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By Paul Justice, CFA | 06-29-2011 04:07 PM

Giving ETF Investors Scalpellike Accuracy

Russell's Greg Friedman describes how his firm's new family of funds complements traditional index ETFs and allows individuals to invest with more precision.

Paul Justice: Hi, there. I'm Paul Justice with Morningstar. Russell Investments has joined the ETF growth, issuing their own products based on some of their own indexes. Today to talk about this with me is Greg Friedman, managing director of Global Product at Russell.

Thank you for joining me.

Greg Friedman: Absolutely. Thank you for having me.

Justice: Now most investors in the ETF space are already familiar with Russell, coming from different product providers folks like iShares, perhaps, and other big names. Now you're not going to be actually issuing those same funds on the existing indexes like Russell 2000, you have some more exotic strategies. Could you talk a little bit about what those are and what you intend to come out with?

Friedman: Correct. Russell's been in the ETF game since 2000, when the Index Division of Russell has licensed our intellectual capital to other sponsors. Those products have been extremely successful building upon the Russell heritage and the Russell name. Russell has been known for multimanager, consulting, transitioning services, and manager-manager research. Russell is not and has not been interested in playing the game that has been played so far. The benchmark and the asset-defining classification type ETFs are out there. The Russell brands are associated with all those sponsors, and they're very successful products.

What we're offering is a complement to those products. We're not looking to compete with the existing Russell Family or with other ETFs. The ETF industry has really grown quite dramatically around benchmark passive investing. What we want to bring out of Russell is the next-generation of ETFs that complement the existing family suite. Because of Russell's heritage of 40 years of multimanager experience, we believe this is the right time for Russell to enter into the ETF space.

We can bring a new perspective and a new type of product. Our goal is the next-generation of ETFs. So we want smart beta and intelligent beta as the Investment Discipline series that we brought out and also the factor funds. Those, we believe, are the next generation. It allows investors to complement what they've already done with ETFs and in some cases Russell-branded indexed ETFs.

Justice: Now in asset management this is not Russell's first trip to the rodeo at all. You already have a well-established business here. Could you talk about how large that business is and how some of these ETFs may be piggy-backing off some of the existing strategies?

Friedman: Sure. Russell's been around for 75 years. It always had a great sense of innovation. How do we change the way people invest. How do we look and be very client-focused. So what we're doing now is taking that same innovation. Russell manages more than $140 billion in assets on the asset management side. On the ETF Indexing side, there's already $85 billion just benchmarked to Russell ETFs.

So we've been through this. We understand how investors think, and what we're doing is we're taking that intelligence we've gotten for 40 years of multimanager experience and brought it into our advanced intelligent beta or smart beta-type products.

Justice: So these are going to target things such as higher-volatility/lower-volatility portfolios or high beta, kind of the move that the market is going to make being amplified or even muted a little bit using baskets of stocks within the existing indexes, is that correct?

Friedman: A little bit. There are two different types of families we brought out so far, and there's a third stand-alone product that we'll be adding to. The Investment Discipline series allows us to take the 40 years of multimanager experience that we have and look at how investors have invested in the past. Take all that data, and if you think about an advisor and how they've always chosen portfolios, there's a set of stocks they've either decided to include or set of stocks saved purposely not included. We've taken that and codified that into a methodology that allows us to replicate that style in a very transparent cost-effective ETF form. That's one set of family.

The other set of the intelligent beta is that the factor funds allow us to really hone in on risk-type investing and allow the investor to layer those type of tools on potentially other Russell broad-based indexes managed by their sponsor. So it allows a scalpel approach; it allows investors to really be more precise on how they invest. I use the word "complement" very carefully because we're not competing. We're not looking to replace because the ETF industry has been very successful with those type of products, asset-defining benchmark-type products. What we're bringing out are products that we're going to add to it. The new products give the investor another chance, another approach, or another discipline to be more precise in how they invest for their clients.

Justice: So, really what is this, you're reviewing ETFs more. It's a new distribution channel for strategies that have been in place by varying investors, more sophisticated investors, for quite a long time. These are strategies, again, implemented by Russell in some other areas.

Now that you're bringing it through the ETF wrapper, could you talk about the people that you've brought on-board to ensure that this is going to successful launch for you and a good investor experience for people going forward?

Friedman: Absolutely. Russell's taken this very seriously. This is one of the largest initiatives Russell ever undertaken. So, we brought a leadership team of myself and two others that have had, together more than 35 years of ETF experience. Myself alone since 1996. We've also brought in leaders of the mutual fund industry, as well as ETF expertise. So we've got a very deep bench of experts and professionals. We'll be up to 40 devoted, dedicated ETF people here in the U.S., by the end of next month. We have five dedicated in Australia and by the end of the year, we'll be up to 50.

So we believe we're bringing a unique set of products. We're not looking to do me-too type of products or index-only baked products. We're looking to bring smart beta. We're also looking to bring ETFs of ETFs which is active asset-allocated strategy and will be truly active down the road in 2012. So, we're bringing innovative products that are new to the market. We are bringing a management team and a professional team that is world-renowned in terms of their experience in other firms, and we're investing a lot of money.

So, as you see some other entrants enter into the ETF space, they are entering slowly or they don't have the resources. We're lucky enough to have a great parent in Russell. Focused, we brought a great team of people on-board. We've spent quite a bit of money that we want to be a significant player, and we are taking this extremely seriously.

Justice: Great. Well, thank you for your insights into your initiatives, and we wish you luck going forward.

Friedman: Thank you, appreciate it. Thank you.


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