Matt Barry

Yeah. So I'm Matt Berry. I run product management and ETF capital markets for Touchstone Investments. I've been with Touchstone and also our parent company before that for a combined about 10 years now. Joined after business school and then Touchstone is about a $25 billion mutual fund manager. So historically, that's been our business. As part of my time running product here, we saw the writing on the wall as far as ETFs and continued growth of active ETFs. And really, that's where the puck was going, where we wanted to skate to. And so over the past few years, a big part of what I've been working on is building out the ETF platform that we launched about a year and a half ago with our initial ETFs.

So before we get into Touchstone and a little bit about what you guys do over there, I always like to ask, any hobbies? What do you like to do when you're not sitting behind the desk?

Yeah, so I like getting outside a lot. I'm trying to play a lot more golf this year. I like to travel, outdoorsy stuff. I hiked to Kilimanjaro a few years ago, so that was probably the coolest one of those trips we've done. And then next year, we're going to do a little trip to Switzerland to do some hiking.

Oh, that sounds great. Well, your golf season is over if you're in Cincinnati. I'm seeing snow out my window as we speak.

Yeah, last time I played was about a week ago and it was in the 40s and now it's like 20 here. So things change quickly. It's almost ski season here, so I'll switch to that.

Yeah, season is over. So why don't you tell us a little bit more about Touchstone's business, kind of the whole breadth of product and services and kind of what the whole business is about?

Yeah, so at Touchstone, we are distinctively active. That's our mantra. Everything we do is very active. If you look at our strategies, they'll typically look very different from the benchmarks because we believe that to be able to beat the benchmark, a prerequisite is you have to look different from the benchmark. So you'll typically see high conviction in the best ideas, portfolios with a relatively higher tracking error. We are fully sub-advised. So we have 15 different sub-advisors that we go out and hire to run in a particular asset class. And it's really finding best in breed institutional caliber asset managers to run our strategies on the mutual fund side. And then over the last year and a half on the ETF side as well in our suite of active ETFs.

So what is it about active specifically? Is it that you guys want to focus on it solely, right? Is it trying to provide that differentiation? Is it risk management? Is it alpha generation? What is it about active that you guys really like and why you focus in that area specifically?

Yeah, so I think when you take a look at the universe of investing overall, but within active managers in particular, you'll see a lot of strategies that have a few ailments that make it hard to generate alpha. managers that are so big have tens or hundreds of billions of dollars and are by almost definition forced to look a lot like the benchmark. And so that makes it very difficult for them to be able to beat the benchmark. So the niche that we're trying to fill there is, more of a specialist manager, more cognizant of the capacity of our strategies who want to manage that. So our sub-advisors continue to offer the ability to add really strong alpha through risk-adjusted returns, also protect on the downside.

So having that many sub-advisors and doing kind of manager due diligence, what in your mind makes a good active management team and a good sub-advisor?

Yeah, so we have our framework. We call it SPDR. It's spelled in a kind of goofy way, S-P-I-D-I-R. That's basically our version of, the piece, people, process, performance, where we look at the organizational stability, personnel, infrastructure, investment discipline, and results. So that's kind of our framework for evaluating our managers. One of the things we do is we're not testing with our clients' money. We're hiring managers that have a demonstrated track record of performance, repeatable investment process, and something that we think is really differentiable when we look at the competitive landscape. We do a lot of work looking at the competitors before we bring strategies to market and making sure that we have a lot of conviction in the managers, that we hire their ability to continue doing what they've demonstrated in the past, and that they're set up for future success as well.

So with Touchstone specifically, what comes first? Are you guys doing manager due diligence and finding managers to launch strategies that you guys might want to bring to market, or are managers coming to you? Like, how does the ETF creation process at Touchstone work? Is it the strategy first or the idea first, and then a manager builds it? Or are you finding an existing strategy that you're bringing to market?

Some of both. It depends on the circumstance. So I'd start out by saying we take a lot of meetings. Our stance in general is trying to take as many as possible, constantly from institutional asset managers that are looking for new avenues to grow their strategies, open up a retail market with our 50-plus person distribution team that targets the advisor intermediary channel that's not necessarily the bread and butter from a distribution standpoint of those institutional asset managers. So we have several hundred meetings a year with asset managers across asset classes. Sometimes, at times in the past, we've had a particular search. So on the mutual fund side a few years ago, an example of that, we looked in the liquid alt space, ended up hiring Aries Capital to run our credit opportunity strategy.

Yeah, I have a handful of questions specifically for HEAT. So let's get back to that here in a couple of minutes. But before we do that, the active ETF landscape as a whole, right? We've seen a massive explosion in active ETFs over the last couple of years. What do you think attributes to the growth in that space and why we're seeing so many managers and issuers come to market with active ETFs?

Yeah, so I think there's a couple of things. One on just some of the structural benefits of the vehicle that investors are demanding. So we're seeing a lot of demand for the types of active strategies we've always offered, but the ability to also wrap those in a vehicle that offers the tax efficiency, the liquidity, the transparency, those benefits that ETFs have always been known for. So that's key reason why investors are becoming more and more interested in active ETFs. The other key thing that happened is a few years ago, the ETF role. So once the SEC adopted rule 6C11, it just made it a lot easier for active managers to come to market. So instead of filing exemptive relief for each individual strategy, you can rely on that rule.

All right. So let's talk about heat. Let's talk about a couple of your ETFs. This is the climate transition ETF that you already alluded to. Can you give me a very high level overview of what the strategy is and what it's trying to accomplish? Yeah. So it's managed by Lombard ODA.

They're a Swiss firm that's several hundred billion dollars of assets dating back to the 1700s. Extremely long pedigree tenure there. Had to read that a few times initially. I thought it was a typo. So they've been around a while. They're really in the forefront of sustainable investing. They've raised over a billion dollars in Europe in this strategy. They are looking to invest in companies that are going to benefit from the transitioning climate environment. So one of those buckets is a there's three different buckets. One of them is a clean energy solutions providers buckets. That's probably most similar to some of the other competitors that you'll see out there that really focus on your solar companies and your wind companies.

So as much as you can speak on it, do you know how the fund is really screening and finding these opportunities?

Yeah, so they've got a very robust team. They partner with Oxford for some of the academic research over there. It's all active. So they're looking at their sustainability team and then their investment team looking at kind of bottom up fundamental research based on those three buckets and trying to find the best ideas from across the world. It's a global portfolio. So around 60% of it is in the U.S. right now and the other 40 internationally. So a team with dozens of people kind of scouring the world to find those 40 to 50 best ideas there.

So it's a pretty highly convicted portfolio. And how are they weighting those names inside of the portfolio? Is it equal weight? Is it market cap? Are they doing it? Are they making bets based on fundamentals of the company? How are they weighting the ETF?

Yeah, so it is a very high conviction best ideas portfolio. It's not equal weighted. They're looking at it from a risk management perspective. So a risk management team is in it as well, looking at exposures to different countries, different factors, and then weighting it based on conviction. So the best ideas are overweight there.

And is everything done kind of on the fly? Or are they doing kind of a weekly, monthly, quarterly, annual rebalance or reconstitution? Or is it a real pure active type strategy where they can make decisions day to day? Yeah.

So in the ETF vehicle, we're looking at it on a monthly basis. So for SMA, they might rebalance it a little more frequently, but it is active. It's not on a set cadence that's quarterly or annually. We're looking at it monthly and being able to utilize some of the tools like custom baskets as we rebalance that to make sure we do get the tax efficiency and the benefits that the ETF vehicle is known for.

So if you or your distribution team is really talking to an investment advisor about heat, where would you kind of sleeve this in an overall model portfolio construction? Yeah.

So we've had a lot of conversations around that because the thematics have really emerged over the last year. It's become a much bigger slice of the investment universe. I think the interesting thing about heat is it's more broad based than some of the other sustainable, clean energy things that are really high beta and have gotten really beat up so far this year. So it does make a good complement to kind of like global, international, global equity portion of an investor, best investors portfolio. So what we've seen a lot of advisors doing is kind of taking that core exposure and then use heat as a satellite to pair with it to get an investor exposure to a theme that they might be passionate about.

Sure. So if it's okay with you, I'd like to pivot. I quickly want to talk about TSEC, the Touchstone Securitized Income ETF. We're going to go through the same exercise here. What is the fund looking to do? What's it trying to accomplish? What's in it? Can you just talk at a high level about the fund?

Yeah. So I'll talk, I'll kind of pair two of them together. TSEC and then TSEC are run by the same team at Fort Washington. We launched TSEC. That was one of our first four ETFs is the Touchstone Ultra Short Income ETF. So it's been out for about a year and a half now. It was launched last summer. Fort Washington's short duration team really emphasizes securitized investments. So TSEC will have some corporate in there, but overweight securitized investments. And we think securitized investments, residential mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities, collateralized loan obligations. Those are kind of the key building blocks of that strategy. Historically securitized investments have been a really interesting place to be from a risk return profile perspective, relative to something like investment-grade corporates or high-yield corporates.

So does that portfolio have any mandated kind of weighting requirements around the type or amount of paper it holds? Or is it kind of go anywhere? I know you've mentioned, 50% of it has to be investment grade. But as far as the different types of paper, is there any guardrails on that? Or is it kind of go anywhere? Could you get, I guess my question is, can you get concentrated in one section over another?

In terms of those four buckets, they do have strategic kind of guardrails that they try to adhere to. So coming out, they've run the strategy for TSEC and SMA format for over a decade. It really started after the financial crisis. And at the time, it was mostly residential mortgage-backed securities. That's where they saw the most relative value. So that's evolved over the past 10 years or so to where it's become much more evenly dispersed between those buckets. I think going forward, you'll see it continue to be within their strategic guard lines that you have 10% to 40% kind of give or take in any of those buckets. But it hasn't been as concentrated in one bucket in a number of years now.

So do you have any insight on kind of how the portfolio trading decisions are made and how they're moving around those buckets? Is it more of a fundamental or quantitative approach? How are they making decisions or portfolio weighting decisions in real time? Yeah.

So it's based on the relative value that they're seeing across each one of those buckets and really the bottom-up analysis on a particular issue. The team at Fort Washington over the last 20-something years, they've really developed very robust risk monitoring techniques, surveillance techniques. One of the key things about securitized income is it is really critical just to understand the underlying assets and what that collateral looks like, being able to stress test it, see if it's a recessionary scenario, what do we think the cash flow profile will look like. And so they're running daily reports to look at delinquency rates, what those cash flows look like, and then making relative value decisions based on kind of what they're seeing from the bottom-up analysis.

So same question here as we had with Heat. Like where would an advisor put this in their overall model portfolio construction? Yeah.

So I'll talk about 2C and TSEC. So 2C on the ultra short, I think we're seeing a lot of interest there from investors that just want to earn a little bit more on their cash sleeve in the portfolio. So the team at Fort Washington describes as kind of your inside-out investors or your outside-in investors. Your inside-out investors would be the ones that have a cash segment of their strategy, maybe want to segment it to carve off a slice of that cash, say, I'm willing to take a little more price volatility risk, want to maintain a really high quality, low duration profile, and just juice up the yield a little bit, earn a little bit more carry on that cash that I might not need for the next 6, 12, 18 months.

Yeah. No, that makes a ton of sense to me. Before I let you go, you had mentioned earlier that you've got a distribution team of about 50. You guys have been around for a long time, a very robust mutual fund business. How are you viewing... A couple of questions here, really. Is there a difference between how you distribute traditionally a mutual fund and how you're going about distributing these ETFs? And I'm sure there are some similarities, but what differences have you and the team kind of picked up over the course of trying to get these to market? Yeah.

So I think in general, our advisor population is pretty similar between mutual funds and ETFs. It's the same advisors that historically we've sold mutual funds to. In reality, most of them are using mutual funds and they're using ETFs and maybe they're using SMAs and they're using all those types of vehicles together. So it's a similar population of advisors. We have had to make some strides as far as our sales team and the ETF vehicle specific parts of the conversation. We brought on an ETF specialist who has a couple of decades of ETF sales experience to help train our team. Just so when they're talking to advisors, telling them about the benefits of using limit orders and about all the different ETF characteristics that our sales team hasn't had to deal with those characteristics.

Yeah. And that makes a lot of sense to me. And it would seem to me, maybe I'm making an assumption here, but just thinking as we're talking that buying a mutual fund seems a lot stickier than buying an ETF, right? In a lot of instances, just because of the liquidity and sometimes how active managers can use them or incorporate them in a portfolio. Is there anything that you've learned about that over the period of time, just that you guys have been in the ETF business? Is it a different discussion? Or again, is it just the same advisors and just a different vehicle for them to be able to use?

So I think what we've seen so far is there might be some higher level of turnover from advisors going into and out of the strategy because it is very liquid and tradable. But I do think we're going to see a different experience for our types of strategies than maybe your passive giant ETFs that are used in a very tactical nature have been used. A lot of ETF strategists are making the calls going into and out on a very short term basis for those ETFs historically. I do think a lot of our users will use it a little more strategically where they're able to get in and out when they need, but something like a 2C or a TSEC or a HEAT to be able to maintain that exposure for a year or multiple years because they do like the benefits that the active management, that strategy is able to provide.

Yeah. Well, Matt, again, thank you so much for your time. Before I let you go, where can people learn more about you? Where can people learn more about the touchstone and the variety of different funds that you guys have to offer?

Yeah. So the first place is touchstoneinvestments.com, our website. We've also got a LinkedIn page where we're posting a lot of good content. So please feel free to give us a follow there.

Well, Matt, again, thank you for your time. I really enjoyed this and I hope in the future you and I have a chance to meet face to face and talk in person. All right. Thanks, Brad. Bye.