1 00:00:00,160 --> 00:00:05,600 Speaker 1: This podcast is brought to you by HKX, Asia's ETF marketplace. Well, 2 00:00:05,640 --> 00:00:08,719 Speaker 1: you'll find a gateway to liquidity and a diverse selection 3 00:00:08,800 --> 00:00:13,320 Speaker 1: of opportunities across asset classes, sectors and themes in Asia 4 00:00:13,360 --> 00:00:16,760 Speaker 1: and beyond. Search HKX to learn more. 5 00:00:17,880 --> 00:00:21,080 Speaker 2: Good morning, good afternoon, good evening, and good night's wherever 6 00:00:21,160 --> 00:00:24,520 Speaker 2: in this vast little blue planets you're joining us from 7 00:00:24,560 --> 00:00:27,800 Speaker 2: Welcome to Tiger Money, a Bloomberg podcast about all things 8 00:00:27,800 --> 00:00:30,640 Speaker 2: investing with a twist on exchange traded funds in the 9 00:00:30,680 --> 00:00:33,720 Speaker 2: Asia Pacific and beyond. I'm David Ingless, Chief Markets Editor 10 00:00:33,760 --> 00:00:35,200 Speaker 2: for the Asia Pacific at Bloomberg TV. 11 00:00:35,240 --> 00:00:35,720 Speaker 3: I'm Alted, a. 12 00:00:35,760 --> 00:00:38,280 Speaker 2: Host of The China Show, and Michael pilot Is. 13 00:00:38,800 --> 00:00:42,840 Speaker 4: I'm Rebeccason, head of Asia Pacific ETF Research at Bloomberg Intelligence. 14 00:00:43,120 --> 00:00:46,559 Speaker 4: This conversation is strictly non confidential. If you like what 15 00:00:46,600 --> 00:00:49,800 Speaker 4: you hear, don't forget to subscribe, like and share. We've 16 00:00:49,840 --> 00:00:52,239 Speaker 4: all heard about the rise of indexing, but today we're 17 00:00:52,280 --> 00:00:55,440 Speaker 4: going to discuss whether index funds and their actively managed 18 00:00:55,440 --> 00:00:58,760 Speaker 4: counterparts can sit at the same table without eating each 19 00:00:58,800 --> 00:01:03,000 Speaker 4: other's lunch. A few active managers outperform their benchmark so 20 00:01:03,160 --> 00:01:05,080 Speaker 4: is there a room on the playing field for both? 21 00:01:05,319 --> 00:01:07,839 Speaker 4: And as strange as it sounds, how much to active 22 00:01:07,840 --> 00:01:10,920 Speaker 4: and passive fund managers need each other. Let's bring in 23 00:01:11,040 --> 00:01:14,600 Speaker 4: Duncan Burns, head of investment management and equity indexing for 24 00:01:14,680 --> 00:01:17,960 Speaker 4: Asia Pacific at Vanguard Australia, because more than twenty years 25 00:01:18,000 --> 00:01:21,240 Speaker 4: of trading and investment management experience have Tanum a thing 26 00:01:21,360 --> 00:01:25,400 Speaker 4: or two. Besides being an investor, he's also an added cycler. Duncan, 27 00:01:25,600 --> 00:01:26,680 Speaker 4: Welcome to Tiger Money. 28 00:01:27,040 --> 00:01:29,680 Speaker 3: Pleasure to be here, David Bega, I've been looking forward. 29 00:01:29,480 --> 00:01:33,440 Speaker 2: To this, Yeah, Duncan twenty years, so you'd be in 30 00:01:33,480 --> 00:01:35,959 Speaker 2: probably the perfect position to tell us how things have 31 00:01:36,040 --> 00:01:38,680 Speaker 2: evolved and where things are probably headed. Let me just 32 00:01:38,680 --> 00:01:40,440 Speaker 2: start by asking what have you guys been busy with? 33 00:01:40,560 --> 00:01:42,560 Speaker 2: What's taking up most of your mind space? 34 00:01:43,440 --> 00:01:47,440 Speaker 5: Yes, maybe I'll just touch on what Vanguard's doing in 35 00:01:47,480 --> 00:01:50,600 Speaker 5: the region here, and you're looking at Vanguard by the 36 00:01:50,680 --> 00:01:55,280 Speaker 5: numbers globally, we're looking after fourteen trillion auarsie dollars on 37 00:01:55,360 --> 00:02:00,080 Speaker 5: behalf of fifty plus million mom and dad investors. And 38 00:02:00,440 --> 00:02:03,600 Speaker 5: while I've been a Vanguard for some ten years, I 39 00:02:03,640 --> 00:02:07,480 Speaker 5: still find those figures amazing. But We absolutely never lose 40 00:02:07,520 --> 00:02:10,000 Speaker 5: sight of the fact that that's all client money and 41 00:02:10,000 --> 00:02:13,160 Speaker 5: we're just looking after it for him. Zeroing in on 42 00:02:13,480 --> 00:02:17,000 Speaker 5: our APAC operation, we're looking after a trillion Ausie dollars 43 00:02:17,160 --> 00:02:23,160 Speaker 5: across fourteen markets. Here and Melbourne, Australia is Vanguard's APAC hub. 44 00:02:23,560 --> 00:02:27,400 Speaker 5: We have two other hubs London looking after Europe, and 45 00:02:27,440 --> 00:02:32,400 Speaker 5: we've got Malvern, Pennsylvania just outside Philadelphia looking after the Americas. 46 00:02:32,639 --> 00:02:36,480 Speaker 5: And again our Aussie based investment team. We got about 47 00:02:36,760 --> 00:02:43,440 Speaker 5: fifty five strong portfolio managers, traders, risk analysts and economists 48 00:02:43,560 --> 00:02:47,600 Speaker 5: and they are driving Vanguard's money management operation and some 49 00:02:47,680 --> 00:02:51,359 Speaker 5: thought leadership here in the region. And in terms of 50 00:02:51,400 --> 00:02:55,040 Speaker 5: what we're up to, we're largely index focused in the region. 51 00:02:55,120 --> 00:02:59,480 Speaker 5: We're bringing that to market through a personal investor offering, 52 00:03:00,080 --> 00:03:04,320 Speaker 5: and that's retail through an advisor offering. And our newest 53 00:03:04,400 --> 00:03:09,200 Speaker 5: launch is Vanguard Super And a lot of clients think 54 00:03:09,200 --> 00:03:11,680 Speaker 5: of us as just an index manager, but as we 55 00:03:11,760 --> 00:03:14,840 Speaker 5: kick off here, I want to share about three quarters 56 00:03:14,880 --> 00:03:18,560 Speaker 5: of Vanguard's AM is in the index space, but roughly 57 00:03:18,600 --> 00:03:21,280 Speaker 5: a quarter is in the active space, so we don't 58 00:03:21,280 --> 00:03:23,200 Speaker 5: want to be thought of as just an index manager. 59 00:03:23,440 --> 00:03:26,079 Speaker 5: We like to think of ourselves as a low cost manager. 60 00:03:27,200 --> 00:03:30,160 Speaker 4: So speaking of low costs, Vanguard is known to be 61 00:03:30,200 --> 00:03:34,120 Speaker 4: one of the cheapest ETF and passive provider. For instance, 62 00:03:34,160 --> 00:03:37,600 Speaker 4: your average expense ratio is only eighteen basis points compared 63 00:03:37,600 --> 00:03:39,720 Speaker 4: to Blackrock iheres which is thirty two. So you guys 64 00:03:39,720 --> 00:03:42,320 Speaker 4: are definitely one of the cheapest in terms of you know, 65 00:03:42,360 --> 00:03:44,920 Speaker 4: you mentioned active and passive. We've heard a lot about 66 00:03:45,080 --> 00:03:48,120 Speaker 4: active not performing. In one of our recent podcasts, we 67 00:03:48,160 --> 00:03:51,040 Speaker 4: had Mark Mobius and Dan Draper, who's the CEO of 68 00:03:51,080 --> 00:03:53,240 Speaker 4: S and P five hundred, and he said that ninety 69 00:03:53,280 --> 00:03:56,120 Speaker 4: percent of fund managers don't beat their benchmark. And so 70 00:03:56,240 --> 00:03:58,960 Speaker 4: now when we talk about the rise of indexing, Bloomberg 71 00:03:59,000 --> 00:04:02,040 Speaker 4: Intelligence has a prediction that ETFs will reach thirty five 72 00:04:02,120 --> 00:04:05,600 Speaker 4: trillion US dollars by twenty thirty five. And so can 73 00:04:05,800 --> 00:04:09,040 Speaker 4: passive and active really coexist? And what are your thoughts 74 00:04:09,080 --> 00:04:10,400 Speaker 4: around the rise of indexing? 75 00:04:11,320 --> 00:04:12,760 Speaker 3: I love that question, Rebecca. 76 00:04:13,400 --> 00:04:16,680 Speaker 5: Before I jump to it, perhaps just defining a few 77 00:04:16,760 --> 00:04:20,680 Speaker 5: terms here for the listeners as Vanguard sees them indexing. 78 00:04:21,000 --> 00:04:23,800 Speaker 5: If we think of that as strategies that are designed 79 00:04:23,800 --> 00:04:27,880 Speaker 5: to match a benchmark and not beat it, and really 80 00:04:27,920 --> 00:04:33,280 Speaker 5: most powerful when we're targeting a total market portfolio. Indexing 81 00:04:33,480 --> 00:04:37,040 Speaker 5: is synonymous with passive, So not a fan of the 82 00:04:37,120 --> 00:04:40,159 Speaker 5: name passive. Hopefully that's the only time I say it 83 00:04:40,200 --> 00:04:44,480 Speaker 5: here during the session, but you may hear those terms 84 00:04:44,560 --> 00:04:50,279 Speaker 5: used interchangeably. That's index and passive and active, so active investing. 85 00:04:50,440 --> 00:04:52,560 Speaker 5: I think of that as really anyone who's looking to 86 00:04:52,640 --> 00:04:57,239 Speaker 5: outperform the market, and think about stock selection or market 87 00:04:57,240 --> 00:04:59,960 Speaker 5: timing based approaches, jumping in and out of the market, 88 00:05:00,160 --> 00:05:06,400 Speaker 5: picking individual stocks. And lastly ETF or exchange traded fund 89 00:05:06,680 --> 00:05:09,200 Speaker 5: and I think of those as kind of the offspring 90 00:05:09,440 --> 00:05:13,520 Speaker 5: of index funds or index funds two point zero and 91 00:05:13,640 --> 00:05:14,640 Speaker 5: ETFs are a rapper. 92 00:05:14,680 --> 00:05:15,960 Speaker 3: You can put anything in them. 93 00:05:15,839 --> 00:05:19,560 Speaker 5: These days, but the vast majority of AM and you 94 00:05:19,600 --> 00:05:24,080 Speaker 5: know that's really focused on total market ETFs. With that understanding, 95 00:05:24,080 --> 00:05:28,120 Speaker 5: I'll circle around to your question, Rebecca, why does Vanguard 96 00:05:28,160 --> 00:05:29,680 Speaker 5: believe in in indexing? 97 00:05:29,800 --> 00:05:32,720 Speaker 3: Is there room for active and indexing? 98 00:05:33,640 --> 00:05:36,720 Speaker 5: And I'll say there absolutely is room for both, and 99 00:05:36,960 --> 00:05:40,400 Speaker 5: I'd love to drill into cost shortly, but the key 100 00:05:40,480 --> 00:05:43,800 Speaker 5: is getting costs right on both sides of that. But 101 00:05:44,240 --> 00:05:46,280 Speaker 5: you know, as we look at the landscape today and 102 00:05:46,320 --> 00:05:49,680 Speaker 5: we look at the index revolution as it's taking shape 103 00:05:49,680 --> 00:05:53,880 Speaker 5: around the world. It's moving at different paces, and US 104 00:05:53,960 --> 00:05:58,800 Speaker 5: is leading the charge. They're just approaching fifty percent passive share, 105 00:05:58,839 --> 00:06:01,479 Speaker 5: so it's fifty percent passive, fifty percent active in funds 106 00:06:01,480 --> 00:06:04,479 Speaker 5: and ETFs. Europe see somewhere in the range of thirty 107 00:06:04,560 --> 00:06:08,160 Speaker 5: to forty percent, and Asia pac In Australia we're bringing 108 00:06:08,240 --> 00:06:09,320 Speaker 5: up the end. 109 00:06:09,160 --> 00:06:09,719 Speaker 3: Of that train. 110 00:06:10,279 --> 00:06:13,520 Speaker 5: We're not even through twenty five percent here in Australia. 111 00:06:13,600 --> 00:06:17,680 Speaker 5: So index revolution absolutely playing out, but we've got a 112 00:06:17,760 --> 00:06:20,960 Speaker 5: lot more growth ahead of us here in Australia and 113 00:06:20,960 --> 00:06:24,600 Speaker 5: in Asia in particular. What would you both say if 114 00:06:24,640 --> 00:06:27,680 Speaker 5: I told you that all the investors are throwing away 115 00:06:27,720 --> 00:06:31,880 Speaker 5: billions of dollars a year, and this isn't something that's 116 00:06:31,960 --> 00:06:34,040 Speaker 5: just started. It's been going on for about ten years 117 00:06:34,120 --> 00:06:37,080 Speaker 5: or so. You know, those are some eye popping numbers. 118 00:06:37,200 --> 00:06:40,960 Speaker 5: But the fact is a lot of investors are paying 119 00:06:41,040 --> 00:06:45,800 Speaker 5: for something that simply cannot be delivered. And as I 120 00:06:45,880 --> 00:06:48,520 Speaker 5: look at the active landscape, but a lot of investors 121 00:06:48,600 --> 00:06:53,080 Speaker 5: paying for the promise of active outperformance. And as we've 122 00:06:53,080 --> 00:06:56,200 Speaker 5: done some studies and looked at things here in ows 123 00:06:56,279 --> 00:07:00,240 Speaker 5: recently across a few different aspects of the market. Love 124 00:07:00,320 --> 00:07:02,679 Speaker 5: to delve into that and kind of the why behind 125 00:07:03,360 --> 00:07:09,360 Speaker 5: indexing working. But yeah, the index revolution is playing out 126 00:07:09,400 --> 00:07:13,440 Speaker 5: globally and locally, and what we see here as a 127 00:07:13,560 --> 00:07:16,800 Speaker 5: trend is the smart money and the serious money is 128 00:07:16,840 --> 00:07:20,160 Speaker 5: moving the core of their portfolio over to that index 129 00:07:20,480 --> 00:07:25,000 Speaker 5: total market exposure. And in terms of what's behind that shift, 130 00:07:25,080 --> 00:07:28,640 Speaker 5: if there's one key driver, it comes down to performance, 131 00:07:28,760 --> 00:07:31,480 Speaker 5: and there's a performance edge of index overactive. 132 00:07:33,040 --> 00:07:35,440 Speaker 4: I think one of the things that's unique about Asia 133 00:07:35,600 --> 00:07:37,920 Speaker 4: is the fragmentation that you have. So to your point, 134 00:07:37,960 --> 00:07:40,760 Speaker 4: you know, Australian investors are very different to Chinese investors, 135 00:07:41,200 --> 00:07:43,720 Speaker 4: and one of the things that's unique about the Australian 136 00:07:43,760 --> 00:07:46,160 Speaker 4: market is you're the only region that has banned retro 137 00:07:46,240 --> 00:07:48,920 Speaker 4: session fees, which are rebates, and I think that's why 138 00:07:49,000 --> 00:07:52,320 Speaker 4: you've been able to be so successful in Australia. So 139 00:07:52,360 --> 00:07:55,560 Speaker 4: for instance, in other regions, people are still paying distributors 140 00:07:55,640 --> 00:07:58,960 Speaker 4: fees to sell a product. And so you mentioned earlier 141 00:07:58,960 --> 00:08:01,200 Speaker 4: that you have the Australian can tell us a little 142 00:08:01,200 --> 00:08:03,240 Speaker 4: bit more about this and why you guys decided to 143 00:08:03,280 --> 00:08:03,840 Speaker 4: get into this. 144 00:08:05,320 --> 00:08:09,120 Speaker 5: Yeah, so our latest launch and a big focus here 145 00:08:09,160 --> 00:08:12,560 Speaker 5: for our Australian ra Pac operation has been moving into 146 00:08:13,160 --> 00:08:17,440 Speaker 5: the Australian superannuation market and that's the retirement scheme here locally, 147 00:08:18,280 --> 00:08:20,760 Speaker 5: and the key driver here or the point on that 148 00:08:20,840 --> 00:08:24,520 Speaker 5: business is Vanguard wants to be close to the client. 149 00:08:24,640 --> 00:08:26,960 Speaker 3: We are focused on retail clients. 150 00:08:27,000 --> 00:08:28,840 Speaker 5: And over the years we've probably moved a little bit 151 00:08:28,840 --> 00:08:33,000 Speaker 5: out of institutional to really point at that sector of 152 00:08:33,000 --> 00:08:37,360 Speaker 5: the market. And Vanguard's mission is to take a stand 153 00:08:37,440 --> 00:08:40,040 Speaker 5: for all investors, treat them fairly and give them the 154 00:08:40,040 --> 00:08:43,720 Speaker 5: best chance for investment success. And as we move into 155 00:08:43,760 --> 00:08:46,320 Speaker 5: the super space, we're looking to bring the power of 156 00:08:46,360 --> 00:08:50,960 Speaker 5: indexing into super and really drive some fantastic client outcomes 157 00:08:50,960 --> 00:08:51,679 Speaker 5: off the back of that. 158 00:08:53,120 --> 00:08:56,559 Speaker 2: Okay, give us a sense of the skill of your business. 159 00:08:57,120 --> 00:09:01,840 Speaker 2: And you mentioned you guys the APAs in Melbourne or Melbourne. 160 00:09:02,520 --> 00:09:05,160 Speaker 2: My Aussie friends are going to crucifyd me for that. 161 00:09:05,240 --> 00:09:07,680 Speaker 2: But you know, I tried give us a scale of 162 00:09:07,720 --> 00:09:10,400 Speaker 2: your operation there relative to the market and where you 163 00:09:11,240 --> 00:09:13,080 Speaker 2: want it to be in a couple of years. 164 00:09:14,360 --> 00:09:18,240 Speaker 5: So as we look at at Vanguard's footprint in Australia 165 00:09:18,600 --> 00:09:22,280 Speaker 5: and in the Asia Pac region, we very much run 166 00:09:22,440 --> 00:09:25,560 Speaker 5: our investment book on a global basis. So I mentioned 167 00:09:25,559 --> 00:09:29,120 Speaker 5: those three hubs before, we're passing the book and passing 168 00:09:29,160 --> 00:09:31,000 Speaker 5: the trade amongst those three offices. 169 00:09:31,120 --> 00:09:32,559 Speaker 3: So we're we. 170 00:09:32,520 --> 00:09:39,359 Speaker 5: Are in every major market cross equities, bonds, FX and futures, 171 00:09:39,920 --> 00:09:42,400 Speaker 5: and we're trading twenty four hours a day, five days 172 00:09:42,440 --> 00:09:45,880 Speaker 5: a week. And we use that hubstructure again to reach 173 00:09:45,920 --> 00:09:46,960 Speaker 5: into local markets. 174 00:09:47,200 --> 00:09:48,199 Speaker 3: Gives us better. 175 00:09:47,960 --> 00:09:51,640 Speaker 5: Control and helps us lower cost, cut out the middleman. 176 00:09:51,720 --> 00:09:54,760 Speaker 5: We do a lot of self trading and as we 177 00:09:54,880 --> 00:09:58,520 Speaker 5: zoom in on our APAC operation and what we're looking 178 00:09:58,520 --> 00:10:02,679 Speaker 5: after here off our Melbourne desk, fourteen markets, Japan is 179 00:10:02,760 --> 00:10:06,240 Speaker 5: the number one. We've got Alls, Hong Kong, China, India 180 00:10:06,360 --> 00:10:10,319 Speaker 5: in there as some of the other biggies, and we're 181 00:10:10,320 --> 00:10:15,640 Speaker 5: looking after global vanguards investments into that basket of fourteen countries. 182 00:10:16,920 --> 00:10:18,960 Speaker 4: So if we look at the product offering that you 183 00:10:18,960 --> 00:10:23,040 Speaker 4: guys have globally, you mentioned the three hubs in Australia, 184 00:10:23,480 --> 00:10:26,440 Speaker 4: Europe as well as in the US. Do you find 185 00:10:26,559 --> 00:10:29,800 Speaker 4: the product offering an investor appetite different across the region? 186 00:10:31,000 --> 00:10:35,000 Speaker 5: There are some slight nuances, and again I might go 187 00:10:35,160 --> 00:10:38,280 Speaker 5: back to the index revolution and the way we see 188 00:10:38,320 --> 00:10:42,079 Speaker 5: that playing out our offering in our lineup does look 189 00:10:42,400 --> 00:10:47,679 Speaker 5: quite similar around the globe, and we do see investors 190 00:10:47,679 --> 00:10:52,800 Speaker 5: gravitating to it early in the US, probably Europe close 191 00:10:52,840 --> 00:10:57,120 Speaker 5: behind that, and Australia and Asia bringing up the risk. 192 00:10:57,240 --> 00:10:59,760 Speaker 5: We do see the index revolution playing out in a 193 00:10:59,760 --> 00:11:02,320 Speaker 5: big way, and hopefully by shining a bit of a 194 00:11:02,360 --> 00:11:05,360 Speaker 5: spotlight on that today and some of the benefits around 195 00:11:05,400 --> 00:11:10,120 Speaker 5: the power of indexing, we can accelerate that. And Vanguard's 196 00:11:10,160 --> 00:11:14,679 Speaker 5: bringing that to market through managed funds and through ETFs 197 00:11:14,720 --> 00:11:18,360 Speaker 5: would be the core products that we're putting out to market. 198 00:11:19,360 --> 00:11:22,600 Speaker 2: Yeah, you mentioned a few figures earlier on which really 199 00:11:23,160 --> 00:11:27,120 Speaker 2: I guess in many ways underscore the potential for the region. 200 00:11:27,160 --> 00:11:29,920 Speaker 2: I think you mentioned twenty five percent for example, versus 201 00:11:29,960 --> 00:11:32,880 Speaker 2: say a fifty percent let's just call it penetration rate 202 00:11:32,920 --> 00:11:36,000 Speaker 2: of passive in the US. And you know, Rebecca brought 203 00:11:36,040 --> 00:11:38,560 Speaker 2: up a very good point as well on there's just 204 00:11:38,640 --> 00:11:42,160 Speaker 2: different distribution, say schemes across the region. But I guess 205 00:11:42,160 --> 00:11:44,800 Speaker 2: my big picture question to you is is there a 206 00:11:44,920 --> 00:11:50,960 Speaker 2: sense of inevitability that we are headed, you know, agnostic 207 00:11:51,000 --> 00:11:53,720 Speaker 2: to what markets you're operating, we are headed in that 208 00:11:53,760 --> 00:11:57,679 Speaker 2: direction of just more money going into index indexing and 209 00:11:57,720 --> 00:12:02,600 Speaker 2: passive and what do you think the future is for 210 00:12:02,640 --> 00:12:04,960 Speaker 2: active I'm just wondering where you think we go longer 211 00:12:05,040 --> 00:12:06,640 Speaker 2: term and if there's anything we can do with the 212 00:12:06,679 --> 00:12:10,200 Speaker 2: change the trajectory. 213 00:12:08,679 --> 00:12:11,400 Speaker 5: You know, I think the key driver behind that, David 214 00:12:11,600 --> 00:12:15,719 Speaker 5: has got to be performance, and there are active managers 215 00:12:15,720 --> 00:12:19,120 Speaker 5: out there that can and do beat the market. You 216 00:12:19,160 --> 00:12:23,560 Speaker 5: have a few brilliant investors buffet, maybe David Swenson at 217 00:12:23,559 --> 00:12:28,280 Speaker 5: the Ale Endowment, the late David Swinson, or throw Jim 218 00:12:28,320 --> 00:12:31,679 Speaker 5: Simon's over at Renaissance Technologies in that bucket as well, 219 00:12:32,160 --> 00:12:37,000 Speaker 5: but they are extreme outliers. And it's not that active 220 00:12:37,040 --> 00:12:41,760 Speaker 5: can outperform, it's that on average active can't outperform. 221 00:12:42,000 --> 00:12:43,000 Speaker 3: My friends over at S and P. 222 00:12:43,240 --> 00:12:46,720 Speaker 5: They put out a fantastic piece every year called SPIVA, 223 00:12:46,760 --> 00:12:50,000 Speaker 5: which stands for S and P Index versus Active And 224 00:12:50,040 --> 00:12:52,040 Speaker 5: what they do with that piece of work is they 225 00:12:52,040 --> 00:12:56,160 Speaker 5: compare active managers versus their chosen or their closest benchmark 226 00:12:57,000 --> 00:13:00,160 Speaker 5: and the punchline of their work. What really sits with 227 00:13:00,240 --> 00:13:02,760 Speaker 5: me is that over the long term, over five ten 228 00:13:02,960 --> 00:13:07,920 Speaker 5: twenty year periods, about eighty percent of active managers underperform 229 00:13:08,200 --> 00:13:13,360 Speaker 5: their chosen benchmarks. After cost, and I'm a numbers guy, David, 230 00:13:13,600 --> 00:13:16,960 Speaker 5: and I bring it back to performance and think about 231 00:13:16,960 --> 00:13:22,120 Speaker 5: those probabilities, and think about an investor looking to make 232 00:13:22,160 --> 00:13:25,280 Speaker 5: the decision active, passive, or a bit of both. If 233 00:13:25,320 --> 00:13:29,280 Speaker 5: they are steering hard towards active, they got to think, hey, 234 00:13:29,280 --> 00:13:34,120 Speaker 5: eighty percent, those are my odds of underperforming versus twenty percent. 235 00:13:34,160 --> 00:13:38,800 Speaker 5: I'm much smaller twenty percent of outperforming. So I think 236 00:13:38,840 --> 00:13:40,880 Speaker 5: that that sticks with me. And I also want to 237 00:13:40,880 --> 00:13:43,520 Speaker 5: call out persistence is an important thing to look at 238 00:13:43,520 --> 00:13:45,480 Speaker 5: there too. You say, hey, I'm not going to pick 239 00:13:45,480 --> 00:13:47,319 Speaker 5: any of those bad managers. I'll just pick some of 240 00:13:47,400 --> 00:13:49,240 Speaker 5: the good ones. Are the great ones in that twenty percent. 241 00:13:50,040 --> 00:13:53,960 Speaker 5: And as S and P looks at that in their scorecard, 242 00:13:54,280 --> 00:13:56,800 Speaker 5: there's a whole lot of turnover in that twenty percent, 243 00:13:57,480 --> 00:14:01,040 Speaker 5: and the quantity or the amount of active managers that 244 00:14:01,200 --> 00:14:04,120 Speaker 5: can outperform and outperform on a repeated basis, there's something 245 00:14:04,160 --> 00:14:07,440 Speaker 5: in the order of two to three percent. So yeah, again, 246 00:14:07,640 --> 00:14:11,280 Speaker 5: bringing it back to the odds and where the average 247 00:14:11,320 --> 00:14:14,240 Speaker 5: investors should be starting their portfolio and building the core 248 00:14:14,240 --> 00:14:17,560 Speaker 5: of their portfolio, indexing just makes a lot of sense, 249 00:14:17,559 --> 00:14:19,160 Speaker 5: and it's going to give them a bit of a 250 00:14:19,200 --> 00:14:22,240 Speaker 5: head start there on the performance side, when again they 251 00:14:22,280 --> 00:14:25,280 Speaker 5: don't have a process or an advisor to help them 252 00:14:25,360 --> 00:14:27,400 Speaker 5: drive towards the right active manager. 253 00:14:28,280 --> 00:14:30,120 Speaker 2: If the odds are stacked up against you, and you 254 00:14:30,160 --> 00:14:33,760 Speaker 2: know you do have outliers that tend to have lasting power, 255 00:14:33,840 --> 00:14:36,120 Speaker 2: like you know Warren Buffett for example, and you know 256 00:14:36,160 --> 00:14:39,560 Speaker 2: these outliers, to your point, literally have to turn money away. 257 00:14:40,480 --> 00:14:42,440 Speaker 2: Why do you think people even bother to try and 258 00:14:42,560 --> 00:14:45,720 Speaker 2: outperform the market? And I guess part of that question 259 00:14:45,760 --> 00:14:47,840 Speaker 2: too is because you guys also run active strategies. You 260 00:14:47,880 --> 00:14:50,000 Speaker 2: mentioned that earlier on, So why do you guys even bother? 261 00:14:50,600 --> 00:14:54,600 Speaker 5: Yeah, Vanguard absolutely believes inactive and at the intro I 262 00:14:54,760 --> 00:14:57,160 Speaker 5: mentioned if Vanguard doesn't want to be thought of as 263 00:14:57,240 --> 00:14:59,440 Speaker 5: an index manager, we want to be thought of as 264 00:14:59,480 --> 00:15:02,480 Speaker 5: a low cost manager. And one of the keys to 265 00:15:03,360 --> 00:15:07,160 Speaker 5: getting performance after fees right for an active manager is cost. 266 00:15:08,200 --> 00:15:10,720 Speaker 3: And all investors. 267 00:15:10,200 --> 00:15:13,320 Speaker 5: So active and index you know they've got cost of 268 00:15:13,360 --> 00:15:17,720 Speaker 5: dealing in the market. I think management fees, salaries, bit 269 00:15:17,760 --> 00:15:22,640 Speaker 5: ass spreads, commissions, market impact and taxes. Those costs can 270 00:15:22,640 --> 00:15:27,760 Speaker 5: be high and they absolutely reduce investor returns over time. 271 00:15:27,960 --> 00:15:30,680 Speaker 5: So you know, that's a hurdle, and if you're an 272 00:15:30,720 --> 00:15:34,000 Speaker 5: active manager, you've got to overcome that hurdle to deliver 273 00:15:34,160 --> 00:15:40,080 Speaker 5: alpha after costs. And again, the higher the cost of active, 274 00:15:40,440 --> 00:15:41,480 Speaker 5: the higher that hurdle. 275 00:15:41,640 --> 00:15:43,120 Speaker 3: And you can turn a great. 276 00:15:42,880 --> 00:15:45,640 Speaker 5: Active manager, a brilliant active manager into a bad one 277 00:15:45,680 --> 00:15:49,360 Speaker 5: simply by raising their fees up too high. So as 278 00:15:49,400 --> 00:15:53,000 Speaker 5: we think about bringing active and passive together, getting the 279 00:15:53,040 --> 00:15:56,640 Speaker 5: cost right and getting a talented manager are absolutely key 280 00:15:56,680 --> 00:15:58,080 Speaker 5: on the active side. 281 00:15:58,640 --> 00:16:01,600 Speaker 2: That's a good point from an internal perspective. Is it 282 00:16:01,640 --> 00:16:04,880 Speaker 2: more expensive to run an active operation that it does 283 00:16:04,880 --> 00:16:06,240 Speaker 2: at passive? For example? 284 00:16:07,440 --> 00:16:11,400 Speaker 5: Yeah, it is certainly more costly to run active than index. 285 00:16:11,840 --> 00:16:16,960 Speaker 5: And again, if you think about salaries, analysts, data, research, 286 00:16:17,280 --> 00:16:20,680 Speaker 5: information to feed that to get that edge on the 287 00:16:20,720 --> 00:16:24,440 Speaker 5: active side, there's a lot of inputs you need to. 288 00:16:25,920 --> 00:16:27,480 Speaker 3: Have an edge over the market. 289 00:16:27,600 --> 00:16:29,480 Speaker 2: What's the edge though, I mean, we just came from 290 00:16:29,560 --> 00:16:34,239 Speaker 2: an exchange there where over time the edge disappears. 291 00:16:35,240 --> 00:16:35,680 Speaker 3: It does. 292 00:16:35,760 --> 00:16:38,400 Speaker 5: David and I have been doing some thinking with the 293 00:16:38,440 --> 00:16:43,680 Speaker 5: team here and looking at professionalization of the market and 294 00:16:44,080 --> 00:16:49,119 Speaker 5: see some interesting things there with manager skill. And basically, 295 00:16:49,880 --> 00:16:52,320 Speaker 5: as I talk about professionalization, I want to explain something 296 00:16:52,320 --> 00:16:54,080 Speaker 5: to the listeners. If we were to break up the 297 00:16:54,120 --> 00:16:59,160 Speaker 5: market into two camps, let's say professionals think mutual funds, 298 00:16:59,240 --> 00:17:02,760 Speaker 5: hedge funds, ETF providers. 299 00:17:02,440 --> 00:17:05,359 Speaker 3: Index managers. Those are your pros, and then. 300 00:17:05,280 --> 00:17:08,960 Speaker 5: You've got your non pros, think retail managers, ordinary people 301 00:17:09,000 --> 00:17:13,520 Speaker 5: punting and picking stocks. It's important to remember the financial 302 00:17:13,520 --> 00:17:16,359 Speaker 5: markets and the equity markets, this is a zero sum game, 303 00:17:16,960 --> 00:17:20,640 Speaker 5: so there's no natural source of alpha out there, and 304 00:17:21,600 --> 00:17:24,680 Speaker 5: for investor A to be above average, investor B needs 305 00:17:24,720 --> 00:17:27,600 Speaker 5: to be below average, and the total outperformance of the 306 00:17:27,640 --> 00:17:31,240 Speaker 5: winners must equal the total outperformance of the losers. So 307 00:17:31,320 --> 00:17:34,199 Speaker 5: with that in mind, when investing, it's really important to 308 00:17:34,200 --> 00:17:37,080 Speaker 5: know who you're trading against. And you got to ask 309 00:17:37,080 --> 00:17:39,240 Speaker 5: yourself the question like who's on the other side of 310 00:17:39,280 --> 00:17:41,880 Speaker 5: my trade, and why do I think I have some 311 00:17:41,960 --> 00:17:45,120 Speaker 5: sort of edge over them? And as we've been looking 312 00:17:45,160 --> 00:17:48,800 Speaker 5: at some data here in OZ, you know, fifty years 313 00:17:48,800 --> 00:17:52,080 Speaker 5: ago our AUSI market and really equity markets around the world, 314 00:17:52,480 --> 00:17:56,280 Speaker 5: they were largely non professionals, so a lot of retail 315 00:17:56,400 --> 00:17:59,960 Speaker 5: players and professionals were a smaller segment of the market 316 00:18:00,119 --> 00:18:04,919 Speaker 5: it and you'll fast forward to today where most major markets, 317 00:18:04,960 --> 00:18:08,439 Speaker 5: including all US, they are dominated by pros, and ninety 318 00:18:08,440 --> 00:18:11,640 Speaker 5: percent plus of daily turnover in the market is professional 319 00:18:12,200 --> 00:18:14,679 Speaker 5: and if we bring in the derivative markets, that number 320 00:18:14,680 --> 00:18:15,320 Speaker 5: pushes up. 321 00:18:15,200 --> 00:18:16,879 Speaker 3: To like ninety eight or ninety nine percent. 322 00:18:17,880 --> 00:18:22,920 Speaker 5: And what's happening there is increasingly the amateurs are shifting 323 00:18:22,960 --> 00:18:26,679 Speaker 5: to professional funds and index funds and the easy money 324 00:18:26,800 --> 00:18:29,760 Speaker 5: or the somewhat of a mean term here, but willing losers. 325 00:18:29,760 --> 00:18:31,080 Speaker 3: They're dropping out of the market. 326 00:18:31,920 --> 00:18:37,040 Speaker 5: And in essence, the UH active is getting harder every 327 00:18:37,080 --> 00:18:41,840 Speaker 5: year because the market is now dominated by professional investors. 328 00:18:42,160 --> 00:18:45,040 Speaker 5: And again the big problem for active investors is at 329 00:18:45,160 --> 00:18:48,280 Speaker 5: edge like it's pros versus pros, and the markets are 330 00:18:48,320 --> 00:18:50,280 Speaker 5: getting more efficient and they're getting harder. 331 00:18:51,400 --> 00:18:54,720 Speaker 1: This podcast is brought to you by hk EX Asia's 332 00:18:54,760 --> 00:18:58,840 Speaker 1: ETF marketplace. Well you can get exposure to themes ranging 333 00:18:58,840 --> 00:19:02,679 Speaker 1: from AI to virtual assets, small cap to large cap, 334 00:19:02,960 --> 00:19:07,280 Speaker 1: Greater China to global search HKX to learn more. 335 00:19:08,040 --> 00:19:11,359 Speaker 2: The late great Charlie Munger and one of those annual meetings, 336 00:19:11,359 --> 00:19:14,760 Speaker 2: of course, he said all he has to do is, 337 00:19:14,960 --> 00:19:19,560 Speaker 2: and I'm paraphrasing outperform idiots, and he said, thank God 338 00:19:19,600 --> 00:19:21,280 Speaker 2: that the world is full of them, and I just 339 00:19:21,320 --> 00:19:24,720 Speaker 2: have to be somewhat just half a step ahead of idiots. 340 00:19:25,480 --> 00:19:28,760 Speaker 2: So how do I develop skill? From an organizational perspective, 341 00:19:28,800 --> 00:19:30,879 Speaker 2: you know, from a recruitment perspective, who is a skilled 342 00:19:30,920 --> 00:19:34,920 Speaker 2: manager and coming up for up and coming fund managers? 343 00:19:34,920 --> 00:19:36,840 Speaker 2: How do I develop that skill? What is the north 344 00:19:36,920 --> 00:19:37,480 Speaker 2: star for that? 345 00:19:38,680 --> 00:19:41,640 Speaker 3: Yeah? You know, David, I love the angle of that question. 346 00:19:42,000 --> 00:19:45,080 Speaker 5: Might break up skill into kind of two dimensions and 347 00:19:45,640 --> 00:19:50,320 Speaker 5: think about absolute skill and relative skill and absolute skill, 348 00:19:50,359 --> 00:19:52,040 Speaker 5: I think, is where your questions going. 349 00:19:52,119 --> 00:19:53,639 Speaker 3: And man, it has never been better. 350 00:19:54,359 --> 00:19:59,440 Speaker 5: And active managers of today they've got CFAs, PhDs, Bloomberg's 351 00:20:00,080 --> 00:20:05,280 Speaker 5: data feeds, accounting info, AI, machine learning, better systems, algorithms, 352 00:20:06,040 --> 00:20:09,719 Speaker 5: And we talked about performance earlier. I'm like, why aren't 353 00:20:09,840 --> 00:20:12,880 Speaker 5: the active managers doing better with all that skill. 354 00:20:12,640 --> 00:20:16,720 Speaker 3: And all that technology And a bit of a paradox here, and. 355 00:20:18,280 --> 00:20:21,280 Speaker 5: The answer is in relative skill, And we were just 356 00:20:21,320 --> 00:20:23,720 Speaker 5: talking about absolute skill. If we look at relative skill, 357 00:20:24,320 --> 00:20:27,720 Speaker 5: the spread of skill among market participants, kind of going 358 00:20:27,760 --> 00:20:30,880 Speaker 5: back to the professionals and the non professionals, that has 359 00:20:31,080 --> 00:20:34,560 Speaker 5: really narrowed over the years and over the decades, and 360 00:20:34,840 --> 00:20:39,520 Speaker 5: all investors today are a whole lot smarter and asset 361 00:20:39,560 --> 00:20:43,560 Speaker 5: management again largely professionalized. A lot of those non pros 362 00:20:43,600 --> 00:20:46,679 Speaker 5: have turned to indexing and pros for better results, and 363 00:20:46,720 --> 00:20:51,919 Speaker 5: the variance in the skill set of market participants has really. 364 00:20:51,720 --> 00:20:53,960 Speaker 3: Dropped, and that matters again. 365 00:20:54,160 --> 00:20:57,760 Speaker 5: What active managers want are weaker players introduced back into 366 00:20:57,800 --> 00:21:02,080 Speaker 5: the market so they can express their skill. And you know, 367 00:21:02,119 --> 00:21:04,359 Speaker 5: as I talked to clients about this, I'd love to 368 00:21:04,440 --> 00:21:06,960 Speaker 5: use an analogy. It kind of reminds me of my 369 00:21:07,040 --> 00:21:10,040 Speaker 5: friendly neighborhood poker game, and we get. 370 00:21:09,960 --> 00:21:12,520 Speaker 3: Players in there of varying skills. 371 00:21:13,200 --> 00:21:16,399 Speaker 5: The newbies, the ones that aren't educated, aren't sophisticated in 372 00:21:16,560 --> 00:21:20,040 Speaker 5: playing poker. They get knocked out pretty early. They hand 373 00:21:20,080 --> 00:21:21,760 Speaker 5: over their cash, they eat some snacks, and they're out 374 00:21:21,760 --> 00:21:25,040 Speaker 5: of the game. But you know, come midnight or one o'clock, 375 00:21:25,760 --> 00:21:28,560 Speaker 5: it's all the card sharps and the game gets harder 376 00:21:28,880 --> 00:21:33,640 Speaker 5: as the evening progresses, and it's like midnight or one 377 00:21:33,720 --> 00:21:36,560 Speaker 5: pm in the markets these days. Again, it is largely 378 00:21:36,600 --> 00:21:41,440 Speaker 5: professionalized and the game is just getting harder there. So, yeah, 379 00:21:42,119 --> 00:21:44,800 Speaker 5: those are some thoughts on skills. And you know, we'll say, 380 00:21:44,800 --> 00:21:46,480 Speaker 5: if we had time machine and we could go back 381 00:21:46,480 --> 00:21:48,359 Speaker 5: into the seventies with today's skill set. 382 00:21:48,880 --> 00:21:51,399 Speaker 3: Any of the managers of today would absolutely kill it. 383 00:21:51,440 --> 00:21:54,240 Speaker 5: But it's the again as a paradox on the skill side, 384 00:21:54,240 --> 00:21:56,159 Speaker 5: we can't just look at absolute skill. We need to 385 00:21:56,160 --> 00:22:00,639 Speaker 5: think about relative skill. And as markets grown more and 386 00:22:00,640 --> 00:22:04,119 Speaker 5: more professionalized, that's just one of the reason why indexing 387 00:22:04,280 --> 00:22:07,040 Speaker 5: is looking more and more attractive to investors and particularly 388 00:22:07,119 --> 00:22:08,000 Speaker 5: novice investors. 389 00:22:09,440 --> 00:22:12,200 Speaker 4: I think another thing that's helped is that the cost 390 00:22:12,240 --> 00:22:17,040 Speaker 4: of active investing has come down significantly. So this year alone, 391 00:22:17,040 --> 00:22:20,880 Speaker 4: active ETFs AUM has surpassed one trillion dollars in assets. 392 00:22:21,280 --> 00:22:25,160 Speaker 4: And Eric Balchunez, who's interviewed John Boglan, has a book 393 00:22:25,200 --> 00:22:28,119 Speaker 4: called The Vogel Effect. They talk about the rise of 394 00:22:28,160 --> 00:22:30,639 Speaker 4: indexing and what's happened, and one of the things he 395 00:22:30,760 --> 00:22:33,639 Speaker 4: discovered was that for active to succeed, you either have 396 00:22:33,720 --> 00:22:36,440 Speaker 4: to be really expensive or really cheap. And I think 397 00:22:36,440 --> 00:22:38,359 Speaker 4: to your point, Dunk and a lot of investors now 398 00:22:38,520 --> 00:22:41,560 Speaker 4: are much more educated that the average retail person knows 399 00:22:41,560 --> 00:22:44,920 Speaker 4: a lot more about active funds, whether that's passive active, 400 00:22:45,160 --> 00:22:46,919 Speaker 4: and they can pick and choose. And in some of 401 00:22:46,920 --> 00:22:49,840 Speaker 4: our previous podcasts episodes on Tiger Money, we interviewed Mark 402 00:22:49,840 --> 00:22:51,960 Speaker 4: Mobius and one things he said, was you know he's 403 00:22:52,000 --> 00:22:54,520 Speaker 4: launching a new fund that because it's so competitive, he's 404 00:22:54,560 --> 00:22:58,119 Speaker 4: waiving the fees with that in mind, you know, feed compression, 405 00:22:58,200 --> 00:23:01,639 Speaker 4: active rising, you know, passive as a whole indexing. Where 406 00:23:01,960 --> 00:23:03,960 Speaker 4: do you think the future of investing is going in? 407 00:23:04,000 --> 00:23:05,000 Speaker 3: What's next? 408 00:23:05,960 --> 00:23:09,159 Speaker 5: So on the future side again, I see this index 409 00:23:09,240 --> 00:23:13,600 Speaker 5: revolution coming to Australia in Asia pac in a bigger 410 00:23:13,640 --> 00:23:17,680 Speaker 5: way and it was somewhat eye popping as to the 411 00:23:18,359 --> 00:23:22,239 Speaker 5: growth in AM in the space and some status are 412 00:23:22,240 --> 00:23:25,560 Speaker 5: I just pulled from our cap markets team, roughly thirty 413 00:23:25,600 --> 00:23:30,000 Speaker 5: percent of all ETFAM is in the sector and thematic space. 414 00:23:30,680 --> 00:23:33,320 Speaker 5: And we looked at launches and just about forty percent 415 00:23:33,359 --> 00:23:37,000 Speaker 5: of ETF launches in Australia last year, about twenty seven 416 00:23:37,000 --> 00:23:39,000 Speaker 5: out of sixty four launches, we're in the sector or 417 00:23:39,119 --> 00:23:39,959 Speaker 5: thematic space. 418 00:23:40,000 --> 00:23:42,120 Speaker 3: And the allure. 419 00:23:41,760 --> 00:23:46,240 Speaker 5: There is obvious, like these products capture some really exciting themes, 420 00:23:47,040 --> 00:23:49,720 Speaker 5: you know, they dominate headlines and shape our future. I'm 421 00:23:49,720 --> 00:23:54,440 Speaker 5: thinking blockchain, electric vehicles, solar and AI things of that nature. 422 00:23:55,119 --> 00:24:00,480 Speaker 5: And these products, these ETF sector funds provide a targeted 423 00:24:00,520 --> 00:24:02,840 Speaker 5: way for investors to place a bet and there's just 424 00:24:02,880 --> 00:24:07,680 Speaker 5: an intoxicating combination of FOMO, some compelling narrative and hope 425 00:24:07,680 --> 00:24:12,760 Speaker 5: involved there. But I've actually got some concerns about it. 426 00:24:12,960 --> 00:24:17,080 Speaker 5: And what's worrying me is some performance chasing behavior we 427 00:24:17,119 --> 00:24:21,520 Speaker 5: see with those products. And the good people over at 428 00:24:21,600 --> 00:24:24,440 Speaker 5: morning Star put out a survey every year called Mind 429 00:24:24,480 --> 00:24:28,239 Speaker 5: the Gap, and what they do with that report is 430 00:24:28,920 --> 00:24:31,679 Speaker 5: they look at the gap between reported fund and ETF 431 00:24:31,760 --> 00:24:37,600 Speaker 5: returns and actual investor returns in those products, and there's 432 00:24:37,800 --> 00:24:41,879 Speaker 5: a material difference between the two and it's attributable to 433 00:24:42,000 --> 00:24:46,479 Speaker 5: poor timing from investors. And what really attracted my attention 434 00:24:46,560 --> 00:24:49,800 Speaker 5: in this last cut of morning Stars report was they 435 00:24:49,920 --> 00:24:56,520 Speaker 5: stratified this impact across segments of the market and sector, 436 00:24:56,560 --> 00:24:59,919 Speaker 5: and thematics stood out as a real laggard in the report, 437 00:25:00,359 --> 00:25:03,000 Speaker 5: and I think it was looking at US data, but 438 00:25:03,280 --> 00:25:05,560 Speaker 5: for the last ten years, it was showing that investors 439 00:25:05,720 --> 00:25:10,679 Speaker 5: in thematic and sector ETFs and products were on average 440 00:25:11,000 --> 00:25:14,760 Speaker 5: earning two point six percent less than the benchmark of 441 00:25:14,800 --> 00:25:18,320 Speaker 5: those funds, which was a staggering number to me. And 442 00:25:18,359 --> 00:25:21,480 Speaker 5: again I'll bring that back to performance chasing. So a 443 00:25:21,600 --> 00:25:26,800 Speaker 5: bit of a concern there as investors pile in on 444 00:25:26,840 --> 00:25:29,480 Speaker 5: the back of some big moves in those sector and 445 00:25:29,560 --> 00:25:32,159 Speaker 5: thematic ETFs. You know, as soon as you get the 446 00:25:32,200 --> 00:25:34,200 Speaker 5: first sign of troubles or a bit of a shakeout, 447 00:25:34,600 --> 00:25:37,399 Speaker 5: investors are cutting their losses there and onto the next 448 00:25:37,640 --> 00:25:38,600 Speaker 5: sexy new theme. 449 00:25:39,200 --> 00:25:42,120 Speaker 3: And what you end up with is that that buy 450 00:25:42,280 --> 00:25:43,520 Speaker 3: high sell low pattern. 451 00:25:43,760 --> 00:25:48,320 Speaker 5: And again you think about investor returns and you know, 452 00:25:48,359 --> 00:25:51,919 Speaker 5: are they getting the full index return? That's that's advertising 453 00:25:52,000 --> 00:25:54,600 Speaker 5: some of these products, and you know trends and stuff 454 00:25:54,600 --> 00:25:56,560 Speaker 5: we've got an eye on down here in Australia, that's 455 00:25:56,560 --> 00:25:59,800 Speaker 5: certainly one of them. And as I bring that back 456 00:25:59,800 --> 00:26:01,480 Speaker 5: to the theme of the day and the power of 457 00:26:01,480 --> 00:26:05,560 Speaker 5: indexing is we bump into clients that are perhaps struggling 458 00:26:05,600 --> 00:26:09,880 Speaker 5: with that or have in the past, steering them towards benchmarks. 459 00:26:09,960 --> 00:26:13,040 Speaker 5: With broader exposure, you know, they're they're going to pick 460 00:26:13,119 --> 00:26:16,920 Speaker 5: up that market return, there's going to be less volatility 461 00:26:17,160 --> 00:26:19,159 Speaker 5: in there, going to be more likely to hang on 462 00:26:19,200 --> 00:26:22,639 Speaker 5: to those products during periods of market strife. 463 00:26:23,080 --> 00:26:24,639 Speaker 2: Yeah, I'm glad you brought it up, because it's a 464 00:26:24,680 --> 00:26:28,320 Speaker 2: good opportunity to hear from someone like Vanguard, for example, 465 00:26:28,359 --> 00:26:30,800 Speaker 2: to clear up some of the I guess misconceptions. If 466 00:26:30,800 --> 00:26:32,840 Speaker 2: I could frame it that way. I want to get 467 00:26:32,880 --> 00:26:36,280 Speaker 2: your thoughts on this. Do you think indexing exacerbates concentration risk? 468 00:26:37,280 --> 00:26:39,679 Speaker 3: I am glad you raised that question. 469 00:26:39,800 --> 00:26:41,960 Speaker 5: David was hoping we get to that one today and 470 00:26:42,000 --> 00:26:47,080 Speaker 5: they think about criticisms of indexing, that's probably the number 471 00:26:47,119 --> 00:26:50,040 Speaker 5: one item cited there. And what the critics are really 472 00:26:50,040 --> 00:26:53,520 Speaker 5: getting after is they're worried about price setting in the 473 00:26:53,640 --> 00:26:58,120 Speaker 5: markets and whether it's concentration risk and a handful of names. 474 00:26:58,880 --> 00:27:04,639 Speaker 5: When think about concerns of passive investment dominating the market 475 00:27:04,640 --> 00:27:08,040 Speaker 5: and having a big impact, they're a little early with 476 00:27:08,119 --> 00:27:11,600 Speaker 5: that call, quite frankly, and important for the listeners to 477 00:27:11,600 --> 00:27:14,800 Speaker 5: remember that passive funds we buy and hold stocks because 478 00:27:14,840 --> 00:27:18,399 Speaker 5: they're in our benchmark versus active managers. They're looking for 479 00:27:18,480 --> 00:27:22,760 Speaker 5: overvalued and undervalued stocks and to express their views. So 480 00:27:23,400 --> 00:27:27,560 Speaker 5: active provides a hugely valuable service in price discovery. They're 481 00:27:27,600 --> 00:27:32,880 Speaker 5: helping keep stock prices near their fair value. And as 482 00:27:32,920 --> 00:27:36,199 Speaker 5: passive grows, what we all need to remember is that 483 00:27:36,280 --> 00:27:41,119 Speaker 5: it's trading and not aum that drives price discovery in 484 00:27:41,200 --> 00:27:45,280 Speaker 5: the markets. And that's really important because passive is a 485 00:27:45,280 --> 00:27:48,280 Speaker 5: low turnover strategy. Something in the order of ten to 486 00:27:48,280 --> 00:27:51,760 Speaker 5: twenty percent a year on the index side. Over in 487 00:27:51,760 --> 00:27:54,840 Speaker 5: the active camp, that's fifty to one hundred percent a 488 00:27:54,880 --> 00:27:58,800 Speaker 5: year turnover on average. So the turnover ratio there is 489 00:27:58,880 --> 00:28:01,400 Speaker 5: roughly one to five. And if I were to look 490 00:28:01,480 --> 00:28:05,280 Speaker 5: at passive share in Australia today, we're south of twenty 491 00:28:05,320 --> 00:28:09,200 Speaker 5: five percent, and you know that leaves seventy five percent. 492 00:28:08,920 --> 00:28:10,200 Speaker 3: Of the market active. 493 00:28:11,119 --> 00:28:14,240 Speaker 5: We've still got plenty of active players in the market 494 00:28:14,320 --> 00:28:17,879 Speaker 5: to drive price discovery and set prices. And if we 495 00:28:17,880 --> 00:28:21,280 Speaker 5: were to take a really stylized, simplified example and think 496 00:28:21,320 --> 00:28:24,960 Speaker 5: about a situation where passive grows to fifty to fifty 497 00:28:25,280 --> 00:28:28,760 Speaker 5: in Australia, you know, half index share half active share. 498 00:28:29,440 --> 00:28:33,680 Speaker 5: In that scenario, we'd still have trading dominated by active again, 499 00:28:33,800 --> 00:28:37,840 Speaker 5: back to that five to one ratio. So understand the concern. 500 00:28:38,080 --> 00:28:41,920 Speaker 5: But the naysayers are very early with this call, and 501 00:28:42,360 --> 00:28:44,920 Speaker 5: indexing still has a ton of room to grow before 502 00:28:44,960 --> 00:28:46,440 Speaker 5: that becomes a valid concern. 503 00:28:46,920 --> 00:28:50,320 Speaker 2: Yeah, well, willing payers, but unknowing losers. As we alluded 504 00:28:50,320 --> 00:28:52,960 Speaker 2: to earlier on just the other misconception that I think 505 00:28:53,000 --> 00:28:54,960 Speaker 2: keeps coming up, just to use your analogy, that the 506 00:28:55,000 --> 00:28:59,520 Speaker 2: professional game has come so far the level of skill 507 00:28:59,560 --> 00:29:02,560 Speaker 2: in the market get absolute and relative to the seventies, 508 00:29:02,560 --> 00:29:05,560 Speaker 2: has gone grown by leaps and bounds. That you know, 509 00:29:05,640 --> 00:29:08,200 Speaker 2: your analogy of the poker game is perfect. At eight 510 00:29:08,240 --> 00:29:11,560 Speaker 2: pm you have a wider group, the average is lower. 511 00:29:11,720 --> 00:29:13,760 Speaker 2: By the time you get to twelve midnight, you have 512 00:29:14,120 --> 00:29:16,480 Speaker 2: just a handful of the very good players at the table. 513 00:29:16,480 --> 00:29:19,080 Speaker 2: By two am, it's just a big fish. Really, correct 514 00:29:19,080 --> 00:29:20,760 Speaker 2: me if I'm wrong. You just brought up something very 515 00:29:20,760 --> 00:29:23,800 Speaker 2: important as well, that you guys at Vanguard are trying 516 00:29:24,280 --> 00:29:27,720 Speaker 2: do give an avenue for the smaller players to come 517 00:29:27,760 --> 00:29:30,360 Speaker 2: in and be able to I guess to somebody said 518 00:29:30,440 --> 00:29:32,120 Speaker 2: level the playing field. Is that a good way of 519 00:29:32,160 --> 00:29:34,920 Speaker 2: describing you know that on ramp that you guys are 520 00:29:34,920 --> 00:29:37,440 Speaker 2: providing for the retail investor to just level up their 521 00:29:37,480 --> 00:29:38,120 Speaker 2: game as well. 522 00:29:38,960 --> 00:29:40,880 Speaker 3: That's it. I think you nailed it, David. 523 00:29:40,920 --> 00:29:44,480 Speaker 5: And you know, if we were an oversimplified example here, 524 00:29:44,480 --> 00:29:46,880 Speaker 5: but if we were to break up investors into two groups, 525 00:29:46,880 --> 00:29:50,760 Speaker 5: and if you have an average investor with no real 526 00:29:51,440 --> 00:29:55,280 Speaker 5: drive to understand the markets really well and a process 527 00:29:55,320 --> 00:29:58,720 Speaker 5: to pick an active manager, they probably should be starting 528 00:29:58,760 --> 00:30:01,600 Speaker 5: with one hundred percent and index in their portfolio, and 529 00:30:01,600 --> 00:30:04,640 Speaker 5: they potentially they could add some active satellites in a 530 00:30:04,720 --> 00:30:08,280 Speaker 5: very small manner, but jump to the other camp. If 531 00:30:08,320 --> 00:30:11,920 Speaker 5: you really understand the markets, you're a sophisticated investor, or 532 00:30:11,960 --> 00:30:14,560 Speaker 5: you have an advisor with a process in an approach 533 00:30:14,640 --> 00:30:18,560 Speaker 5: for pickning active there. I also want to call out David, 534 00:30:19,280 --> 00:30:23,120 Speaker 5: those investors would be well suited to place the core 535 00:30:23,160 --> 00:30:27,760 Speaker 5: of their portfolio in an index total market framework and 536 00:30:27,760 --> 00:30:31,479 Speaker 5: then around the margins in the satellites take some really 537 00:30:31,560 --> 00:30:37,080 Speaker 5: targeted active bets, and so certainly don't want to say 538 00:30:37,160 --> 00:30:41,240 Speaker 5: all investors should be indexed. I think again, there is 539 00:30:41,280 --> 00:30:44,400 Speaker 5: a place for active. There are really talented active managers 540 00:30:44,400 --> 00:30:49,040 Speaker 5: out there that price their services appropriately. And again, blending 541 00:30:49,080 --> 00:30:52,200 Speaker 5: those two a core satellite strategy for the sophisticated end 542 00:30:52,240 --> 00:30:56,000 Speaker 5: of town really can work, and you're back to novices 543 00:30:56,080 --> 00:30:58,280 Speaker 5: just looking to get a start. You know, I'm not 544 00:30:58,360 --> 00:31:01,920 Speaker 5: an advisor, but the only advice I ever feel comfortable 545 00:31:02,160 --> 00:31:05,240 Speaker 5: sharing with people when they ask me is look at 546 00:31:05,520 --> 00:31:11,600 Speaker 5: index funds ETFs, broadly diversified total market exposures. Dollar cost 547 00:31:11,640 --> 00:31:16,320 Speaker 5: your average dollar cost averager way into those positions over ten, 548 00:31:16,440 --> 00:31:20,240 Speaker 5: twenty thirty years, forget about them until you retire, and 549 00:31:20,920 --> 00:31:25,520 Speaker 5: as we think about setting up investors for buying a home, education, 550 00:31:25,960 --> 00:31:26,880 Speaker 5: or their retirement. 551 00:31:27,520 --> 00:31:29,320 Speaker 3: Again, that's a winning strategy. 552 00:31:29,400 --> 00:31:32,719 Speaker 5: That's a great place for the everyday investors to start. 553 00:31:33,800 --> 00:31:37,600 Speaker 4: The power of compounding is very powerful. So Duncan you 554 00:31:37,640 --> 00:31:41,640 Speaker 4: were previously a portfolio manager, Cio, what do you hold 555 00:31:41,640 --> 00:31:43,640 Speaker 4: in your personal portfolio? 556 00:31:44,480 --> 00:31:45,280 Speaker 3: Yeah, so. 557 00:31:47,160 --> 00:31:50,040 Speaker 5: My friends and family are always shocked when I lift 558 00:31:50,040 --> 00:31:53,880 Speaker 5: the lid on my personal account. I eat what I 559 00:31:53,920 --> 00:31:57,560 Speaker 5: bake here at Vanguard. It all comes back to performance 560 00:31:58,240 --> 00:32:02,200 Speaker 5: and you mentioned compound there, Rebecca. Yeah, when I think 561 00:32:02,200 --> 00:32:04,440 Speaker 5: about what I'm trying to do with my portfolio, it's 562 00:32:04,440 --> 00:32:09,960 Speaker 5: almost like a strategic mediocrity approach to investing. Acid allocation 563 00:32:10,160 --> 00:32:13,000 Speaker 5: decisions I'm making today, getting the balance of stock and 564 00:32:13,080 --> 00:32:16,280 Speaker 5: bonds right in the core of my portfolio. It's what 565 00:32:16,400 --> 00:32:19,480 Speaker 5: I can stick with and capturing those market returns, those 566 00:32:19,520 --> 00:32:24,160 Speaker 5: average returns over a long period of time. That compounding 567 00:32:24,240 --> 00:32:28,520 Speaker 5: is really where the magic happens. So again, I firmly 568 00:32:28,560 --> 00:32:31,320 Speaker 5: believe indexing is the simplest way to invest, is actually 569 00:32:31,360 --> 00:32:33,840 Speaker 5: one of the smartest way to invest. And for me, 570 00:32:33,920 --> 00:32:36,720 Speaker 5: it all comes back to performance. So that's home base 571 00:32:36,800 --> 00:32:38,480 Speaker 5: for me in the personal account. 572 00:32:39,360 --> 00:32:41,200 Speaker 2: What would that be the same advice you would give 573 00:32:41,240 --> 00:32:43,000 Speaker 2: your younger professional self. 574 00:32:43,880 --> 00:32:47,920 Speaker 5: Absolutely, I wish somebody had given me that advice when 575 00:32:47,960 --> 00:32:50,040 Speaker 5: I was much younger. David, I've made a lot of 576 00:32:50,080 --> 00:32:52,840 Speaker 5: mistakes in my early days. I started out my career 577 00:32:52,840 --> 00:32:55,480 Speaker 5: in investment banking, spend a bit of time on the 578 00:32:55,520 --> 00:32:59,520 Speaker 5: active side of things, and it took me a long 579 00:32:59,600 --> 00:33:03,000 Speaker 5: time to mature in my thinking and my understanding of 580 00:33:03,840 --> 00:33:07,280 Speaker 5: what it means to do well in this market. And again, 581 00:33:08,200 --> 00:33:11,480 Speaker 5: I think with indexing, you don't just get average performance. 582 00:33:12,200 --> 00:33:16,400 Speaker 5: The average investor does worse than the market. And again 583 00:33:16,440 --> 00:33:19,200 Speaker 5: because of costs and other mistakes we've talked about, like 584 00:33:19,280 --> 00:33:22,360 Speaker 5: performance chasing. So if you can get the whole market 585 00:33:22,400 --> 00:33:25,440 Speaker 5: return or close to it, you're going to be an 586 00:33:25,480 --> 00:33:28,160 Speaker 5: above average investor, and in a lot of cases you're 587 00:33:28,160 --> 00:33:31,239 Speaker 5: going to be a top quartile investor. So yeah, in 588 00:33:31,320 --> 00:33:34,200 Speaker 5: terms of advice, that is absolutely where i'd steer it. 589 00:33:34,240 --> 00:33:35,760 Speaker 3: The young investors today. 590 00:33:36,400 --> 00:33:41,680 Speaker 5: Avoid that lottery or that speculation mindset, and you avoid 591 00:33:42,000 --> 00:33:43,080 Speaker 5: performance chasing. 592 00:33:43,880 --> 00:33:45,520 Speaker 3: The compounding is where it's at. 593 00:33:45,680 --> 00:33:48,480 Speaker 5: Average returns for an above average period of time leads 594 00:33:48,520 --> 00:33:49,760 Speaker 5: to magic results. 595 00:33:50,600 --> 00:33:53,880 Speaker 4: So start early and go broad based, index based. All right, 596 00:33:53,960 --> 00:33:55,560 Speaker 4: last question, favorite ETF. 597 00:33:55,600 --> 00:33:58,160 Speaker 3: That's not a Vanguard ticker favorite. 598 00:33:58,720 --> 00:34:01,760 Speaker 2: Yeah, and do you own that in your personal portfolio? 599 00:34:02,840 --> 00:34:06,320 Speaker 5: You know, I got to be totally honest, all Vanguard 600 00:34:06,320 --> 00:34:07,960 Speaker 5: in my portfolio. 601 00:34:07,840 --> 00:34:11,920 Speaker 4: And no Hot Sauce or satellite position. Thematics that you mentioned. 602 00:34:12,719 --> 00:34:16,600 Speaker 5: I will share a slight value tilt. So Vanguard has 603 00:34:16,880 --> 00:34:19,600 Speaker 5: a value fund. I've been sitting on that position for 604 00:34:19,719 --> 00:34:24,480 Speaker 5: close to five years. Yeah, ninety five percent index core 605 00:34:24,880 --> 00:34:27,840 Speaker 5: with a touch of hot sauce, if you will, Rebecca, 606 00:34:27,920 --> 00:34:30,240 Speaker 5: that would be a value tilt in a small position. 607 00:34:30,280 --> 00:34:34,040 Speaker 5: But yeah, nothing exciting there. It's a Vanguard product, and 608 00:34:34,640 --> 00:34:37,560 Speaker 5: I will say it hasn't performed with the market the 609 00:34:37,640 --> 00:34:38,600 Speaker 5: last five years. 610 00:34:39,040 --> 00:34:41,760 Speaker 3: But I'm okay with that. And as I think about. 611 00:34:41,600 --> 00:34:45,240 Speaker 5: Building my portfolio, I don't want to be jumping from 612 00:34:45,880 --> 00:34:49,759 Speaker 5: one hot sauce product to another. I think again, over 613 00:34:49,800 --> 00:34:52,360 Speaker 5: the longer term, that value play may pay out, but 614 00:34:52,440 --> 00:34:54,719 Speaker 5: I'm ready to sit on that thing for another five 615 00:34:54,760 --> 00:34:58,319 Speaker 5: another ten years. And again, as I think about how 616 00:34:58,360 --> 00:35:02,239 Speaker 5: that fits into my overall portfolio, do you want to share that? 617 00:35:02,239 --> 00:35:03,080 Speaker 3: That's absolutely key. 618 00:35:04,640 --> 00:35:06,560 Speaker 4: Thank you so much, Duncan. We've shared a lot of 619 00:35:06,680 --> 00:35:10,080 Speaker 4: valuable insights for us today and we're so glad that 620 00:35:10,120 --> 00:35:11,600 Speaker 4: you could join Tiger Money today. 621 00:35:12,400 --> 00:35:15,279 Speaker 5: Absolutely a pleasure, Rebecca David, thanks for having me. 622 00:35:15,239 --> 00:35:18,520 Speaker 2: On Duncan fantastic. Let's run this back at some points, 623 00:35:18,520 --> 00:35:21,400 Speaker 2: hopefully in the not too distant future. So all our 624 00:35:21,440 --> 00:35:24,160 Speaker 2: listeners out there, thank you for blessing us with your 625 00:35:24,200 --> 00:35:27,000 Speaker 2: time and your presence and listening to Tiger Money, your 626 00:35:27,000 --> 00:35:30,360 Speaker 2: Bloomberg podcast about investing funds and financial markets in Asia. 627 00:35:30,800 --> 00:35:32,600 Speaker 2: Then all to be hones. If you like what you hear, 628 00:35:32,680 --> 00:35:35,279 Speaker 2: don't forget to subscribe to listen, and of course to 629 00:35:36,160 --> 00:35:38,520 Speaker 2: share with friends and family. Until next time, you can 630 00:35:38,560 --> 00:35:41,680 Speaker 2: find us on the Bloomberg terminal on LinkedIn. We look 631 00:35:41,719 --> 00:35:45,080 Speaker 2: forward to hearing from all of you. 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