Ron O'Hanley: Tim, welcome. Thanks for doing this. It's very good to see you.
Tim Armour: Well thanks Ron, it's great to be here and have an opportunity to discuss the excitement that we're seeing in ETFs with you.
Ron O'Hanley: So Tim, my first question for you is, if you think about Capital and you think about the American funds, Capital has many things, but I think we can safely call it the quintessential mutual fund company. What was the thought process that you and your partners went through as you made the decision to launch ETFs?
Tim Armour: Our mission really is to help people improve their lives through successful investing, and part of that for us, over time, has been willing[ness] to adapt and change. And the basic principle is: we believe active money management, the way we do it, is a very valuable service for investors. And we've always been flexible to want to deliver those investment services in whatever vehicle, whatever form makes most sense. So you say, today, we're regarded by many as a quintessential mutual fund company, but over our long history, we've had segregated accounts, CITs, SMAs and now ETFs. So we view it as a continuation of broadening our service offerings to investors in the way they want them. Specifically for ETFs, though, it became clear, over time, that this vehicle has some important attributes for people: the tax advantage, if you're a taxable investor, of deferring your capital gains; and, also, inter-day trading has proved valuable and important to some investors, to some advisers.
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text: The evolution of ETFs
Ron O'Hanley: You went through a long deliberative process around this, and I know it's early days, but you're off to a great start in terms of the growth of the ETFs. How do you foresee the ETFs evolving and sitting alongside other investment vehicles in the firm?
Tim Armour: It’s been exciting for us. There’s still an important place for mutual funds. ETFs, obviously, have become very important, but I would say most ETFs, heretofore, have been index ETFs – ETFs that follow a benchmark or some subset of a benchmark. And they've been providing what some would say [is] beta. Now, our expertise is really differentiating, with active management and trying to generate much stronger returns over time, which we've been able to do. And we think that we can bring that to investors in the ETF form. Clearly, there are a group of advisers out there who prefer to use just ETFs. They tend to be lower-cost, relative to the group of mutual funds that exist today. In part, though, I think that's conflating a little bit index versus active management. But we're excited – as you know, we have some of the lowest active money management fees out there in the industry, and bringing this to investors where we think there's a lot of pent-up demand for active management in ETF form we think will be a good outcome for investors, for advisers, and for our organisation.
Ron O'Hanley: Tim, Capital is highly regarded by the adviser community and you, personally, are very close to that community. How do you see ETFs changing the adviser community? How has it changed it to date, and how do you see it changing it going forward?
Tim Armour: We think a big change for the adviser is really the way they're conducting their business today. They are active managers of people's wealth. It's much broader than being an investment adviser in the way that we used to think about it, Ron. So we think advisers are spending a lot of time providing scenarios for their clients, planning for generational change, building portfolios and, frankly, a whole financial portfolio, if you will, for that investor. So they're looking for part pieces, in some cases, to fill out what they think the total picture needs to be for their clients, and it's clear that ETFs are an important part of the structure that they want to utilise, as well as other existing vehicles that already are out there today. It's interesting, since we launched our ETFs, we've had about 7,000 advisors actively buy and sell our ETFs, which is a pretty large number, considering the base of 140,000 that we have actively working with us. And we believe nearly 15 per cent of that 7,000 are brand new to us. So that's part of the attractiveness of having ETFs as part of our stable of offerings today, because we think we can appeal to even more advisers in the future.
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text: Offering choice for investment products
Ron O'Hanley: You work with a wide range of advisers and a wide range of firms – some very large firms, some modest-sized firms. How do you see ETFs changing the way you distribute investment products?
Tim Armour: The bottom line is: we think ETFs are very compatible with mutual funds and other types of vehicles, and we should be providing all. And that's what advisers want. You know, there are some advisers at one end of the spectrum or another who just utilise one type of vehicle or want index or only active. But we think, more and more, most advisers are using a combination of active, passive, ETFs, mutual funds, SMAs, other types of vehicles, to deliver the services they need for their clients.
Ron O'Hanley: And that's the great thing about Capital making the decision to enter this market, because you've now brought to the market a much wider range of products that were there, as opposed to what was there before you entered. So I think it's just a great advantage to the adviser to have this as an ETF.
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text: ETFs and Capital Group
Ron O'Hanley: Any other ways that you see the ETFs changing the firm, at all? Or do you just, again, see this as just an evolution in the firm?
Tim Armour: Well, I think, with the advent of a new service like ETFs, I must say, early on, Ron, when ETFs first began, we at Capital thought of ETFs as index, our passive investment vehicles – and, for all intents and purposes, that's what they were. However, I wish, in hindsight, we had spent more time really understanding some of the characteristics of the ETF wrapper, if you will, because there are some advantages for certain types of clients in certain situations to using that wrapper. And I think that's very important. The other element that I think is good to remind ourselves is: most active managers were concerned with ETFs because they thought they would be disclosing their portfolios on a day-to-day basis, real-time. And we got comfortable over time that we could do this in a way that we did not think we would be giving away what we're doing [in] real time and hurting our ability to get in and out of securities when we think it's appropriate. So we think that's a pretty bright future for both ETFs and us as an organisation and the broader industry.
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text: The next big thing in ETFs
Ron O'Hanley: Tim, one final question. As you think about ETFs, and as you think about the future of our profession, what do you foresee as the next big thing in ETFs, or the next possible big thing in ETFs?
Tim Armour: I think the next big thing that's going to become clearer and clearer, frankly, is active in ETFs. True active in ETFs is very, very small [out] of the overall assets in ETFs today, as you know. It's growing rapidly off that small base. Our expectations are very lofty of how rapidly this is going to grow. We also believe advisers want to use active ETFs, in some cases, in the core of the portfolios they're creating for their clients. And providing them with a range of services through active ETFs, we think will enable them to do that very effectively. After all, active provides the opportunity to get better returns than index-like returns. And, again, we've been able to do that, after all fees, very consistently over the long run.
Ron O'Hanley: I find that very compelling, Tim, because part of the growth in passive, in general, has been not that it's necessarily a better or not better alternative but that it was viewed as less expensive, and you have shown that you can bring active returns at very low cost to investors, so I find that very promising. Well Tim, it's been great to talk to you about this. It's remarkable how much progress Capital has made in so short a time – so congratulations on that, and thanks very much for doing this.
Tim Armour: Thank you, Ron, and thank you for the great partnership with your organisation. You all have helped us get ready to deliver ETFs and do it effectively. So we're looking forward to a lot of great growth in the future.
Ron O'Hanley: It's been our pleasure. Thank you very much.
