Patrick O'Shaughnessy on the Next Big Thing in Passive Investing

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:16)

And I'm Joe Weisenthal.

Tracy Alloway (0:18)

So Joe, it's been a while since we've talked about passive investing, and I can't decide if that's just because so much else has been going on in the world, including a global pandemic, or if it's because passive investing itself seems to have gotten a little boring. It doesn't feel like there's that much happening in this space.

Joe Weisenthal (0:44)

Well, I know I've said it before, and I don't remember the last time we talked about it, but I know I've said it before that in the post-grade financial crisis period, it felt like there was just this overwhelming message, and it was through the media and marketing and academic research. It's like, just go passive, just go index, whatever, forget about your investments.

And it really feels like in the last couple years, even before the pandemic, but now especially since the pandemic, it's like there's been the revenge of active management and individual stock selection and Robinhood and crypto and all that. And it's like this repressed desire to trade and invest in individual names has just come raging back. So I guess that sort of asks the question. It's like, okay, well then, where does passive fit in now?

Tracy Alloway (1:30)

Yeah, totally. And the other thing I've been thinking about just on that point about the message about investing in passive, like when you start to break it down, this idea of just pour all your money into an S&P 500 ETF, like SPY, you know, something like that.

If you think about it, that's basically telling you to invest your money in a technology, like a fun technology that can trace its origins back to the early 1990s. And it's kind of crazy with all the technological advances that we've seen since then that the biggest or the most prominent advice is to just dump everything in an ETF.

Joe Weisenthal (2:11)

Yeah, I like your characterization of that as a technology. And this is something that I think about a lot. Like, okay, we call say index investing, passive investing, and it's pretty passive.

But prior to the advent of the index fund, and especially like ETFs, it was not like a trivial thing to do. So the academic research might say, buy the S&P or buy some big basket and forget about it. But prior to like some easy way to just sort of automate that, like that was not actually like a strategy an individual could do. No individual is going to like, buy all 500 stocks in the S&P 500 and re-waste them every day and, you know, so it's like, it is kind of like a technological breakthrough that that happened that we sort of take for granted.

Tracy Alloway (2:55)

Totally. So on that note, today we are going to be talking about what a lot of people are saying is the next technological breakthrough in fund management or the next big advancement, something that is definitely not boring, but does count as passive investing, sort of as we'll get into. We're going to be talking about custom indexing and there's been a lot of action and deals in that space recently.

Joe Weisenthal (3:20)

Right. And of course this gets to the question of like, you know, as again, I think this is something you've pointed out a lot. You could buy this in P 500, it's passive-ish, but you're sort of outsourcing the indexing question or the management question to whoever, you know, in that case, the committee at S&P, or if you buy an MSCI index, the, you're outsourcing investment decisions to MSCI. So what is the future of like essentially designing the index?

Tracy Alloway (3:46)

Exactly. So we have the best guest to talk about it. We're going to be speaking with Patrick O'Shaughnessy. He's the CEO over at O'Shaughnessy Asset Management, of course, also the chairman at Colossus and general partner and CEO at PositiveSum. And in addition to that, he is also the host of the Invest Like the Best podcast. So a fellow podcaster.

Patrick, thank you so much for coming on.

Patrick O'Shaughnessy (4:12)

I'm really delighted to be here. I love this show. So thank you for having me.

Tracy Alloway (4:16)

Oh, thank you. So maybe just to begin with, we should start with the obvious question. And I should mention here that your company, OSAM, it has its own custom indexing platform called Canvas.

What exactly is a custom index and what does your platform do?

Patrick O'Shaughnessy (4:36)

Sure. Well, thank you for having me. I love where you started the conversation around technology and innovation. And that's how I think about this entire story and custom indexing is just one point in the timeline. And I think you raised the right ones, which are I think of code-mingled funds as a technology or an innovation. I think of Vanguard's mutual structure that allowed for much lower cost for investors as a great innovation in this timeline. Ditto for ETFs. I think custom indexing is just the next natural stop in that journey. And when I say journey, I mean better, cheaper, more convenient investing, more tailored investing for each individual investor. So in the past, ETFs in general and just index funds in general have been sort of like the Model T. You can have any color you want as long as it's black.