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The Passive Debate with Betashares
44 Plays2 years ago
AFI interviews Jessica Leung at Betashares. We analyse the dynamics of the passive market, managing passive money & integrating ESG. We also discuss Jess' social media platform @theleungway which promotes financial education. For more information on Betashares please go to: https://www.betashares.com.au/ The Alpha Females Invest is a financial podcast for those who want to elevate their investing knowledge. We host a series of experts to navigate a technical deep dive into their field of expertise. We aim to promote gender diversity by having at least an equal representation of female guests on our show. Thank you for listening and supporting The Alpha Females Invest. Disclaimer: The views expressed in this podcast are those of the speaker. The content is not financial advice. You should seek the assistance of a professional who can take your personal circumstances into account prior to making any investment decision. This episode was edited by Emily Li. The awesome tunes are courtesy of @tmykmusic.
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Transcript
Introduction to Alpha Females Invest Podcast
00:00:03
Speaker
Welcome back to the Alpha Females Invest podcast, two females working in the finance industry searching for alpha. My name is Emily. And my name is Clooney. And together we bring diversified perspectives from the buy and sell side of the finance world. As usual, any information discussed in this podcast is not financial advice.
00:00:22
Speaker
All opinions reflect those of the individuals and this podcast is for educational purposes only. You should always read the PDS and talk to a financial advisor who can consider your personal circumstances before you invest.
Meet Jessica Lung: ESG and Portfolio Management
00:00:35
Speaker
Today on our show, we've got Jessica Lung, who's an equity portfolio manager at Betashares. She has a focus on ESG and looks after funds such as Ethi and Fair, which have over $3 billion in assets under management combined. Prior to Betashares, Jess worked within the systematic equities portfolio management team
00:00:55
Speaker
at Macquarie Investment Management. She is super passionate about markets and financial literacy and is also the face behind the social media account The Lung Way, which is really about raising awareness with financial literacy and educating on all things investing and especially ETFs. Welcome to the show Jess.
Jessica's Career Blunder: An Embarrassing Moment
00:01:15
Speaker
Hi, I'm so excited to be here. Thanks for having me. So to kick it off, we love to start every podcast episode with the same first and last question. And look, we've had some great stories over the last few episodes that we've done, you know, ranging from very, very embarrassing work moments to releasing statements that were totally incorrect. So I'd love to hear what is your most embarrassing career moment?
00:01:42
Speaker
So I would say mine's actually similar to one of your previous guests. It's a wardrobe malfunction. So this was right after I started working at Macquarie. You know, it's my first show up straight up uni, walking up Martin Place. And then all of a sudden I just feel this tap on my shoulder. And then it was this girl. I didn't know who it was at that time. And then she just whispers in my ear, it's like, you have a big slit.
00:02:04
Speaker
the back of your dress." And I was just like... And then I suddenly put my hand behind it and I felt it was just, you know, the bottom half of my dress completely open. I had no idea what it was. And then she just quickly scurried off. So she was very nice about it. You know, she just wanted to tell me discreetly, but then I realized as she was walking off and I kind of saw a full view of her, that she was actually the HR recruiter that recruited me into memory.
00:02:29
Speaker
I love that embarrassing story with hate to our twist. And aren't the girls just the best? I like to walk to work in thongs, full disclosure. And I was once wearing a full length skirt, which was almost a white, like a sand color, and it was raining. And obviously from my thongs, it flicked dirt the whole way down the back of the dress.
00:02:52
Speaker
And this lady really nicely told me on the train, like, oh, by the way, you've got dirt all the back of your skirt. But like, I'd rather not know because now I have to spend the whole train ride and the walk to the office paranoid thinking about it. Exactly. With the dirt all down the back of my dress. But anyway, I feel like it's always better policy to tell someone than let them continue to walk around.
00:03:13
Speaker
Yes. I think you've got to say something. I've definitely been in that situation. I've done the toilet paper at the back once. That was a low point. I've also had a just a little heel like fully break on me and that was hard. I was walking to a client meeting, meeting this client for the first time, you know, looking, thinking I'm looking fantastic and really professional and I get there with like half a shoe on and that wasn't great either.
00:03:37
Speaker
I feel for all these people with embarrassing career slash wardrobe moments. I feel like we've all been there, so we can all emphasize it with each other, like we know, we know. We've all been there. So Jess, let's jump in to your role and what you're doing, particularly your side hobbies, which are all very interesting.
The Lung Way: Empowering Financial Literacy
00:03:57
Speaker
So your role is portfolio manager at beta shares and you also have your own financial education social media platform, which is the long way. Can you tell us what this is all about? And it's actually how we came into contact with you through social media.
00:04:12
Speaker
Yeah, so my social media don't worry, you can find me on Instagram, TikTok and YouTube. So like you mentioned before, my main aim is to really help raise awareness with financial literacy and just to help educate investors about personal finances, investing and especially ETFs. So with the rise of retail investors and the influences of the like,
00:04:34
Speaker
I felt like there was almost a need for a platform to educate people about investing. So most of the influences or stuff that I see online is about sharing their personal journey, which I'm all for as well. But I just felt like that was just really lacking an educational voice in this space.
00:04:49
Speaker
Yes, I felt like there was a need for a platform to educate people about investing, about ETFs and especially about risk. So that's something that not many people talk about because I guess they're just not familiar with it. And I wanted to do this in an approachable, easy to understand manner and just to help best equip investors with the tools so that they can be more informed and make better investment choices for themselves.
00:05:12
Speaker
So I would say we're quite similar in the sense that I thought who else would be better in this space and someone that's actually working in the industry and especially the person that's managing these ETFs. So I know these products inside out and I just really wanted to be a responsible and trustworthy voice that people could rely on.
00:05:29
Speaker
I love that motive, Jas. I think it really aligns well, as you said, with what we're trying to do here. Em and I are definitely behind the long way and I just think it's fantastic. The more people that can get on board with this promotion of financial literacy, the better. Moving on to beta shares, which is obviously a
00:05:47
Speaker
big provider of passive ETFs. Can you perhaps just firstly tell us what is passive investing, in your view, a little bit about beta shares and little things like how much money do they manage, and I guess their style and thematics?
Understanding Passive Investing with BetaShares
00:06:01
Speaker
Let's start with beta shares. Beta shares from the leading ETF providers in Australia. We recently expanded into New Zealand.
00:06:09
Speaker
Actually, our FUM, or Funds Under Management, is currently sitting over $22 billion. So now you may think that we're purely a passive shop because we have so many passive products, but we actually do also offer some active ETFs as well. So our goal is to provide investment solutions to investors. So that's why we offer a wide range of products to help them build a well-diversified portfolio.
00:06:32
Speaker
So now what is passive investing? So passive investing is where the fund aims to replicate the index, so there are no active weights relative to the index. So what that means is, for example, if CBA was 9% of the index weight, then your portfolio should hold 9% in CBA too.
00:06:50
Speaker
So now passive just doesn't mean your broad market cap-weighted indices, so the ones that you're familiar with, such as the ASX 200 or the S&P $500 NASDAQ, which are more commonly referred to as your market exposure ETFs. And there are also passive country-specific ETFs, sector-specific ETFs, and of course your thematic ETFs as well, where you're investing in innovation, and that's usually where the country and sector agnostic.
00:07:17
Speaker
So at the end of the day, passive investing just really means that you're following a set of rules and how you construct the rules to give you the exposure that you want. And that's known as the index methodology. Given that, and you are trying to meet a lot of investors' needs with the products that you're providing, and that's great to hear you recently opened in New Zealand, very exciting. Can you talk us through some of the most popular beta shares products and why or how an investor would use these products?
00:07:43
Speaker
So some of them are most popular, so I'm just doing this by the largest assets under management. The three funds are A200, NDQ, and ETHI. So they're all suitable for core allocations within your portfolio, and they give you exposure to a wide range of stocks. So let's start with A200. So that's a domestic exposure. That's 200 of the largest companies by market cap.
00:08:08
Speaker
listed on the ASX. So it's also one of the cheapest ETFs providing that exposure on the market right now at just seven basis points. So NDQ or the Nasdaq 100, that's the largest non-financial company is listed on the Nasdaq stock exchange. It's another broad market cap weighted index. It gives you exposure to big tech names such as your Apple, Microsoft and Amazon. So both Nasdaq and A200 are great to use as building blocks or the foundation.
00:08:37
Speaker
of your portfolio. And lastly, one of my personal favourites called that management, EFI. So this one gives you exposure to a diversified portfolio of sustainable international names that are considered climate leaders in its sector. So I think this one has resonated really well with investors because it's a true to label
00:08:56
Speaker
It has the most comprehensive set of screens in the market and it appeals to both green and keen investors as well as beginner ones that just want to expand or step into ESG and learn more about the space. And most importantly, it just really appeals to those that want to invest their money as well as do good with their money. So we're very transparent about our holdings and Ethe is also certified by the Responsible Investment Association Australia, ORIA.
00:09:24
Speaker
I think all those products sound really interesting and I'm sure Em and I would love to delve into them a little bit more at a different point in time, but I know we've got plenty more questions to go through. If I take a step back, this type of investing is clearly quite different to active investing. Why did Betashares go for an ETF model? Can you perhaps explain the key difference and I guess your key competitive advantage in that
ETFs: Making Investing Accessible and Affordable
00:09:50
Speaker
regard?
00:09:50
Speaker
Yeah, sure. So, beta shares were started and went down the ETF route. It's really just to help democratize investing. So, beta shares has been around for over 10 years. So, even though ETFs has kind of become a household name just over the past few years, we've actually been around a little bit longer than that. So, thinking back to 10 years, ETFs went that well known. And how would you invest your money back then? So, back then you would just invest by a managed fund.
00:10:14
Speaker
So they usually have a higher barrier to entry, you probably have to invest 10,000 or 15,000, and then they charge, I guess, higher fees than our current passive products do, and then they're not as transparent with their holdings or their positions as such.
00:10:29
Speaker
So our aim was to really provide diversified exposure in an efficient and convenient manner. So you can trade at intraday like you would any share on the ASX via your brokerage. There's lower barriers to entry. So most of the time it's just your $500 minimum trade size and yes.
00:10:46
Speaker
What do you see as the key difference to active investing and why do you prefer passive? Yeah, so we went through passive investing just a bit before. So just as a quick recap, so passive is index tracking. Well, active is where the fund manager tries to be the index. So the portfolio manager has to use either about a certain stock, sector, or asset class, and they implement that by the positions in a fund.
00:11:10
Speaker
So most active managers are benchmark agnostic and so their positions actually look nothing like the index. But yes, I think for mainland investors, the most important part, especially for retails and ones trying to grow their wealth over the long term, is to just get exposure to the market in the first place. So that's why passive stands out.
00:11:29
Speaker
Thanks, Jess. I have been on record saying that I think ETFs are a great way for people to start getting exposure to the market, particularly as a way, if they don't have a large amount to invest, to get exposure to a lot of different securities or to the market as a whole and just to start investing, watching market moves, getting a foot in the door. So I do really think that there's a purpose for ETFs and passive ETFs as well.
00:11:59
Speaker
I guess going into your role a little bit more specifically, as we mentioned, a passive ETF tends to track the benchmark index, which is not set by yourself. The index is set by the index provider. So what would a role of a portfolio manager do? And you briefly touched on some of the funds that you focus on, but maybe just any other funds that you work across and what they do.
00:12:24
Speaker
Yeah, sure. So let's start with the funds that I manage. So I look after our ESG suite of funds. So like you mentioned cleaning before, that includes FE, FAIR, and some other ones include IRF, so ERTH, who's a ticker, as well as our Ethical Diversified ETFs. And some other international ETFs that I manage as well include the cloud computing ones, that's ticker, CLDD, and robotics and AI, so RBTZ.
00:12:50
Speaker
So now what do I do as a portfolio manager? So as a portfolio manager, I look after the underlying assets. So which in my case, because I look after equities, it's just all the stocks and cash in the portfolio. So even though the portfolio is primarily unchanged, there's actually still a lot of day to day maintenance of the fund. So that includes taking care of the cash balances, any corporate actions, trading for flows and index rebalances.
00:13:16
Speaker
So yeah, between all the funds I cover, it actually takes quite a lot of my time. And another big part of my role is product development. So seeing what's out there in the market, what's missing, and working with index providers to come up with new products and solutions for our investors. You touched just then, Jess, on cash balances and index rebalances, and that goes really nicely into the next question that I had, which was how does rebalancing work on a passive portfolio? Is it typically quarterly or is it more often than that or less often?
00:13:45
Speaker
Yeah, so this is actually a really timely question. So today is the 21st or the Monday in March. Most of the commonly used indices rebalance every third Friday of each quarter. So I actually just rebalanced a lot of our funds last Friday. So this is all very fresh in my mind.
00:14:03
Speaker
Yeah, so what is index rebalancing? So like we said, there are rules in place that is known as the index methodology that determine what goes into the index. So as a portfolio manager or as a passive fund, all we do is we try to follow the index rules. So the index rules might dictate what names gets added or removed, and also the weights of names change throughout time.
00:14:26
Speaker
So just in between rebalances, the way it's drift because of market movements and then there's also corporate actions such as mergers. So for example, 200 names might become 199 and so forth. So our job is to really make sure that the fund mirrors the index of which is tracking. And as your point as to how frequent there's a portfolio rebalance, it really depends on the fund and the index methodology itself. So like I said, a lot do quarterly, but at the same time, there are also funds which do semiannual or just even once a year.
00:14:56
Speaker
Yeah, that's so interesting. I didn't appreciate all of the day today, but it makes so much sense because you're getting inflows, outflows, drifting in the portfolio. There's probably, I can imagine, a huge amount of work that goes into just maintaining that zero active exposure or benchmark tracking. That's really interesting to hear your perspective.
00:15:18
Speaker
Yeah, because I think a lot of people don't realize that the index is hypothetical. There's no cost, it's very frictionless, it's just plug it into a computer and it spits out the output. But there needs to be someone that's actually maintaining the portfolio in the real-life situation to make sure that it mirrors the index best as possible. Yeah, definitely.
00:15:37
Speaker
So in terms of the beta share products, and we've just passed or are going through a pretty volatile period in markets, what trends are you seeing from some of your investors? Are you seeing more than usual withdrawals or are people doubling down and putting in applications? Are there certain thematics that are becoming more in favour or less in favour? Are you seeing more into the global or the domestic funds? I'd be really interested to hear a little bit about market sentiment and your
00:16:07
Speaker
client movements with the current markets?
Market Trends: Uptick in ETF Investments
00:16:10
Speaker
Yeah, sure. So overall, we're still seeing influence across global equities and selective defensive asset classes like the hybrids and government bonds. So it's actually quite reassuring to me at least that there hasn't been many outflows. It's reassuring to me because
00:16:25
Speaker
We know that our investors are investing for the long term and they're actually just holding and writing out the current volatility that we're experiencing in the market right now. So just given recent events and inflation and the rising living costs, what I found was interesting was that we have actually seen a small increase or increasing flows into our food ETF. So that is our global agriculture ETF.
00:16:46
Speaker
That's really interesting and I think I took a look at some of the other products that are offering and there are a couple of others that spiked my interest too, including a crypto ETF, a cyber security ETF, an electric vehicle ETF. I'd be really keen to understand what are the requirements for companies to make it into these types of products. Obviously it's going to vary depending on the theme, but are there certain aspects you look at? Yes, I do.
00:17:13
Speaker
Like you mentioned, they're all different in the way that we construct them, but they all have an overarching theme, and especially about thematics. It's something that we consider a pure plainness, or essentially you can think about it as a percentage of revenue of which that company or stock generates, which is in line with the theme.
00:17:29
Speaker
So we want to capture as many pure plays in the space as possible. So Crypt, which is our crypto innovators ETF. So that one doesn't actually hold any crypto assets itself, but instead just gives you exposure to the stocks within the crypto economy. So really the picks and shovels that's really fueling this whole trend that we're seeing at the moment.
00:17:49
Speaker
So that gives you exposure to companies building crypto mining equipment, crypto trading venues, and includes names such as Coinbase and Right Blockchain. So now another one that you mentioned is Hack, so our global cybersecurity ETF. So I guess this one has gotten a lot more coverage, I would say, just with all the recent hacking events or news media that we see. So that fund will give you access to global cybersecurity companies, and the top holdings include Cisco and CrowdStrike.
00:18:19
Speaker
And lastly, Drive. So this one is one of our very new products that we recently launched. It's electric vehicles and future mobility ETF. So I guess the rationale behind that one is that the sales of electric vehicles are projected to grow strongly in the coming years. And that will significantly increase the use of semiconductors and high tech companies within these cars.
00:18:40
Speaker
So this fund will give you exposure of up to 50 of the world's leading automotive technology companies. And of course you have names like your Tesla, your Uber, NIO, and Active. There's some really interesting themes and concepts. What do you think is the next sort of ATF concept and where do you think there's a gap in the market or where do you think the next product is going to spring from?
00:19:02
Speaker
Well, I can't give away too many of our crazy growth. But just in terms of the next cycle theme, where do I even start? There's just so many to work on. But I guess an actual area or type of product that the current ETF market, especially just in Australia, is missing.
00:19:20
Speaker
is leverage and volatility ETF. So we see those quite a bit in the US, but we don't actually have many or any here. And of course, there's always more room for ESG products, in my opinion. In mine also. I reckon that was the right answer, Jess.
Responsible Investing and ESG Engagements
00:19:36
Speaker
On that ESG theme, very timely for this question, what power do you have as passive investors on the stewardship and activism front? Obviously, as active investors, you can, I guess, threaten to withdraw your money or exit a position, reduce a position, but I guess maybe that power would be a little bit limited in the passive sense or maybe it wouldn't. I'd be interested to hear your thoughts.
00:20:03
Speaker
Yeah, so as a signatory to the principles of responsible investment, so beta shares is committed to responsible investing. So we actually do actively engage with investing companies and vote proxy interests in beta to advance management and of course ESG issues. So one of the biggest tools that we actually have is proxy voting.
00:20:23
Speaker
So that's effective in the sense that we are holding companies that we invest in accountable, encouraging good governance and driving improvements. So now, just given the fund that we manage, we actually do have quite a lot of say. And you will see recently in articles names like BlackRock and stuff also participating or doing their part.
00:20:44
Speaker
And something else, so in our Ethical Funds, we have something which is known as a Responsible Investment Committee or the RIC. So they independently review and advise on any shareholder resolutions and touch on matters of ESG concern. So we're also very transparent about everything that we do. We publish details on all proxies voted on our website on an annual basis. And the RIC will also engage with companies where they see fit.
00:21:10
Speaker
Yeah, that's really interesting. And obviously, ESG is always a question that we have in every podcast episode and makes it mandatory. But no, it is really interesting to understand how different products on the market are providing an angle in there. Changing tact a little bit, how does beta shares differentiate itself from other passive ETF providers in the marketplace? What do you see as your key benefit?
00:21:35
Speaker
Yeah, so I guess thinking back to 10 or 11 years ago, when Beatrice has just started, our main differentiating point was that we're Australian, we're Aussie-owned. We have the broadest range of products, and we also offer some of the cheapest products on the market. So going back to A200, where I mentioned before, and that's seven basis points, giving you exposure to 200 of the largest companies listed on the ASX.
00:21:59
Speaker
So personally, I think how beta shares differentiates from other providers in the market is that we're really innovative. We're always thinking about what's next and what our investors want. We're very in tune with our investors. We engage with our clients a lot more. The most ETF providers
00:22:15
Speaker
We're just always trying to do better. What else do our investors want? Where's the next trend? What else can we best give them? Jess, that's so amazing to hear that there's a seven basis point fee on one of your products. I know how important fees are as a consideration for investors. Obviously, passive does tend to have lower fees.
00:22:38
Speaker
and typically no performance fees. It's a far cry from the 2 and 20 that some places charge or have charged in the past. I guess what's the incentive to perform? Is there an incentive to perform? Why can you charge such low fees? Something that I like to say is that you can't control performance of the fund, but you definitely can control fees.
00:23:01
Speaker
So that's something I feel like it actually gives power back to the investor in terms of managing your portfolio and achieving the best long-term results that you can as an investor.
00:23:11
Speaker
So going back to a point which I mentioned before, so I think relevant to the majority of retail investors and the likes of ourselves out there, the most important thing is actually just gaining exposure to the market in the first place and getting that exposure as efficiently and cheaply as possible. So all the active managers might have an incentive to outperform. Once again, it's never guaranteed and the data suggests that most active managers actually underperform the broad market cap indices
00:23:41
Speaker
with persistent outperformance particularly difficult. For two women who make their career off active investing, you do provide some very valid points. I was just about to say something similar, Em, and I do agree with the concept of gaining exposure to the market being just a critical first step, and that's where I think this just plays such an important role in developing financial knowledge across the market.
00:24:09
Speaker
I guess that ties in quite nicely to my next question, which at the beginning we spoke about your social media platform.
The Lung Way's Future: Aspirations and Podcasting
00:24:17
Speaker
I would love to hear why did you start that and what's next in store for the long way? Yes, I mentioned before that I guess a main reason as to why I started was just to help educate people out there
00:24:28
Speaker
But another big reason personally, our main driver as to why I decided to launch my social media was representation. So as we know, there aren't many women working within finance and when you go to investment teams, that number is even less and less by a lot. Many people don't know what would even consider
00:24:49
Speaker
a portfolio manager or just even the ETF industry in general as a possible career path. So even though it's quite daunting and almost, almost embarrassing putting yourself out there on social media, I actually see it as quite important, you know, paying it forward and just to really be the representation and hopefully to inspire younger generation and in particularly girls to pursue this as a career path. So what's in store next? So
00:25:14
Speaker
I hope to grow my platform, to reach as many people as possible, to educate about investing and raise awareness about financial literacy, as well as finance and portfolio management as a career path. So right now I'm mainly on Instagram and TikTok, but I'm also on YouTube. So as to what's next, maybe I can start my own podcast.
00:25:35
Speaker
Well, I'm sure you'll ask M&I to be our guest on your podcast too, Jess. You'll be the first stars, opening stars on my show. That's great. And of course we share a very similar mission here and so we love the work that you're doing and we are followers of your social media and I encourage our listeners to do the same.
00:25:56
Speaker
But our final question for the day, and we're sad to wrap this up, but it is always one of our favorite questions.
Career Advice: Asking for Raises and Promotions
00:26:03
Speaker
Can you share with our audience your top career tip for people who just need a little bit of inspiration or a little bit of advice from someone who works in the industry and has a really rewarding career?
00:26:16
Speaker
So this one I've been saying this myself since I first came out of uni is never be afraid to ask for that pair eyes or the promotion that you deserve and to always go into negotiations with a plan and if you need be just go to the bathroom a few minutes before and strike a power pose it does
00:26:35
Speaker
Amazing. I love that strike a power pose. You know what? I've actually heard that before and I think the first time I heard it, I was like, oh my God, how ridiculous as if I'm going to walk into the bathroom and strike a power pose. It's scientifically proven, you know? It just changes your mindset and your confidence and yeah, it works. I must admit, you know, even sometimes when you just rehearse things to yourself or you do come into a conversation really prepared,
00:26:58
Speaker
I can't say how much further that conversation often goes. So I think that's a great tip. I think everything we've spoken about today has been really interesting. As Em said, you are speaking to two very active orientated investors. So I've loved hearing about the other side of the coin. And as Em said, anyone who doesn't currently follow the long way, please get on it. Em and I are both following it and we think it provides some really fabulous, entertaining and financial insights.
00:27:27
Speaker
So thanks so much, Jess, for coming on the show. Thanks, Jess. And before we go, I would just like to see an example of this power pose because I have never heard of this before. Well, have you guys watched Ted Lasso? Yes. So my new one that I'm trying to copy off is the girl boss one where she's in a mirror and it's like a tiger and she goes,
00:27:48
Speaker
If you want to see it, watch the TikTok. Awesome. Well, thanks Jess. It's been such an enlightening conversation. We've enjoyed having you on, and we can't wait to follow Betashares and the long ways journey. And please stay in touch. Well, thanks for having me. This was so much fun. And I'm glad to have converted active to passive. So I hope you're done. Thanks Jess. Thank you.