Russell’s Friedman: Redefining Beta

October 07, 2011

Russell is leading the charge into next-generation, ‘intelligent beta’ ETFs, Greg Friedman says.

 

Greg Friedman has been in the ETF industry for 15 years, most of those with iShares, the world’s biggest exchange-traded fund firm. But now, in his new role at Russell Investments as managing director of its ETF product group, Friedman is overseeing the company’s push into what it calls “intelligent beta.”

He told IndexUniverse.com Managing Editor Olivier Ludwig that clients are asking for a new indexed way to capture returns through smart beta, and that Russell is taking the lead with its investment discipline- and factor-based ETFs it began rolling out in May. He also said Russell plans to get into active ETFs, but stressed all will be transparent.

 

Ludwig: All the funds Russell put into registration over the past two years appear to have been abandoned, and the broad strategic direction appears to have changed. It seems like it’s no longer a “me-too” sort of initiative at Russell, but rather more of a “Let’s stake out some new terrain in this industry as it matures,” no?

Friedman: You can’t draw too many conclusions from our filings, but our focus is really bringing up the next generation of ETFs.

We think that’s really in two buckets. One is this “intelligent beta,” and we’re seeing the market’s reacting to that, bringing out a lot of “me-too” products in response to ours. And the other bucket that we’ll be doing a lot of work in will be in the active space.

Our goal is really to bring out the next generation, to bring out products that are complementary to the fantastic ones already out there. We don’t want to focus on being a “me-too” player, but rather a player that’s leading the industry in developing new ways of looking at ETFs.

Ludwig: OK, but let’s go back to the filings for a moment; for example, the “One World” family of international equity funds segmented by style that was in the works. Is that still happening?

Friedman: One World is still on our radar; they’re still in the product development pipeline. But we’re really focused on how to bring out products that our clients need, our clients want, that are slightly different from what’s currently offered.

Ludwig: So One World is not abandoned, but on the back burner?

Friedman: We have a product development pipeline that is 100 to 200 different products. I can’t comment on where they are, but we have not completely abandoned the One World products.

Ludwig: That’s an iota of clarity for me, because there’s a feeling out there that there’s been a shift in focus at Russell. So, I’d like to hear you speak to the intelligent beta funds you’ve brought to market in the past few months. What is it about “intelligent beta” that’s promising, and why does it matter?

Friedman: My heritage is coming from a massive index shop at BGI. In my mind, beta is asset-defining, benchmark-centric investing, where you have a very diversified portfolio and you’re betting on the entire horse race, not just the horse. There are a huge amount of ETFs that are extremely successful doing that—the Russell 1000, 2000, 3000 family; S&P 400, 500 and 600; MSCI EAFE. These are fantastic beta plays that give advisors and investors access to markets that are very transparent, liquid, tax efficient, cost effective. Those products have really defined and helped grow the ETF industry as we see it today.

But as players have used those products, they’ve been coming back to all of us as sponsors and saying: “What’s next? How do I get a specialized tilt? How do I do it a little bit smarter? How do I continue to add value to my clients’ portfolios?”

So what we’ve come up with are a series of products that take it to the next level. Let’s say you are already a user of the Russell 1000 and you’ve got a position in it—call it your core—and that’s where you get your market exposure, through a beta play. But you’re really worried about volatility, or you’re really sensitive to beta. So, we’ve now given you a tool to be even more precise on how you allocate and invest your clients’ money.

 

 

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