Matt Barry

Matt Barry runs product management and ETF capital markets for Touchstone Investments, a $25 billion mutual fund manager that expanded into ETFs about a year and a half before this recording. Touchstone's model is entirely sub-advised: they hire specialist managers for specific asset classes rather than running money internally. Matt joined after business school and has spent about 10 combined years with Touchstone and its parent company, Western & Southern Financial Group, a large diversified financial services holding company.

On this episode, Matt talks with Brad about Touchstone's rigorous manager due diligence process, the transition from a pure mutual fund shop to one that includes ETFs, and two of their funds: HEAT (a climate transition equity ETF) and TSEC (a securitized income ETF).

The Sub-Advised Model and the SPIDIR Framework

Touchstone's motto is "distinctively active." Everything they do is high-conviction, best-ideas investing with relatively higher tracking error than typical active strategies. They work with 15 different sub-advisors across asset classes, evaluating each through a proprietary framework they call SPIDIR: organizational Stability, Personnel, Infrastructure, investment Discipline, and Results. The firm takes several hundred manager meetings per year with institutional asset managers looking for new distribution channels to reach the wealth management market.

Sometimes they run specific searches. When they wanted exposure to the liquid alternatives space, they identified and hired Ares Capital to run a credit opportunity strategy covering high yield, bank loans, and CLOs in the below-investment-grade space. Other times the process is purely opportunistic. Their HEAT ETF came about because an intriguing manager crossed their desk through a routine meeting. They weren't specifically looking for a climate transition product at the time, but the manager's approach was differentiated enough from existing ESG and clean energy products to warrant further due diligence and ultimately a launch.

HEAT: Climate Transition Beyond Solar and Wind

HEAT is managed by Lombard Odier, a Swiss firm with several hundred billion in assets and a history dating back to the 1700s. They've raised over a billion dollars in Europe in this same strategy, giving it a substantial live track record before Touchstone brought it to US investors. What makes HEAT different from typical clean energy or ESG funds is its three-bucket approach. Bucket one: clean energy solutions providers, the solar and wind companies you'd expect in any climate fund. Bucket two: "transition leaders," more carbon-intensive companies like steel manufacturers that are on the forefront of becoming more sustainable and reducing their emissions footprint. Bucket three: companies that benefit from adaptation to a warmer environment, like manufacturers producing highly efficient air conditioning equipment for a world that needs more of it.

The portfolio is global, roughly 60% US and 40% international, holding 40 to 50 best ideas with position sizing based on conviction rather than equal weighting. A dedicated risk management team monitors exposure across countries, sectors, and quantitative factors, with monthly rebalances and custom baskets that maintain tax efficiency within the ETF structure. The distribution team positions HEAT as a satellite complement to a core global equity allocation, noting it offers far broader diversification than concentrated clean energy plays that suffered significant drawdowns in 2022 and 2023.

TSEC and TUC: Securitized Income

Touchstone launched TUC (ultra short income) about a year and a half ago, followed by TSEC (securitized income) more recently. Both are managed by the same team at Fort Washington, whose short-duration securitized debt specialists have been working together for over 20 years. The building blocks across both funds: residential mortgage-backed securities, commercial mortgage-backed securities, asset-backed securities, and CLOs.

TUC is ultra short duration (under one year), with at least 85% investment grade, designed for investors wanting to earn a bit more on their cash with minimal price volatility. TSEC operates in a slightly longer duration range (two to three years), requires at least 50% investment grade, and has the flexibility to reach into higher-yielding securitized fixed income segments. Fort Washington has run the TSEC strategy as an SMA for over a decade, starting right after the financial crisis when they saw compelling risk-reward in securitized markets that other investors were abandoning wholesale. Their process is bottom-up relative value analysis, with the team running daily reports on delinquency rates, prepayment speeds, and cash flow profiles, stress-testing every holding against recessionary scenarios. TSEC is positioned as a complement or alternative to high yield corporate bonds, historically offering comparable yields with a meaningfully lower volatility profile.

Key Takeaways

• Touchstone uses 15 sub-advisors and takes several hundred manager meetings per year, evaluating candidates through their SPIDIR framework (Stability, Personnel, Infrastructure, Discipline, Results).
• HEAT's three-bucket approach includes clean energy providers, carbon-intensive "transition leaders," and companies benefiting from climate adaptation, with about 40-50 holdings globally and monthly rebalancing.
• Lombard Odier, HEAT's sub-advisor, raised over $1 billion in Europe in this strategy and has firm roots dating back to the 1700s.
• Fort Washington's securitized income team has been together for 20+ years. TSEC has historically matched high yield corporate yields at significantly lower volatility.
• Touchstone hired a dedicated ETF distribution specialist with decades of experience to train their 50-person team on ETF-specific conversations like limit orders, trading mechanics, and market-on-open execution.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.