Why TCW is betting on Engine No. 1's ETF business

TCW is acquiring Engine No. 1’s ETF business, in a deal that is expected to close in the third quarter. Engine No. 1 CEO Jennifer Grancio joined Yahoo Finance Live to discuss the deal and its impact on the company. Grancio says, TCW has "such a strong reputation for investment managers that are great fiduciaries" and "they also run concentrated active portfolios. And so for us, it’s very exciting to move into that larger platform and kind of bring the active ETFs with us."

Video transcript

JULIE HYMAN: TCW group last week announced an agreement to acquire Engine No. 1's ETF business. That deal's expected to close in the third quarter. It marks an expansion of TCW's relatively small ETF business and a further diversion from the firm's traditional investment in fixed income, its sort of core business. Engine No. 1 was founded in 2020. It launched its first two ETFs a year later-- VOTE and NETZ, those are focused on aligning companies with ESG and decarbonization goals.

This year, the firm launched its third ETF, Engine No. 1 Transform Supply Chain. That's under the ticker SUPP-- S-U-P-P. Its focus is on reindustrialization of supply chains. To talk more about the deal and how it's going to fit in at TCW, Jennifer Grancio is joining us, Engine No. 1 CEO, who is going to be joining TCW as its head of ETFs. Thank you so much for being here, and congrats on this. So Jen, talk to me about kind of why you guys decided to do this deal and what it's going to bring to TCW.

JENNIFER GRANCIO: Yeah, thank you. So we built Engine No. 1 to help people invest in these major, epic transformations kind of that lie ahead of us and are already happening. And this is a real proof of concept or sort of testament to the idea from an Engine No. 1 perspective that both in the private and the public markets, these are huge investment opportunities.

And so we're very excited to be taking this set of NETZ on the carbon transition perspective and supply chain on reshoring back to the US, to be taking this set of active products into TCW. And if you think about TCW, they have such a strong reputation for investment managers that are great fiduciaries, that are active. They also run concentrated active portfolios. And so for us, it's very exciting to move into that larger platform and kind of bring the active ETFs with us. And then there's a lot to do that TCW does today around other thematics that could be put in an ETF wrapper.

JULIE HYMAN: OK, well, let's talk more about that. So you guys in your ETFs have about $600 million in assets right now. What are the ambitions for this business as you go to TCW? I understand it's early days, but kind of what's the vision here?

JENNIFER GRANCIO: Yeah, it is early days, but at the same time, you know, TCW has great capabilities on the fixed income and bond side, and they also have a range, including other thematic capabilities like AI, in the equity business. And so what this allows is we continue to build NETZ and Supply Chain and VOTE, and those products will become TCW products and be run the same way with the same portfolio managers, but that ETF capability that we have can then get extended to other thematic strategies. And so that from a TCW solutions perspective, we'll be able to do a much broader range of thematics and ETFs, which is very exciting.

JULIE HYMAN: So I'm curious as-- and we've talked about this a little bit before. Do you consider yourself to be an activist investor, or do you consider yourself to be a thematic investor, and how then does that fit into the culture at TCW?

JENNIFER GRANCIO: Yeah, we think about it-- at Engine No. 1 on the ETF part of the business, we think about it as what was missing in the market? What could be done better? So VOTE is sort of simply a better index fund where you're always using your governance options. And then NETZ and Supply Chain are active.

And the way we think about active and one of the great things about Engine No. 1 transform ETFs moving to TCW is there's great alignment on how TCW investors today think about it, which is you're running concentrated portfolios, you're investing across a system to drive an outcome, and then we want to be active owners and we want to work actively with companies. That's not traditional activism, but it's working actively with the biggest holdings to release value and create value for investors.

JULIE HYMAN: I also want to ask, since these are traditionally thought of as ESG, quote unquote, areas and ESG is having a weird moment right now for lack of a better word, right? You had Larry Fink of BlackRock who had been all in on ESG sort of distancing himself from that wrapper a little bit. So as somebody who's in these kinds of investments, how are you thinking about it right now? What kind of reception are you getting from investors?

JENNIFER GRANCIO: Yeah, I mean, I think in our industry sometimes we spend a lot of time on an acronym. And what did the acronym mean 20 years ago? What does the acronym mean going forward? And again, I think maybe we're all wasting a little bit of time on that.

But from an Engine No. 1 perspective, we think of it as in industries and systems that are in transformation. So if you think about how we have energy or how we do transportation today, demand is changing. People want all electric. They want battery electric cars. And so if you leave ESG aside for a minute, that is a monumental investment opportunity. Trillions of dollars are being invested every year to change that system.

So honestly, we think of it as just an investment opportunity. There's a huge performance opportunity. And so I think, as investors, you don't want to be confused between labels and values-based investing versus places where there's a lot of economic value to be created. Those are just investment opportunities. And we should make sure that we understand them as investment opportunities, even if they also get other labels.

JULIE HYMAN: Interesting. So-- because I think of it as-- you know, decarbonization for example, there are also other reasons to do that besides profit, right? And critics of it have said, we don't want investors to be pushing a company in a particular direction for that reason. But you're saying, reframe it as just the focus on growth.

JENNIFER GRANCIO: I think I would say, think about systems that are in transition. And if you want to win as a public company through time, you have to understand how your market's changing. And so if you make automobiles or if you make airplanes, people want more efficient and electric cars. People want more efficient airplanes.

And so if you want to win and make money and beat your competitor, you need to move in line with that consumer demand. And so I think, to some extent, we can elevate it in some of these spaces because the demand is moving. And so now it does just become an economic issue in many cases.

JULIE HYMAN: Interesting stuff. Thank you so much. It's great to see you. And again, congrats on the deal. Jennifer Grancio, Engine No. 1 CEO, soon to be head of ETFs at TCW.