Top-Heavy Markets, Fragile Portfolios: How to Break Free of the Mag-7 Trap

Pierre Daillie: [00:00:00] Welcome to Insight is Capital. I’m your host, Pierre Daillie, Managing Editor at AdvisorAnalyst.com. With markets ricocheting between rate cuts, tech rallies, expanding breadth, and soft versus hard data contradictions, it’s easy to feel lost in the noise. To help us unpack all of that, I’m joined by Ahmed Farooq, senior Vice President and head of ETF Distribution at Franklin Templeton Canada.

Ahmed’s been right in the thick of it, helping bring new ideas to market, expand Franklin’s ETF lineup and guide advisors through a rapidly evolving investment environment. So whether you’re a portfolio manager, an advisor, or an investor, you’ll wanna stick around for this one.

Announcement: This is Insight is Capital. Join us in our fireside chats with some of the most fascinating people in finance to discuss their insights on life markets, macro investment strategy, and much more.[00:01:00]

Pierre Daillie: Ahmed, welcome and thanks so much for joining me today. Thank you.

Ahmed Farooq: It’s, it’s been a while since we chatted. Uh, I remember our conversations at conferences and Yeah. Right. Maybe 10, 15 years ago. And look at us now. We’re, we’re going a podcast.

Pierre Daillie: Wonderful. It’s, it’s great to see you again, Ahmed. I, I, I, uh, I was looking forward to catching up with you.

Thank you. So, um, thank you. And, uh, Ahmed, what’s, what’s new? Like, let’s just get right into it. What have your conversations been like with advisors this year?

Ahmed Farooq: Yeah, I think it’s important to look at the context of the conversations when you travel across the country. Uh, when you’re, when you’re on the East Coast, it tends to be very pro Canadian, very patriotic, and, um, clients are asking to reduce their US exposures as kind of the noise from the US has kind of soured the appetite of how much you want in the us, uh, versus going to Montreal or going to Toronto.

It becomes more [00:02:00] diplomatic in the conversations of, well, we can’t reduce all of the us but we can maybe trim or maybe pause some of the exposures that we want, uh, uh, in, in, in the portfolio. And then as you move further out west, as there are a lot more Asian clients that are, that have US dollar exposures, uh, in their portfolios.

They tend to be obviously very different in terms of how they feel, where they still have a large portion of their money invested in USD. So their portfolios are not in cad, but in US dollars, but held in Canada. So all of a sudden you have to look at, are there different opportunities to kind of maneuver around some of the, the noise that’s happening, um, within, within what’s happening as, you know, on a daily basis.

Pierre Daillie: Interesting. I, I, uh, you know, I I, I sort of had a feeling at the beginning of this year when things started to unfold with all the tariffs speak, and, and that, that, that, you know, it seemed like a logical thing that that sentiment would shift from north, south to [00:03:00] east West to some degree. Uh, but it’s interesting to hear the nuances.

Ahmed Farooq: A hundred percent. And, um, there are clients that own homes in the US and feeling that to this time to, for us to sell off or advisors are trying to tell their clients to breathe a little bit and to understand the implications or will you get the most dollar value for your home if you sell in a quick scheme of getting out?

Or do they feel, um, it’s funny ’cause you even hear the points of some clients saying, well, to, to their, to their advisors that, well, I feel guilty being in the US in this environment, uh, because I have a home there and I go there and, but I see less plates that are Canadian or less. My, my Canadian friends that I to hang out with have, have taken a stance so they don’t want to be there.

And, um. And as you all know, this is a a four year period and, and this could be even a two year period where all of a sudden the primaries kick in again and all of a sudden things can miraculously change again. Uh, we’ve seen [00:04:00] in, in New York City where, uh, uh, a democratic, uh, mayor has come about that’s really, yeah, shocked the system where, uh, I was just on vacation in St.

Lucia. I met a couple of American, uh, New York travelers and they said that they would never thought that a kind of a socialist style, uh, mayor would, would really kind of having a grassroot appeal to, to the people and the voters, and all of a sudden has really kind of shocked the Democratic party and also shock the Republicans that this guy is gonna win and he’s gonna come in very hard and change the game.

So, and this can happen in a flash. As you can see, that has happened so fast. And so we are seeing sentiment change. We’ve seen, even with all this happening, the US fell off a cliff and now it’s positive again. You can never take the wit out of the US market. It’s resilient. Uh, it will come back stronger.

Um, and the same time you, you can’t give up on it either.

Pierre Daillie: Yeah, I, there’s been so much, there’s been so much uncertainty. I [00:05:00] mean, and, and some months definitely more than others, but it can’t help thinking that, that, it’s hard. It’s hard not to think that, you know, the idea that the market is climbing a wall of worry is still true now.

Oh wow. I feel so much better that tariffs might level out at 10% and the impact of that might be, might be, you know, less than what was previously expected. It’s kind of like earning season, right? I mean, as the year progresses, earning season gets more and more moderate

Ahmed Farooq: if you look at the charts and in terms of whenever there is a president through there and what does the markets do, eventually it still goes up.

Right? And so. Always, you try to not bet on the president. You try to bet on the economy. But this is a very unpredictable and unprecedented way. Unprecedented was COVID. It happened five years ago. We were unknown, but we knew from a, from a sideways market or a sideways news story that this, this is what we’re in, we’re all stuck in the same boat.

Yeah. And the curve balls have been thrown [00:06:00] at us and we’ve caught them. And now we’re just hoping that this disease goes away. Right. So that was that one. Then came inflation. So we, it came, uh, we were told that it wasn’t coming. We were told many times it wasn’t coming. Hit us like a Mack truck. All of a sudden grapes jumped up to $15 and all of a sudden you start telling your family and kids like, we’re cutting down on certain items and so forth.

But it was unpredictable the first time in 35 years, inflation jumped that high and then we all waited and waited for, right. So again, it was, we were kind of playing with what we knew was happening and we just were hoping that. If these interest rates hikes would help and then all of a sudden it would come down.

So we renew that where the path was going. Here is about the unpredictability and the unknowns. And inauguration happens $5 trillion of the stock market gets Yeah, gets cut off. Liberation Day comes about $2 trillion off. If stock market comes up, then all of a [00:07:00] sudden the market rallies and it comes back to back to square one and where it was.

Um, we’ve been told on a number of occasions that there’s gonna be a lot of deals being made. 200 plus deals. I think we’re at three right now. So there’s a deal with Vietnam. Yeah, there’s a deal with China and there’s a deal with the uk. Um, I think there was optimism that there will be a deal with, um, Canada and all of a sudden the digital service tax was removed and we assumed that that was a way for us to avoid some of these pen, uh, these tariffs that were going to happen.

Then today we were told that there’s gonna be potentially a 35%, um, tariff on Canada, uh, because there’s still a lot of fentanyl coming into Canada, which is one of the key reasons that this is happening. So again, it’s these curve balls that are coming in and out of the marketplace. Sometimes a market shrugs them off and says, eh, I, I’m not really worried about it.

And sometimes they don’t. Um, and then you kind of mentioned the taco [00:08:00] situation. Is that, is it a negotiation tactic to put pressure on someone? Um, just like there was a negotiation tactic to put pressure on Canada, and all of a sudden we remove the digital service tax. So how long does this last? And then obviously to your question, is that, or the statement you made is like, well, will the markets continue to rise at the end of the day?

Um, and that’s a kind of like. The bogey that we don’t know. Yeah. ’cause every, uh, the other day I think there’s a ball thrown up in the air and we all run and chase it to look up in the air and something else is happening. And when that ball comes down, it, it’s like a dog. We’re just chasing bad, whatever that thing is.

Uh, because we’re so consumed by, by the media and, and information. Uh, but the markets are data driven, very data driven, to the point where if the data comes in off by, off a percent or off by the numbers that was predicted or for whatnot, the markets [00:09:00] moves faster and harder based on that, then this. And I think we’re getting a little bit more accustomed to that now.

Pierre Daillie: Yeah. And the trick is not to get overly emotional about it. I mean, it’s been hard not to, and it’s been hard not to get angry at times. And it’s been hard for, I, I would say, for investors at large to not feel panicked at times in this year. I think this year has shown us, uh, very, very clearly that that kind of emotionality when it comes to investing, does not pay.

And, you know, so yes, you know, investors have a lot of fear and uncertainty, but I think largely we’ve, we’ve, you know, I, I think, uh, collectively we’ve sort of realized that, um, it might not end up as bad as, you know, we, we let ourselves run away with that thought. You know, that, that, that things could be terrible.

I think, I [00:10:00] think that that’s been the lesson this year. Is that, is that, you know. Prepare and, and you know, and, and especially now, like with Nvidia yesterday crossing over 4 trillion in market cap, um, you know, that seems to be an inflection point, or at least a, a, a flagpole, you know, marking. Like what is actually happening?

What, what’s actually happening versus, you know, what the reality is versus what we once, you know, what we imagined throughout the first part of this year. But it’s also, it, it, it might also be cautionary right? And, and while the sun is still shining, um, it’s worth it for, for you and i for us to have this conversation because I think, I think this is a time where, where advisors and investors alike can put their heads together while the sun is still shining and, and make preparations that, that prepare their portfolios for multiple different outcomes as opposed to one sort of negative outcome about tariffs or one sort of negative [00:11:00] outcome about.

Um, you know, where the world will go, uh, in the long run. It, it is really something where, where diversification has become valuable again. And, you know, we, like the horse was out of the barn for, for a little while, now it’s back in the barn. While it’s back in the barn. Let’s make sure it doesn’t, you know, let’s make sure it doesn’t get out of the barn.

I mean, I, I, to to, to that point, I think, you know, and it’s, and it’s, it’s timely because investors have been asking their advisors for income, a smoother ride in their portfolios. Um, maybe they’ve been looking at, at investing more, uh, they’ve been looking at investing more in international markets. Um, you’ve been seeing, uh, significant and growing interest in your low volatility high dividend, ET, F suite.

Why is that?

Ahmed Farooq: I think what has happened is that for the first time in 10, 15 years is that we’re starting to see advisors ask. For international [00:12:00] markets, develop international markets or different areas or, and the low volatility, high dividend was piggybacking on the success of a US mandate that we had already, that was international.

Um, five star Morningstar rated. It was, um, two and a half billion dollars in size. But what it was, was we were trying to take two factors in putting it together versus separate factors. So I’ve sold ETFs my whole career and essentially if you wanted dividends, you bought dividends in one factor, but you couldn’t combine them with some volatility screens.

Um, on the flip side, if you had, um. Low volatility factors, uh, a factor in your portfolio. Uh, you would have to live and die by the volatility. For example, if volatility was high, you bought low volatility, it protected you, um, or you hoped it protected you in the time period. And then if growth picked up, then all of a sudden you had to figure out, do I still wanna be in this?

Because now missing out on the growth opportunities that are happening in the [00:13:00] marketplace. Um, and so we kind of hit the right kind of note that people were feeling right now was we’re looking for something else. We’re looking to, we want some compensation for taking some low volatility by dividends.

And we combine those two together in, in a, in a, in a kind of double factor type portfolio, kind of giving you best of both worlds. And for us, it delivered, I think for one is that advisors we’re looking to diversify finally out the us. Um, as you know, uh, as, as a, as a wholesaler or as a salesperson, you’ve been trying to barking up this tree for 10, 15 years.

And the resilience against the US marketplace was that, hey, if you want to invest in market cap by sectors or within the us, you break it down by sectors, then you go by factors value, momentum, growth, small cap, and then you jump back to, they jump back to market cap. Or there’s always a way to find of, find your way within the US marketplace.

But I think what has happened is now [00:14:00] is that the sourness of what has happened, um, and also, um, I think. I would, I would give this analogy as well, is that where you and I, if we had for building up a good rapport and reputation, it takes years to build a reputation together. Like, hey, Ahmed’s a great guy.

Pierre’s a great guy, but if I cross you once, you’re gonna say, no, Ahmed’s not a great guy anymore. But like, what about those 10 years of greatness that you and I loved each other, or we had a great relationship and we were great friends and all that. But if I crossed you, and I think advisors are feeling that right now.

They’re saying, you know what? The way the US is treating Canada and other places, I’m now physically open. And then you add on top of that, um, performance. So international markets are up 15%, emerging markets are up 8%. Uh, what if I give you a four and a half, 5% dividend in your pocket? And I kind of subdued some of the volatility in there.

And, and what we do a little differently than traditional dividend products or traditional low-vol products as we’ve combined them together [00:15:00] is we look at earnings as well. Um, I feel like, um, being in the career that I’ve been, I’ve sold dividend ETFs my whole life. There’s always three ways to buy it.

There’s one way as payers, companies that consistently pay, right? There’s growers, companies that continue to grow, but there’s a five year track as we grow for five years, 10 years, whatever that number is, and then the highest, which means that you just screen by an index by the highest payers and you screen by and you just screen by that and say, okay, these are the top 200 that we’re gonna pay the highest.

What we do is we take a one step further, we do the highest paying companies within the international markets, within the US markets, within the Canadian market. ’cause we have three different versions of this low vol high dividend suite. We then look at the past four quarters of their earnings to say, Hey, are they gonna be able to sustain those dividends going forward?

Right? Um, and, and that’s just a good indicator of volatility or future vault. If they have poor earnings and they say, Hey, you know what? We had bad earnings call. We don’t know what’s going on with our company, [00:16:00] but they’re paying a high dividend. You know, that dividend might be under attack. They may have to cut because they can’t sustain those dividends.

Um, we also look at forward guidance, um, because I think it’s important to look at can the company sustain those dividends and have the guidance to do so? As you know, a lot of companies came out this year said, Hey, we have great earnings, but our guidance is poor. We are not sure what’s gonna happen with the tariff situation.

We don’t know how this is gonna app. Uh. Affect our supply chains. We’re not a hundred percent sure how this apply. The logistics, uh, as we are a global company, like a Home Depot came out and said, Hey, create earnings. Poor, uh, poor outlook. We just don’t know. Um, right. That could be another screen of, of volatility that we’re taking into fact of that.

And the third thing I think is important to look at is stock volatility. Uh, we don’t wanna be in a trap such as a BCE, for example, where right, you, you screen made a lot of it. The highest dividend index you’re screening for dividends. BCE obviously jumps up to the top because it’s paying about a 12% yield.

However, [00:17:00] the stock is down 20%. So that’s an indicator where stocks are falling off a cliff yield is rising. That’s a low volatility screen that we would add into the portfolio. And when you do that into this, uh, into, into the, the portfolio, it tends to provide you with that a stable dividend yield. Where the company has good earnings to protect itself, it knows it’s gonna be able to sustainably do that.

So that takes off stock volatility off the table, not a hundred percent, but again, takes off the bigger worries. Right? And then if stocks are coming down, because yield’s going up, that is removed and we’ve kind of launched these products, um, LA last year just on the piggybacking on the US success, and they’ve been just, uh, flying off the shelf just because the story makes a lot of sense and it resonates well with advisors.

Like if I do all that, would you be interested in that? And we’re gonna charge you 12 basis points for the US version. 15 for Canada and 25 for international. But the one that has ED the most has been the Canadian one and [00:18:00] the international one. Um, international is because it’s an idea that makes a lot of sense.

I’m looking at diversify away. EFI markets rough 15. Our strategy’s up 19, so we’re giving you a double. The dividends. The dividends yields around 4.6%. The index around two and a half or so, so 2% higher, and we’re giving you 400 basis points on performance on top. Um, I think it’s, and I think the story makes sense because clients are like, well, you’re gonna give me better performance in the index.

You’re gonna gimme a higher yield and you’re gonna protect me the downside. And by the way, if you wanna see it living and breathing in the US I can show you how it’s done in real life for the last seven years. Um, it kind of really helps me solidify my pitch to the client.

Pierre Daillie: Thank you for explaining the, uh, the methodology behind it, um, behind this, the, uh, low vol, high dividend, uh, suite ETF suite.

Because I think, I think when people just look at, at the raw factors on their own, there’s a danger in [00:19:00] buying, you know, just raw unmanaged factors because like for example, uh, for example, on the low volatility factor, you could end up with low volatility traps. Uh, on the high dividend factor, you could end up with high dividend traps.

And you, you very nicely explained both.

Ahmed Farooq: And we we’re always telling clients and advisors, uh, adv investors or whoever is our audience, is that just to look under the hood? Because you need to understand how these strategies work and, and obviously we have to tell them about ’em because, like you said, just by face value, you’re not gonna a hundred percent know what is really going on in, in the portfolio.

And that’s why I think it’s important to look at that. We can help you with lower costs, we can help you with just telling you the story behind it. And, and every time when I, when we have these conversations with, with advisors, it’s always trying to make sure it fits with what they’re trying to do or accomplish with their end client.

Um, when you usually, when you give up dividends, you’re giving up a little bit of growth. So what am I giving up? [00:20:00] Or, or we’re trying to give up something, or if it’s a, a grower strategy, which means the lower dividend, but more growth. So you’re not getting the income, you’re not getting compensated by the income, but you’re looking for more growth.

So we’re always trying to find a way, well, how, how do we kind of make sure that the client understands what they’re getting, um, from that perspective and make sure the performance is there as well. ’cause obviously if the story’s great, the performance doesn’t add up, then, then, then that doesn’t add up at all.

’cause clients want, obviously you want both in the best case scenarios, right?

Pierre Daillie: Absolutely. Now it’s, and it’s a great way to sort of mitigate some of that, uh, market concentration risk in the s and p 500 indices. It’s definitely a, a good time to, to look at, at, you know, looking at, first of all, international, uh, but also incorporating these factors.

Now you also, in order to, in terms of addressing the market concentration risk in the US market. You, you also earlier this year launched [00:21:00] FMID, which is your new US mid-cap multifactor, ETF. And of course, in, in that context, there has been a lot of noise about how top heavy US equities have become, especially with the MAG seven, dominating the headlines and dominating the s and p 500, which seems, you know, which is definitely by far, probably the single largest core holding for anybody.

Um, what was the idea behind launching this mid-cap product, uh, this year, and how does, how does that help Canadian investors get better diversification in, in US equities?

Ahmed Farooq: I think from a, from a, from a thesis perspective, we looked at it more holistically, uh, of Trump coming into power. Um, he had mentioned that, uh.

Tax cuts would come ne last and terrorists would come first. First term it was the opposite. He had tax cuts come first and terrorists come next and, and trade and so forth. So we looked at it as like, what would be the most insular to what was [00:22:00] happening in the us. Um, from a, from a, from a thesis perspective, it made a lot of sense.

Like mid-cap companies are tend to be more local, domiciled, more locally based companies. But when I give you the names of the companies, you’d be surprised that they’re considered local. Um, we looked at the Mag seven where about 53% of their revenues come from outside of the us. So we knew that from a supply chain perspective, from a globalization perspective, there’s gonna be some issues that are gonna kit them.

We also looked at, well, who’s gonna pay for these tariffs? Um, usually are they gonna send it down to the consumer? Is it gonna be sent down globally? Is everyone gonna pay for it? Where every country that has this company, they just raise the prices accordingly. Um. But we felt the mid-cap strategy made a lot of sense in this environment because of the fact that only 23% of their revenues came from outside of the us.

So we felt like this could be an idea where if these tariffs came about and all of a sudden [00:23:00] all other countries were being hit, local domestic type companies would, would tend to perform better. Um, and the companies to the likes were a Best Buy or an EA sports, or a Garmin Williams, Sonoma, eBay, GoDaddy.

Um, these are companies that we kind of all know of, or Delta Airlines would be an example that’s considered a mid-cap company. Right, right. Um, in our pitch to clients was talking about mid-caps are all, uh, people then they like, well, how big is mid-caps in comparison to Canada, for example? Actually mid-caps are bigger than all of Canada.

The market capitalization just to feel secure that you’re buying. One step down from the large cap or the mega caps that these are companies that are massive in nature. Uh, and so that was kind of the thesis behind of why we thought that this would be a great idea to come out with. It wasn’t just a market cap index, it was a another rules based.

It was more high [00:24:00] quality and value. So we were just gonna take the index and say, well, let’s kind of, um, filter the companies based on higher co, higher quality of companies with straw, with greater cash on book, um, that paid dividends and had a value type approach. So this way they could stomach some of the volatility.

Um, and again, it was piggybacking on the success of another US product that we had. But the wrench was thrown and the run was thrown at everybody at the us Right. And essentially, so we, we had this, the pitch, right? We had the, the thesis. Correct. Um, but again, it, it, I kind of, I think the, the wrench that was thrown within the US market, the noise affected everybody in the us.

Uh, it is positive, uh, as of now, right? And I think it’s early days, so we do feel that maybe it’s a time to buy in now at a low point because of, it was quite high when, when we launched a product from a, from a valuation perspective. Um, and so I think mid-cap strategy from a long-term perspective, um, allows you to [00:25:00] diversify from the large cast.

We’re not saying to get rid of it because we all know that every advisor or investor owns somehow the mag seven individually. They own it through a large cap manager or a, or a, or a beta index strategy. It’s all littered in the portfolio. As you, as you’re aware, uh, we thought this would be a great way to compliment, uh, the port, the portfolio with another slice of the US market.

Um, uh, so we do be, we do believe in it, but it’s just been under a lot of stress just because the US market has been under stress, uh, uh, over the last, uh, six months. So.

Pierre Daillie: I mean, with all the favoritism, uh, you know, sort of every, all this ongoing onslaught of monthly, you know, 401k contributions going to s and p 500 index funds.

Um, you know, there’s been a lot of talk about, about the, the juggernaut of, of, you know, the labor market rules concerning 401k allocations and things like [00:26:00] that, which have constantly been, you know, providing a floor on the market because of the, the ongoing monthly or biweekly payroll contributions to, you know, DC plans and things like that.

So there’s, there’s, there’s a strong case there for sure. But, but when you consider the permanence now, like, well, now that we’ve had this one big beautiful bill act pass, um, and, and the earlier tax cuts, TCJA becoming permanent. Um, it, it, it definitely has, uh, a positive impact on the profit margins for, for, for all US companies in terms of, you know, the tax cuts being made permanent now that Outlook has cleared.

Right. That, that’s no longer a question. Like as you said this, the year, you know, we didn’t start out this in, within the, the, um, post-election period didn’t start out with the tax cuts being made permanent. It started out with all the, all the noise of the tariffs. But now that, that, you know, the noise from tariffs had dissipated and the one big beautiful act, uh, whe whether you like it or [00:27:00] not, has passed.

You know, um, there, there’s, there’s definitely a, uh, a higher degree of, of, uh, certainty some of the fog has lifted from, from, you know, the market and from the economy, uh, and who, you know, who knows where we end up in the end, when, when, when all the dust settles, right?

Ahmed Farooq: Yeah. We, we don’t know. And, and, and I think, uh.

Yeah, and I totally agree with you. It’s, it’s, it’s one hurdle that’s kind of been now check boxed off, and now let’s see how the market’s react to that now.

Pierre Daillie: Yeah. So now let, let’s, let’s, uh, switch gears and talk about fixed income because that, that seems to be a much bigger question on people’s minds than, than, you know.

Uh, of course equities are, are, you know, the core driver of portfolios over the long term and fixed income traditionally was the ballast. But, but one thing that, that has sort of become more entrenched is the idea that we’re in for higher, for longer rates. Uh, [00:28:00] and higher for longer just means longer term we’re in for a much more normalized rate market as opposed to what we had the last, uh, 15 years.

Um, most of it was at zero. Um, you know, now, now we’re sitting with, with. Bond yields that actually pay that actually where you can actually earn an income. Um, and, and you know, the question is now where do I position my fixed income? Franklin Templeton’s got a deep bench, um, when it comes to fixed income globally, uh, globally, you’re known for it.

So how are you bringing, uh, all that expertise that you have within Franklin to the Canadian ETF market? Um, there’s definitely been a shift in sentiment towards, uh, actively managed bonds, actively managed bond strategies, ETFs. Um, and among your bond ETFs, which strategies are advisors really leaning into right now and and how does that differ from what you might be [00:29:00] recommending or guiding?

Ahmed Farooq: I mean, one thing that I’m quite proud of working at Franklin Templeton is that we’re about $650 billion or so within global fixed income. And one thing that I really enjoy about working about the firm is that when we have, we talk about fixed income from a Canadian perspective, a US perspective, international perspective, even emerging market perspective, we have managers that are locally based in those areas.

So local, regional, regionally. So they understand the markets from a kind of like a boots on the ground type approach. Um, where some firms will struggle, where all their fixed income comes from Toronto, and they may use a sub manager or somebody to kind of help them in different parts of the world where.

If you want Canada, our team’s based in Calgary, if you want us, they’re ba they’re based in New York or they’re based in San Francisco. Um, and then we have London, and then we also have Hong Kong and Singapore. That’s the original friend of Franklin Fixed Income group. And then when we acquired like Mason, it kind of brought [00:30:00] in the specialist investment managers that we acquired during that.

So just brought our capabilities even further, uh, from that perspective. So it’s always good to kind of have the ability to kind of hear from different views, um, and from different manager styles and so forth. So that, that kind of brings a different kind of, uh, ammunition box to me or like, uh, or arrows in my quiver or whatever you wanna call it, that they have the ability to kind of discuss in that.

Um, from a perspective of where investors or advisors are investing in fixed income, I would say has been not what we’d assume, what would be the case. Um, because the, as you mentioned in the beginning, that why TMS kind of shot up. Remember we went from almost zero to 10 rate hikes and then we had five or six rate cuts.

Um, all of a sudden in, in a normal world, you’d assume that when rate cuts start to happen, people start to going further and further out on the curve. Um, but what has [00:31:00] happened is that we still have an inverted yield curve at the front. And as you know, with the way bonds work or anything works, that if I, if you are a longer term unit holder, they should give you more, right?

It’s like if you, right, if someone’s giving you something to hold onto, it’s like, if, can you hold it for five years? Yes. But you better gimme more to hold it for five years, then three years or one year. And what’s happened is that the one year is as the same level, or very close to the same level as seven year, uh, on a duration standpoint, right?

All of a sudden it’s like the opportunity costs like, well, wait a second. If I’m gonna hold onto something longer and take on more risks, why would I? And we’d hope that the advisors who are. Loading up on cash during COVID or GICs that are now coming to maturity, uh, or ultra short or short-term fixed income will start to migrate further out.

Um, and they haven’t done so just because of the opportunity cost, the [00:32:00] risk that’s involved in there. Um, there were some advisors that went long early because they thought this is gonna be the greatest way to make money, and obviously the volatility of inflation not coming down as fast as we we thought.

Right? Then all of a sudden Trump came in and all of a sudden he’s been pushing Drone Powell to cut interest rates. Um, and he makes sense. I mean, imagine you and I that are working, we have a a a a. A loan that’s coming due fairly soon. We would, we would want the bank to cut interest rates so that when we renegotiate for our next loan or for the next mortgage, we negotiate lower mean this’s.

Just normal way of thinking. Like we want it to be lower. Um, but the, the curve ball again, is coming is that our tariffs considered inflationary. And what we’ve seen is that Trump keeps on saying, well, look, the, the CPI numbers have come in and they’re coming in lower. And that’s because a lot of the terrorists haven’t really kicked in because they keep on being pushed out and they kept them being pulled [00:33:00] in and pushed out and pulled in because it’s, again, it’s a more of a tactic to negotiate with countries.

Uh, so Powell said, well, I’m not gonna cut, but I would say that there’s proposed two cut. And so all of a sudden the money that was supposed to go further out haven’t gone out. Even from our perspective, like we’ve had the lion’s share of money come into our ultra short mandate. Um, because yield to maturity is around 3.6%.

You’re getting a yield in your pocket about 3.3 that’s higher than a GIC. So it’s way more than what you’d get in a cash product. Um, and then there’s been some money going out to maybe two to five years because they’re starting to tippy toe out. Uh, those that are don’t like to be very tactical, have gone to the benchmark level, but they’ve not been compensated for it.

Like the short, ultra short and short term is up about 1.9. 1.9 is ultra short. 1.6 is the short term, right? 0.6 is the benchmark, and your yield [00:34:00] is almost the same. So, and the volatility is very different to the drawdowns on the ultra short, are very, very minimal to the drawdowns are up and down based on what the sediment is of where the rates are gonna go.

Pierre Daillie: Yeah. You’re not getting paid for the duration

Ahmed Farooq: risk. So what we’ve been seeing is that money has gone in that direction. On the flip side, on the global level, we’re starting to see flows come in a little bit because global yms are higher in aggregate when you put all the yms together globally. Right.

People are starting to add back into the global markets, uh, and we’re starting to see that for us. So FHIS is our ultra short FLSD is our short term. Core pluses are flagship kind of universe. And then FL Gs are global. And the way we kind of treat our global strategy is like, Hey, go find your home run hitter managers.

The higher torque managers use them as your kind of, it will be kind of your steady Eddy global fixed income product for that perspective. So we’ve kind of seen that. Um, so it’s being a very [00:35:00] different. Mindset, I would say. ’cause you’d assume in traditional methods is that rates come down, you start going longer because duration equals and you get more bang for your buck.

We haven’t seen that happen.

Pierre Daillie: No. I there were the term premium sort of kicked in. And, uh, as you, as you said, and I know that’s what you were explaining, which is that, you know, and investors want to get paid more for taking on the duration risk and, uh, the term premium did kick in, but not as fully as it could have.

Uh, investors aren’t willing to go out that far out on the, on the yield curve at the longer end. Um, there have been speculators obviously who are going out to the long end. Um, you know, we’ve seen flows into longer term bond ETFs that, that sort of defy, um, the, you know, defy logic. Right? Why would you, why would you continue to pour money into long, long duration bonds?

Ahmed Farooq: The, and the risk and the volatility on those has be as much as equities. So you’re trying to look like, is it a [00:36:00] bet or is it a positioning? And I think it’s more as a bet ’cause you’re trying to make quick money on a duration.

Pierre Daillie: Yeah, exactly. And, and so I mean that’s, that’s what’s so tricky about fixed income right now, is this juggling between income needs and, and, you know, rate risk.

At the same time, active management has obviously come very much back into vogue, especially on fixed income because of the complexity that we’re seeing there. Where do, where do you know we’ve moved well beyond the plain vanilla Bond index? As I was thinking while you were talking about, you know, the, the, the duration bet, you know, when, you know rates, when, when yields were, were going up like, like the 10 year US Treasury for example, up to four and a half and the 30 year up to five recently.

You know, it was hard not to think like, how long can that sustain, you know, at those, at those levels. But the reality is that it can. And it can even go higher [00:37:00] depending on what happens with sentiment, right? There’s, there’s a lot of volatility at that, you know, up in the, in the, the between 10 and 30 year yields and, and you know, that’s part of the, that’s, that’s, that’s being sort of the problem.

Maybe that wasn’t, you know, like I, I recall, you know, if you go back to 2003, 2010, you know, that was a great time to, to make that, that that bet. You know, with, with, you know, in hindsight, of course, um, yields obviously came down very dramatically over the ensuing, you know, intervening 10 years. Um, but hanging onto that sentiment that, that, you know, high yields like four and a half on the 10 and five on the 30, you know, US treasuries, um, hanging onto that idea is, is, you know, has been dangerous, let’s say, because of the rate volatility.

I mean, so. Advisors are leaning more into rules [00:38:00] based, and we’ve talked about rules-based, factor driven strategies, um, and they’re also looking for precision, right? How are, how are you seeing demand evolve in your ETF lineup to meet that?

Ahmed Farooq: Yeah, I, I mean, just to go back me on the fixed income side, one thing we forgot to mention was like, discount bonds.

I think, um, there’s something that,

Pierre Daillie: yeah,

Ahmed Farooq: let’s talk about talk.

Pierre Daillie: Yeah.

Ahmed Farooq: Remember like 10, 15 years ago, the bond desks were inundated with phone calls from advisors, Hey, I wanna buy this. I wanna buy that. I wanna buy that. Then they never got a call in years, and the bond desk was calling the client, Hey, how’s it going man?

I got some new issues. You wanna buy some? And all of a sudden, this past year or the last year and a half, we saw bond, the phone lines is, is buzzing again, because all of a sudden we’re in that environment. And I think also there was a first time in some time where you could make money without very little risk.

And even on the ultra short side, what we did is that we were buying bonds that were. Maybe duration was five, six months when we first launched it, and now it’s gone down to eight [00:39:00] months. And what we did is that we were trying to find opportunities where bonds were maturing back up to par. Um, and, and what we found is that talking to a lot of advisors at the time was they were spending too much time with the, or their associates were spending too much time.

Um, ’cause the book was churning the book as Bonds matured, right? Cash came into the book, you had to redeploy. Imagine if you did that over a $50 million book or a hundred million dollars book, or a $300 million book.

Pierre Daillie: Yeah. You got all that reinvestment risk. It’s just so much time and effort. So exactly the, the, the, the amount of time it takes to,

Ahmed Farooq: to decide, decide.

That was the biggest, uh, I would say talking to, I, I asked an advisor, I’m like, what is the time that you feel that you can get back or what is the most concerning? He goes, my associate spends way too much time trying to manage the cash coming in and redeploying it out. When we built FHIS, we want to solve for that mystery.

Like just how do we take that back? Like what if we can do that [00:40:00] for 15 base points? Would you be happy with that? The other issue that was happening, if you remember, cash ETFs were banned at banks. Do you remember that? Um, and the right, the SIE came in and they tried to bring in the wholesale rates very close to retail rates to ensure that there wasn’t a competitive advantage.

Like the bank would sell you their wholesale pricing, but they didn’t want you to buy it from them ’cause they wanted you to buy their own in-house money market products. So we were wanted to solve that problem for decline to the time, we’ll give you discount bonds, we’ll give you, um, TBI, money markets, commercial papers, bankers acceptance notes when they were still around.

Uh, we kind of built a product that kind of fit a problem that an advisor had. And now FHIS is $400 million in size because we’ve been able to go and have those conversations with clients. I think being a smaller or scrappier ETF provider that’s smaller in nature, we can, we are able to kind of build these type of products faster and quicker than the bigger [00:41:00] shops because then it has, you have to figure out, has does a fit in the overall lineup?

Where does it, what’s, what’s in their pipeline currently? And do we have a manager that wants to do that? So I think for us it was very, very important to kind of address that problem that we were seeing in the marketplace and do it in active manner. You kind of mentioned in your, the question was like, what’s happening next in terms of Yeah.

Precision and, and so forth. Um, so one active manager will always exist specifically in fixed income because clients, advisors. As you know, don’t feel the excitement of managing the fixed income part of their portfolio. Um, they get excited about listening about stock stories. They excited about hearing a portfolio manager talk about they visited some company and this is what’s going on.

It’s stories that they can tell their clients. It’s stories that kind of excite them on the opportunities of how much growth will happen. Fixed income, not much excitement. Even if high yields are up today, [00:42:00] it’s still not as exciting as, as something from a fixed income standpoint. Um, so what was happening is that we’re still seeing advisors would prefer to outsource that to an active manager just because a lack of expertise, lack of time, um, and just lack of will to put that much effort and time into that portion of the book.

If it’s 30%, if it’s 40%, if it’s 50%, whatever that number is, they’d rather outsource that. So we feel fixed income will, will continue to be managed. From an active perspective. Obviously advisors still hunt and look for high active share type portfolios. Um, and, and some advisors really like the stories where managers are, are looking for hidden gems buried by benchmark.

We live and breathe by the top seven holdings, the top 10 holdings, SMB 500 would make up almost 30 to 35% of the benchmark. Now in Canada, the top 10 equals almost 25%. The banks and the energy companies just take over the index. [00:43:00] Um, all of a sudden you, we wind up. Are there opportunities where there’s that?

Now with high active share, there’s a zero sum game as you know, you’re gonna win and you’re gonna lose. And so pe but advisors are okay with that as long as there’s a great story behind it. Um, so I still feel where there’s inefficient markets, active management will take place. At Franklin, we’re an active manager, so we do have great active management, uh, in, in, in portfolios.

And we will lead advisors in whatever direction they want to go after. If they want to go passive smart beta or, or, or active, we’ll kind of move them in that direction. From a smart beta perspective, um, and I’m gonna take the word away because it’s caused a lot of confusion.

Pierre Daillie: Yeah.

Ahmed Farooq: And it has, as you know, smart beta was like.

The biggest buzzwords in ETF and now it’s slowly been buried in a, in a corner. And they’re not talked about. ’cause they call, they now they call it indexed back to index because

Pierre Daillie: I think, I think we, yeah, we talked about it at the 2018 inside ETFs conference.

Ahmed Farooq: Yeah. Before we did. Yeah. And [00:44:00] indexing is, again, rules-based driven.

And those were, and s and P 500 is a rule-based methodology or an STSX 60. ’cause it’s got constraints. It won’t do this, it’ll rebalance. And so we’re seeing is now is that smart beta 1.0 was, as I mentioned to you, dividend growers 10 years, 15 years, 20 years. Where that’s a rule-based strategy. It’s not, it’s, and now what we’re seeing is smarter or let’s add some more nuance.

Let’s, let’s finesse, right. Let’s add some more to it. So the low vol height I mentioned to you took a simple concept of dividends and low volatility and then added. A earning screen or a stock volatility screen, and that allowed us to add one more set. So we’re starting to see a lot more products that are taking original strategies and adding another layer of, of not complexity, but just another level layer that makes a lot more sense.

Uh, and I think advisors want that. They, they think like, well, this strategy came out in 2005, like, is that all it [00:45:00] is? And, and you’re like, yep, that’s all it is. Yeah. And not to say that it’s broken, but I think people are looking for different ways to kind of slice and dice the way they’re allocating their portfolios.

Pierre Daillie: Yeah. It’s really interesting. I, I I coming back again, circling around this fixed income topic, because I, I think, you know, I think 2022 was a real wake up call for everyone where, you know, both fixed income and equities were down. And certainly nobody, you know, especially investors, but advisors alike, nobody wants a repeat.

And if the bond market, if the rate environment has become more complex because of regime change and higher for longer, and sticky inflation and rate, rate, market volatility, the term premium, all of these factors have made it a lot harder. Um, you know, why, why try so hard [00:46:00] to create, you know, some kind of bond strategy in your, your portfolios, your client’s portfolios or your own portfolio, uh, that run the risk where, you know, we’re, we’re the risk of making that kind of, uh, you know, mistake is so high, right?

I mean, if anything, you know what you’re doing as an active, uh, bond manager is simplifying the, the, you know, the ability to make an allocation in the bond sleeve and not feel like. Did I take too much rate risk? Am I, am I, you know, too far out on the curve? Am I taking, is there too much duration in my portfolio?

Um, whereas, you know, you can then say, no, this is exactly what you’re getting in this portfolio. This is exactly what you’re getting in this ETF, this fixed thing can meet this bond. ETF, you’re, you’re getting exactly this much duration. Here’s the breakdown. Here’s how it works. Here’s what you can expect from it.

Um, you know, I, I [00:47:00] think, I think that makes it much easier for, uh, advisors to build portfolios for their clients, especially. That’s why I, I mean, I sort of started out the question about fixed income, that, that, you know, fixed income has become more complex. It’s something that, that, that requires, well, yeah, I mean back a lot more thought right now, right?

Yeah,

Ahmed Farooq: yeah. Yeah. So back in the day, it is like you buy the bond universe. You call it a day. Buy one position and call it a day. Um. Essentially that was all working and they said, okay, maybe let add a corporate sleeve on top, a high yield sleeve on top, a government sleeve on top. So now I’m gonna try to make it a little bit more cool ’cause I got three line items from one line item.

All of a sudden you become the active manager, the the advisor. Because now he’s like, well wait a second. So now I gotta figure out do I tinker it every six months or a year? Or if rates are at zero, then do I go long or buy real? Like what do I do? And that’s where active management has really come in and said, well wait a second, these these, [00:48:00] um, active calls that now I have to make ’cause I’m not comfortable.

And so we far to see, and that’s why, uh, we’ve seen a, an influx of a lot of active products, fixed income products have come into the space. And so when I first started Franklin, that’s what we did is we came in very hard and we want to be a fixed income ETF manager actively, um, but very close to passive costs.

We felt like, Hey, wait a second. Some of the pricing even didn’t make any sense. And we’ll get to that. I know you’ve got questions on that. Yeah. But even on legacy pricing, does it make sense for what this is priced today than what it was 15 years ago? And so we, we were very conscious of making sure that we were competitive.

’cause as a new provider, we had to be a little bit scrappy. Like, uh, if I’m coming in, coming into your office, you’re gonna open the door a little bit. I’m gonna stick my foot in. And I hopefully by the conversation that we have, the door opens wide open. You let me in and I sit down. Otherwise, like, I’m not interested.

Thanks for coming out. Um, please send me an [00:49:00] email. And, and, and, and that’s how it is. That’s the life that we in. Right? We, we, we. I’m not the only person calling you there is every provider. And back in the day there were only three or four ETF providers calling an advisor. Now they’re over 40, right? And those 40 providers are also some of the more mutual fund providers.

So all of a sudden you’ve got a very we intersection of a traditional asset manager that was always active, is now doing active ETFs or now they’re doing passive. And so it’s kind of blurred the lines of a true traditional ETF provider is now. It seems that in Canada it you could be anybody. ’cause remember, ETFs is a structure and you can stick what you want inside of it.

Uh, as long as there’s liquidity and there’s spreads and there’s a market maker and so forth. So we feel that the, it’s been a, a massive evolution in what type of products are available to the street.

Pierre Daillie: In the earlier days of ETF proliferation, um, you know, we were mostly looking at a lot of passive. Uh, [00:50:00] index product, right?

Like s and p 500 Ag, uh, the Canadian Bond universe, you know, like, it, it, it was, it was very simple. I mean, anybody could, anybody could launch, uh, any of the large or small fund, you know, ETF, uh, issuers could launch, you know, beta products like that, index products like that. There was no, there was, there was, you know, there was no need to worry about, uh, all the compounded knowledge of an organization like yours, right?

I mean, if active, active was out in passive, was in for some, some period of time in, you know, in the intervening years, um, there was, there was all things being equal. Like the, the only thing that, that it came down to for a while there was cost. How much does your, your s and p 500 index, ETF cost. You know, now we’re down to near zero on some of these products and, and, [00:51:00] and, and so they’ve become really commod, I think with, the word I’m looking for is commoditized, right?

But you can’t commoditize the actively managed programs because those actively managed programs are based on your, the, the company’s lifelong experience in managing assets across markets. So now it has come down to what can Franklin do for me? What can any ETF issuer do for me? And I think, I think with all the proliferation, the active question now seems to sort of narrow the field back to skill.

And, and not, not just beta, like now, now you know, who’s actually in a position to produce it, to create alpha in this market and, and who’s in a position to, you know, if, if not alpha, then at least even the same returns, but with less risk and, uh, you know, aim for, for that [00:52:00] kind of amelioration as opposed to, uh, just, you know, blindly buying an index.

Ahmed Farooq: Yeah. And, and from our, from our perspective being a newer provider, like, so when I came in here seven years ago trying to help launch the Canadian business, we looked at all that. We looked at, um. I mean,

Pierre Daillie: it’s become, it’s become really important again, it it for a while there a lot of people that ah, active, who cares, you know, and, and, and, and you know, the Spiva reports, uh, you know, didn’t help you.

Ahmed Farooq: You know, like there, there, there’s gonna be always these reports. And, but I think is is about what is the client trying to achieve? And, and you have to, obviously you have to do it in such a way that is it, is it to the point where it’s feasible to eat that cost or the cost doesn’t, like, oh my God, it’s so expensive and, and unless it’s like a, a, a manager that’s just shooting the lights out, you’re like, I’ll pay for it because Yeah.

Is it

Pierre Daillie: worth the fee budget? Definitely. Yeah. Right. Yeah.

Ahmed Farooq: And so we have to be [00:53:00] very cognizant of that. And sometimes there’s like a psychological barrier in your head. Of like, oh, this is what I can’t afford and what I can’t afford. And then if I, if I can’t afford it, just like when you’re buying anything is like you’re gonna the store, you’re like, okay, this is what I’m gonna buy.

But if it’s $20 more, $30 more, like, what am I getting more out of this than right? Am I getting an extended warranty? Am I getting someone’s gonna be able to pick up the phone when I have a problem, then all of a sudden, um, I’m okay to pay that. And so I think it’s important that you look at the total cost of what you’re gonna get from there.

Uh, is Ahmed available or Ahmed’s gonna sell me something and I’m never gonna hear him from again. Um, and then, or when I’m ready to buy again, he’s available again because he is gonna help me make the trade, uh, but not make to help me when he is out, when I’m about to leave. So I think it’s about the experience as well, and I think that’s very important.

Um, just like when you go to a car dealership, you don’t wanna be sold, uh, something and then you never hear from the, the, when you have problems with a car, you never hear from ’em ever again. And you can’t, you can’t get in front of them either. So I think the cost has to be embedded in that at some [00:54:00] point, uh, from an active manager perspective, is just a track record of what they can do and are they doing it at a, at a cost that makes sense to you and me.

And so at every firm, and as you know, at Franklin and other firms, like they’ve kind of gone and kind of done that exercise and we’ve been able to kind of bring in costs. Um, I can’t comment on the mutual fund side, but I know some of the certain side has come down. Uh, from an ETF perspective, what we did is that we looked at legacy pricing on stuff that we thought that just didn’t make any sense.

Um, when I started my career, obviously at another bigger shop, like we had products that were out for years, but there was no competitor. So that was the cost of entry point. Like Dozi, that’s the only cost setting. And we thought when competitors came that they would come in and kind of jazz it up a little bit.

Um, but we found them matched the same cost as, as the bigger shops. And all of a sudden you got, then it’s about like, which brand do you want from the same cost of the same product. And so we thought that we would kind of. Poke the bear a little bit and change things up. So we felt that beta should be [00:55:00] priced at lowest cost pot.

We’re getting that. So for example, our Canada exposures at five or um, US at seven, um, international, uh, is at, uh, is at nine as well. So you’re getting, so 5, 7, 9. So nine is international and 15 is emerging markets. And when we did nine it on a, on Europe, I mean on international, it was a game changer because it was like, whoa, you guys are cutting the cost by 50%, emerging markets 50%.

And uh, all of a sudden we’ve been able to raise a lot of assets for, for, from a fiduciary perspective, people are coming like, well, if you’re giving me a passive mandate that’s giving me carbon copy exposure, then I think this makes a lot of sense to do so. And we’ve even got analysts to say like, yeah, they’re even promoting it when, when their advisors call and like, which one should I buy for this exposure?

Um, so it’s been a good situation from that perspective. For smart beta where we feel that there, again, legacy pricing where some smart [00:56:00] beta or rule-based driven strategies were routine 50 60 basis point, because that was the premium back in the day when active wasn’t around. Right? There was no active management.

So when you wanted some premiums, you charge 50, 60 basis point for a rule-based strategy that had some quant drivers in there or or whatnot. We bought it back down to maybe 25 to 35, which I think is kind the sweet spot in what we think is is right. And then active management from a fixed income standpoint or ultra shorts 15.

So that’s almost as if you thought that could be passive pricing. Um, so we went aggressively there, but we think it makes, and then obviously as the, the, the active share and so forth goes up, then the price goes up because you’re getting a little more from the managers that we can’t get. And then we also have our flagship mutual funds that are ETFs, but they’re priced at mutual fund levels because we gotta price in the F class and the ETF class, the same.

So we do have a, a spectrum, but a spectrum is based on what you’re trying to get and what you’re trying to achieve. Um, and we [00:57:00] think we’ve priced it accordingly to the market that’s going after that, according to our competitors in that space.

Pierre Daillie: It gives, I mean, it gives advisors the opportunity to build portfolios with an appropriate fee budget, both for passive and active ETFs, actively managed ETFs, but it also then gives them the room on the fee budget to devote.

Higher fee budget, perhaps to some of the alternatives that they want to think about adding to the portfolio where the cost is relatively higher than for, you know, systematic, uh, active, uh, and of course ultimately beta. But, but when you’re building a portfolio, uh, across all considerations and, and, uh, all things being equal, if you’re looking at, at the cost of beta, the cost of actively managed DTF programs and then, uh, making room that way by keeping the cost down on, on, [00:58:00] on the regular, uh, investment assets, uh, versus alternative assets, alternative assets command, higher fee budgets, uh, for good reason.

But, but then you have an opportunity to work with all that room in the fee budget to, to take on more costly active. Alternative mandates as well to, to build a portfolio around

Ahmed Farooq: a budget. I was gonna say, uh, I mean exactly what you just said. Uh, if I can save you 12, 13 basis points on your EFI exposure, you can take that and pay for another, that active manager that you want.

’cause that gives you money back, but you can go and pay for that manager. Um, so we, we do have those conversations openly with our advisor. Like, Hey, you know what? I can save you 13, 14 basis, but here, six M base point on the passive side. You can then redeploy that to somewhere else where you want to in the portfolio as it makes sense for you.

Um, and, and it’s working because, uh, we’re starting to see the flows and, and, and it’s [00:59:00] 99.98% correlated to the, the index that we’re, we’re following client’s like Yeah, that I’m, I’m good with that. Yeah. I can work with that.

Pierre Daillie: And, and it, you know, I mean it certainly makes sense in the context of, of the regulatory framework we’re heading into, which is CM three, uh, in the coming year.

You know, when, when advisors will be able, will, will be mandated, but will have the opportunity to talk about this kind of fee budgeting a lot more as we head into the second half of, of this year. What’s on your radar? What, whether it’s macro sector leadership or investor behavior, what themes or, or shifts do you think advisors should be thinking about when it comes to ETF positioning?

Ahmed Farooq: It’s a tough one. Um, I think it’ll be interesting to see what deals are made from a US perspective. Um, obviously we, we know that there’s some current geopolitical issues that are happening around the world right now, and obviously Trump is trying to make deals within the Middle East, within, within Russia and the Ukraine conflict.

Will those [01:00:00] conflicts be solved or will there be new conflicts that will be created? I think that will, these are some of the curve balls that I think a lot of people are thinking about. I think there was a huge market sediment in play that sanctions would come off Russia, the war would end, all of a sudden gas prom would open up their pipes again and all of a sudden the world would start to kind of ease off on the issues with, with that.

And, and as you know, it, it hasn’t gone away at all. It seems that, um, more drones are being, uh, coming into, in, into Ukraine as well. Um, I think it’s also important to look at how can it creates these kind of cross provincial traits. I mean, that’s something, that’s something that is on a lot of people’s minds.

I know, uh, the premier in, in, in Alberta has been talking about that quite pointed, I guess, to the prime Minister to saying like, Hey, we need to solve this. Uh, we need to figure that out. Does this, what happens with the largest training partner? Um. I think the, as you know, 35% came on today as well. So I think those are [01:01:00] very, very unpredictable markets and it, it is become very dynamic in nature.

And, and so I would say it’s kind of tough to kind of figure out which way to go just because of the uncertainty, uh, of what Trump puts up, uh, in there. But, uh, as you can see, and we talked about at the beginning was just how resilient the markets have been. Um, Canada market is still up. US market is now positive, international markets are up.

Um, eventually we’ll probably see some cuts, interest rate cuts within the us, uh, which could then fuel the US economy again. So I would say there’s a lot of small things that need to align. Uh, but I don’t have an answer. I would say these are kind of the maneuvering points that we, we we’re the trends that could potentially happen.

I think I mentioned mayor, the mayor changing things up in New York. Imagine other cities, larger cities within us, start to see that, yeah, that’s gonna be a game changer for how the Democratic party changes, uh, to kind of combat the [01:02:00] Republican party and so forth. So there’s a lot of curve balls that I could say that’s up in the air right now.

Pierre Daillie: Diversifying for multiple outcomes as opposed to diversifying or thinking that there’s a single, you know, a, a unified direction to go in. You know, I, I think, I think, you know, we’re just so, I think we’re, so, we’ve been so used to, you know, making directional bets in, in the market over the course of time.

I mean, I, you know, that could just be that, because we came out of a 40 year cycle where rates bottomed at zero after the, you know, after the financial crisis. Um. We’re no longer in that, we’re no longer in that time. And, and we’re even more so in a time where we don’t know what all the outcomes will be.

Um, but we don’t have to know what the final outcome is, is the point. The point is, is don’t bet don’t, don’t build a portfolio based on a final outcome of all of [01:03:00] this. Build it on a multiple, a series of multiple unknown outcomes that could possibly materialize. You know, build your offensive side of your portfolio, the, the offensive side of your portfolio, and the equities and the bonds that which is basically your, you know, you’re, you’re 90, 80, or 90%, uh, interest rate or economic risk.

But add, add other dimensions to your portfolio such as liquid alternatives, you know, where, where you’ve got some, some blend of, you know, long short merger arbitrage. Um. Event driven type situations, uh, you know, uh, it is becoming a lot easier in this market to also to start adding, you know, we talked about fee budgeting for alternatives, but it’s become a lot easier to, to add, uh, first and second responders to a portfolio.

And, and those, those are the, [01:04:00] those are the items that will help mitigate, you know, downside, low volatility, high dividend factor will help mitigate the downside risk in some of those more dramatic market drawdowns. I think, you know, it’s, you, you have to position for uncertainty, prepare for uncertainty, whatever that is.

Ahmed Farooq: Yeah. And being probably diversified makes a lot of sense. Right.

Pierre Daillie: Your point. I appreciate you making, not making a call on the market. I think, I think the overall sort of overarching sentiment is that, is that things are, are on balance positive, but, but making, you know, making a call on the market is very hard right now.

Making a call on where things will wind up, you know, we’ll leave that to, to, uh, you know, some of the investment right now, you and I, we were just sitting there. We could, we could figure it all out, but the point is you can’t, and, and, you know, it’ll be a different podcast. Exactly. Yeah. Before we wrap up, how are you?

I, I, I want to just ask you, you know, how are you and your team working with [01:05:00] advisors to integrate your ETFs into models and platforms? Like what, what tools or support are you offering to help them make the most of the growing ETF toolbox?

Ahmed Farooq: I think for us it’s, it’s very, very important to learn the advisor’s platforms and learn to speak their language.

I think it’s important because then, um, we we’re speaking with them about their platforms, uh, and then, then eventually speaking about our products on their platform. Um, we also, one of the most important things for me is that when we’re building products, uh, we build it within their models or understand their guidelines for risk.

Um, I think it’s very important because if we build a product and it’s offsite for a risk, then we’re not gonna get any traction. If we build a product that doesn’t fit within the client platform because it’s too high risk or it’s just, you know what I mean? Like we gotta be able to build products that fit [01:06:00] within their platforms.

’cause every firm, for example, you go to an R-B-C-A-C-I-B-C-A, td, a National, a Scotia. Right. Um, they all have different types of platforms and they all have different type of risk guidance levels, and so we want to make sure that we build products that fit, um, that that’s easily consumable from their end.

Um, we also work very closely with the in-house analysts to ensure that any products we’re launching or any products we wanna talk about, uh, will be, will be something that they’re talking about already to their clients. And if we can sell them, then they will sell the advisors calling in to the in-house analysts, and then we will then sell from the other side, from our side and saying, Hey, by the way, your, your analyst is talking about this as well.

Pierre Daillie: Right?

Ahmed Farooq: So we’re very, very conscious that when we’re, when we’re, when we’re trying to integrate our ETFs, uh, into a, a model or a platform, we wanna make sure that we could speak their language and understand that first, build [01:07:00] products that make sense for them, and then, and then obviously then push it down the ladder.

Both ways. One from the analyst perspective, one from the advisor perspective. Um, so that’s number one. Number two, I think the toolbox is like just being, uh, building, like I meant, we talked about FHIS, we talked about building products that solve problems, right? Um, like, uh, for example, there’s a lot of active global managers that are higher torque.

Let’s help you, let’s find an anchor for that product to that space, and then you can go and find managers that are gonna do a little bit more, uh, things that we can’t do, but that’s the risk budget you’re giving to those managers versus ours. Um, and, and then number two, and with the last thing I would say is more on the pricing side, just because as I mentioned earlier, that we’re a new provider, so we gotta come out somewhere swinging a little bit and we’re, we’re gonna go after, not all the places we’re gonna try to fight in, in the toolboxes or in the sandbox where we feel we can win.

So we’ll go after certain products, certain competitors. Where we feel their pricing is out of scope or outta line. [01:08:00] Um, maybe their performance is not that great, but because they have a good branding, we’ll try to play in that. And I think that’s where we’ve been winning right now, is trying to pick our fights, uh, with, with, uh, with our competitors in a friendly manner, obviously.

Uh, but doing that in a way where we can add value, um, we can get, um, buy-in from the internal adv, uh, the internal sh part of the company, of the, of the, of the advisor, and then the advisor sells, Hey, this is rated this Oh, it it’s already in a platform. Yes. It’s, it’s priced accordingly. And then we’re good to go.

Yeah.

Pierre Daillie: Ahmed, ladies and gentlemen, Ahmed Farooq. Ahmed, thank you so much for your incredibly valuable time and your insight. It’s been really great catching up with you. I, I’m just, uh, I’m so glad we finally did this after I, I don’t know how many years. Yeah. Quite a while. I went quite, very quickly. It did.

It’s that whole COVID thing. Just, just like blurred like time. I, I feel like everything just [01:09:00] turned into one big blob of time. Like we’re not, I know we’re not in COVID anymore. Yeah. But then, you know, we’ve got this whole new thing happening right now. But Im in Wonderful to have you on the show. It’s so great to catch up with you.

Ahmed Farooq: Thank you. It was great to be here.

Pierre Daillie: Thank you.