Building New Financial Products with BlackRock's Stephen Cohen

28:09I have to keep it safe. What's my password? Hey, this is a lot of money and it's a bigger pain in the neck to keep track of than the rest of my assets. I can own this in an ETF. Why do I ever want to own Bitcoin directly? Seems to be what a lot of people are saying. And that's what we heard over and over again. both, again, from people who had held or hold Bitcoin in digital wallets and felt that this was kind of an easier, better way to hold it. Especially when you read the numbers, 25 % of all coins ever mined, it might even be 30%, have been lost. Either the drives were damaged or the passwords were lost.

28:50There's some great stories out there. Crazy. The guy who went out and bought a landfill because he was trying to find the... $200 million worth of Bitcoin on a drive that was accidentally thrown away. So, you know, putting in an iShare probably would have been at least an easier way of owning a landfill. It's kind of amazing, but it raises a question that I've been thinking about for a while. alternatives and privates, whether it's private equity, private debt, private infrastructure and real assets are probably the fastest growing segment of the market. Are we ever going to see something like that in an ETF wrapper, an illiquid alt in an ETF?

29:37Possibly. Look, it's definitely something that a lot of people are looking at, including ourselves. But there There are a lot of ways to, I think the biggest story, I think people jump towards the kind of private markets and ETFs. And the real story is, how do you open up access appropriately for more people to access private markets as part of the portfolio? So if we think about a world which we believe in, which you're kind of moving from, call it 60-40, the traditional portfolio to more of a 50-30-20, where 20 is private markets. And that's applicable to somebody who owns a defined benefit scheme.

30:10In fact, they've got that already, probably more through the way the scheme's managed. But actually, if you then apply that to, say, to other pension types, like a defined contribution scheme or a wealth investor, that kind of journey towards incorporating more private markets into a portfolio, for all of the diversification reasons that we've talked about a lot, how that happens is the real work. And that may end up requiring an ETF. But I think there are lots of other ways that can open up the door to private markets being a bigger part, either a completely new part or a bigger part of a portfolio for an individual retiree or an individual investor.

30:55Again, it comes back to what we were saying earlier on about rather than thinking about different product types, an ETF or a mutual fund being associated with one type of strategy. it's actually saying what are the strategies that we believe would help a client an investor have a better portfolio for whatever their goals are and then how do you best put that together so it's less about the product more about the solution to the to me it's about the portfolio yeah what's the solution exactly what are you trying to achieve you know and if it's a long-term retirement or retirement income whatever it is um and then what does the portfolio need to look like or should look like and how does it evolve over time?

31:35And then how do you do it, right? And what are the kind of mixture of tools that are most appropriate to get you there? That's the shift in thinking. So let's dive into that a little bit. You know, the advantage of stocks, bonds, convertibles, they all come with a QCIP number. It's pretty standard in terms of the custodianship, where it's held, what sort of public information is available, the due diligence you can do about it. how to get liquid when you want to get liquid, all those stocks, bonds, and put convertibles as sort of a hybrid. Everybody knows how to operate around that. It seems like when we look at privates, they're all one-offs.

32:19The custodianships are all a single thing. Doing the due diligence is time-consuming and expensive. The hope is they're not correlated, and you're giving up liquidity in exchange for the illiquidity premium, can that ever be standardized enough that as a wealth manager, I could say, hey, Stephen, I want to move 10, 20 % of these clients' assets to a diversified set of equity debt and real assets. And I want some liquidity. Like, is this a pipe dream? Oh, and I don't want any K1s because they're a disaster to deal with. Like if that were something that was turnkey and available, I would think that every wealth manager in America would rush in that direction.

33:10How long might it be before privates look something like public markets or at least the pain points are reduced to something tolerable? I think we're on a journey. And I think that that is about, first of all, developing investment strategies and therefore and being able to put them in products that work for a wealth manager. Secondly, there's a big, you know, the operational lift, right? The technology development that is happening and we're working with a number of firms around how can we make sure that, for example, model portfolios can incorporate private markets in a more efficient, easier to use way.

33:55it's going to be different to public markets. It should be different to public markets because I think the role of an infrastructure, for example, in a portfolio is different to the role of owning stocks or owning bonds. And I think that part of the way we've always thought about the role of stocks and bonds has been different as well. Bonds as a ballast to a portfolio, stocks as a growth driver, for example. I'm old enough to remember when bonds actually generated attractive yields. Maybe that'll come back. You know, we might need a bit of inflation. But yeah, one day, one day, Barry. Will we be back on the podcast to cover that off?

34:32But I think that different role is very important. But there's a lot of development that is happening to be able to make that more efficient than it has been historically. And I think we will see a lot of change in the next couple of years. You mentioned technology. Let's dive a little deeper into that. BlackRock acquired Prequin and acquired eFront. And I read about some integration into your Aladdin platform. How significant are those tools when it comes to offering private market investments to the public? Incredibly important. I think that, you know, for anybody who is, for a wealth manager who is running a portfolio for a client, it's not just, as you know, it's not just about buying the different products or doing the asset allocation.

35:24It's also about the risk management of what does that portfolio look like. And that's really what Aladdin is about. And as more and more investors, whether that is a retail investor or wealth investor, or whether that's a big pension fund, incorporate private markets into portfolios and blend private and public. And I think, again, if you go back over that 10, 15 year journey, we started with indexing on one side of the floor and active on the other side. And we gradually brought those together and that became commonplace to blend. And I think we're now in that world of starting to blend public markets and private markets, which historically were completely distinct.

36:05And we're starting to kind of blend those because the industries are crossing over, more companies are staying private for longer, et cetera, et cetera. So as we bring those together, the need to be able to risk manage and understand And those portfolios in different scenarios is incredibly important. That's what Aladdin is about. With pre-coin, what is so exciting is that I think over time, the private markets will become more transparent. There will be more data available and around. And very similar to what Aladdin and BlackRock did with public markets will happen in the private markets as well.

36:42And that, I think, will help more and more investors access private markets in the way and understand what it is that they have, partly of which is, again, understanding the different liquidity and being comfortable that they're different for a reason. And you're not trying to create a one-size-fits-all. You're trying to create a portfolio that delivers the right outcomes. Alladin, I think, is going to be critical for that. So let's talk a little bit about product development. Just in the ETF space this year, over 1 ,000 new ETFs have come out, or at least we're on pace to do that by the end of this year.

37:18This sort of hyper-development of ETFs, everything we've talked about seems to be very thoughtful and very measured with a really specific approach. Kind of feels like the rest of the industry is just throwing stuff up against the wall to see what sticks. How do you look at this? we can only focus on what we do so but you have to be aware of what you are aware of what's going on 100 % 3x inverse bitcoin like what why do I want that or why does anyone want that yeah you'll have to ask them I mean I guess it's they want to give people an opportunity to make any type of trade and every type of trade I'm assuming that's not your approach I think there is a lot out there of throwing things out that sticks.

38:06Our approach is very much where do we believe that we can develop products, strategies, exposures that are going to help create better portfolios, right? And if you look at the evolution of the ETF industry and what's happened is it started, you know, go back 30 plus kind of years ago. It started very much with how do you give access to kind of broad indices? And then it was how do you, in equities. Then how do you give access to more granular exposure, like sectors or different countries. Then it was how do you move into different asset classes, like fixed income, for example. And then more recently, it's been something like digital assets with IBIT.

38:46And that's really been the journey of ICS, right? And I think that's been, therefore, the journey of the industry as we've led it. that remains very much our view, how we think about continuing to expand the iShares platform. And that includes now using the ETF technology we've built to take things like active funds and wrap them into an ETF because the ETF is a more efficient way for many investors to actually own those different strategies. But again, it starts with the strategy. And I think that for us, It's about how do you, what is it that you're developing in terms of an exposure or strategy?

39:28Why, how does it fit with the world that we see today in terms of where we think the world is going from a market standpoint and a macro standpoint? How does it fit in terms of kind of a portfolio construction standpoint? You're going to have waves of innovation right now. We're having a huge wave of ETF launches. And in particular, last two, three years, you know, the ETF is, it's gone from being kind of very much on the side of the industry to being very central. We're excited about that. You know, that's what we were what's what we've built at BlackRock and iShares. But it's also meant that ETFs are very much kind of being used more broadly.

40:00And, you know, that's going to be, I think, part of how the industry evolves and then it kind of matures. Especially on the active side where you get all the benefits of mutual ownership without the capital gains penalty that you get in mutual funds. So it makes sense that a lot of active ETFs would develop where they might have been active mutual funds. What else do you see as changing or in the midst of transforming? Is it by asset class? Is it by, you mentioned, geography or sector? What is really in flux these days? So I think that, you know, when you look at, I'll give you a couple of good examples.

40:45So digital assets, I think, is kind of fairly early days. Ibit is incredibly fast growing. It was the fastest to 20 to 30 to 40 to 50 and now hopefully to 100 billion as an ETF. And we, you know, we have an Ethereum ETF. I think there will be more product development in something like that. And again, for us, that's about bridging this kind of DeFi world with the traditional kind of finance world. That's one area. The second area is take something like fixed income. You know, we've been building out fixed income ETF industry for 20 years. The industry is now two and a half-ish trillion dollars.

41:25We think it's going to be six trillion by kind of 2030. The growth is huge. less than 2 % of bonds in the world are in an ETF. Wow. So it feels, and I can tell you, having been on the journey and been out there, you know, kind of pounding the streets on the value of fixed income ETFs over the years, it feels like this has become really, really big. And it has. And yet when you think it in the context of the$140 trillion of fixed income out there, you know, ETFs are still a pretty tiny part of the market in terms of how people own bonds. It's relatively large compared to what it was, but in absolute terms.

42:03But in absolute terms, I still, you know, we're still, to use the sports terminology, given it's the World Series, you know, the first inning, maybe the second inning. And then even if you look at, what's really fascinating is if you look at, and we talked about active ETFs, and again, that's still very early stages. But on fixed income, they actually seem to do very, like the Bloomberg Ag includes everything, good, bad, and different. It seems like it's relatively easy to capture a little bit of fixed income alpha with a handful of screens. You're taking out the lowest credit quality, or you're taking out the riskiest credit that you're not getting compensated for.

42:46Why does fixed income active seem like it's a better bet or a higher probability bet than active equity? I think the historically fixed income, and I go back to when I started, was very much a world of limited transparency and kind of understanding, frankly. I think the understanding for most investors of fixed income relative to, I don't mean investors who are doing fixed income every day, but for most retail investors in particular, I think people have a much more natural affinity to stocks than they do for bonds in terms of kind of the understanding. Bonds feel complicated at times. It feels like it's a world we don't quite understand, whereas equities, you kind of, you know, Google or whatever it is.

43:34And so I think there's always been a sense of kind of outsourcing those decisions kind of more so. The other thing is that the indexing market in fixed income has been slower to evolve. So you mentioned the ag, and people tend to, when they think about fixed income indexing, they automatically go to the ag. Sure. The ag is one index, and it's a very specific index in terms of what it is. It doesn't have a huge amount of credit in it, for example. But there are other indices with Bloomberg for which we have products like Universal that actually are much more representative of fixed income. So part of it also is, you know, what are you benchmarking yourself against?

44:15And I think we went through that experience with equities, and we are going to go through that or we're going through that experience with fixed income. And the other thing we're seeing with fixed income is that we're developing and building the more granular strategies in fixed income. So we're carving up the market in fixed income the way we did in equities through ETFs. So if you want to own zero to three-year government bonds, own S-Gov, if you want to own long-term treasuries, own TLT, if you want to own bits of the different types of credit crossover, you can now do that through ETFs. So, you know, it is an amazing tool.

44:49And what's fascinating about fixed income ETFs is that some of the fastest growing users are asset managers. So fixed income managers using ETFs as a way to be better at their job. And I think, again, that's that blending of indexing. But even in the equity world, equity indices are evolving. We were saying, if you look back to 2000, the top seven, the whole S &P was worth the equivalent to what the top seven stocks were worth six months ago. And so you mentioned earlier in the program, equal weight S &P. We're seeing a lot of demand right now for things like equal weight or capped indices. We launched a top 20 fund, top T.

45:32We did the same thing with NASDAQ. You know, even the S &P 500, owning the top 20 stocks versus owning the 500 stocks is a very, very, very different game. And so even something like large cap U.S. equities, which you would have thought there was nothing else to innovate in, even that has been the area where we've probably done more in the last six months than many other areas because the dynamics of the U.S. equity market have shifted so much in the last couple of years and investors are looking for different things. Coming up, we continue our conversation with Steve Cohen, BlackRock's chief product officer and head of global product solutions, discussing what goes into product development in finance.

46:15I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

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47:25I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Steve Cohen. He's BlackRock's chief product officer and head of global product solutions. He also sits on BlackRock's global executive committee. Since we've been talking about technology and you mentioned the top seven, I'm legally obligated to ask a question about artificial intelligence and AI. What is AI doing to your business of developing new products? How are we thinking about either AI as an asset class or actually deploying AI to help build new products? I think we're seeing AI in probably three areas.

48:11The first one is obviously AI as an investment theme, which is very well publicized, etc. And we're seeing that through things like data centers, obviously stocks, credit, etc. The second one is AI in terms of investment strategy. For example, BlackRock, we're very fortunate to have a systematic group, investment group, that has a 40-year track record and history of delivering really great performance. and they would argue they were doing AI well before it was called AI, when it was called machine learning or whatever it was called before that. It's been around. Most people think it's a new thing.

48:53It's been around a while. Watson played Jeopardy and I forgot the one. Or was it Deep Blue played chess? And Go. Those were 30 years ago. Yeah. So it's gone through its iterations and they've got some fantastic examples of the way they've used machine learning stroke now AI to really understand every single day they will pass thousands of reports, earnings calls, et cetera, transcripts for sentiment. And the investment results of those signals that they create are really quite fascinating and very lucrative in terms of investment alpha. And so we're really seeing a huge demand right now for systematic investing.

49:47And this is something that historically people were nervous about because it was a black box. They didn't understand it. And now people are using things like ChatGPT, et cetera, which is a black box. But they're seeing the value they're getting. And so what's interesting is there's a psychological shift and a greater acceptance of saying, actually, systematic investing using AI. That's really interesting and exciting. And so I think the second thing is we're seeing it through using AI to be better investors. And then the third one is product development. And so how can we use the data that we are able to collect and effectively deploy big data and the AI that we've developed in-house that sits on that to identify what are some of those themes that are coming up?

50:32What are some of the things that clients are talking about or being picked up in the news or whatever it is? And be more kind of systematic, I would say, in being able to see what those are. And also, we are able to use it to test and stress test strategies that are new in different market environments. So, it's a really, again, it's a really exciting time for product development because it's giving us new tools that we didn't have before. So BlackRock tends to come out with these very well thought out, very rational products. And the question that I've been thinking about when I first started doing my homework for this is, what are some of the crazy ideas that you looked at and said, yeah, no, that's just a bridge too far?

51:17Like what hasn't come out because it was just too either not solving a problem or just too wild and reckless? Oh, there's a whole treasure trove of, yeah, we could do another podcast, I'm sure. But, you know, typically what's interesting about it is there are two reasons why you might end up like that. One is it's a crazy idea, but there's just really no demand for it. Okay. Well, that's an easy business decision. Which is an easy business decision. The second time often is you're just too early. Uh-huh. And, you know...

52:19that actually the fixed income market wasn't ready. We weren't quite ready to be able to do that in an ETF a decade on. And by the way, we launched a bunch of those as well. Knowing that it would take a long time, we didn't expect to launch it and it would take off straight away. Knowing that it would take time for the kind of market to get there, but we were comfortable we could manage that fund. And so often you end up in a situation where you're kind of waiting for maybe the liquidity of the market to be broad enough that an ETF works. So you know it's going to work in the future. It's just a little bit early now.

52:56So there are a couple of different reasons why that may be the case. So that raises a question, what's next on the product roadmap? So we've talked about digital and crypto. We've talked about fixed income. And we've also talked about privates. What are you seeing as the next 10 years? It's really across the whole waterfront of what you just said. I mean, obviously with HPS and GIP, with our new partners, there's a lot of opportunity, we believe, to develop in the private credit and the infrastructure space and also the crossover of those kind of areas. I think this crossover of public and private markets and what does that look like in portfolios, whether that's within a fund or in a portfolio, I think is going to be a big and very interesting theme.

53:42And the third area, I think, is we constantly, obviously, we're always working with our active portfolio managers to develop better strategies and new ideas they have. But we are always looking back as well. Because I think you can fall into the trap of thinking you've done it. And I mentioned the example of US large cap equities and indexing. And why would you ever look at that as an innovation area? Well, because these markets keep changing. And I think the world we're in right now, and a good example of the last six months, the number of clients around the world, particularly outside the US, who are questioning their US dollar exposure is pretty significant.

54:22And what does that mean for time? Look at the move in gold. Suddenly that is, you know, the thing to jewel. And so, you know, you see, you have to, I think you have to be willing to question the environment, the macro, the market environment and say, actually, what does that mean for things that we kind of thought we'd done. And I think that creates a lot of opportunity for our clients to re-innovate things. So before I get to my favorite questions, I have one last broad question for you. What do you think investors and clients are not thinking about talking about, overlooking, but perhaps should be aware of?

55:02It could be an asset, a geography, a data point of policy. What is below the radar that really should be front and center? I think there are things that are kind of half on and half off the radar, like the impact of what's happening in demographics and immigration and changes like that. And what does that mean for inflation, for the different types of income streams that people are going to need, is something that's kind of talked about, but always slightly in the background. I think that's going to come more and more to the fore. It ties into the fiscal policy, which is very much kind of talked about.

55:42I think that's one thing. I think the second thing is we're still living through a lot of the post-COVID impact. And, you know, COVID's kind of done and it feels like it was many, many years ago. But there are a lot of industries, and luxury is a good example, which is still being impacted by what happened then, both in terms of the lockdown and then the immediate kind of boom that happened afterwards. There are still a lot of things that are still trying to work their way through the system, as it were. And that tends to be something I think people have kind of forgotten, but from an investing standpoint, is actually pretty important.

56:16I completely agree with you. It's funny, we were just having a conversation the other day about housing, and someone asked why we have such a shortfall of single-family homes in the United States. Not even talking about affordability of homes, just sheer number. And the answer was that's a hangover from the financial crisis 15, 16 years ago. So following that boom and bust, a lot of builders shifted over, pivoted over to multifamily houses and apartment buildings, not single families. So it's 15 years ago and we're still suffering the effects of it. It's amazing how long a tail some of these things happen.

56:56It takes a long time. I don't have you all day. I know you have a flight to catch tomorrow, so I have to get you out of here at a decent hour. Let's run through some of our favorite questions, starting with, tell us about your mentors. Who helped shape your career? So I think I've been very lucky. In each stage of my career, I've always had, I think, somebody who has been, whether a manager or a mentor, but really helped me think through and, frankly, just supported me in my career. I think two particularly jump out. One is the person who actually took me to ING Bearings and who I first worked with there, who sadly is no longer with us, but was just an incredible friend.

57:44And in quite a pivotal time in my career, really helped me think through what do I want to do next and kind of set me on that next kind of journey. And then the other one, I have to say a shout out to someone who was very early in my career, who I worked with, who I kind of looked up to in terms of their success, who became my wife. So that became kind of a good mentor. She continues to mentor me in slightly different, more direct ways. That's a nice couple of mentors. Let's talk about books. What are some of your favorites? What are you reading recently? Big fan of people like Ian McEwan. I know the name.

58:24martin amis they're just great uh great authors give us some titles mart martin amis and ian mckeon yeah there's a great book uh ian mckeon um called sweet tooth which is all about it's got a great twist which i won't go into but it's about 1950s 1960s kind of spies uh in in uh in the uk and there's a book uh by martin amis which is um uh the first i can't remember the full title it's time something but it's written backwards i kind of remember my wife reading something like that from martin amos and i don't remember the title it's it's fascinating he writes it backwards so everything happens backwards so the day starts with the character going to bed and it's the it's written in the as the consciousness of the the man and um so it's brilliant it's just uh I'll dig up the title.

59:19Very cleverly written. And a good story, actually. Not quite Inception. But it's in that guise of trying to think about how time works and yeah, I won't spoil it for you. Read it. It's the kind of book where even the most simple paragraph, you kind of reread it because you're trying to get your head around the fact that it's being written backwards. Speaking of Inception, um what what's keeping you entertained these days what are you streaming either watching or listening to so we've been on a bit of a marathon recently we've done yellowstone 1883 1923 and landman that is all on my in my queue and i haven't started i saw the first yellowstone on a plane and i'm like oh my god to drag my wife into this one it's good you need to commit um but it's well worth it um very very uh yeah very gripping all very different as well so you're you're a brit giving me uh an american western recommendation let let this new yorker give you uh an mi5 london recommendation have you seen the film black bag i have you have i saw it on a plane i spent a lot of time on planes okay i actually saw on a plane it was very good very all upside surprise wholly unexpected.

1:00:37Very good. I'd never heard of it. And then... And I assume you watch Slow Horses. That's where I was about to go. So I had my wife watching through the second season and she kind of tapped out. I'm trying to bring her in for the most recent season. You've got to get in. We're very much the, we won't watch it until it's all out. We've made that mistake not doing that with certain things. It's incredibly... It's incredibly... Like, what is this watching one show a week? What, are we living in the 90s. It's like I'm a caveman. It's like when an advert appears. Right, it really is. Final two questions.

1:01:12What sort of advice would you give to a recent college grad interested in a career in fill in the blanks? Investing, ETFs, financial product developing, fixed income. What's your advice for that person? Go for it. I really think this industry is changing so quickly. I think it's changing faster than I've in my kind of career in terms of what is happening, which I think creates a lot of opportunity for somebody starting out. My advice I always give to all of our analysts who are starting out, and frankly, I give it to pretty much all of our team, is you've got to keep learning. This is constantly changing, and you've always got to be on that kind of learning curve.

1:02:00And that's how you get better. It's also where the opportunities come from a career standpoint. Makes a lot of sense. Our final question, what do you know about the world of investing, product development, ETFs today would have been helpful back in the 1990s when you were first getting started? Well, if I'd known that Bitcoin was going to be at 120 ,000, I probably would have done something differently. You could say that, you know, back up the truck. I could say that about everything. Right, back up the truck on Amazon in 2002 or Apple in 98 or Microsoft from the IPO. I think one thing it does lend itself to, and it sounds a bit strange for somebody who started out, you know, on a bond trading floor doing bond maths, is you realize over time only when you look back the power of compounding.

1:02:44I know everyone writes about compounding and you learn about it, obviously. But it's only when you have been around for a while and you look back at what compounding actually means as both an investor, you know, managing your own kind of future retirement wealth. And then or as somebody who works with clients about managing portfolios, what compounding actually does imply. And I was thinking about that the other day, actually. It's very counterintuitive. There's nothing in the natural world in your ordinary experience as a mammal that would give you any insight into just exactly how exponential it is.

1:03:27Yes. It's really fascinating. Well, thank you, Stephen, for being so generous with your time. We have been speaking with Stephen Cohen. He is BlackRock's chief product officer and head of global solutions. If you enjoy this conversation, check out any of the 586 we've done over the prior dozen years. You can find those at iTunes, Spotify, Bloomberg, YouTube, wherever you find your favorite podcast. Be sure and check out my new book, How Not to Invest, The Ideas, Numbers, and Behavior That Destroys Wealth and How to Avoid Them at your favorite bookstore now. I would be remiss if I did not thank the crack team that helps put these conversations together each week.

1:04:11Alexis Noriega is my video producer. Anna Luke is my podcast producer. Sage Bauman is the head of podcasts at Bloomberg. Sean Russo is my researcher. I'm Barry Ritholtz. This has been Masters in Business on Bloomberg Radio.

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