Anthony Caruso, Nomura Asset Management

Yeah. You and I, I only have two kids, but I think you and I live pretty parallel, similar lives at the moment. Little kids and golf when we can. Yes. You try to get them into golf that way. You have to go out on the golf course. The four hours are necessary. That's right. That's right. Five hours. Don't tell anybody it takes four. Yeah, that's true. That's true. So let's talk about Nomura, right? You guys are a global firm, Japan's largest asset manager, but relatively new to the US ETF space. So can you give us the quick high level on the firm and what you're trying to build here in the US? Yes. And Nomura's been around for 100 years in Japan and then 100 years also in the US. Obviously,

With the acquisition of McCorris Public Business, it brought over legacy franchises like Delaware Investments and Ivy and capabilities across equities, fixed income, and multi-asset. And so overall, we started our ETF business a few years ago at this point, the tail end of 2023, and are up to nine ETFs within the US ETF marketplace and just over a billion in assets. That's great. So we're going to talk about one of those funds today, which is FRWD, which is the Nomura Transformational Technologies ETF. You guys launched it January 13th of this year. It's actively managed. So at a high level, what is this fund and the problem that it's trying to solve?

Yeah, so this one's an interesting one, Brad. We actually were managing a separate account for going back to 2018. And so in January, we converted this strategy to the ETF marketplace. But it's great because it does have a long term track record overall within the marketplace. But what our transformational technology, to your point, ticker FRWD forward, it's meant to do is it's provide investors with access to innovation in its simplest form. And the way that it approaches that from the portfolio managers, Gus Sin and Brad Warden, is they do so in a two-prong approach, where first they take a look at overall the themes and the thematic views within the marketplace. They understand the maturity, the duration of that. They understand the economic viability of that,

The investability of it. And they identify then, okay, are there opportunities to take advantage and access this theme? Which brings the second point of deep fundamental analysis, not only from a valuation standpoint, but understanding the durability of the companies and their management teams. And so you really bring those two together. And having spent my career in the ETF industry, we know how many thematic strategies pop up. And while that's great to access and provide investors, that also can come back with some drawbacks and the risk and volatility of any one theme. So having a team that's done this for over 50 years combined experience, and the overall franchise has been around for 75 years of investing in innovation. So this is what they do. They live

And breathe innovation. I always say it's like a movie every time you connect with these guys to just try to see what's going on within the marketplace. And you can't think big enough when you talk with them. It's fun. So you touched on this briefly, but from what I understand and what I read, the evaluation framework has two lenses. There's a secular kind of trend analysis and bottom up fundamental research. So by the time we're all said and done, about 60 to 75 stocks actually get in and forward selects the 20 to 40 highest conviction ideas from that little universe. So can you talk about how those two lenses actually work together and how we get from super big idea to concentrated high conviction portfolio? Yeah. So within that thematic lens, when they're looking across

Those buckets that I previously mentioned, they try to identify, okay, what are the themes that we believe has economic viability that we want to invest in today? And then from within that, they look at a high level from a company standpoint and say, where do we see opportunities from a fundamental standpoint? That gives us an overarching framework, to your point. We do have a strategy in another vehicle that takes advantage of the broader framework. What this does then is say, okay, within that universe of securities that we deem as attractive, what are our highest conviction, about 20 to 30 stocks that we look to put in the portfolio? So you end up with, we've just over 25 in the portfolio today. And really it comes down to the fundamentals of the company and the

Valuations and what the overall opportunity and economic pickup is from those securities that lead to the end state of the portfolio. And when you look at that portfolio today, it's not just technology. And I think that's something that often gets missed when investors think about AI or innovation, which really can happen across different industries. And so that's what the strategy looks to do. And if you look through time, it will go through cycles of different types of securities, where at one point it's maybe more healthcare oriented, now more technology. But again, that's the benefit of having a active manager that has, again, 75 years within this franchise of doing it, is identifying where innovation is, how it's going to apply across different industries, and to take advantage of that.

So when I was, again, looking at the portfolio, the top 10 holdings right now are about 57% of the fund. That's a very different profile from something like QQQ, right? This is not just like blanket tech exposure. Why go that concentrated in the portfolio? What's the benefit of that? Yeah. So if you want to access innovation, right, you need to identify which ones are going to be the leaders and which are going to be the laggers. And you have to, I would say, put your money where your mouth is at the end of the day. And so that's what they're looking to do is invest in those that they believe are going to actually drive this innovation on a go forward basis. To your point, if you want to access any theme and you buy a passive strategy, it's going to own

Every stock potentially out there with that theme. That's not the way that we want to approach markets. We know there's going to be leaders and having the expertise we do in innovation, we want to take advantage of that. And I think it shows in the results where if you look over that 20 to 2018 period, the strategies outperform the Nasdaq 100 index by about 200%. So it's pretty meaningful from a return standpoint when you're able to take advantage of that innovation. And obviously, to your point, it is concentrated and that's intentional. Yeah. And your team has said that the market consistently underestimates innovation's magnitude, breadth, and duration. And that's a pretty bold statement for how long I feel like we've been talking about tech just overall in financial services. What's the evidence behind that thesis?

Yeah. So, it's funny. I was talking with the portfolio manager this morning. We were talking about longevity. how much are you seeing about longevity right now? We talk about AI, their hyperscalers, the ROI required. And I would say that's the main topic. And it should be an important topic, right? But we're not even seeing all the applications of AI and how that's going to play out, right? And anything you've seen, I apply to the ETF industry as an ETF nerd as I am. If we back up a decade ago or two decades ago, any survey you ever look at in the ETF industry, we're surpassing it, right? We had record years last year. We continue to surpass that already this year. And it was just a new technology. I think the same applies when you

Look across other areas. You don't even know the applications and all how it's going to play out. So, we were talking this morning, it's black mirror to me. I don't know if you've ever seen that show, Brad. But so it's all about futuristic and it's, you can't believe that it's going to happen and then it ends up actually happening. And so that's, that's really what it is here. So when you think about longevity, when you think about healthcare, rare diseases, all of the different ways in the compute going to be required and needed, we're just not built as humans to actually think that way. When you talk to these portfolio managers, it is a completely different mindset that they have and the way to think about innovation in just the future. So

I think, when we talk with most people, the overall opportunity set of AI, it goes to your usual suspects and the different derivatives of the AI supply chain. The way they think about it is just completely different in terms of like the futuristic abilities to help different industries, industrials, logistics, healthcare, curing rare diseases, helping, from a longevity, how's that going to impact GDP? So I think, I think there's a lot, research to back that up in terms of just the different cycles we've seen and how we we've never been able to think that big from whether it's electricity, internet, you name it, right? When one product comes out, it completely transforms. Look at the iPhone and all the different applications.

I don't think anyone thought at that time, uh, what would happen there. Well, it's, what's interesting about this cycle of innovation though, is the speed and the pace in which it continues to iterate and get better, right? Like if you played with AI a year ago, it was like finding fire for the first time, but like, it seems as if every, I don't know, two months or even 45 days, it's getting better and better and better. And, I hope to see, continuing innovation. And it's like, um, I was, I actually was watching a YouTube video before this. Um, I'm thinking about trading in my model S to get a model Y because it's got the new computer and self-driving is better. if you look at self-driving three years ago, it was like a cool

Party trick, but now, it parks, it does all this stuff. So, um, yeah, I totally agree with, with your thesis. And so you've made though the kind of the argument that innovation should be treated as like a long-term allocation, not just like a tactical satellite. I think people think about thematics is like, okay, we're going to take a satellite exposure to this. And there's a great line comparing that to using, Babe Ruth as a pitcher. Can you talk us through why that framing matters and how advisors should position forward? Yeah. Yeah. Using, yeah. Babe Ruth as a pinch hitter, uh, overall, is that really the best use? Yeah. For this strategy, we see it, it tends to sit within the gross side of a portfolio, mid and large cap stocks. Um, we think from a reasonable

Allocation standpoint, if you're just looking at overall equity allocation, 10 to 20% is, is sensible with that. And, for innovation, this is a core strategy, right? What drives growth segment of the market? It's innovation. And so we think it's prudent to have an allocation of that over time. And then to your point, we know, and we meet with hundreds of financial advisors that they have a view, they want to invest in, whether it's driverless cars or robotics, or you name whatever theme it is, that's great to tack it on. But to have something as your core with a team and franchise that has done it for 75 years of innovation, going all the way back to steam power and, and, uh, straight energy to where we are today to have a team that

Has seen these cycles time and time again, as the core, um, we think is just a, a prudent way to invest in that. And then of course you can add satellites, uh, separately from that, that take tactical short-term views of the theme, but this is meant to be your, your set it and forget it access to innovation. And within the strategy, it will change what it's exposed to over time as it continues to evolve heavy AI infrastructure today. But of course that can change tomorrow as we continue to see build outs in healthcare or industrials, or, or you name the segment and opportunity set. Yeah. you kind of walked me into my next question perfectly, which is like this fund is built around waves of innovation. Like each one starting from a higher

Baseline, a larger addressable market moving a lot faster than the last one. So, where do you think we are in this current AI driven wave and like, what comes next, do you think in your, in your current framework? Yeah. So I would say in connecting with a team, another area of, uh, exploration, no pun intended is space. So I'd say in the AI, from a product standpoint, we haven't even scratched the surface in terms of all the different types of products and applications that are going to happen, happen, right. We've laid some of the infrastructure, obviously continues builds out. We're having some adoption. Um, but the different types of products that are going to happen, I think, uh, we still have a long way to go and having even scratched the surface on those types of

Products. Um, and then from a space standpoint, getting to exploration, that's all on tested territory. We're still in the infrastructure stage, right? We have to build the road. After you build the road, you can have, you name what after that. Um, but that's another, investment opportunity or quantum. And so these are just continued areas that we look, we assess through that, uh, innovative theme framework. Um, and then we look to take advantage of assuming we can invest in those types of securities within the marketplace. So you guys have plenty of competition, right? You've got ARK, BlackRock has some active tech funds. Um, how would you separate forward from maybe those other funds or some of the competition maybe in

The market? Yeah. So, first and foremost, let's just go back to some of the points that I've mentioned in terms of like the team and their track record. There's not many teams that have done this for 75 years. And so I think that is a really important point. And then these two combined PMs of 50 years at the end of the day, if you're going to invest in innovation, um, you're talking to a specific person, right? So I know when I talked to my brother, he owns a tech company on the side, you, you were talking about use of AI. He called me, he built a, uh, a new application and he built a video game over two days. and this was for fun on the side, right? Like you need

To be talking to an expert in the field and that's someone that's not necessarily an expert in the field, but he has the tools available. So first and foremost, it's the team. The second is that process. I think the way that we, uh, take a look at from the thematic view lens and fundamental, I do think is unique pairing those two together overall. And then third and finally, we're, we're going to be high conviction. There's, I'm not going to speak to any specific competitor, but there's some competitors that maybe won't take as much high conviction as we will. Um, but we have a proven process and the results behind it. And so that's the way we approach it. So I'd say those are the three main points behind that.

And look, we charge 65 basis points for this from, from a fee standpoint. So there are individual other strategies and passive themes that are significantly more expensive. Um, but we think that's, uh, a reasonable fee for the type of strategy or getting the core exposure and just continued access to innovation over the longterm. Yeah. So we've talked, we've had a good run in tech and innovation for a very long time, right? Can we talk about the other side of the coin, right? We've got a little bit of volatility that's picked up. There's bigger swings across the whole sector and different themes. How is this strategy designed to maybe handle those stretches? What's the process look like when maybe the market's punishing tech more broadly? And I know that this fund can move

Other places, but how do, how do we handle the other side? Yeah, it's interesting. Uh, so one, it's a daily process as you would expect from an active management portfolio where they look at risks. But I think from this standpoint, these are long-term views, right? This isn't a short-term, we're going to turn the portfolio a hundred percent, it's about 20 to 40% turnover. So it is a longer term, uh, portfolio in the way that we, we build this strategy. And so I think that's really important. Now volatility, it's going to happen. Anything that, any news that breaks in terms of a, uh, uh, one of the hyperscalers or earnings reports, whatever, it can shake the industry for us. We're going to be long-term and our portfolio managers use noise like that actually

As investment opportunities. So from a volatility, what does that create? That creates mispricings, which creates opportunity. And that's the way they look at it. It's a long-term view. Um, you're not going to see us shifting the portfolio overnight, um, necessarily driven by anything. It's a long-term 20 to 40% turnover. So the fund has had great growth. It's around 260 million in the first six months. what do you think, uh, from inside the walls, what do you think is driving that advisor interest? I would say it's a story. Obviously, anything tied to the AI build out and infrastructure right now, you're seeing some growth behind it. Um, but in particular, given the team's history and track record, they do have a pretty good

Following from the investor community as well, both Brad and Gus. And so we've been fortunate to have success and have clients that want to get into the strategy. And so, yeah, we have seen that growth, which has been great. And it's also on the back of, pretty strong performance too. So I think those, those all, um, just create the opportunity to grow the strategy. And we're really excited about that. So we touched on this like a bit earlier, but if you've got, if you guys are walking into an advisor's office, it's got a, already diversified model portfolio, where do you kind of start looking for places in pockets for forward to kind of sit inside of that already existing, uh, maybe model portfolio that they're offering clients?

Yeah. So I would say for a lot of the clients we meet with that are owning, whether it be strategies, tracking Nasdaq 100 or what Russell 1000 growth, uh, in some of these passive segments in their portfolio, really, I would say that's a, that's a pretty sensible place to start for those investors and where we have those conversations and they want access to that innovation and they want access to that as a core holding where they don't have to look every single day, what's going on? They're comfortable knowing, okay, I have a team that is fully doing this. And if I want to invest on something on top, they'll tactically take that on top. Um, but that's, I would say generally where we're seeing the source of allocation from. And it also goes to a lot of

The market today is it's concentrated into the, the mag seven, which also has changed all the way over time. If you look back, four horsemen, you name it. Then we had fang, fang, ma, mag seven, mangos. you continue to have that, but having a portfolio manager, that's actually looking through taking advantage of the opportunities, we think is important. So it starts with that growth side, I would say is where we, most of the advisors we engage with are allocating from. Um, and it goes back to about 10 to 20% of the, that allocation. And it naturally diversifies you away from the mega cap tech stocks and opens up a little bit more across the AI supply chain versus just say the hyperscalers. So the, the entire platform over

There, kind of just crossed a billion dollars over, all of your ETFs. What other things in your existing lineup, are you guys excited about? And are we going to see more, uh, from the more, more launches, do you have some stuff in the pipeline in the lab? Yeah. Uh, always, always have stuff in the lab, right? Uh, what I will say though, on the existing lineup, um, I'd say two other strategies. One is our emerging market strategy. Uh, it's over 600 million in assets, similar type of, uh, thesis kind of behind that strategy where diversifying way, kind of that concentration risk that you have within the mega cap growth stocks, starting to see investors like outside the U S. Um, we launched that fund in 2024. It's up over

170%. It's top percent off strategy. Um, so we have a lot of, a lot of tailwind behind that. It's also a concentrated strategy, as you can imagine, exposure to Korea and Taiwan. Um, and that's EMEQ. We were having a lot of conversations around that strategy and actually pairs well with, um, forward together when you look at, more predominantly U S allocation with, uh, merging markets. And then the, uh, second strategy is our high yield muni H tax. So just about 60 million, but, uh, I was looking at tax equivalent yield this morning, about 9% and high yield munis. So as when compared to the corporates, the default rates are generally lower and recovery are, are, are higher for munis.

And so we see pretty attractive opportunity to kind of lock in some of those yields as well. So those I would say are the two existing ones that were having some momentum behind Brad. And then, uh, new, we've had a lot of filings come out, uh, recently. So a handful of conversions, um, we had three announced last week. Uh, so those are going to be a few taxable funds, a small and mid cap equity strategy, um, a Japan equity strategy in partnership with, uh, of course, Tokyo and all the expertise we have of investing in, uh, Japanese securities and many more to come, but there are a handful of, uh, filings out there right now. And I would expect our lineup to look, uh, significantly larger, um, uh, by the end of the year.

Well, Anthony, I really appreciate you taking some time with me today before I can let you go though. Where can people learn more about Nomura? Where can people learn about your ETFs? Yeah. So if you go to nomuraassetmanagement.com, uh, you can learn more about Nomura as a whole, the insights we offer, and we have an ETF page on there where you can look at any of these individual strategies. Well, again, Anthony, thanks again. Really appreciate it, Brad. Thank you so much. Thank you.