It was not unusual for a client, an advisor to ask me, "So Steve, I know you run more than 30 funds. What are you good at?" Well, at Touchstone we don't run money. We hire institutional sub advisors, institutional money managers to sub advise our mutual funds. We hire experts in their respective asset class. So when I get the question at Touchstone, "You've got 30-plus funds. Well what are you good at?" I say, "If we're doing our job, we're good at all of them."
Welcome to Distinctively Active Investing, profiles and perspectives, presented by Touchstone Investments. I'm Steve Graziano, President of Touchstone, and on this show you'll find out what makes Touchstone, its leaders, and its portfolio managers distinctive. We'll share in-depth interviews with the people who are actively engaged in leading and managing the Touchstone funds.
Hi, I’m Mary Mock, Divisional Vice President for Touchstone Investments, and I’ll be hosting this first episode of our podcast. On this episode, I interview the president of our company, Steve Graziano. I've known Steve since he joined Touchstone back in 2009 and we had a great time chatting about his accomplishments and career story from company headquarters in Cincinnati, Ohio. In this podcast, we want to bring the people in our company to life, and Steve provides some great background to not only his life but Touchstone Investments as a company. We're not necessarily going to talk about the investments themselves, so if you want to learn more about that side of things, visit touchstonefunds.com. Here's Steve Graziano on his upbringing in early life in New England.
I grew up in a suburb of Boston. It was a blue collar suburb. What was interesting about that town is we were all equal. There wasn't a great deal of poverty, nor was there wealth. It was a great place to grow up. I found myself being an organizer of sports. I had a very large group of friends and we competed against another very large group of friends. We competed throughout my whole time there, honestly. From junior high through high school, we would compete on intramural basis effectively, games that we would set up. We competed in football, we competed in softball, we competed in basketball. I found myself developing organizational skills at a very early age there.
My dad was a mechanic and so we grew up in a blue collar family. My mom was a homemaker. Didn't make a lot of money. In fact, my dad had a heart attack when I was heading off to college, so money was very tight. I worked all summer long, although I can't say it was heavy lifting. I actually drove a tour bus on Martha's Vineyard for three years, because when I went to college I learned to drive the campus bus. Which was a great job in college because frankly, I would drive a students to a field trip and I'd sit and study. I was able to earn money and study.
I was the first out of 80-some odd grandchildren to go to college. I always wanted to go to Boston College. My family couldn't afford that at the time. I went to University of Massachusetts. It was a great experience. Then I ultimately went to Boston College nights for graduate school.
I grew up being a Boston Red Sox fan. I am an avid baseball fan. My dad was a big baseball fan, and so every year my dad would take me on my birthday to a Red Sox game, and that became a tradition for us and a tradition I carried over with my kids.
I left high school and went to UMass where I had a real keen interest in consumer behavior and market research. I went to UMass to become an accountant because I had an aptitude for math. I hated accounting. Accounting is a language and I'm not somebody who's good at memorizing. I'm really good at figuring things out on an algorithmic basis, so I gravitate to algebra, and statistics, and calculus, and found myself majoring in marketing, and minoring in statistics. Which brought me to having a real interest in market research.
During my college years, I was able to develop a relationship with two professors. One was the professor I had teaching market research. I took it as a junior. I had such a good rapport he hired me to teach two out of the three classes a week to seniors when I was a senior. I really had a real interest in that. The other professor taught consumer behavior. He hired me as a teaching assistant to work as his research aid, and we did studies for local companies. The one that's most interesting I think is the study, we were hired by Spalding to evaluate the merits of endorsements, the value of endorsements. We did one-on-one research and surveys to determine whether or not it had some appeal, and how much appeal, and how it affected pricing. It was quite interesting. Something that's quite interesting to do as an undergrad.
After his early working years, Steve talks about how he got interested in the investment business and how it led to managing a sales team at Pioneer Investments.
My interest lied in consulting. I wanted to become a consultant when I got out of school. This was 1976. Jobs were scarce. Finding a consultant job was even more scarce needed to have an MBA at least to be able to move that ball ahead. I pursued as quickly as I could a graduate degree nights at Boston College. But my first job was selling word processing workstations. It was before Apple, and Google, and Microsoft, and so word processing recorded every keystroke on a cassette tape. The screens that people had was a seven-line CRT screen. I started out selling word processing, but every time I went into a new sales opportunity, when I was done, I would go into the HR department and apply for a research job.
I eventually landed a job doing market research for a publisher of textbooks. With the job, the job required me to interview college professors, do one-on-one interviews and to determine the relative weights of subject matter and textbooks. It's quite interesting. It gave me an opportunity to go back to the schools, colleges, see some of the more prestigious schools in the country. Loved it. But I really wanted more than that, and so I found myself interviewing and getting a job at one of the local banks where I was doing market research and product development. That's when I was first introduced to investments. We developed the money market fund, one of the first money market funds. It was a money market account for the bank and we did it in cooperation with fidelity investments. That job eventually landed me an opportunity to get into consulting, because one of my colleagues at the bank had left to go to consulting, hired me to join his team.
I finally made it over to consulting and specialized in banking, but quickly added investment assignments as well. Honestly, it was a great experience. I think it set the stage for who I've become over the years.
In the consulting world, I had the opportunity to work on some groundbreaking products, at the time, anyway. ATMs were brand new. I did research on ATMs. I did research on debit cards. Consumers, by the way, did not like debit cards. They would say, "Why would I give up writing a check and getting the benefit of float and use a debit card." It's interesting how that's changed. Developed auto leasing programs for banks. I worked on new mutual fund concepts. I worked on asset allocation models. I even worked with Merrill Lynch to help them build the CMA account.
Wow. Okay. Then after that, you ended up at Pioneer a few years later. Can you talk a little bit about your experiences when you're there at Pioneer?
Yeah, so Pioneer was a client. Well actually, when I went from consulting, I jumped over to Fidelity and I was at Fidelity for five years. Fidelity was a client. Pioneer was a client as well. During my time at Fidelity, I was responsible for doing marketing for the company at Fidelity that worked with broker dealers, which now brought me back around to the world where we live in today. We distribute our mutual funds through broker dealers here at Touchstone, and that was my first foray into that with Fidelity. Was with Fidelity for five years. Had an opportunity five years into it to join Pioneer Investments, which was a much smaller company. When I joined Pioneer, it was a publicly held company. It only had 10 billion in AUM when I joined in 1994. When I left in 2008, we were 90 billion. So we saw a lot of growth at Pioneer.
Steve joined Touchstone in 2009, and I asked him to talk about his early experiences at the company.
Touchstone, when I joined in '09, we had about five or 6 billion in AUM. What was fascinating about the company is, it is owned by a mutual life insurance company. Mutual life insurance companies are owned by the shareholders of the insurance policies. We effectively operate like a private company. It was very refreshing not to have to worry about quarterly earnings and be able to invest in the long-term. Prior to my joining, the stock market had crashed in October of '08, recovered by about March of '09. Senior leadership at our parent company and here at Touchstone decided what better time to launch new products but when the markets are an all-time low. We now have nearly 20 billion AUM.
And so, they seeded, 11 new strategies, which I had the opportunity to launch, I joined in August, and those strategies launched in October. Number one, it speaks to the commitment that the parent company has in Touchstone. Number two, it speaks to the long-range thinking in an opportunity to be a leader in the market by starting leading-edge products.
Which by the way, is another thing that separates us, differentiates us from Pioneer. At Pioneer, we ran our own funds. We obviously had a style of running money, which basically means you can't be good at everything, so what strategies lend themselves to the style that you use? It was not unusual for a client, an advisor, to ask me, "So Steve, I know you run more than 30 funds. What are you good at?" Well, at Touchstone we don't run money. We hire institutional sub advisors, institutional money managers to sub advise our mutual funds. We hire experts in their respective asset class. So when I get the question at Touchstone, "You've got 30-plus funds. Well, what are you good at?" I say, "If we're doing our job, we're good at all of them." Quite interesting, very different from Pioneer.
Those institutional money managers are going to be our focus for the upcoming episodes of the podcast. That's where you'll get a peek behind the curtain into the lives of the people who manage our funds and how they aim to help your clients achieve their investment goals. I asked Steve about Touchstone’s active approach and what it means to be Distinctively Active.
Distinctively Active are words we purposely selected two to describe who we are because when Touchstone hires money managers, we look for money managers that have high conviction, that have concentrated portfolios, that don't have broadly diversified portfolios. Most mutual funds have portfolios of 80 to 150 stocks. We hire managers with high conviction, 30 to 50 stocks, so we're Distinctively Active in that way. The sub advisors that we hire do not use street research. The sub advisors that we hire are fundamental investors. They are buying companies. They generally hold these companies for three to five years. They have a thesis that they're looking to play out, but they're not trading stocks. Distinctively Active describes the types of managers we hire, the high conviction, the fundamental investors, to set us apart from those funds that have 80 to 150 stocks that tend to manage to be close to an index. In fact, they're the closet indexers in a lot of ways, particularly when they try to mimic indexes.
In 2009, there was a landmark study that was done by Martin Cremers and they coined the phrase active share. It measures how different and similar fund portfolios are to their benchmark.
Advocates claim any difference in performance between fund and named benchmark (index) can only come from fund positions that are different from the benchmark.
Active share is the percentage of fund holdings that is different from the benchmark holdings. Active share can most easily be calculated as 100 percent minus the sum of the overlapping portfolio weights.
Research has shown that as a group and over fairly long periods of time that funds with low active share may tend to underperform their benchmarks net of costs; funds with high active share may tend to outperform their benchmarks net of costs, especially among funds that do not trade frequently, among small cap funds and among funds that do not have very large assets under management.
An active share of 100 means it's very different in holdings are sector weights. An active share of zero means it's identical to an index. You'll find many funds that are out there that are 50 to 60% active share, which effectively means that 60% of the portfolio is different and 40% is identical. We're very different.
Which means we're a very good complement for an ETF, which is passive, because we will behave very differently than that, and also a good complement for closet indexers.
Steve, just thinking about the market over the past 10 years, passive has more than doubled its market share of investment dollars. How do you think about active versus passive today in that context? I mean, is passive going to continue to take all the market share? How do you think active is going to fare going forward?
You know, we have had a protracted boom market that's been over 10 years, so investors could basically throw a dart and have an increase in their wealth, which has spawned the popularity of ETFs. The environment won't always be like that. I think the pendulum is swung way too far to ETFs and will swing back when volatility reenters the equation. The debate around active passive is not black and white. It's truly a continuum along that level. The question that investors have to ask themselves is how much volatility, vis-a-vis the index, are they willing to take? Frankly, today, buying the benchmark is free. I mean, you can buy an ETF right now. That makes no sense to me that investors would buy mutual funds that are closet indexers and that do not have high active share. In fact, I think the first question an investor should ask is what is the active share measure?
Then the question is how much volatility do they want to take, and I would suggest that you marry a Touchstone fund with the index of their preference and dial up the percentage to Touchstone or the ETF depending upon how much different they can handle.
Active share may be a new concept for many advisors, so I asked Steve how an average investor would come up with that metric and what they should typically look for.
We recognize that it's not a common statistic. It's not something that investors typically look for. Investors typically look for past performance over a one, three, and five year basis and did not know to ask about active share. Touchstone partnered with Dr. Cramers, who by the way left Yale and is now the Dean of the business school at Notre Dame. We partnered with Dr. Cremers Is to make the active share calculation available to all investors and so we've just developed a website called activeshare.info where you can get the actual active share measure for any fund you choose. You can also compare that to the fund's stated benchmark and also to the benchmark that most correlates with the portfolio. There's another interesting twist that one can get off of that website and it's something called active fee. Active fee is a term coined by Dr. Cremers.
Active fee measures how much you're paying for the active part of your portfolio. While Expense Ratio is commonly used to measure fund cost, sole reliance on it does not allow context regarding the service being delivered in return for the cost. Because only the active portion of the fund (the part that differs from benchmark holdings) can contribute to a return different than the benchmark, it is important to understand its Active Fee. It represents the amount by which the active holdings have to outperform the benchmark in order for the fund to beat the benchmark. It wouldn't be surprising to me for you to find that the funds that claim to be cheaper when looked at from this lens, you discover that you're actually paying more for the active part of that portfolio.
To round out our conversation, I thought I would get Steve's thoughts on the trends that are going to drive the investment business for the next decade.
Well, I certainly don't think that what we've seen in the past 10 years will be replicated in the next 10. Which is really important for investors because when looking for new funds, they would typically look at the past performance. Well, if the environment is going to be different going forward, that past performance is not relevant, and so they need a new way to look at funds. Another good example of what investors need to be thinking about when they're looking at new funds is the environment that they believe we're heading into. Like today, one might say there's been a shift from growth to value.
I ask investors who believe that there's a shift from growth to value, tell me how you picking your next value fund, and more often than not, they'd say to me, "I'm looking for a value fund that has great performance over the last five years," at which time I remind them that we've been in a growth cycle for the last 10 years. So if their fund performed in the last five, it was not a value fund, it was a growth fund. And that what they really should or should do is look to your last value cycle and see how these funds performed back then.
Now back to the question of trends for the next 10, I mean, I don't have a crystal ball and I don't know. I don't really know where the market's return. If I did, I wouldn't be working, I suppose. I'd just invest my money. But what I do believe in is balanced portfolio, holding the portfolio for the long run, because over the long run, the stock market has delivered wealth and wealth creation. It does not deliver all wealth creation if one is chasing one's tail and trading the stocks or their funds every two or three years, trying to find the best performer. Pick a solid investor who has created wealth over time. I would describe that by the way, as creating wealth over rolling five year timeframes and since its inception, and I would buy it and I would hold it.
Hopefully you've gleaned some insights today from our first episode about Touchstone and its president Steve Graziano. Lots of leaders have daily routines to keep them performing at their best, so I asked Steve about his daily and weekly routines.
My routines are at the end of every week, I summarize my accomplishments and identify the things that I've not accomplished that I need to get to. I start with that. I always, every weekend, I need to do a status report because I need to know how the company has done on the objectives we've set, so I can't let that slide. I look at that every weekend. On Sunday night, that's when I catch up. I get my reading done, trade publications, research reports to get myself motivated for the upcoming week. All that being said, if I have not done something athletic over a weekend, I go crazy. I need to play a round of golf, tennis, I need to do something athletic are I will be a mess for the remainder of the week.
Thanks to Steve Graziano for taking the time to sit down with me and share his story, and thank you the listener for taking a bit of time out of your busy day to listen to the podcast. On the next episode, we'll interview and explore the life of one of our most trusted portfolio managers.
Thank you for listening to Distinctively Active Investing. You can find the resources mentioned in episode and learn all about Touchstone active managers at www.touchstoneinvestments.com. If you liked this show, please share it with someone you know. We appreciate when you subscribe to the show and take the time to leave us a rating and review. Find our podcast on Apple podcasts, Spotify, or your favorite podcast app. I'm Steve Graziano, from all of us at Touchstone Investments, thanks for listening.
The information provided is for general information purposes and is not investment advice. Opinions may change without notice based on economic, market, business, and other conditions. Please consider the investment objectives, risks, charges and expenses of the Fund carefully before investing. The prospectus and the summary prospectus contain this and other information about the Fund. To obtain a prospectus or a summary prospectus, contact your financial professional or download and/or request one at TouchstoneInvestments.com/resources or call Touchstone at 800.638.8194. Please read the prospectus and/or summary prospectus carefully before investing.
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