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- [00:01]
Hannah Fry
I'm Hannah Fry and I'm on a mission to find out about a mysterious day called Q Day, which experts think could be the moment our most precious encrypted data is suddenly at risk. Learn more later in the podcast.
- [00:15]
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- [00:49]
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- [01:30]
Hannah Fry
Audio Studios Podcasts Radio News this is Masters in Business with Barry.
- [01:40]
Wise / Verizon / iShares Advertiser
Ritholtz on Bloomberg Radio.
- [01:44]
Barry Ritholtz
This week on the podcast, I have yet another extra special guest. Zach Buchwald is Chairman and Chief Executive Officer at Russell Investments. They run about $370 billion. I found this to be a fascinating conversation. Russell has been at the forefront of a number of really interesting innovations indexing and outsourced CIO and Smart Beta. They were way ahead of the rest of the investment world. Now they're putting together really interesting active portfolios, including private investments. They work with both wealth clients as well as institutions. You may not know Zach's name, but he's got an absolutely fascinating background at blackrock, Morgan Stanley and Lehman Brothers. I thought this conversation was fascinating and I think you will also with no further ado, my conversation with Russell Investments. Zach Buchwald Zach Buchwald, welcome to Bloomberg.
- [02:45]
Zach Buchwald
Delighted to be here, Barry. Thanks for having me.
- [02:46]
Barry Ritholtz
Thank you so much for joining us. I spoke to your predecessor about three years ago, right after the pandemic. But let's start talking a little bit about your background. Undergraduate bachelor's degree at Harvard. What were you studying there?
- [03:00]
Zach Buchwald
I studied English. So this was not on the. On the docket that I was going to have a career in finance.
- [03:04]
Barry Ritholtz
Not. Not the plan. Huh. So. So you come out of school in 96. What was your first gig?
- [03:10]
Zach Buchwald
So out of school, I applied to law school, not sort of knowing where I was going. And I. And I decided to have a little break before I. Before I went back to school. And I got recruited by. By Lehman Brothers. So I spent two years working in structured finance at Lehman Brothers. And it became apparent to me right away I didn't want to become a corporate lawyer. I worked with lawyers, and that was not the job for me, but I had a knack for it. I enjoyed it. I always liked math, even though I was an English major. And you can find other ways to put your writing and your reading acumen to work as well.
- [03:41]
Barry Ritholtz
And I'm gonna say late 1990s, nobody had any clue what was coming a.
- [03:45]
Zach Buchwald
Decade later, not at all. Now, Lehman Brothers was a great place to start my career, but after two years, I went to Morgan Stanley. And that's how I think of the beginning of my career, because I spent 10 years at Morgan Stanley. I was very invested in the firm, and the firm was invested in me. I learned about the capital markets top to bottom, and I had a career there that took me from, you know, from a starting associate role to running a business that became the CLO business, which now is like a real, you know, really important part of capital markets.
- [04:10]
Barry Ritholtz
What were your titles there? What'd you do there?
- [04:12]
Zach Buchwald
Yeah, well, I started as an associate within. Within Fixed Income. I, you know, I was in sales, I was in trading, I was in structuring. I always worked within the credit derivative space. And then ultimately credit derivatives started getting wrapped up in different ways. And I, and I worked on the CLO platform and Morgan Stanley had a leading Cielo platform that by the end of my. My time there, I. And that was about, you know, I think about the role that Clos play in the, you know, in the. In the markets today. It's an enormous origination function that helps, you know, finance a lot of corporate America.
- [04:43]
Barry Ritholtz
John Mack was CEO at the time. Is that right?
- [04:46]
Zach Buchwald
So I was there for Phil Purcell and I was there for John Mack.
- [04:49]
Barry Ritholtz
Wow. Those are two legends in the industry. What inspired you to head over to blackrock?
- [04:56]
Zach Buchwald
I went to blackrock with the guy that I was working for at Morgan Stanley, and we created a business that was essentially an advisory practice. This was 2008 and BlackRock was H work on a lot of these situations that were, you know, at the start of the crisis. So we worked with the Federal Reserve, we worked with the Treasury, a lot of the big financial institutions that had, you know, problematic portfolios. And BlackRock was very well positioned as a buy side firm, as a company that sort of hadn't underwritten a lot of like the problematic derivative.
- [05:23]
Barry Ritholtz
I mean, did they even have an investing banking division back then?
- [05:27]
Zach Buchwald
No. I mean, we called it advisory, but essentially was like an investment banking function. I mean it was really consultative, providing advice, running portfolio analytics, thinking about, you know, if you can separate like liquidity crisis from the actual credit risk and sort of the expected cash flows on these securities, what could you expect to get back? And we, you know, we created a roadmap for the government on how to invest in these securities that they took away, you know, that they essentially backstopped from these big organizations and tried to create a roadmap to bring them back to par to repay all the taxpayers with interest. And in almost every respect over time, the government was successful in doing that. And BlackRock really played a very special role in creating those roadmaps. And it wasn't what I would think as like a highly profitable business, but in terms of like the aura that was created around blackrock as being like a solutions provider, you know, sort of a force for good in the world, that, that's what we did. And it was a, it was a, it was a great role for me.
- [06:20]
Barry Ritholtz
I recall that era that BlackRock essentially had become the Street's bond desk. Like every brokerage firm used to have a fairly substantial bond desk. And it seemed like BlackRock has just sucked up all that paper and, and all those traders.
- [06:38]
Zach Buchwald
Well, that sounds like an HR strategy. And I don't know that I had any part of that, but there was a lot of talent for sure. And there continues to be a lot of talent. Some of the folks that worked on those assignments are essentially running BlackRock now. And it was the consultative nature of thinking about the challenges, how we can create solutions to those challenges, thinking about the aspirations and the ambitions. And that doesn't just apply to workout situations, that applies to all the clients. And it's something that I've tried to import, you know, into my current role at Russell.
- [07:11]
Barry Ritholtz
So you're there for 15 years, eventually you become head of their institutional business. That's, that's a $2 trillion silo. And you also helped establish BlackRock Retirement Solutions. Explain what these Groups do, yeah.
- [07:26]
Zach Buchwald
So after, after the consulting practice, I went on to run the insurance business at BlackRock. That was a $200 billion business at the time. A little sleepy, not, you know, what I would say is like a growth center. And, and it was housed with. The business itself was housed with true insurance experts, asset liability experts, people who really understood the nuts and bolts of insurance companies. And I did not have an insurance background. And for the first year I had an insurance guy sort of stapled to me every time I went to a client, make sure I didn't get out over my skis. But this being an outsider sometimes can actually really help you think externally about some of the things that might be impacting the clients, the industry, the sector, the business itself. And early on when I was in that role, we ran an analysis of the whole US insurance industry. Every company that was bigger than $1 billion of general account assets. And we asked ourselves the question, what are some of the external factors that could impact these companies that they might not be expecting or prepared for? And, and where could blackrock play a role in helping them deal with those kinds of challenges? And we came up with seven situations, Barry, that we thought were going to have, like seismic type impacts on the companies. And four of them happened. And in three of those cases, BlackRock went on to play a really big role and run the general accounts. And that was more than $100 billion of assets. And we put on another $100 billion along the way. So that was the case where the business started growing very meaningfully. And I think BlackRock sort of paid a lot of attention to that and realized we could play a bigger role with these insurance companies. They're going to do a lot more interesting things than just invest in sort of high quality fixed income over time. You also had some interesting stuff happening with Apollo and Athene. They were kind of remaking the model a little. And BlackRock pays a lot of attention to what's going on in the outside world. And we grew the business to say the very least.
- [09:14]
Barry Ritholtz
What are they, 12, $13 trillion now in assets?
- [09:17]
Zach Buchwald
It's a good business to say the very least.
- [09:19]
Barry Ritholtz
So 10 years at Morgan Stanley, 15 years at Blackrock. What lessons did you take from those experiences to Russell Investments?
- [09:27]
Zach Buchwald
Yeah, well, first and foremost, it's all about the client. And if you lose sight of that, understanding what the client is dealing with, their challenges, their ambitions, their aspirations, being a consultative provide. If you start from a push out, like, here are the products that I have, here are the things that I've done before. It almost never works. And it also, that's not the age that we're living in today. The age that we're living in is how can I help you achieve the outcomes that you're trying to get to? How can I anticipate some of the challenges that you're going to experience? How can I help you learn from some of the things that I've, you know, I've seen in the sector or the industry? And you start from there and it builds a foundation with the client that is just sort of irreplaceable. So that's, I mean that was one really important learning. Now I came into Russell Russell because Russell had like, first of all, it's a 90 year legacy. Thank you for starting with that 1936.
- [10:16]
Barry Ritholtz
That's you coming up on a century soon.
- [10:18]
Zach Buchwald
Yeah, exactly. I'm really proud to run. I'm the eighth CEO by the way of 90 years of Russell investments. I mean that's so for a US asset manager that's old. And I think about the things that Russell has done in that time, Barry. I mean it's been a real innovator and category creator. Everybody knows the Russell indexes, which were sort of cultivated and innovated in all sorts of cool ways. And we all have it in our pensions and our 401ks. You know, Russell was the original pension investment consultant. We created that category. Russell was the original ocio and we're still a leader in ocio. These are really, you know, sort of important categories that have a big impact on, on the investment ecosystem. And what was, what was special to me about Russell and the reason I wanted to join is Russell's approach to doing all of these solutions is its entirely open architecture. So the view is we build and implement portfolios. Russell, which is, you know, something I worked on at blackrock and to some extent Morgan Stanley too. But the idea is we use best of breed managers and strategies from around the whole investment universe. So if I put together an OCIO portfolio at Russell, I'm building, you know, fixed income Manager, you know, the best quality fixed income managers, the best private assets managers, the best cash and so on and best index products. You know, we can kind of, it's, it's, we can kind of go everywhere within the ecosystem. And that was a model that I was very excited about because it became more about like thinking through the lens of what the client is looking to achieve and how can I use all of the tools and the ingredients available as opposed to sort of a Set, you know, set of tools that I, that I had at hand from the company that I worked for.
- [11:49]
Barry Ritholtz
Huh. Really interesting. We're going to talk about pensions, oci, we're going to talk about a little later. I didn't realize this till I started doing my homework. Russell is effectively credited with inventing smart beta. I mean, who knew that? I think of a couple of other firms as taking the leadership in that recently, but 40 years ago you guys were on the cutting edge of that. What is it like running a firm that has a near century long legacy? How does that affect how you think about risks and opportunities?
- [12:25]
Zach Buchwald
Yeah, I mean the legacy is a wonderful thing but you know, you can't rest like we all know, we can't rest on our laurels. It's, you know, the job for me is to make sure that I'm taking sort of the best parts of the history and the legacy, the innovative spirit, all these cool things that we've done and then evolving them for the world that we're in today. Our mainline business, we have sort of two central businesses. It's OCIO and its model portfolios that we do on the retail side, which is essentially same kind of ideas of the institutional business, building great portfolios and implementing them. 90% of our business falls into those two categories. What I need to do today is make sure that I'm using all of the tools available. So as the market moves from active products to passive products, as the market starts integrating private assets with public assets, all of that is part of our portfolio today. And so the goal as the leader is to make sure that the strategy is incorporating we're open architecture. It's truly incorporating the entire ecosystem into what we build for our clients.
- [13:23]
Barry Ritholtz
I want to get your feedback on a quote of yours I found in my homework. Quote. Financial security is a central challenge for this industry. How did your experiences at blackrock, at Morgan Stanley and way back when at Lehman Brothers, how did it affect your concept of financial security?
- [13:44]
Zach Buchwald
Financial security and retirement security especially took me a little bit of time to hone in on Barry. I mean, I think back to my years at Morgan Stanley and the job there was very much about sort of like finding the arbitrage in the markets. It's where can we make money as a sales and trading function. And we help clients along the way by delivering the products and the services that they want. But first and foremost it was about the investment bank. And that changed for me. I had a review with my boss at the time and she said to me something that she meant as a compliment. She said to me, zach, you can really smell the money. And I went away. And that was not the legacy that I wanted for my career. And I moved to blackrock shortly after that, where I was helping the government, the taxpayers deal with really critical issues, really big, big thorny problems that were going to have an impact on the quality of life of the people in this country. And it was a complete reset of my perspective. Now we build portfolios at Russell, but if I'm working for a pension or a 401 or an insurance company, at the end of the day I'm serving individuals, I'm helping them, and we don't lose sight of that. I'm helping them have a secure retirement. Now, by the way, they have to do their part too, because it's also about saving early, contributing, making sure that you're, you know, learning about the plan and making the right decisions. But the role that we play within the industry is a make or break in terms of whether they're able to, whether they're able to achieve that. Now you also have something going on in the background that's going to have a very big impact in the next couple of decades with retirees in America. And that is that really the risk has shifted. Now. The retirement security risk has shifted from organizations like the companies and the government.
- [15:33]
Barry Ritholtz
Companies in defined benefits, to define contributions, to define contribution. Right.
- [15:38]
Zach Buchwald
So the standard pension model is shifting to the 401k. And today still about half of retirees have access to a pension. And that plus, plus Social Security more or less gets the job done. But in another decade it's going to be less than a third, and another two decades it's going to be very little at all. So that means that now the 401k is the staple that's going to result in a secure, comfortable retirement or not. And, you know, the big challenge with a 401k is that the risk of saving, investing and also decumulation, taking that pot of money and knowing how long, you know, the longevity risk, knowing how, thinking about how long you're going to live and how to allot it over time, all of that risk will now be borne by the individual. And we have not fully processed that within the country that this is a crisis that's coming, that people aren't prepared to own that responsibility. And the system today isn't set up in such a way that sort of the decisions are very easy to you to make it. The onus is really still on the individual.
- [16:38]
Barry Ritholtz
So that's really fascinating. How does that affect what you see within your role as CEO at Russell Investments?
- [16:45]
Zach Buchwald
Yeah, well, thanks, Barry. Our whole mission is built around helping people achieve financial security. And we do that on the institutional side by partnering with corporate sponsors and helping to, you know, ensure that the plans that they're putting in place and the role that they play through matching, through, you know, providing lifetime income, whatever the set of benefits are, is going to be, is going to serve the participants in the way that we think is going to help them have, you know, retirement with confidence and with, with security. But as the, you know, as the machine shifts and it moves more toward a 401k and then, you know, a lot of folks end up with a nest egg that they have to manage on their own. The goal is to make sure that on the wealth side, we also have sort of the right kinds of products and services and solutions that help them, you know, understand income, help them understand decumulation, help them get the right diversification, help them get fair fees. I mean, the goal is to make sure that we're. We're really delivering sort of a set of products and services that's going to allow them to live the kind of retirement that they ultimately, they all hope for.
- [17:39]
Barry Ritholtz
Really, really interesting. So whenever I talk to people about Russell, everybody knows the Russell 2000. The question is, what does Russell do? How do they make money on. They must do something more than the Russell 2000. Tell us a little bit about the different business lines at Russell Investments.
- [17:58]
Zach Buchwald
Sure. So the index business is now owned by London Stock Exchange, and they, they do a magnificent job with it. And we still have a little bit of the, you know, the aura. Every time I'm in the elevator, I see the advertisements for Russell and I think, I didn't have to pay for that ad. We can't. We get the benefit. The business is predominantly an. It's an active asset management business. And we really have one main function, Barry. It's about building and implementing great portfolios. And we do it for institutional clients and we do it for retail clients. So building the portfolios is really about sort of portfolio construction, its strategies and managers. For 90 years, we've done manager research at Russell. We have, you know, a huge team of people now. It's augmented by AI and technology, helping us look at 16,000 different managers and figuring out. We invest with about 225 of them, you know, figuring out which managers and strategies we think make sense in the different portfolios we create. And then the implementation is one of the coolest parts because that's we actually do the investing on behalf of the managers. They typically give us model portfolios and, and then all the things around the portfolio that you can be very incremental. It's the transitions, it's the hedging completion, exercise completion, mandates, overlays. And you know, those things can be alpha generative, they can be very important for risk management. You can add a values overlay for clients. And so it's a, it's a full portfolio delivery at the end of the day.
- [19:22]
Barry Ritholtz
Coming up, we continue our conversation with Zach Buchwald, Chairman and CEO of Russell Investments, discussing exactly what Russell Investments does for its clients. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
- [19:48]
Hannah Fry
Right now, bad actors are harvesting our data, hoping to decrypt it later using quantum computers on so called Q Day today. I'm Hannah Fry, host of the Exponential Era, a series that explores the real world impact of future network technology. And I sat down with two experts to discuss how we protect our data from this quantum threat. Find out what I learned@bloomberg.com Nokia you.
- [20:17]
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- [20:45]
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- [20:53]
Barry Ritholtz
Business is so perfect. Now I can choose exactly what I want and I only pay for what.
- [20:58]
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- [21:19]
Barry Ritholtz
I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Zach Buck. He's chairman and Chief Executive officer of Russell Investments, the firm was founded in 1936 and runs about $370 billion. Zach joined Russell in 2023, coming from his previous career at BlackRock. So you mentioned you're researching 16,000 different managers and internally you're generating just a fire hose of data. How do you analyze that? What value is that data to the firm?
- [21:56]
Zach Buchwald
Yeah, I mean the data is everything and we, we had, we do have a historical trove of data, but it changes quickly. You think about how quickly the, you know, the investment ecosystem evolves and you know, managers have strategies that make sense on one day and then things change and those strategies don't make sense. So it's, it really has to stay current. Even though we, you know, we certainly value the historical data and performance and use it. We start with 16,000 and the first layer is largely technology driven. So it's, you know, we have huge feeds that take into, you know, that, that take in and analyze all of the available information that's provided to us by managers directly and also that we can find out there in the, in the public domain.
- [22:41]
Barry Ritholtz
When you say managers, are these mutual fund managers, ETF managers, private managers, or all the above?
- [22:47]
Zach Buchwald
It's, it's all of the above. I mean, typically because of our size and scale, we don't, we don' invest in a ton of direct like shared products. We do much more sort of separate accounts and, but we do invest in mutual funds. We do invest in ETFs or index products where, where that makes sense and that can help, you know, drive down cost or, you know, help with diversification. But, but the managers is for the, the active strategies. And active represents, I'm going to guess probably 85% of the assets in that, that we manage overall. Remember, we're using different active strategies as the building blocks to create these portfolios. So predominantly it's not Russell managed. Although, you know, we can talk about the smart beta that you brought up. Predominantly these are externally managed strategies that we bring together and then we collapse the whole thing together in one portfolio. And we look enterprise wide because you might have, you know, three active equity managers and they're not paying attention to what the other ones are doing. And so you can end up with outsized positions or underweights. You can end up with, you know, people on opposite sides of trades and we look to, you know, to correct or make adjustments where it makes sense.
- [23:54]
Barry Ritholtz
So you guys were very innovative and helped create the concept of outsourced Chief Investment Officer Ocios. Tell us a little bit about that business line. Who are the clients. And how much assets does that run?
- [24:09]
Zach Buchwald
Yes. So OCIO represents the lion's share of the 370 billion that we manage. And it's a fast growing segment, not just at Russia, Russell, but it's growing because a lot of companies are outsourcing their pensions or their 401ks to, you know, folks that live and breathe the markets and that think about retirement security like we do all day long. So, you know, a typical day at Bloomberg might have one top story about a big corporate, you know, big US Corporate that's chosen to outsource their retirement portfolio. Now we work with a lot of in house teams as well. We help by bringing in any of those implementation services like transitions and hedging. We do that for a lot of, a lot of companies that have internal teams, teams. But sometimes sponsors decide to, you know, to hire retirement experts to, to run their, to run their retirement portfolio. And that's when they would bring in an outsourced chief investment officer. We're a top five provider and it's some of the big, you know, the other big asset managers that, that also provide that. We're the ones who do it with an open architecture framework. So the goal is not to, you know, have Russell run the whole portfolio. It's to bring in best of breed managers and to bring those together.
- [25:13]
Barry Ritholtz
Huh. Really, really. Kind of interesting when you talk about hedging, are you hedging equity, Hedging fixed income? What is the hedging business like?
- [25:22]
Zach Buchwald
Yeah, it can be all of the above. Also foreign, you know, foreign currency. You know, it can be hedging individual sectors. You might have a sponsor that's in the technology sector and they feel like they already have enough exposure to technology. And so you can, you know, make some adjustments to the portfolio that way. You can also build in a values orientation for, you know, organizations that have a particular, you know, view of the world that they want to express in their investment portfolios.
- [25:47]
Barry Ritholtz
So let's talk a little bit about Smart Beta, which Russell helped Pioneer in 1985, way before your time or my time for that matter. Is this still something that's a key part of what you're doing?
- [25:59]
Zach Buchwald
So we still have a strong footprint within Systematic, Barry. And you know, Russell manages on average between 10 and 20% of the portfolios that, that we look after and Systematic typically is within that, that 10 to 20%. We use it not to make, you know, credit decisions or stock picking decisions. Like that's not, that's not our game. That's why we hire External managers who are true experts in that we use it to round out the portfolio, to make adjustments, to make sure that the portfolio is complying with why the client hired us or whatever their investment, their stated investment strategy says. But Smart Beta is one of the many places where Russell was an innovator and these things can take on a life of their own as the industry adopts those practices.
- [26:43]
Barry Ritholtz
We mentioned artificial intelligence earlier. Tell us how you're using AI and either risk management, portfolio construction or just data analytics.
- [26:51]
Zach Buchwald
So Barry, we have a list this long of sort of desired use cases that we're working on for, for AI and I think we're still in, in early innings here. But the kinds of things that we use AI for today very effectively are more task oriented. You know, we have IT fill out our RFPs, we have it build pitch decks. We have actually we use AI to, you know, read 500 page filings, you know, which we used to have a human being do back in the day. And it's very effective at that. The real goal for, you know, for this company is that I want AI to actually help us with investment insights, with manager research insights that's going to actually drive performance at the end of the day. And I think we still have a fair amount of, we're making progress, but I think we still have a fair amount of work before, before that happens. But you know, that's the view where having, you know, having a portfolio where we look after 16,000 different strategies and managers, we're starting from a place where we like, as you said, we have troves of information of historical information that we're relying on and that we're using AI to sort of help build out that framework.
- [27:56]
Barry Ritholtz
So I'm always fascinated by, you know, the old joke is no one's ever seen a bad backtest and AI and those sort of things are only capable of looking at what's already occurred. And built into all of those backtests and to some degree built in to AI is that the future is going to resemble the past. How do you navigate around that? Because sometimes the future doesn't resemble the past. Just look at AI and how it's changing so many aspects of various businesses.
- [28:31]
Zach Buchwald
Yeah, well, that's a place where, you know, I'm still pretty optimistic that there's an enormous amount of value creation to come, Barry, because the, you know, what we've seen from AI so far at least how it's, how it's shown up in terms of, you know, in the market performance has been almost Entirely harbored in the technology sector. It's where, you know, sort of where AI exists. What we haven't seen yet is all of the other sectors that we know are going to be sort of enormously impacted by the proper use of AI, the creative and innovative use of AI. So, you know, you see a little bit of it in like health care and life sciences, but, you know, logistics and shipping and consumer goods and investments, asset management, they're all going to get transformed by AI because it's changing things. And you know, this is where I'm really optimistic that we have a lot more room to run in the markets today is because you're still not seeing like all the, you know, the potential and the benefits of AI showing up in some of these, you know, what we think of as sectors that are peripheral to technology. But, you know, in truth, technology is like critical to how we, you know.
- [29:37]
Barry Ritholtz
How we all exist makes, makes a lot of sense. Let's talk about private markets. How can Russell Investments help their clients access private markets? Between AI and privates, those are probably the two hottest topics we've been talking about this year.
- [29:55]
Zach Buchwald
So privates represents about 7% of the portfolios that we manage. It's heavier in the institutional portfolios, it's lighter. Right now within wealth portfolios, there's a lot more growth that's going to happen, especially in wealth. I think the average wealth client has something like 1 or 2% of their portfolio outside of their real estate holdings, about 1 or 2% in privates. And that number is going to grow and should grow. Right? Because this is a really important source of return and risk diversification. And if you rely on the historical precedents, it's been an enormous outperformer writ large. And so kind of delivering access is a very important function that we do at Russell, but also that we work with our financial advisor partners to figure out the best ways because it's how you deliver privates to institutional investors is different. Right. There's tax considerations and reporting considerations, liquidity considerations that also all need to be considered with individuals. So we're trying to do this really judiciously within wealth portfolios. Wealthy people, wealthy families, there's a lot of room to run here. I'm being extra cautious when I think about sort of 401ks or 401 graduates, middle class people, nest eggs, because that's where I think about, are these appropriate investments? Do they help with financial security? Can you get your money back when you need it? Are the fees fair and appropriate? And, and so I think you need to be extra careful with, with the, you know, sort of true working people, working families and their, their retirement nest eggs, but wealth writ large. There's a, there's a ton of room for, for private markets.
- [31:33]
Barry Ritholtz
So, so you mentioned 7%. Where could this possibly go? Is this 10%, 15%, 20%? I've heard people say 60, 40 is out. It's now 50, 30, 20, or whatever the number numbers add up to.
- [31:49]
Zach Buchwald
I don't know where it gets to. It's certainly going to be north of, of 7%. You know, I think it's, I think you have to think not only about what's appropriate for the portfolios. Listen, if you do a backward looking analysis of private equity and private credit, you know, which I, outside of, you know, specific real estate investments that people choose themselves, those are like the two biggest food groups. If you run an analysis of what those investments looked like over the last 20 years, Barry, it's going to be different. Different than what you're going to get in the next 20 years for a lot of reasons. But I'll tell you from my personal perspective right now, in the last two years, my vet's office has been bought by private equity. My landscaper, my garbage collection, my dentist, they're all owned by private equity now and they're doing these roll ups. And there's lots of efficiencies to be created on bringing these practices together. But that's a pretty different investment than buying a company and making a company better and selling that company, which historically is where private equity made its name and its reputation and the return stream that we've seen. So another thing I think about is how am I going to make sure that the risk and return profiles I'm putting into these portfolios that we can reasonably predict what they're going to look like and that we can manage them appropriately, given that the asset pools might look a little different. Different than what we were, you know, what we were investing in 10 years ago.
- [33:13]
Barry Ritholtz
Really, really interesting. So let's talk a little bit about some of the things that are going on in the market today. Fee compression has been a giant factor really since the financial crisis. You recently decided to reduce some of the fees on your flagship fixed income products. Tell us a little bit about what drove your decision and what are you thinking about in terms of fees generally?
- [33:41]
Zach Buchwald
I mean, the governing precept, Barry, is always to make sure we're providing value to the clients. And you know, we do that by charging a fair and appropriate fee for what it is we're doing if, if I'm going to focus on anything, it's less about what's the fee that I can charge and more about making sure that I'm invaluable to these clients and that we're really, you know, helping them achieve their goals. When you, the truth is when you do a great job for the client, the fee almost becomes not an issue. Now having said that, we have some businesses that are scaled businesses and that I compete with, you know, with other good providers and I have to make sure that we're staying competitive. So we're not in any way immune to fee compression. But you know, but if you can provide a really good value proposition, it's not such a big deal.
- [34:25]
Barry Ritholtz
So this has been an ongoing factor in the industry, particularly for active managers, and Russell is primarily an active manager. Are you seeing any changes in this trend globally? I mean, it started very much in the United States with entities like BlackRock and especially Vanguard. You're a global firm. What does this look like overseas?
- [34:50]
Zach Buchwald
Yeah, fee compression in our space is, you know, it comes through in different ways globally. OCIO is the place where we've been been sort of most susceptible to, you know, to fee compression, Barry. And you know, if I think about who we compete against, the landscape has changed for us over the last 10 years. You know, 10 years ago I competed largely against like the consult, the traditional consultants and we had a very different offering. We actually implemented the portfolio. We weren't just doing manager research, sort of on paper. We were actually trading the portfolio and you know, doing the risk management and the overlays and the completions, things that were available, very big value add. And we were unique in that respect. And then along came the really big asset managers that saw OCIO in part as sort of a distribution function. You know, if I can deliver the entire portfolio, I can put a lot of my own underlying products into that portfolio. And by the way, that can be a great business for you if you have.
- [35:42]
Barry Ritholtz
But that, that's a closed architecture. You guys run a very open architecture.
- [35:45]
Zach Buchwald
We run a completely open architecture and we're unique in that it's true open architecture. 80% plus percent and sometimes 100% of the assets come from third party managers. But we still have to compete against organizations that are running their own version which might be closed or semi, semi closed. And you know, if you have a whole lot of underlying products you're putting into the portfolio, it gives you a lot of leeway to change the fee or to compress the Fee at the OCIO level because you're making money in all sorts of other ways. Russell doesn't do that. So it does mean that we were susceptible to some of the fee compression and our fees had, have narrowed. But the way I see the solution here is just to make sure that the value proposition that we're offering, the way we go about building an ocio, the costs that, you know, it takes, the human capital that's required, you know, we put over $100 million into our technology system that allows us to build these open architecture portfolios. When clients understand what it is that they get from us, paying a slightly higher fee doesn't seem to be a big deal.
- [36:44]
Barry Ritholtz
What about the, the private markets that we're looking at? We were talking about private equity, private credit. First, is it possible that those sort of things can be indexed? And then second, they've always been pricier than public markets. Are we starting to see any fee compression along those lines?
- [37:02]
Zach Buchwald
Yeah, so we haven't seen a ton of fee compression. I mean, those are cases where I think the value proposition is crystal clear. And you know, the high performing managers can charge higher fees or substantial fees because they've really delivered and in general they continue to deliver. I think if they stop delivering and we start seeing what look more like public markets performance or even weak public markets performance, it's going to be much harder for them to charge those fees. But that hasn't happened yet. Especially within private credit and private equity, there's been real outperformance, especially at the top of the heap versus the public markets. So it becomes easier to justify those fees.
- [37:44]
Barry Ritholtz
Makes a lot of sense. So let's venture into the world of public policy a little bit. You've proposed national account programs to help young people start investing early. The most recent big bill that passed in this administration has these accounts for babies. Every kid that's going to be born is going to get, what is it, 1500 or $3,000, I don't know what number.
- [38:08]
Zach Buchwald
$1,000, $1,000.
- [38:09]
Barry Ritholtz
All right, better than nothing. But where do you see these sort of programs going? And if you start Investing at age one day, what potential compounding can we see 50, 75, 100 years later?
- [38:25]
Zach Buchwald
Now you're really talking my language. When Trump was elected, I wrote a piece that we put into Barron's that Barron's published saying that we should give $1,000 to every kid in a America and open an investment account and let them actually learn about the power of compounding. Because it's different when you actually own the assets. And you know, when you give people an investment account, you can find lots of ways to create some educate, you know, investment education that goes along.
- [38:48]
Barry Ritholtz
Let me just interrupt you because it sounds like a lot of money. There are 3 million kids born a year. It's $3 billion, which to a $31 trillion economy and a 6 or 7 trillion dollar government spend is a rounding.
- [39:04]
Zach Buchwald
It's nothing in the grand scheme of things. And you know, you know you're onto something because it got, actually got criticized by both the right and the left and the right said, oh, this is another entitlement program. Anyway, we put this thing into Barron's and to my surprise and delight, it ended up in, in the big beautiful bill and it actually got, it actually.
- [39:21]
Barry Ritholtz
Passed, passed and funded. Right.
- [39:22]
Zach Buchwald
Became legislation. And you know, treasury is working hard now thinking through, through, you know, the implementation and we're, we're helping along the way. It's, it's an awesome program because fundamentally what it does is it makes investing universal. You know, all these families in the United States that think that investing is not for them or they never had any exposure to it. And that's, by the way, most of America right now, to the extent they have a, you know, have a kid, they are going to have an investment account that, that's, you know, there is a, there is $1,000 to kickstart it from the government, but there's going to be lots of avenues for families to make continued contributions for employers to make contributions, for philanthropies to make contributions over time on hopefully a tax advantaged basis. And folks are going to see the way compounding really works. So it's not the $1,000 contribution, which as you said is kind of a drop in the bucket at least as a burden on, on society. It's the, it's, you know, what can you pull together from all of the different constituents that are going to want to contribute to a program like this? So we're, we're really excited and you know, I think that ultimately I hope this will dovetail with retirement security. You know, you said it when, when you ask what can happen in 50 or 75 years. I think initially, you know, the thought is these might help fund college education and by the way, with a little bit of contributions on an ongoing basis, it will fund, fund a college education with the compounding. But over time there's six or seven of these programs and eventually, you know, maybe we can pull them all together and create a national program that actually funds People's retirement Coming up, we continue.
- [41:04]
Barry Ritholtz
Our conversation with Zach Buchwald. He's Chairman and Chief Executive Officer of Russell Investments. Discussing the state of markets today, I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.
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- [43:00]
Barry Ritholtz
I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Zach Buchwald. He's Chairman and Chief Executive Officer of Russell Investments. The firm was founded in 1936 and runs about $370 billion. Zach joined Russell in 2023. Coming from his previous career at BlackRock, I'm a fan of using milestones as an excuse to give some sort of a gift. You can see sweet 16s or kid turns 13 or whatever it is Grandma and grandpa write a check and put it right into their account. Here's some Eli Lilly or here's some whatever s and P500, knock yourself out. And that's going to just appreciate over the next, you know, X number of decades. It could really make a substantial difference in the retirement of people who have yet to even be aborted.
- [43:59]
Hannah Fry
Coin.
- [43:59]
Zach Buchwald
It's absolutely true. And by the way, it's investing in, in the US stock market.
- [44:04]
Barry Ritholtz
Right. So I'm assuming the s and P500 would count and any of the Microsoft or Lilly or whatever, Apple, Amazon, whatever big tech company you're enthusiastic about, I would recommend a broader, more diversified approach than a single stock.
- [44:18]
Zach Buchwald
Right.
- [44:19]
Barry Ritholtz
I mentioned Lilly because I just know a friend just put a bunch of Lily stock in his nephew's account and I'm like, oh, what are you doing there for? He's like just doing a transfer. It's tax free and I have to worry about it.
- [44:33]
Zach Buchwald
Well, I'm not a stock picker, but Lilly's a great company. Having diversified exposure in these, in these accounts is the way to go. And you know, listen, a generation ago, Barry, the version of that was not so much Lily stock. It was very typically a U.S. treasury bond. Right? That's what you got when you turned 13 or 16 or had that milestone birthday. And a Treasury bond, in the long term you'd rather be in the stock market.
- [44:58]
Barry Ritholtz
You get, you don't want to 2 1/2% ahead above inflation. That doesn't excite you?
- [45:04]
Zach Buchwald
I'd rather have the long term return of the S and P for sure.
- [45:07]
Barry Ritholtz
Especially if it's a newborn or even a teenager. Their investment window is 60, 70 years.
- [45:14]
Zach Buchwald
That's exactly right. And the trick here is you have to get people to actually understand because that 16 year old old, when they're 22, they're going to get a job that's going to have a 401k and they have to understand why am I taking 6% out of my, you know, out of my paycheck when, you know, my starting salary might not even be enough to get, you know, to pay my rent and my other bills, why would I want to do that? And, and they really, if they understand the power of compounding and the long term implications of that, they're going to, they're going to buy into it.
- [45:43]
Barry Ritholtz
I really didn't think about my 401k until I was in my 30s. Right. But if I actually had money put in an account when I was born, by the time you're 25. You're going to see some impact from compounding 100%.
- [45:57]
Zach Buchwald
Well, I'm not too worried about you, Barry.
- [46:00]
Barry Ritholtz
I'll be all right.
- [46:02]
Zach Buchwald
You'll be all right. But, you know, but think about all those folks that don't, you know, the average income in America is still $70,000. Right? All those folks that don't have access to investments and they're not thinking about, am I going to be able to make my contribution at age 22? Because they're thinking about, can I, Can I afford to pay my rent?
- [46:20]
Barry Ritholtz
Right. The bottom half of the economic strata in this country. And we're having this conversation on election Day in New York where it looks like at least the leader up until, up until today has been someone who describes themselves as a socialist and has made affordability their key campaign theme. This is going to be an ongoing issue, especially for the bottom half of the. Of earners and savers.
- [46:45]
Zach Buchwald
That's right. We're not a political organization at Russell, but I do concur. Affordability is the issue. And I think it's not a left issue. I think it's an issue for everybody, almost everybody in this country. And we're gonna be hearing a lot about it from all sides. I wrote a piece after the baby accounts, which they call the Trump accounts, by the way, after that became part of the legislation, I wrote a piece that the Washington Post published that essentially described what these accounts are and the impact that it can have in terms of, of helping to educate our population about the power of investing and compounding. And it was very interesting to see the commentary. You know, when you publish something in the Journal or the, you get a lot of, you get a lot of comments. And by and large, the vast majority of the comments said, why wouldn't you just write us a refund check? Which is what we got during COVID by the way, like stimulus type checks. And it was the opposite of the point that I was trying, right.
- [47:41]
Barry Ritholtz
We don't want you to spend this. We want you to save this.
- [47:43]
Zach Buchwald
We want you to save it and to understand what the difference is from a savings account or a Treasury bond versus investing it into the markets and getting to see long term compounding. So it was honestly, it was a little bit of a refresher for me that we have a lot of work to do to help people understand why a program like this can actually help them.
- [48:01]
Barry Ritholtz
As someone who's been writing in public for nearly 30 years, my best advice to you is simply never read the comments. There was a Golden era of blogs in, like, the early to mid 2000s, where the comments were these, like, fantastic communities. All of that has kind of migrated to Reddit. If you want to see lightly moderated, intelligent debates with some nonsense thrown in along the way, that's what's left of that sort of issue. I think even YouTube used to do a better job at moderating the comments. The spam and the bots still slip in every now and then.
- [48:43]
Zach Buchwald
It does give you a perspective on what's on people's minds, though. Even though some of the comments are, like, unhinged.
- [48:48]
Barry Ritholtz
Right.
- [48:49]
Zach Buchwald
You can tell, like, what's coming through, what, what are people's fears and worries and concerns. If you can, if you can read it through the, you know, the craziness.
- [48:57]
Barry Ritholtz
Yeah, you have to, you have to fight your way through it. It's kind of fascinating because I'm going to just digress for a moment. We all are subject to these cognitive errors and these behavior behavioral biases, and it very much shows up in people's portfolios and the decisions they make. I wake up on a day like today where Nasdaq is down 1 1/2 percent. I know I'm going to see a bunch of emails, ah, you told us to stay long. And look, we're down 1.5% today. I knew I should have gotten out of the market. So what are you talking about? We're up 17% for the year and the NASDAQ's up 23%. This is the price of admission. You have to deal with some volatility.
- [49:41]
Zach Buchwald
I mean, this is a place, by the way, where technology has not actually served people in their retirement portfolios. Because if you can pull up your phone and in three seconds, you know, you work as a teacher or a nurse or whatever, and you pull up your phone and in three seconds you see your portfolio is down one and a half percent. And at some level, it flips a switch and you think, my portfolio is, is, is, is in trouble or I should sell. Like, that's how you get to really bad decisions. Because we all, you know, we all know, long term, like, if you're, man.
- [50:08]
Barry Ritholtz
If you're, do we all know that? Because I'm not sure everybody does. And there's such an inherent bias towards action. Don't just sit there. Do something.
- [50:18]
Zach Buchwald
Right.
- [50:18]
Barry Ritholtz
That, that just seems to be human nature.
- [50:21]
Zach Buchwald
It's anathema to how you're supposed to manage a retirement portfolio, though. You, you, you, by the way, you can make adjustments over, over time. Time, but the goal is not to pull out when you think the market is going to be down. We all know that the bounce backs, by the way, happen faster and stronger than ever. I mean, you think about like what the bounce back looks like during the financial crisis or during the dot com bust. It took years to bounce back. And then you think about COVID or.
- [50:45]
Barry Ritholtz
Even April or Liberation Day.
- [50:47]
Zach Buchwald
Right. The bounce back happens a week. Yeah. Almost instantly and stronger than before. So you know, this is a case where the phone really does not help you. Right. If you're going to make a decision to pull out because you see something going on in the markets on an off day. And you know, as we're, as we're thinking through how to implement new programs like the Trump accounts, you know, my goal is you want to have like lots of transparency, but you don't want to make it easy for people to make bad decisions. You have to help them make good long term decisions.
- [51:13]
Barry Ritholtz
A little bit of choice architecture that prevents those sort of things. Last question before I get to the standard questions we ask all of our guests. What do you think investors are not talking about, but perhaps should be? What are the important overlooked topics? Assets, geography, policy, whatever that, that should be getting a little more following.
- [51:33]
Zach Buchwald
Yeah, well, Barry, I'm still really positive on, on AI and how much more room to run we have. You know, there's been so much to talk about, about how we haven't seen a broadening in the markets. You know, most of the value capture has happened within the, the technology industry. But you know, but I think every sector is going to be transformed, almost every sector transformed by AI as much as it was by, by the Internet net. And we just haven't seen that come through yet. But I can tell you every company that we invest in is thinking about this and working on it behind the scenes, even if it's not showing up yet in their, in their quarterly earnings reports. But it's all happening. And you're going to start seeing, by the way, you'll see winners and losers both, you know, sort of specific companies and sectors. But there's going to be enormous amounts of efficiency gains and enormous amounts of, you know, sort of value creation that happens as a result of the, that I don't think it's going to be a straight line, but I do think it's coming shorter term rather than, rather than just longer term.
- [52:30]
Barry Ritholtz
Back in 2019, I interviewed Joe Davis, who's the chief economist at Vanguard, and they had this fascinating research report. Eventually it became a book that all technological innovations Take place in two phases. The first phase is kind of what we're experiencing right now in AI, which is wild prices, couple of hand. Everybody knows a handful of companies very boom, boom. Like some people have been too many. A lot of people have been calling it a bubble. The second phase is where the value creation spreads out to the rest of rest of the market, rest of the industry, rest of the economy. I see it the same way you do. This is just going to make all of us more efficient, more productive, more profitable.
- [53:16]
Zach Buchwald
Right. That's exactly how I see this playing out. And you still have to pay attention mentioned because, you know, we all remember during the first, the first.com phase, before every company started incorporating the Internet into this business strategy and its operations, there were winners and they were losers. And the winners are still around and they're, you know, they essentially, you know, run global commerce today and the losers went away. We're going to see some of that across sectors. And you know, that's something that investors need to pay close attention to. But, you know, writ large, I see a lot of value creation.
- [53:47]
Barry Ritholtz
I always like to hear that sort of stuff. So let's jump into our favorite questions that we ask all of our guests, starting with tell us about your mentors who helped shape your career.
- [53:59]
Zach Buchwald
Sure. I had a great mentor at BlackRock, a guy called Mark McComb, who's a vice chairman of the company. And he put me into a couple of jobs and he nurtured me and supported me. But he also, he encouraged me to think like the outsider that I am. You know, when he put me into the insurance job job without having an insurance background, he sort of said bring, you know, bring all the capabilities and the perspective that you have from all the other things that you've done. And that, you know, really helped us think like an external provider and grow that business. By the way, I'm a, I'm a gay guy in finance. So I come at it from a, from an outsider's point of view, kind of looking in, and that has informed just about everything that I do at, you know, at Russell and, and before that is thinking about what's working, what isn't working, what do I think we might be able to do better? What have we not? You know, the question that you asked, what are people not talking about? What have we not asked about? And that's often my starting point. And I think if I had come in with the insider status, it would have been harder for me to take that perspective.
- [55:02]
Barry Ritholtz
That's really interesting. It's affected your perspective. You see the world both as, as a participant but also an outsider.
- [55:11]
Zach Buchwald
Yeah, that's right. And you know, this is the first time I've been to Bloomberg in a couple of years. But when I, when I took the job at, at Russell, even before I'd started, Bloomberg invited me to come speak at a conference and I was, you know, flattered and excited. And then I learned it was their diversity conference and I was the, the gay CEO and, and I said, invite me back five times to talk about investing and retirement and on the sixth time I'll come talk about diversity.
- [55:35]
Barry Ritholtz
That's interesting. You know, in all the research we do, that did not come up in anything. It's not anything that bubbles up to the top of search. Although the old joke is if you want to hide something, disclose it at the end of an hour long podcast. No one will hear it. But you know what it's like with all the YouTube. There's a drop off, but I always find that amusing. Let's talk about books. What are some of your favorites? What are you reading right now?
- [56:03]
Zach Buchwald
Yeah, so I read a lot of fiction like, you know, Cormac McCarthy and Tyler. I'm reading a book called the Inheritance right now, which is like a family drama. It's an escapist for me to get away from. I don't read a lot of finance books.
- [56:16]
Barry Ritholtz
I'm the same way. Every now and then something will, you know, come across that I have to read that's finance related. I have a big stack of fiction waiting to go on vacation with me next month. Let's talk about streaming. What are you watching or listening to? What's keeping you entertained? It's either on Netflix or Amazon or whatever.
- [56:34]
Zach Buchwald
Yeah, it's all toddler fare. Right now I've got two three year olds in the house, so we've got twins. Twins? Yeah, it's, you know, all full time. Moana and Frozen and Daniel Tiger, Bubble Guppies, that sort of stuff.
- [56:47]
Barry Ritholtz
So. So a lot of Moana. That's my idea of a nightmare.
- [56:52]
Zach Buchwald
Just Moana's pretty awesome actually, the first.
- [56:55]
Barry Ritholtz
Three times you see it.
- [56:56]
Zach Buchwald
The first three times. And Frozen about three, twice.
- [57:00]
Barry Ritholtz
So our final two questions. What sort of advice would you give to a recent college grad interested in a career in either finance or investing? What would you tell them?
- [57:11]
Zach Buchwald
Yeah, first, like, you know, be yourself. Like, we look for people at Russell from all different kinds of backgrounds, not just economics or finance backgrounds. Study what you want to study, do well and, you know, be committed. But you know, if you come at it from an outsider station or point of view, embrace that. This is a world where we want folks that have different kinds of backgrounds and approaches. I studied English, Barry, and one advantage that that actually gave me early on in my career was that I knew how to write. And you think about how much of our business is done through writing, through email and other ways. Everything you write, this is the advice. Now. Everything you write is a reflection of you and it can come up in, you know, something you put down on paper can come up again and again in all sorts of different ways. We all know that when, when you put something on the Internet, it lives forever, truly. And you know, your careers are long. You want to make sure that you're, you're, that you're properly reflecting the image that you want to create good advice.
- [58:10]
Barry Ritholtz
And our final question, by the way, that advice applies not only to writing.
- [58:15]
Zach Buchwald
Yes.
- [58:15]
Barry Ritholtz
But my wife is a recently retired teacher and she used to always warn the kids, kids, all the stuff you're putting on Facebook and Instagram and TikTok, be aware the colleges you're applying to are looking at that and the jobs you're going to apply to, they're going to find that that's especially as you work your way up the, up the corporate ladder, that stuff never goes away.
- [58:38]
Zach Buchwald
That's right. Now I'll give you a counterpoint. You know, we do 360 reviews at, at Russell and sometimes, you know, people that are relatively new in their careers, 25 or 28 year old, will write a review on somebody that they work for a couple levels up that I, that I read and when I read a review that somebody has put a lot of thought into and there's some, you know, praise and constructive criticism how to make things better, I say to myself, this person would make a good manager. And I, and I think about how can we use them in other places in the company. So it's not just about like when you're writing about avoiding the things that you don't want out there in the world that can harm you. It's also making sure that you're putting the time and the effort, effort into writing things that are really going to help you.
- [59:17]
Barry Ritholtz
Really, really interesting observation and good advice for people just entering the workforce. Final question. What do you know about the world of investing today that would have been useful 30 years ago when you were first getting started?
- [59:33]
Zach Buchwald
I wish that 30 years ago I had the confidence to know that, you know, that as an outsider, as a gay person, as an English major, someone coming at it from a different background that I could make it in this business, that I didn't have to constantly think about how am I going to prove myself, but just by being a good productive contributor, by raising my hand and showing a little bit of ambition, by finding ways to help that that can be enough. And sometimes that being an outsider can actually be a good thing. That it can help you? Re underwrite situations and come at it from a different angle. And if you know that and you're confident in it and you use it to your advantage, it can really help you in your career. I figured that out along the way. It would have been helpful to know when I first started.
- [60:22]
Barry Ritholtz
Really, really fascinating stuff. Thank you Zach for being so generous with your time. We have been speaking with Zach Buchwald. He's Chairman and Chief Executive Officer of Russell Investment Investments. If you enjoy this conversation, check out any of the 589 we've done over the previous 11 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you find your favorite podcasts. And be sure and check out my new book, how not to Invest the Ideas, Numbers and Behaviors that Destroy wealth and how to Avoid Them at your favorite bookstore. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my producer. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.
- [61:23]
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