Inside Smart Beta Conf Keynote Presentation (attached): What the Low Growth, Low Return World Means for The Rise of Passive Investing & SmartBeta. Includes: the 3 Main Drivers of Sea Change From Active to Passive Investing; the 4 Keys to Passive Investing’s Future; Min Vol & the Fabled Free Lunch and the Investment Idea of a Lifetime. Specific focus on Millennials, Pensions and a (subjective) list of winners & losers across both buy and sell side.

1.
The Low Growth, Low Return World
and
What It Means for the Rise of Passive Investing & Smart Beta
Jay Pelosky
Founder & Principal J2Z Advisory LLC
Pelosky.com

2. THE UPSHOT
Low Growth > Low Returns > Rise of Passive
>
Smart Beta & Robo Advisory = Opportunity.

3. GLOBAL GROWTH DECELERATION
• Potential Growth Rates
1990s 2016
US 3.3% 1.75%
DM 2.25% 1.6%
• US & EU Natural Rates of Interest = 0% (Real
Rate that Balances Monetary Policy so it is
Neither Accommodative nor Contractionary).

4. KEY GROWTH INHIBITORS
oPoor Demographics In Both Developed &
Emerging Economies – Getting Old Fast.
oDeclining Labor Productivity – US in
Biggest Slump Since the 1970s. World
Productivity has Collapsed from 1.8% to
0.5% pa.

5. KEY ECONOMIC TAKEAWAYS
o Low Growth World is Here to Stay Over
Foreseeable Future (3-5 yrs.).
o Declines in Potential Growth Rates &
Natural Rates of Interest are GLOBAL.
o Drivers are Powerful, Long Term Factors
that are Unlikely to Reverse Quickly.

6. POLICY SOLUTIONS?
Monetary Policy
oOverused
oRise of the Big Fear?
Fiscal Policy
oUnderutilized… Like Waiting for Godot
BUT
oThe Wait May Be Over: Tricky Transition to
Joint Monetary – Fiscal Policy Ahead

7. THE LOW RETURN WORLD - PENSIONS
o US Public Pension Fund Target Return = 7.5%
o US Public Pension Fund Actual Returns
Last 20 Years = 7.2%
Last 10 Years = 5.8%
Last 1 Year = 0.3%
o US Economy in 7th Year of Economic Expansion. US Stocks
and Bonds Close to All Time Highs in Price & Valuation.
What Happens to Returns when the Next Recession or Bear
Market Hits One or Both Asset Classes?

8.
THE LOW RETURN WORLD -MILLENIALS
o Bigger Cohort than Baby Boomers.
o Good News: Open for Business, Like to Save
(Over 50% Allocation to Cash).
o Bad News: Distrust Experts & Elites, Fee
Averse.

9. SEA CHANGE AT HAND
Baby Boomers: Gen Mutual Fund
Millennials: Gen Passive

10.
ASSET MANAGEMENT LANDSCAPE
oPensions: $35 T
oMutual Funds: $11T
oETFs: $3T
oHedge Funds: $3T
oRIAs: $2T
oSmart Beta: $575B
oRobo Advisory: $19B

11.
ASSET MANAGEMENT LANDSCAPE
o Passive = 40% of US Equity Fund Assets and
25% of US Fixed Income Assets for Total of 30%
of Total Public Assets.
o What is the Prospect for Passive to = 50% of
Total Public Assets by 2020?
o Pretty Good at $1T shift pa ($500B out of
active and $500B into Passive).

12. THREE MAIN CHANGE AGENTS
o Passive Option Exists Globally & in All Parts
of the Market.
o Technology Drives Fee Transparency.
o Poor Active Management Performance (88%
Underperform S&P Past Decade).
o END RESULT: Rapid Erosion of Active Manager
Monopoly Pricing & Rising Appeal of Passive.

13. ACTIVE MANAGEMENT UNDER THREAT
Active Management Under Pressure from
Top
Down Pension Fund Community & Bottoms
Up
Via the Rise of the Millennial Investor.

14. ASSET MANAGEMENT BOTTOM LINE
Expensive & Underperforming in an Age of
Fee
Transparency & Passive Options is NOT a
Recipe
for Success or Longevity.

15. THE RISE OF PASSIVE
o Cost: a Leading Predictor of Performance
o Average US Equity Mutual Fund Fees = 125 bps
vs. Average US Equity ETF fees of 15 bps.
o In the Low Return World Every Basis Point
Counts.

16.
THE FUTURE OF PASSIVE IS BRIGHT
o Pension Fund Globalization & Migration to Passive
o Millennial Adoption
o Fixed Income Expansion
o Regulatory Encouragement (DOL Fiduciary Ruling)

17.
SMART BETA
o Long Academic History: Quant, Rules Based,
Transparent, Repeatable & Scaleable.
o First Multi Factor ETF Launched a Decade
Ago.
o First Min Volatility ETF Launched in 2011
(though most would say 6 months ago).

18.
SMART BETA
o Rules based Tilts: Quality, Momentum, Value,
and Volatility
o A Blend of Active (tilt) and Passive (Index
based)
o Adoption Driven by Search for Edge in a
Highly Correlated, Highly Uncertain World.

19.
MIN VOL & THE FABLED FREE LUNCH
YTD LTM
USMV 9% 13%
SPY 6% 9%
EUMV -1% -1%
FEZ -3% -8%
JPMV 6% 10%
EWJ 2% 4%
EEMV 10% 4%
EEM 15% 8%

20.
MIN VOL BEYOND THE FREE LUNCH, AKA DESSERT
o Reduce Drawdown Risk, Minimize Fee
Pressure
o Avoid Market Timing Challenge
10/08 3/00
SPY -17% 10%
Av Investor -24% 4%

21.
MIN VOL FEARS: EXPENSIVE, OVEROWNED, A BUBBLE?
o Expensive? Yes, it should be in a low growth,
low return world characterized by sharp
drawdowns.
o Over-owned? Don’t Think So. Two Main Min
Vol Products Have Net Assets of $23B vs. SPY
Net Assets of $200B. YTD Inflows to Min Vol =
$16B; total Inflows to Passive = $400B.

22. MIN VOL BUBBLE TEST
If Min Vol Underperforms The S&P During The
Next 10-15% Pullback Then Bubble Believers Will
Have a Case.

23.
MILLENIALS: INVESTORS OF THE FUTURE
o Characteristics Include: Technology = Mothers Milk.
o Veterans of Both 9/11 and the GFC = Deep Aversion
to Permanent Loss.
o Little Trust in Elites or Experts.
o High Savers, Cash Hoarders.

24.
THE ROBO OPPORTUNITY
o Millennial Investment Vehicle of Choice.
o Booster Rocket for Passive.
o Potential Growth From $19B AUM to $500B in
5 Years!

25.
FOUR DRIVERS TO THE (PASSIVE) FUTURE
o Continuation of the Low Growth, Low Return
World
o Sustained Focus on Fees & Performance
o Pension Fund Revolution
o The Rise of the Millennial/Robo Combo

26.
THE BOTTOM LINE
The Investment Opportunity of a Lifetime: A
Fully Loaded, Passive Tool Kit that Allows One
to Create Low Cost, Liquid, Transparent,
Global, Multi Asset Portfolios that Employ
Rules Based Factor Strategies Delivered via
Robo/Hybrid Investment Platforms to Meet
the Investment Needs of Asset Owners &
Millennials Alike.

27.
WINNERS & LOSERS
WINNERS
o Passive/Smart Beta
o Robo Advisory
o ETF Strategist/Model Portfolio
o Asset Allocation Specialists
LOSERS
o Active Managers
o Legacy Buy & Sell Side
o Hedge Funds/Liquid Alternative Strategies
o Research Analysts