles, the evolution of personalization, the evolution of customization.

And so, when you think about our business, our business is a scale business. We all benefit from scale. And I'm not saying that's going to go away, but I do think more customization is going to be part of the business. That's anti-scale. When you begin to customize, even if it's mass customization, it's anti-scale. And so, you've got to have a really efficient operating platform to be able to deliver that scale and all the things that come with it.

You probably know this better than anybody, Sudhir. It's hard, hard work, but it's very necessary, and it's very much a part of what our operating model is, is continue to evolve towards those platforms with, quite frankly, fewer systems, but systems that can connect with each other and serve the client well. You're right. A while ago, people would have just said, no, I want to do the new thing. And the new thing is not so easy anymore.

[SUDHIR NAIR]

Without a doubt. And certainly with continued what seems to be higher rate environment for longer than people either anticipated or were hoping for, I think it will only continue to put more pressure on operating leverage and being able to extract it that way.

[TED TRUSCOTT]

I agree. It's amazing what happens when the cost of capital goes above zero, isn't it? People ask me about this all the time. I'm like, well, I don't see rates going back to 0 in my remaining lifetime. And if they do, we've got a much bigger problem on our hands.

[SUDHIR NAIR]

Let's stay on scale for a minute. So, I personally have seen over the last two decades the response, thinking, and attitude towards outsourcing. Outsourcing of activities has changed quite dramatically and continues to change for many of the reasons, Ted, that you just touched upon. How have you thought about core competencies that you want to invest in and develop versus where you've thought to look to find a partner who might be able to achieve either a better deliverable or more scale than you might?

[TED TRUSCOTT]

I will say freely that our thinking continues to evolve on this point, because you can segment this business into your series of core competencies. And of course, because we're an investment management firm, that core competency sort of begins with your front office investment people. And then you naturally get to some of the other functions that you support the client with, including client service and sales, et cetera.

And so those can be thought of as the necessary core competencies, which means that you could think about the outsourcing opportunity and both back and middle office. Middle office is harder, to be honest with you. There's a lot of work that gets done in the middle office that is very sensitive for a client, not the least of which is client reporting and performance.

So, we continue to have an open mind towards outsourcing. We are going to think about it deeply because once you make that decision, you're pretty committed on that because your outsourcing partner—and you use the right word there, Sudhir, it's a partner. So, if you outsource part of your business, you have a partner with you. That's the mindset you have to have.

Now, the other side that we also know, though, is when we get to a certain scale—and we're at that scale, you're much more at that scale—you can also do this in-house. Because you can attract the talent, you can achieve the operating efficiencies, et cetera. So, a lot of it does come down to not just what your philosophy is about core competency, but it's also about, who can you partner with? And is that going to benefit the client at the end of the day? And that's really the key consideration.

[SUDHIR NAIR]

Maybe we shift gears back to culture and spend a few minutes on talent. So, our industry continues to be a talent magnet. Our industry continues to draw some of the best minds from around the world, including many recent grads just coming out of undergrad or master's programs. When you think about talent, and when you think about building the team of the future, what types of things do you look for?

[TED TRUSCOTT]

So, talent is absolutely key, and we spend a lot of time on talent. And I also think that the industry is so competitive and has been for a while, but so competitive that people are always trying to upgrade their talent, often at the expense of other players in the industry, by the way. But we definitely want to have the best talent. We think that's how we serve the client best.

But the other side of it is, you asked a very good question in regard to, what do we look for? Well, for people coming out of school, we can tell you that in the research department, we won't hire anybody who can't program in R or Python. So data literacy, as it's now known, is absolutely fundamental, particularly if you want to go into the investment management side of the business. That's just a skill set that you have to have.

Obviously, the generations to come are going to become much more fluent in the use of AI and other techniques like that. So, we're going to have to hire with an eye towards that end of the business as well.

[SUDHIR NAIR]

Do you think that will put less focus and less of a requirement on having those sort of core technical skills and being able to write in these programming languages?

[TED TRUSCOTT]

See, that's very interesting because when you think about writing, I think about writing in two ways. So the first is, can you program? Can you extract data? Can you then crunch that data to essentially get to the answer faster than the next person? We like to say that we flip the triangle here at Columbia Threadneedle, meaning that we basically are spending a lot more time analyzing the information than gathering it.

But writing is key. The English language is still the way that we communicate—or for in Europe there are obviously other languages, but people need to be able to write to communicate. We were heavily reliant on email like a lot of other people are. And when you get something that's not well articulated these days, it's problematic.

So as a person who's a supporter of Liberal Arts education, we want to see people who have data literacy but also have literacy from the standpoint of they can write, as in the old-fashioned way of writing. And we look for that as well, because you have to argue a good investment thesis here when you're recommending a stock or a bond. And that's going to be critical that people are able to continue to do that, but also have these new fluences—data literacy being chief among them to serve our clients well.

[SUDHIR NAIR]

So, I couldn't agree more. In fact, I think we've both probably played around with GPT or some of these newer technologies. And I would tell you, nothing's dawned on me more than it's all about the question that you ask and how you frame it. And right now, there's a lot of buzz around prompt engineers and these new roles, but that structured thinking and being able to really write I think is going to continue to be a differentiator and a skill set that we're all going to need to hire for and build up on our team. So, completely agree.

[TED TRUSCOTT]

Yeah, it's fascinating. As GPT evolves, this notion of asking the right question and phrasing the right question is becoming very, very interesting. So people can play around with this thing. But if you want to hone in on what you're really after, the phrasing of that question is going to be ever more important.

It's very interesting because I've just been amused as I've watched the whole notion of AI and large language models develop. And all of a sudden people are really focused on, can you ask the right question as opposed to can you ask a question.

[SUDHIR NAIR]

What we're focused on right now is very much trying to leverage new technologies like AI to make existing processes better, making it easier for our clients to ask questions or access information on our website, or potentially creating efficiencies within our engineering teams on how quickly and efficiently they can write code.

But a lot of that is focused on the existing making it better. When you look out over a few years, do you see some wild paradigm where AI just fundamentally disrupts the investment management process or industry?

[TED TRUSCOTT]

So that's a great and fascinating way to get to what I think is probably the number one interesting paradox in our industry. And that paradox that I've sort of probably struggled with for the better part of 35, 40 years is that there's a lot of talent to underlying investment decision making. That is, quite frankly, there are just some really good investors out there who make great investment decisions and you can't always say why.

So there's always been, I think, a little bit of a battle between can we boil down investment decision making into processes, a set of processes that we can improve upon continuously. And there is certainly a part of Columbia Threadneedle that says, yes, we can absolutely do that. We have a whole internal, call it, Six Sigma for investment folks. We call it 5P, and we basically are always looking at improving the underlying pieces of the investment process. So yes, there is a lot can do to continue to improve that.

But then there's this other part of this, which is, gosh, we have some extraordinarily talented investors and they've honed their craft over time. And I could use a professional sports analogy, I could use an acting analogy. I could use other services out there where you just have some people that are truly talented, and they add to the equation.

And so that leads me to my answer of no, Sudhir, I don't think AI is going to blow apart investment decision making and change the paradigm. This business is both science and art. The scientific part of it we can improve on continuously through better processes, better analysis of what we're doing. The artistic part, that's part of our hiring.

[SUDHIR NAIR]

Well, I think we would share a lot of the same views. And I think calling them artists is very appropriate in this context. So maybe it's not AI and obviously, yes, I think we're both in agreement, there's going to be a lot of change on the back of AI. But is there something else, when you think about two, three, four, five years out—maybe even on a longer horizon—that you think is a mega trend, a mega force that is going to impact our industry?

So you talked about different vehicles, you talked about personalization. What about something like private markets? What impact do you think the private markets are going to have on how we build portfolios for our clients?

[TED TRUSCOTT]

I think private markets are going to have a huge effect on the business going forward. And there's a lot of reason for that. But let's just start with regulation. The reality is, is that the private credit business is exploding because banks are not really in the business of lending anymore. That regulation is in the form of capital charges, has made it very expensive for banks to keep loans on their balance sheet.

So a lot of this is morphing into the private credit space. I don't think that's an unwelcome trend at all. I think it's actually something that is a natural evolution. Private equity is clearly a force to be reckoned with out there, but there are lots of other private assets—real estate, infrastructure, all these kinds of things. And so, I think there are going to be a huge part of the portfolio.

But back to our vehicle discussion. I think what we're struggling with when we think about a vehicle that allows us to deliver private assets or illiquid assets to a retail customer, that's where it gets problematic. So very sophisticated, high net worth individuals can sign a PPM and they can basically say, yes, I can handle the illiquidity.

But as we begin to bring that down to a, shall we say, more sophisticated but more mass retail audience, the search for the right vehicle is going to be paramount. So, there's no question that private assets can help diversify the portfolio. There's no question that the longer run view that many of these asset classes can have, I think is beneficial.

I do think that the industry has done—and by the way, regulators as well, I think that we've probably geared people a little bit too much towards liquidity. Liquidity is important, don't get me wrong, but up to a point. And then at some point that liquidity and the ability to access your money quickly starts to work against you, which is where the private assets come in.

And so, part of what we probably need to do is educate people more on the fact that illiquidity is not. A big problem if you've got enough liquidity on the other side of your portfolio where you may need to access your assets quickly. It's a huge trend, Sudhir.

And the other side of this trend too is I think, the evolution of wealth management. I think that wealth management has got 20 years worth of tailwinds behind it. You're going to have continued evolution of the wealth management space that's going to continue to put pressure on asset managers to provide that wealth management solution in a variety of ways.

And then to your point, you've also got the private asset management business, and there are a lot of competitors who have the jump on us on this because we started in the public markets. And so evolving your business is going to be a big, big theme going forward for the next 10 years at least.

[SUDHIR NAIR]

But how you package it and how you ultimately deliver it into channels, including new channels like wealth, is going to be important. And we've seen recently in the past few months, several firms, including BlackRock, have issued crypto assets wrapped in an ETF, which have gained significant interest from a pretty wide swath of investors.

And you're starting to see more and more tokenization, moving from experimentation to gaining some traction there. So clearly, I think, using some of these investment vehicle technologies is going to be a big part of the unlock.

[TED TRUSCOTT]

It is. And you've made a great point on the tokenization space. And I think tokenization is the latest in what one could call an ongoing improvement in securitization of various assets. My biggest worry about tokenization is, are we going to have the platforms to trade these tokens on so that you have price discovery, liquidity, and all those kinds of good things?

I think that will evolve, but it's going to be interesting to watch because it's going to be a little bit different than what we're used to on the market side of things. But this is all interesting evolution and all, quite frankly, beneficial to the client. I celebrate every day because I think this industry, it's so competitive, and that incredible competition that's going on between everybody in this industry is benefiting the client in huge ways. And, you know, at the end of the day, a lot of these trends are just really good for clients.

[SUDHIR NAIR]

Yeah. And I think one of the most enjoyable parts of being in this industry is just the pace of change and the amount of change. So, you've got so many different firms approaching it from different perspectives, but all trying to better serve their clients, and leveraging great ideas and new and innovative technology to just push the envelope forward. And I think that's what hopefully will continue for many years to come.