00:00You talk about how we're getting in, we're seeing an industry shift where active ETFs are combined
00:05with models. Why is that? Why are active ETFs a good fit with models? Well, thank you so much
00:11for having me on the program today, Isabel. We're seeing a convergence of two key trends in the
00:17industry. First is the growth of model portfolios as a percentage of financial advisors, asset
00:23allocations. And second is the outsized market share that ETFs and specifically active ETFs
00:29are taking within those model portfolios. Just to give you a couple of important statistics,
00:35the model ecosystem is about $19 trillion in AUM. And according to a recent Broadridge study,
00:42there's an expectation that that will continue to grow at about a 15% annualized clip through 2030.
00:49And sorry, that's $9 trillion, not $19 trillion. It's a really large number and ETFs manifest as an
00:56outsized proportion, about 60% of model portfolio assets. So as we're seeing financial advisors
01:02increasingly allocate toward models, they are also increasingly allocating towards ETFs. And so this
01:08is a trend that we think is only going to continue. So we have some data from Cerule that about
01:12a quarter
01:13of all ETF flows are models now, which is big. And I always thought models, they traditionally use
01:20passive ETFs. Model makers, to me, were the new active manager. It's, hey, let me organize these
01:25passive ETFs in a way that's active and sell to the advisor who wants no part of actually assembling
01:30a portfolio. It makes it easy for them. But you're putting active in there. Are these capital group
01:35models or are you just selling to other model makers? Well, so Eric, about 10% of the assets under
01:42management in capital groups ETFs are coming through model portfolio programs. That is both the adoption of
01:48our funds in models that are created and managed by others and in the eight model portfolios that we
01:55manage ourselves. So we're seeing a combination of adoption of our strategies and active strategies
02:01in particular across our models and the models of other asset managers. I think importantly,
02:07the highest growth financial advisors are leveraging model portfolios so that they can spend their time
02:13focused on client acquisition and client servicing. Capital group recently did an
02:18advisor benchmark survey which said that 58% of the highest growth financial advisors are outsourcing
02:24to models. So I don't think in all cases the belief is that you need passive strategies and granular
02:30building blocks to have a really complex and well diversified asset allocation. I think that
02:36increasingly what we're finding is that just as financial advisors have always utilized active mutual funds
02:42in their model portfolios, they now increasingly are leveraging ETFs where they have that option available to
02:47them. You also have noticed that active ETFs now account for almost 9% of assets within the model
02:55portfolios. Where do you see that going in five years? Well, we think the growth of active ETFs and model
03:01portfolios is only going to continue. Part of that is certainly a migration from mutual funds to ETFs as a
03:08vehicle. What we've seen over the last year is that about three percentage points of allocation within model
03:14portfolios across the industry have moved from mutual funds to ETFs. But two of those percentage
03:20points are going to active ETFs and only one to passive. So we believe that as active ETFs have
03:26grown in their prominence and in their availability in the marketplace, in particular core allocations in
03:32a portfolio that are well diversified, we think that that growth and that preference towards active
03:37management once again is going to take over portfolios. Yeah. And Holly, look, we have a chart here showing how
03:43big these legacy active managers like Capital Group are shooting up the ETF league table. But there is a
03:51lot of outflows at the mutual funds and you've just said it that the models prefer the ETFs. How do
03:56you deal
03:57with the mutual fund part of the business? Well, we're most focused on delivering vehicle choice for our
04:03clients. So where the ETF is the preferred vehicle, where the tax efficiency matters the most for our
04:09clients, we want to be able to offer our core active management in that vehicle. And for clients where
04:15the mutual fund is most appropriate, retirement accounts or non-taxable accounts, just as two
04:20examples where we continue to see mutual fund dominance, we want to be able to offer our investments
04:25there. Importantly, we're investing in scale across our asset management and our investment management
04:31ecosystem so that we can deliver either vehicle and we can truly allow clients to express their choice.
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