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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.

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Speaker 1: I am just beyond thrilled to introduce our special guest today.

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Speaker 1: And I know I say this every week we have

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Speaker 1: a special guest. Today we have a special guest. His

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Speaker 1: name is Bill McNab. He is the chief executive officer

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Speaker 1: and chairman of the Vanguard Group, which is one of

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Speaker 1: the world's largest investment firms managing three point one trillion dollars.

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Speaker 1: Everybody knows who Vanguard is. They are essentially the father

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Speaker 1: of indexing UM and have have really just made a

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Speaker 1: tremendous dent on the world of investing. Uh. Bill was

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Speaker 1: really generous with his time. He spoke to hung out

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Speaker 1: for almost two hours and we talked about everything from

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Speaker 1: what Vanguard was like in the old days too, who

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Speaker 1: influenced him, and where van Art is going in the future.

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Speaker 1: I thought this was a master class in exactly what

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Speaker 1: is happening in the world of investing today and what

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Speaker 1: is the right approach to either being an investor or

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Speaker 1: being an investment management firm. UM. He is incredibly accomplished.

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Speaker 1: He joins Vanguard thirty years ago. Next month is his

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Speaker 1: thirty year anniversary. He became CEO just before the financial

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Speaker 1: crisis blew up. A month before Lehman and A I

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Speaker 1: G and City and everybody else blew up. He was

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Speaker 1: named UH CEO and really talk about having a front

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Speaker 1: seat on the past thirty years of changes in the

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Speaker 1: financial world. For those of you who are either investors

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Speaker 1: or work in the world of investing, this is a

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Speaker 1: absolute master class. We spoke for so long I think

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Speaker 1: you may want to listen to this in two halfs.

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Speaker 1: All of it is absolutely fascinating. He's really an incredibly insightful,

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Speaker 1: accomplished guy, and um, I think you're in for a treat. So,

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Speaker 1: without any further ado, here is my interview with Vanguard

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Speaker 1: CEO Bill McNabb. This is Masters in Business with Barry

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Speaker 1: Ridholds on Bloomberg Radio. My special guest today and I

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Speaker 1: say special guest every week, but this is really a

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Speaker 1: special guest is Bill McNabb. He is the CEO and

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Speaker 1: chairman of the Vanguard Group, which manages a little over

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Speaker 1: three point one trillion dollars. Bill, Welcome to the show.

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Speaker 1: Thanks Berry. It's a privilege to be here. So let's

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Speaker 1: give a quick I don't want to spend too much

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Speaker 1: time on your cv UM. But a quick background. You've

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Speaker 1: been with Vanguard since June. That means you're thirty year

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Speaker 1: anniversary coming up next month. That's that's amazing, it's been.

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Speaker 1: It was really a remarkable turn of good luck. I

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Speaker 1: was working for a firm here which is now JP

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Speaker 1: Morgan Chase, and UH got a call to go to

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Speaker 1: Vanguard and Vangard was this little tiny mutual fund firm

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Speaker 1: in n and I went down, loved it. And you know,

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Speaker 1: sometimes better to be lucky than smart. That that's certainly

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Speaker 1: for sure. Today you are the third CEO in Vanguard history,

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Speaker 1: following Jack Brennan, who was actually a prior guest on

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Speaker 1: the show, and some guy named John Bogel, some some

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Speaker 1: guy who's sort of legendary out there, to say the

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Speaker 1: least legendary. I would love to bring him. In fact,

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Speaker 1: he may be one of the few people I'm willing

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Speaker 1: to travel to him with a recorder and interview him,

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Speaker 1: because he is truly one of the giants, the legends

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Speaker 1: in finance. Absolutely, um, you know, founder of the firm.

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Speaker 1: What was it like to work with Bogel? That had

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Speaker 1: to be mind blowing. Well, I think the great thing

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Speaker 1: Jack did was at the beginning of the firm, and

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Speaker 1: I was there, you know, a few years after the

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Speaker 1: founding was he created this corporate structure which is very

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Speaker 1: different than anything else. As you know, we're owned by

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Speaker 1: our funds and therefore our investors, in other words, people

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Speaker 1: by Vanguard mutual funds essentially are the owners of Vanguard Group.

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Speaker 1: That's right, And we have a saying that Jack promoted

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Speaker 1: a lot in the early days that strategy follows structure,

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Speaker 1: so everything we do had to be had to reflect

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Speaker 1: that structure, which basically means just put the investor first

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Speaker 1: and everything you do. And that culture really permeated the

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Speaker 1: organization right from the get go. And the other thing

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Speaker 1: Jack did a really good job of was the internal culture,

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Speaker 1: which was, for lack of a better phrase, lived by

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Speaker 1: the Golden rule. And so they're really not a lot

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Speaker 1: of hierarchy at Vanguard. I'm certainly you know, we pay

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Speaker 1: our you know, best performing portfolio managers higher than those

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Speaker 1: who aren't. And you know, you have all kinds of

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Speaker 1: different compensation arrangements, but at the end of the day,

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Speaker 1: everybody treats each other um peer to peer, and it

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Speaker 1: doesn't matter what your role is and you know, it

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Speaker 1: makes it very different than most firms where there's often

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Speaker 1: an all star kind of cast to it. And uh,

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Speaker 1: it makes it coming to work every day up last

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Speaker 1: because of the people's side that that must be um,

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Speaker 1: a crazy fantastic environment. So let's talk a little bit

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Speaker 1: about your background. Undergraduate government major at Dartmouth and then

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Speaker 1: you end up getting an NBA from Wharton. How did

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Speaker 1: you find your way to finance? What did you do

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Speaker 1: in between? So there was a little bit of a

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Speaker 1: side tour there. Um. After I graduated from Dartmouth, I think,

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Speaker 1: much to my mom's chagrin, instead of coming to work

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Speaker 1: in New York, I ended up going to teach first

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Speaker 1: year of Latin at a boys school. First year Latin?

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Speaker 1: Are you fluent in Latin? Not anymore? I think back

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Speaker 1: in the day I was reasonably good at it. But

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Speaker 1: I think the real thing was it was a private school.

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Speaker 1: I could coach three sports, so I was looked at

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Speaker 1: as a very cheap asset. You know. I could do

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Speaker 1: a lot of things for not a lot of money.

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Speaker 1: It was a recession when I graduated, and I remember,

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Speaker 1: you know, so any any any, any kind of work

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Speaker 1: was good work as far as I was concerned, but

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Speaker 1: those couple of years of teaching actually were really um

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Speaker 1: in some ways, very instrumental in terms of shaping the

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Speaker 1: way I think about the world. I then went to Wharton, UM,

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Speaker 1: you know, got a great education there. I spent a

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Speaker 1: couple of years at what's now JP Morgan Chase, and

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Speaker 1: then found my way back to Vanguard. So was it

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Speaker 1: kind of surprised to get a phone call from a

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Speaker 1: Vanguard How how many years have you been with JP Morgan?

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Speaker 1: So I've been with I've been I've been at the

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Speaker 1: bank for three years and I was working basically in

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Speaker 1: a group that was undoing bad leverage buyouts and UM

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Speaker 1: we were sort of the precursor to what became the

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Speaker 1: private equity desk farther down the road, and it was

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Speaker 1: really fascinating work. I I love the work. I actually

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Speaker 1: liked the team I was on, but it was a

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Speaker 1: little dissatisfied with the bank's overall strategy and some of

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Speaker 1: the cultural aspects. And I my wife was from Philly.

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Speaker 1: I had gone to grad school there, so we thought

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Speaker 1: about UM going back and I get this call from

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Speaker 1: this upstart firm, UM, they were looking to hire a

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Speaker 1: G I c product manager. I had no idea what

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Speaker 1: that was before the internet, and it's guaranteed investment contracts,

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Speaker 1: which were early on the biggest asset class in four

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Speaker 1: oh one K plans. Really, so this is before a

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Speaker 1: number of tax changes that kinda yeah they that go away, yeah,

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Speaker 1: and and and really you know what happened when when

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Speaker 1: as interest rates came down, g I sees were a

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Speaker 1: great deal. You could basically when i UH was investing

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Speaker 1: in them, you could get an eight or nine percent

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Speaker 1: yield and you could keep a constant dollar price because

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Speaker 1: it was an insurance contract. So you know, basically investors

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Speaker 1: were getting three year bonds with a money market price.

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Speaker 1: And so for the four oh one K investor, it

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Speaker 1: was a godsend. And you know, it's these plans were

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Speaker 1: just you know, beginning, Um, this was really a very

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Speaker 1: popular asset class. I didn't know anything about it though.

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Speaker 1: In the last minute we have left in this segment

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Speaker 1: there there are a number of new products will talk

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Speaker 1: about a little later in the conversation. But aside from Bogel,

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Speaker 1: who were your early mentors, so, um, a couple um,

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Speaker 1: you know Jack Brennan who was my predecessor. He and

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Speaker 1: I struck up a pretty good friendship early on, and

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Speaker 1: you know, he ended up being a little bit of

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Speaker 1: a mentor before I went to work for him directly.

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Speaker 1: There was another fellow, Jim Gately, who um one of

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Speaker 1: our great leaders at Vanguard, who I would tell you

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Speaker 1: I learned a ton from him. He he was a

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Speaker 1: guy who had been at Prudential Asset Management and had

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Speaker 1: bought a lot of boutiques, and he brought with him

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Speaker 1: a worldliness that I had never experienced before and really

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Speaker 1: taught me what it was like to be a professional.

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Speaker 1: I'm are Ridholts. You're listening to Masters in Business on

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Speaker 1: Bloomberg Radio. My guest today is Bill McNabb. He is

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Speaker 1: the chairman and chief executive officer of a little shop

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Speaker 1: called the Vanguard Group. They manage about three trillion, that's trillion,

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Speaker 1: with the t three trillion dollars. Let's talk a little

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Speaker 1: bit about what took place over the past five years.

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Speaker 1: Vanguard garnered somewhere around six hundred and fifty billion dollars

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Speaker 1: in inflows and net cash flows. That's more than the

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Speaker 1: next six companies combined. And and there are some estimates

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Speaker 1: that say about a billion dollars per day flow into Vanguard.

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Speaker 1: What is that about? Well, I think you know, our

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Speaker 1: focus on cost and doing the right thing for investors

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Speaker 1: has resonated at a level that even we are surprised by.

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Speaker 1: And uh, it's been very gratifying um to say the least.

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Speaker 1: But we think we're we think we're again all humility aside.

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Speaker 1: We think we're winning for the right re sasons. You know,

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Speaker 1: we're not out there trying to promote something that we're not.

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Speaker 1: So let's I'm gonna skip ahead to another question about cost.

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Speaker 1: Why is it that managing costs is so effective UM

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Speaker 1: for investors? So when you look at all the work

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Speaker 1: that's been done, and you know, Morning started a pretty

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Speaker 1: seminal piece to three years ago where they broke off

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Speaker 1: funds into quartiles and the highest expense quartile had the

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Speaker 1: worst performance and the lowest expense quartile had the best performance.

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Speaker 1: And the performance was very consistent and persistent. And so

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Speaker 1: it just reinforced a notion that we've had cost is

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Speaker 1: the one thing you can control and it's not like

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Speaker 1: other consumer goods where you know, you pay more, you

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Speaker 1: in theory get more UM and investing that has not

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Speaker 1: been the case. Right, So a BMW and a Volkswagen.

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Speaker 1: The BMW may costs more and maybe you get a

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Speaker 1: little more, but it's the opposite in investing. So let's

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Speaker 1: talk about what some people have called the vanguard effect.

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Speaker 1: Well again this was dubbed um. As we enter new markets,

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Speaker 1: you immediately see prices fall. In fact, I think what's

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Speaker 1: happening here is our competitors are getting a little bit smarter.

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Speaker 1: Rather than waiting for us to take a lot of

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Speaker 1: market share, they're actually trying to meet us more quickly.

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Speaker 1: A couple of my colleagues at Vangardive said, you know,

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Speaker 1: are you worried about it? And I said, not really,

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Speaker 1: because at the end of the day, first of all,

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Speaker 1: we're built to do this every day um, and we're

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Speaker 1: built to get better and better. But second of all,

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Speaker 1: it's great for investors. So if investors have more choice,

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Speaker 1: low costs, then we've got to get smarter and more

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Speaker 1: innovative and quicker as to how we compete on that

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Speaker 1: at that level, Who asked you if if you're worried

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Speaker 1: about it, clearly a billion a day. Hey, you guys

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Speaker 1: are doing this wrong. You're only getting a billion a

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Speaker 1: day and new inflows. You gotta mix it all up.

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Speaker 1: It seems like you guys have cracked the code. You know.

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Speaker 1: I think it's again. We we feel great about what's

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Speaker 1: been going on. But um, Indy Grove is one of

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Speaker 1: my favorite executives and he has this phrase, only the

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Speaker 1: paranoid survive, and uh, I really believe that. So the

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Speaker 1: minute minute any complacency starts to show itself at Vanguard,

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Speaker 1: we get very skittish. So let's go back to your

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Speaker 1: original principles. There are four principles which I really like,

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Speaker 1: and this will give people a sense of how you

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Speaker 1: approach the world. Have a goal, maintain a balanced and

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Speaker 1: diversified portfolio, pay attention to costs, and focus on the

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Speaker 1: long term. How did these four principles come about? So

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Speaker 1: I would say these four principles have been present since

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Speaker 1: our founding and and we had talked about him in

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Speaker 1: different ways. But about four or five years ago, as

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Speaker 1: we were kind of rethinking our message to the world,

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Speaker 1: it became clear to us that we needed needed to

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Speaker 1: distill it in even simpler English for people and really

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Speaker 1: make it stark. And I think these do that and

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Speaker 1: people look at it and they say, boy, it's not

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Speaker 1: complicated and I say, yeah, but how many people don't

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Speaker 1: follow this? And you know, for me, especially the goal setting,

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Speaker 1: this is the place where I see most investors miss.

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Speaker 1: They don't have very clear, well defined goals, and you

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Speaker 1: need to know that if you're gonna, you know, construct

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Speaker 1: an appropriate portfolio. One of the comments that I often

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Speaker 1: hear from people who have already accumulated a lot of

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Speaker 1: wealth is all right, what am I going to need

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Speaker 1: to do to beat the benchmarks over the next couple

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Speaker 1: of years? And the response is always why do you

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Speaker 1: feel you've already won? You've got enough money, you can

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Speaker 1: never spend it all. Why do you feel the need

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Speaker 1: to keep competing? You have to that pivot from wealth

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Speaker 1: accumulation to okay, now we have to preserve this and

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Speaker 1: eventually distribute it, whether it's philanthropy or what have you.

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Speaker 1: People have a hard time wrapping their heads around that.

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Speaker 1: I could agree more. You know, at the end of

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Speaker 1: the day, it's it's define what you're trying to do,

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Speaker 1: and then we want to be able to help you

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Speaker 1: get there. So let's talk about something that's really quite fascinating.

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Speaker 1: You're probably best known for indexing, although we'll get to

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Speaker 1: some of the active funds, which is about a third UM.

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Speaker 1: But the story of indexing is really quite fascinating. It

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Speaker 1: came out of Wells Fargo, which had created it for

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Speaker 1: institutional clients. How did you guys end up taking over

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Speaker 1: the Wells Fargo index product and turning it around and

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Speaker 1: offering it to retail investors. So when when Vanguard was

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Speaker 1: founded formally in nive Um, Jack Bogel and the team

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Speaker 1: I think correctly identified that cost was a differentiator. So

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Speaker 1: even before indexing, we were talking about costs, and we

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Speaker 1: weren't particularly low cost at that point, but we were

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Speaker 1: aspiring to be. So um this idea about indexing seemed

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Speaker 1: to be the perfect manifestation of a low cost, very

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Speaker 1: efficient way to invest. And you had the Wells phenomenon

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Speaker 1: in the pension side. You had you know, Burt mal

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Speaker 1: Kill's Random Walk Down Wall Street, which was written around

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Speaker 1: the same time. You had Charlie ellis Is Winning The

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Speaker 1: Loser's Game, which was written, you know, around the same time.

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Speaker 1: Charlie also on your board of directors and he was

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Speaker 1: a guest here. What a tremendous gentleman, tremendous, tremendous person,

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Speaker 1: And I think the genius was to say, if this

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Speaker 1: idea is good enough for a sophisticated institution, why isn't

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Speaker 1: it good enough for the average small investor? And so

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Speaker 1: we took the indexing concept and turned it into a

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Speaker 1: mutual fund, which no one had done. So in the

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Speaker 1: last minute we have left, Let's talk about what percentage

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Speaker 1: of the investable universe is now indexed? Um, how big

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Speaker 1: is too big for indexes? I've I've read some things

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Speaker 1: by people I don't agree with it, that say, hey,

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Speaker 1: at a certain point, you know, indexing is just too

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Speaker 1: big and you need to be more active. Yeah, So,

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Speaker 1: first of all, I don't agree with the premise, but

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Speaker 1: even if you did, indexing is still a very small

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Speaker 1: per centage of the world's market cap. So in the US,

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Speaker 1: the you know, the big change in mutual funds has

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Speaker 1: been indexing has now risen to be about US mutual funds.

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Speaker 1: But mutual funds on the equity side only represent about

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Speaker 1: of the equity market, and in the institutional side it's

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Speaker 1: it's a much smaller percentage. So indexing is still less

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Speaker 1: than twenty overall in the US, and if you go abroad,

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Speaker 1: it's a couple of percentage points. So there's a huge

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Speaker 1: opportunity for it to become much more significant. I'm Barry Ridhults.

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Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My

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Speaker 1: special guest today is Bill McNabb, who took over as

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Speaker 1: CEO of the Vanguard Group. How's this for timing? August

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Speaker 1: two thousand and eight, and in case you forgot, that

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Speaker 1: was about a month before the world's really blew up.

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Speaker 1: What was it like running an asset management shop in

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Speaker 1: the middle of that turmoil? In a word, it was frightening,

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Speaker 1: to be very honest. It was at the same time,

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Speaker 1: probably will be one of the defining parts of my

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Speaker 1: career in that the team that I worked with we

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Speaker 1: got a chance to experience things I hope no one

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Speaker 1: else ever gets to experience, and we got a chance

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Speaker 1: to i think, influence events a little bit um and

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Speaker 1: hopefully move things in a good direction for our clients.

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Speaker 1: But it was it was amazing to to watch it

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Speaker 1: all unfold. So what were the some of the specific

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Speaker 1: challenges both you personally as a new CEO. I mean,

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Speaker 1: you had been with Vanguard since six but you're taking

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Speaker 1: over running the shop. What challenges did you face and

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Speaker 1: what sort of challenges did the staff have to deal

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Speaker 1: with in the midst of that. So there were sort

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Speaker 1: of three levels of challenges. So the first was pretty

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Speaker 1: tactical but big. The whole money fund industry was under

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Speaker 1: UM you know, fire, and what were we going to

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Speaker 1: do with UM the money market funds that we were managing,

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Speaker 1: and how was the Treasury's rules and and and the

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Speaker 1: intervention that was occurring, So you know, that was a

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Speaker 1: big topic. The second that that was the whole breaking

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Speaker 1: the buck situation Reserve fund broke the dollar, and the

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Speaker 1: question was would anybody else? You know, we believe very

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Speaker 1: strongly that our funds were incredibly well positioned. UM our

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Speaker 1: Prime Fund, which you know is supposed to be in

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Speaker 1: commercial paper CDs and so forth. We were sixty percent

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Speaker 1: government treasury at that point, so it was super safe.

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Speaker 1: We had been very worried about what was going on

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Speaker 1: in the housing market, but they were still you were

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Speaker 1: watching the rest of the industry UM struggle with it.

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Speaker 1: You know. The second thing was we were watching our

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Speaker 1: investors behavior and and listening to them call and ask us,

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Speaker 1: you know, what's happening, and you know, what should we do?

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Speaker 1: That was the biggest question, what should we do? And

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Speaker 1: then the third thing, we actually had our staff saying

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Speaker 1: what's this mean to all of us? Because, as you

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Speaker 1: may recall, it was arm again in financial services and

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Speaker 1: people were laying um, thousands of workers off. And so

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Speaker 1: we we did, you know, three really important things. One

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Speaker 1: we you know, on the money fund side, we knew

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Speaker 1: we were we were in really good shape, um, and

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Speaker 1: we got engaged with the SEC in terms of beginning

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Speaker 1: to move the reforms forward right from the get go. Second,

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Speaker 1: in terms of our investors, UM, most of our competitors

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Speaker 1: actually stopped talking, you know, to the press, and stopped

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Speaker 1: going out and meeting with clients. At least that's what

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Speaker 1: we heard. We were very vocal and very visible, and

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Speaker 1: we were very clear that we didn't know how this

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Speaker 1: was going to all unfold, but that you had to

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Speaker 1: step back and again sort of go back to basic

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Speaker 1: investment principles here. And what we saw was it had

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Speaker 1: a real calming influence on our investors. And I did

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Speaker 1: a webcast um probably October of oh nine or oh eight,

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Speaker 1: and I think it was downloaded a hundred thousand times

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Speaker 1: in twenty four hours. It was it was a remarkable number.

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Speaker 1: People were hungry for information right they wanted, and not

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Speaker 1: just hand waving people running around screaming. But you come

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Speaker 1: across as a if I may say this personally, rather

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Speaker 1: calm collected individual, You're not one of these people that

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Speaker 1: are gonna be running around with your quote unquote hair

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Speaker 1: on fire. I think it was really important to project

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Speaker 1: that because you know, there were certainly lots of commentary

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Speaker 1: out there that the world was ending as we knew it.

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Speaker 1: We didn't see it that way, but we knew it

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Speaker 1: was going to be rough. And then the third thing

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Speaker 1: we did um which again will seem tactical, but it

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Speaker 1: was really important. We said to our people, don't worry

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Speaker 1: about your jobs. You all have jobs and you're you're

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Speaker 1: here to serve the client, and stop worrying about nobody's

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Speaker 1: gonna lose their job over this. We want you focused

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Speaker 1: on being here for the client, and boy, that set

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Speaker 1: a tone inside. I also think it really helped with

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Speaker 1: the client interactions because people had confidence when they were

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Speaker 1: talking to clients. I was gonna say that really has

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Speaker 1: to come across in all sorts of subliminal ways. If

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Speaker 1: you can tell when you're on the phone with someone

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Speaker 1: who's worried about their job I've never heard or read

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Speaker 1: that before. Has that been publicly disclosed? Now, I haven't

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Speaker 1: really talked much about it, but in the midst of

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Speaker 1: the crisis, you said, so, how many people work at

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Speaker 1: Vanguard back then? Back then it was about twelve thousand,

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Speaker 1: five hundred. So you said, nobody's getting fired, there are

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Speaker 1: no layoffs. We're good, We're going to make it through

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Speaker 1: this five And I think what it allowed us to

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Speaker 1: do was to be really well positioned as the markets

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Speaker 1: began to turn and you know, activity began to pick up.

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Speaker 1: We were firing on all cylinders and we were ready

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Speaker 1: to serve clients. We were We actually kept our investment

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Speaker 1: in the business going during this period. So in our

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Speaker 1: last minute or so in this in the segment, the

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Speaker 1: one data point that really stunned me, would really surprised me,

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Speaker 1: transaction levels during the Great Financial Crisis at Vanguard were

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Speaker 1: actually much lower than normal. What does that say about

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Speaker 1: the firm and what does that say about your investors? Well,

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Speaker 1: I think it says a couple of things. One um

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Speaker 1: our our investors were listening to um all of the

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Speaker 1: things we've been trying to put forth over the years

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Speaker 1: that you have to think long term to UM. We

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Speaker 1: have a lot of four oh n K investors and UM,

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Speaker 1: they were saving for retirements long term. So don't react.

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Speaker 1: I'm Barry Rehults. You're listening to Masters in Business on

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Speaker 1: Bloomberg Radio. My guest today Bill McNabb. He is the

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Speaker 1: chairman and CEO of the Vanguard Group, which manages three

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Speaker 1: point one trillion. Is that right? That's right, three point

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Speaker 1: one trillion. That's trillion with a T. I have to

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Speaker 1: keep emphasizing that. And let's talk a little bit about

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Speaker 1: the future of investing in the way things have been

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Speaker 1: developing changing. You had you had a comment not too

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Speaker 1: long ago about some of the worst products that Wall

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Speaker 1: Street has thought of. I have a few of them.

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Speaker 1: I want to bounce them off off. You see what

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Speaker 1: you think. I assume you're not a big fan of

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Speaker 1: the liquid alts. What do you think of those? So again,

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Speaker 1: everything in theory can have its place, But in general,

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Speaker 1: what we're seeing in the liquid all spaces UM not

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Speaker 1: all that attractive from an investor perspective. It's really expensive

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Speaker 1: and I'm not sure it's providing any kind of real

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Speaker 1: value add and not especially liquid, not especially liquid, and

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Speaker 1: maybe not as much of a diverse fire as you

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Speaker 1: would hope. It doesn't mean it can't be done, okay,

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Speaker 1: unconstrained bond funds. So predicting which way interest rates are

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Speaker 1: going to go and currencies are going to go really

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Speaker 1: difficult to do. I haven't seen more than a couple

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Speaker 1: of human beings do it, and it's a question whether

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Speaker 1: they're lucky or whether they're actually doing it well. So

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Speaker 1: we're big fans of define what you're trying to do

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Speaker 1: in the bond market and stick to it. Hedge funds

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Speaker 1: with a mutual fund wrapper, in other words, allowing individuals

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Speaker 1: to buy what we've called muppet funds, buying hedge funds

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Speaker 1: through a mutual funds. It's a compensation scheme as far

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Speaker 1: as I'm concerned. You know, people are just figuring out

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Speaker 1: how to get paid a lot for I'm not adding

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Speaker 1: a lot of value. How about structured derivatives. Structured derivatives,

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Speaker 1: it's so again, in general, I think not a good idea. Um,

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Speaker 1: these are instruments that derivatives in general are incredibly helpful

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Speaker 1: in de risking portfolios and managing um subtle changes to

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Speaker 1: a portfolio. But what you see in a lot of

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00:24:16,480 --> 00:24:18,639
Speaker 1: these is a lot of leverage or a lot of

431
00:24:18,640 --> 00:24:22,800
Speaker 1: implicit leverage, and not clear to be um that the

432
00:24:22,840 --> 00:24:25,320
Speaker 1: investors really understand the risk they're taking, not not a

433
00:24:25,320 --> 00:24:29,240
Speaker 1: whole lot of d risking in these instruments. So, but

434
00:24:29,359 --> 00:24:33,320
Speaker 1: old technology isn't bad. And very recently you guys launched

435
00:24:33,600 --> 00:24:37,199
Speaker 1: what some people have derisively called a robo advisor, but

436
00:24:37,320 --> 00:24:45,760
Speaker 1: essentially a software algorithm driven online advisor which immediately leapt

437
00:24:45,840 --> 00:24:48,399
Speaker 1: over all the other advisors and at the time of

438
00:24:48,400 --> 00:24:51,919
Speaker 1: the announcement or shortly thereafter, it had eight billion in

439
00:24:51,960 --> 00:24:54,920
Speaker 1: it um. What what do you call that? And let's

440
00:24:54,960 --> 00:24:57,720
Speaker 1: talk a little bit about We call it Personal Advisor Services.

441
00:24:58,320 --> 00:25:01,320
Speaker 1: And the idea here was we had been running an

442
00:25:01,359 --> 00:25:05,720
Speaker 1: advisory service for clients with a million dollars and we'd

443
00:25:05,760 --> 00:25:07,879
Speaker 1: actually dropped the minimum to half a million. But you know,

444
00:25:07,920 --> 00:25:10,119
Speaker 1: it's a big number for a lot of people, and

445
00:25:10,160 --> 00:25:12,199
Speaker 1: so the challenge we put out to our team was,

446
00:25:12,320 --> 00:25:15,280
Speaker 1: can we take the same quality that we're providing our

447
00:25:15,359 --> 00:25:17,640
Speaker 1: millionaire clients, can we take it all the way down

448
00:25:17,680 --> 00:25:22,040
Speaker 1: to a fifty client. And so we invested tens of

449
00:25:22,080 --> 00:25:25,800
Speaker 1: millions of dollars in the technology. We trained an awful

450
00:25:25,800 --> 00:25:28,040
Speaker 1: lot of people because what we're doing is really a

451
00:25:28,080 --> 00:25:31,800
Speaker 1: combination of technology with a personal touch and the and

452
00:25:31,840 --> 00:25:34,359
Speaker 1: the the stark objective was to get this to a

453
00:25:34,440 --> 00:25:38,720
Speaker 1: price where all in so advice fee plus the underlying

454
00:25:38,760 --> 00:25:41,879
Speaker 1: product would be roughly in the half a percentage point

455
00:25:42,119 --> 00:25:46,919
Speaker 1: range and it would be really high quality. And so

456
00:25:47,000 --> 00:25:49,080
Speaker 1: we're very excited about this. I think it's going to

457
00:25:49,200 --> 00:25:53,080
Speaker 1: redefine for certain type of client how advice is provided.

458
00:25:53,640 --> 00:25:57,600
Speaker 1: And you know, it's not going to supplant um the

459
00:25:57,640 --> 00:26:01,840
Speaker 1: whole advisor world, um, but it gives small investors in particular,

460
00:26:02,240 --> 00:26:06,560
Speaker 1: a really professional choice which they don't have today. I

461
00:26:06,600 --> 00:26:09,159
Speaker 1: spoke to some of the group in your office who

462
00:26:09,200 --> 00:26:12,160
Speaker 1: actually put that together. They had some questions for us,

463
00:26:12,160 --> 00:26:14,160
Speaker 1: and I made them a bet that you guys would

464
00:26:14,200 --> 00:26:16,920
Speaker 1: have that at a hundred billion dollars within a year

465
00:26:17,040 --> 00:26:18,960
Speaker 1: or two. And they kind of this was just as

466
00:26:18,960 --> 00:26:22,399
Speaker 1: it was launching, and they kind of laughed. Um, but

467
00:26:22,480 --> 00:26:25,439
Speaker 1: you launched with eight billion in the first week. What

468
00:26:25,640 --> 00:26:28,000
Speaker 1: is this up to already? So you know, we had

469
00:26:28,040 --> 00:26:31,639
Speaker 1: some existing client business move over, so it's up to

470
00:26:31,640 --> 00:26:34,280
Speaker 1: about seventeen or eighteen billion, So it's a pretty big

471
00:26:34,520 --> 00:26:37,400
Speaker 1: thing already. Not not so I'm really not out there

472
00:26:37,400 --> 00:26:39,440
Speaker 1: on a limb. This is a hundred billion dollar business

473
00:26:39,480 --> 00:26:42,720
Speaker 1: for you guys relatively soon. The team gets very nervous

474
00:26:42,720 --> 00:26:44,480
Speaker 1: when I talk about it as well, because I've been

475
00:26:45,520 --> 00:26:47,840
Speaker 1: a real promoter of the concept. In fact, they're they're

476
00:26:47,960 --> 00:26:51,600
Speaker 1: really happy that they're officially launched, since I've pre announced

477
00:26:51,600 --> 00:26:54,840
Speaker 1: to launch about three different times by accidents. So so

478
00:26:54,920 --> 00:26:58,600
Speaker 1: that that's pretty fascinating. And clearly you're looking at at

479
00:26:58,640 --> 00:27:04,040
Speaker 1: that technology and using software as a future product. That's

480
00:27:04,240 --> 00:27:06,760
Speaker 1: that's gonna just do nothing but grow in terms of

481
00:27:07,920 --> 00:27:11,120
Speaker 1: asset management. So let's talk about some of the other

482
00:27:11,160 --> 00:27:14,080
Speaker 1: products that are out there. Some people use the UM

483
00:27:14,280 --> 00:27:18,920
Speaker 1: phrase fundamental indexing. Other people call it smart beta. Smart

484
00:27:18,920 --> 00:27:22,800
Speaker 1: beta has almost become a buzzword. You guys really don't

485
00:27:23,080 --> 00:27:26,239
Speaker 1: play in that sandbox, but I have a feeling that

486
00:27:26,320 --> 00:27:29,879
Speaker 1: one day you're eventually going to end up there. Yes, so, UM,

487
00:27:30,400 --> 00:27:34,199
Speaker 1: very fair point. And in implicit question there so a

488
00:27:34,240 --> 00:27:37,359
Speaker 1: couple of things. UM. You know, we had growth and

489
00:27:37,440 --> 00:27:41,159
Speaker 1: value index funds a long time, which you could argue

490
00:27:41,200 --> 00:27:45,440
Speaker 1: were sort of a version of UM. Some of these

491
00:27:45,480 --> 00:27:48,520
Speaker 1: factor based funds is the way I think about them. So, look,

492
00:27:48,640 --> 00:27:51,560
Speaker 1: I don't have a problem with the concept UM as

493
00:27:51,560 --> 00:27:55,480
Speaker 1: long as you understand what you're investing in UM smart

494
00:27:55,480 --> 00:27:57,879
Speaker 1: bata is one of the great marketing terms of all time.

495
00:27:58,440 --> 00:28:00,960
Speaker 1: You know, it implies that it's a better way of indexing.

496
00:28:01,080 --> 00:28:04,280
Speaker 1: To me, all it is is you're taking an active bet,

497
00:28:04,760 --> 00:28:07,439
Speaker 1: and you're betting on either a single factor or a

498
00:28:07,480 --> 00:28:09,879
Speaker 1: series of factors, and you're betting that those factors are

499
00:28:09,880 --> 00:28:13,600
Speaker 1: going to outperform the broad market over some particular period

500
00:28:13,640 --> 00:28:16,320
Speaker 1: of time. And you know, right now, you know, MidCap,

501
00:28:16,680 --> 00:28:19,399
Speaker 1: you know, MidCap value over the last fifteen year has

502
00:28:19,400 --> 00:28:23,560
Speaker 1: been a really good place to be. But all of

503
00:28:23,600 --> 00:28:26,440
Speaker 1: the value oriented investors were scratching their head saying is

504
00:28:26,520 --> 00:28:30,720
Speaker 1: value investing dead? Because large cap growth was dominating. And

505
00:28:30,800 --> 00:28:34,080
Speaker 1: so you go through these market cycles where different factors

506
00:28:34,119 --> 00:28:37,200
Speaker 1: seem to work, and they work for you know, fairly

507
00:28:37,240 --> 00:28:39,920
Speaker 1: long periods of time, and then they don't. So to me,

508
00:28:40,000 --> 00:28:42,640
Speaker 1: it's a bet. And as long as the investor knows

509
00:28:42,680 --> 00:28:45,160
Speaker 1: that they're taking a bet they're either overexposed to value,

510
00:28:45,240 --> 00:28:50,040
Speaker 1: they're overexposed to growth, or some combination UM, then I

511
00:28:50,040 --> 00:28:52,479
Speaker 1: think it can be a legitimate, low cost way for

512
00:28:52,520 --> 00:28:56,360
Speaker 1: somebody to make that investment bet. And you know, in

513
00:28:56,360 --> 00:28:58,920
Speaker 1: a sense, if you're if instead of investing in a

514
00:28:59,000 --> 00:29:02,880
Speaker 1: traditional act of growth manager, if you're buying if you're

515
00:29:02,880 --> 00:29:06,720
Speaker 1: buying a factor based fund that's growth oriented, you're hopefully

516
00:29:06,760 --> 00:29:09,000
Speaker 1: doing it at a much lower cost and you're getting

517
00:29:09,040 --> 00:29:12,080
Speaker 1: the same factor exposure that you would from that traditional

518
00:29:12,080 --> 00:29:17,480
Speaker 1: growth manager. So you guys don't offer anything that's fundamentally index.

519
00:29:17,560 --> 00:29:22,240
Speaker 1: There have been pretty I thought significant criticisms about market

520
00:29:22,280 --> 00:29:26,120
Speaker 1: cap waiting an index. Um, any chance we're going to

521
00:29:26,160 --> 00:29:29,480
Speaker 1: see a factor based vanguard fund anytime in the next

522
00:29:29,520 --> 00:29:32,840
Speaker 1: few years. So two things there so on on the

523
00:29:32,880 --> 00:29:36,760
Speaker 1: market cap index. The reason we're so passionate about that

524
00:29:37,000 --> 00:29:39,640
Speaker 1: is it's just math at the end of the day.

525
00:29:39,760 --> 00:29:42,720
Speaker 1: And you know, if you add up everybody in the world,

526
00:29:42,840 --> 00:29:44,960
Speaker 1: all investors, let's just use the US for now to

527
00:29:45,040 --> 00:29:47,320
Speaker 1: keep it simple, you add up to the market and

528
00:29:47,360 --> 00:29:50,520
Speaker 1: it that is a market capped market. If you take

529
00:29:50,520 --> 00:29:52,960
Speaker 1: all your active managers and put them in a box,

530
00:29:53,000 --> 00:29:54,920
Speaker 1: and then you take all your passive managers and put

531
00:29:54,960 --> 00:29:58,520
Speaker 1: them in a box. Um, there's really no third category

532
00:29:58,680 --> 00:30:01,560
Speaker 1: right there. There's it used to be individuals were a

533
00:30:01,600 --> 00:30:05,600
Speaker 1: big group, but today that's di minimous. All your active

534
00:30:05,600 --> 00:30:08,479
Speaker 1: managers by definition have to add up to the market,

535
00:30:09,400 --> 00:30:14,400
Speaker 1: and so it's a market minus costs. Indexers by definition

536
00:30:14,440 --> 00:30:16,920
Speaker 1: add up to the market minus cost and so it's

537
00:30:16,960 --> 00:30:18,479
Speaker 1: a zero sum game at the end of the day.

538
00:30:18,520 --> 00:30:21,320
Speaker 1: And that's why indexing works. It's just lower costs. It's

539
00:30:21,320 --> 00:30:24,760
Speaker 1: not that markets are more efficient or whatever. Um. When

540
00:30:24,760 --> 00:30:28,120
Speaker 1: you're doing factor based stuff, you are making a bet

541
00:30:28,160 --> 00:30:31,480
Speaker 1: against that broad market, and for every winner, there's a

542
00:30:31,520 --> 00:30:33,240
Speaker 1: loser because in the end it all adds up to

543
00:30:33,280 --> 00:30:37,640
Speaker 1: the market. And so to us, if you're going to

544
00:30:38,000 --> 00:30:41,280
Speaker 1: truly index, you want to take advantage of the cost side,

545
00:30:41,880 --> 00:30:45,719
Speaker 1: and that's why market cap makes sense. Now, if you

546
00:30:45,760 --> 00:30:49,120
Speaker 1: want to make an active bet, you have a view

547
00:30:49,240 --> 00:30:53,680
Speaker 1: that you know value is is cheap today versus growth,

548
00:30:54,600 --> 00:30:57,719
Speaker 1: then you could argue that a factor based fund can

549
00:30:57,760 --> 00:31:01,040
Speaker 1: be a really efficient way of doing that. And as

550
00:31:01,040 --> 00:31:03,880
Speaker 1: we think that through, I think that is gonna perhaps

551
00:31:03,920 --> 00:31:07,080
Speaker 1: influence our product development in the future because it could

552
00:31:07,160 --> 00:31:09,520
Speaker 1: very well be a good way for a manager to

553
00:31:10,160 --> 00:31:14,160
Speaker 1: make you know, an advisor in particular like yourself, make

554
00:31:14,240 --> 00:31:17,200
Speaker 1: that kind of um bad if that's something that you

555
00:31:17,240 --> 00:31:19,840
Speaker 1: wanted to do. You know, we've had rob are not

556
00:31:20,200 --> 00:31:23,640
Speaker 1: of a research affiliates on And the argument that he's

557
00:31:23,680 --> 00:31:26,320
Speaker 1: made is, hey, towards the end of the cycle, when

558
00:31:26,360 --> 00:31:28,400
Speaker 1: things get a little crazy, and you could think of

559
00:31:30,080 --> 00:31:34,480
Speaker 1: as a perfect example, all of the cap weighted items

560
00:31:34,680 --> 00:31:37,959
Speaker 1: just went berserk and then got crushed on the other

561
00:31:38,000 --> 00:31:42,560
Speaker 1: side of the cycle. A index that was weighted on

562
00:31:42,720 --> 00:31:47,720
Speaker 1: earnings or sales or some proportionate measure to the impact

563
00:31:47,760 --> 00:31:50,960
Speaker 1: they have on the economy may not quite go quite

564
00:31:51,000 --> 00:31:52,880
Speaker 1: as high, but it also won't go quite as low.

565
00:31:52,920 --> 00:31:55,440
Speaker 1: And over the long haul, reducing a little bit of

566
00:31:55,480 --> 00:31:59,440
Speaker 1: volatility might add some performance. Um. And he's got you know,

567
00:31:59,480 --> 00:32:01,840
Speaker 1: a number of papers on it, and you, of all

568
00:32:01,880 --> 00:32:05,800
Speaker 1: the people who actually offer that sort of fundamental based index,

569
00:32:06,560 --> 00:32:10,000
Speaker 1: you're the notable emission. And why why I kind of think, hey,

570
00:32:10,040 --> 00:32:13,120
Speaker 1: that's a huge, potentially huge marketplace and if anyone could

571
00:32:13,120 --> 00:32:17,600
Speaker 1: do it inexpensively, it would be you guys. And that's

572
00:32:17,600 --> 00:32:20,480
Speaker 1: a very fair point, I would say. Um. And again,

573
00:32:20,520 --> 00:32:22,080
Speaker 1: we have a lot of respect for what Rob and

574
00:32:22,120 --> 00:32:25,720
Speaker 1: his team have done. And look, you know, you when

575
00:32:25,720 --> 00:32:30,040
Speaker 1: you look at the data, it's so time dependent. Um.

576
00:32:30,080 --> 00:32:34,480
Speaker 1: And you may get a little reduction and volatility depending

577
00:32:34,520 --> 00:32:36,240
Speaker 1: when you start your period and when you end it.

578
00:32:36,880 --> 00:32:39,680
Speaker 1: I'm not convinced that over very long market cycles that

579
00:32:39,760 --> 00:32:42,640
Speaker 1: really matters. And you know, to me, then it becomes

580
00:32:42,640 --> 00:32:47,000
Speaker 1: the cost get the lowest cost index fund you can

581
00:32:47,520 --> 00:32:50,000
Speaker 1: and that's really what's going to drive performance. So in

582
00:32:50,040 --> 00:32:52,600
Speaker 1: the last minute we have in this segment, let's talk

583
00:32:52,640 --> 00:32:55,719
Speaker 1: a little bit about high frequency trading UM. Your predecessor

584
00:32:55,840 --> 00:32:58,880
Speaker 1: Jack Brennan said, you know, I've been somewhat critical of

585
00:32:59,000 --> 00:33:03,680
Speaker 1: h f T s running Grandma's mutual fund, but Jack

586
00:33:03,720 --> 00:33:06,960
Speaker 1: tells me and told me it helps bring costs down.

587
00:33:07,000 --> 00:33:10,160
Speaker 1: What what's your perspective? So you know, net net it

588
00:33:10,200 --> 00:33:12,560
Speaker 1: has brought costs down. And the way you can look

589
00:33:12,560 --> 00:33:15,120
Speaker 1: at this is you can you can look at the

590
00:33:15,200 --> 00:33:19,160
Speaker 1: history of our index funds and our traders have actually

591
00:33:19,160 --> 00:33:23,320
Speaker 1: done this, and we can see that the costum of

592
00:33:23,400 --> 00:33:27,280
Speaker 1: trading has been reduced dramatically, and you see that in

593
00:33:27,360 --> 00:33:31,080
Speaker 1: terms of our tracking error and so forth. UM and

594
00:33:31,160 --> 00:33:33,560
Speaker 1: you know, again the data are actually overwhelming over the

595
00:33:33,600 --> 00:33:36,719
Speaker 1: last fifteen years. It doesn't mean that there aren't practices

596
00:33:36,800 --> 00:33:40,320
Speaker 1: within the high frequency trading community that we don't UM.

597
00:33:40,560 --> 00:33:42,880
Speaker 1: You know that we're not critical of. But one of

598
00:33:42,920 --> 00:33:46,880
Speaker 1: the things during sort of the flash crash aftermath there

599
00:33:46,960 --> 00:33:49,200
Speaker 1: was a lot of let's just ban high frequency trading,

600
00:33:49,400 --> 00:33:51,600
Speaker 1: and what we were very afraid of is if you

601
00:33:51,640 --> 00:33:55,480
Speaker 1: pull that thread, not quite clear what would be left. UM,

602
00:33:55,520 --> 00:33:59,000
Speaker 1: because the high frequency trading actually does knit together. That's

603
00:33:59,160 --> 00:34:03,280
Speaker 1: very you know, this very granular, disparate market that we have.

604
00:34:03,800 --> 00:34:06,760
Speaker 1: So again we'd like to see I'd like to see

605
00:34:06,760 --> 00:34:09,359
Speaker 1: some guardrails put in place to protect people from the

606
00:34:09,360 --> 00:34:12,120
Speaker 1: front running. UM. You know, again, I've never been a

607
00:34:12,120 --> 00:34:15,680
Speaker 1: fan that, you know, latency should give you an advantage

608
00:34:16,360 --> 00:34:19,560
Speaker 1: versus somebody who's a mile further away. It doesn't really

609
00:34:19,560 --> 00:34:22,120
Speaker 1: make any logical sense. I don't think it's making markets better,

610
00:34:22,719 --> 00:34:26,560
Speaker 1: but I do think conceptually, UM, you've got to be

611
00:34:26,640 --> 00:34:31,320
Speaker 1: careful around um being too critical or you know, undoing everything,

612
00:34:31,760 --> 00:34:33,680
Speaker 1: or the markets aren't going to be knit together the

613
00:34:33,719 --> 00:34:35,640
Speaker 1: way they need to be knitted together. I mean, I'm

614
00:34:35,680 --> 00:34:38,200
Speaker 1: not sure anybody would design the markets with a blank

615
00:34:38,239 --> 00:34:40,960
Speaker 1: sheet of paper the way they are. But since we've

616
00:34:41,000 --> 00:34:43,719
Speaker 1: had UM, you know, really since the late nineties, UM,

617
00:34:44,040 --> 00:34:47,120
Speaker 1: when we've seen this tremendous expansion of pools of trading,

618
00:34:47,520 --> 00:34:49,839
Speaker 1: you know, we've really seen a pre it's a very

619
00:34:49,840 --> 00:34:53,520
Speaker 1: different market than when I started out to say the least. Bill,

620
00:34:53,560 --> 00:34:55,520
Speaker 1: Thank you so much for spending so much time. You

621
00:34:55,560 --> 00:34:58,120
Speaker 1: can hang around a little bit. We'll continue this conversation.

622
00:34:58,600 --> 00:35:03,000
Speaker 1: Be sure and check out daily column on Bloomberg View

623
00:35:03,040 --> 00:35:06,200
Speaker 1: dot com, follow me on Twitter at rid Holts, and

624
00:35:06,360 --> 00:35:08,600
Speaker 1: check out the rest of our conversation. You could see

625
00:35:08,600 --> 00:35:12,680
Speaker 1: that at Bloomberg dot com or on Apple iTunes. I'm

626
00:35:12,719 --> 00:35:15,799
Speaker 1: Barry Ridholtz. You've been listening to Masters in Business on

627
00:35:15,880 --> 00:35:21,360
Speaker 1: Bloomberg Radio. Welcome back to the podcast portion of our interview,

628
00:35:21,400 --> 00:35:23,399
Speaker 1: where I basically take the mic out of my ear

629
00:35:23,480 --> 00:35:27,200
Speaker 1: and not worry about radio segments and loosen my tie.

630
00:35:27,239 --> 00:35:32,799
Speaker 1: I'm literally literally doing that. Goes my subway card bill.

631
00:35:32,840 --> 00:35:34,719
Speaker 1: Thank you so much for doing this. I'll tell you

632
00:35:34,760 --> 00:35:37,600
Speaker 1: I was really looking forward to this. You guys know

633
00:35:38,320 --> 00:35:42,960
Speaker 1: I'm a huge Vanguard fan. I'm a big Jack Brennan fan.

634
00:35:43,920 --> 00:35:46,440
Speaker 1: I'm somewhat of a Bogel fan, although I do have

635
00:35:46,719 --> 00:35:48,080
Speaker 1: uh I have a little bit of a beef with

636
00:35:48,760 --> 00:35:52,120
Speaker 1: with Mr Bogel. And by the way, I think I

637
00:35:52,200 --> 00:35:55,040
Speaker 1: know where that one's going. If you, if you ever

638
00:35:55,160 --> 00:35:59,640
Speaker 1: wanna have like a miserable couple of days, write something

639
00:35:59,719 --> 00:36:02,719
Speaker 1: really negative about Apple. Not that I do that. I've

640
00:36:02,760 --> 00:36:05,839
Speaker 1: been a Mac fanboy forever, and the emails light up.

641
00:36:06,280 --> 00:36:10,000
Speaker 1: I wrote what I thought was a very measured, very

642
00:36:10,120 --> 00:36:15,439
Speaker 1: circumspect I don't even want to call it critique. Just hey.

643
00:36:15,560 --> 00:36:18,840
Speaker 1: You know, Jack Bogel is a legend, and he created

644
00:36:19,239 --> 00:36:22,760
Speaker 1: one one of the most successful investing companies in the world.

645
00:36:23,760 --> 00:36:26,319
Speaker 1: But he's kind of anti e t f s. He

646
00:36:26,400 --> 00:36:31,120
Speaker 1: thinks people potentially overtrade them, and he's not a big

647
00:36:31,160 --> 00:36:35,000
Speaker 1: fan of international. And you and I both you you

648
00:36:35,200 --> 00:36:38,640
Speaker 1: really have expanded the whole international business. So so let's

649
00:36:38,680 --> 00:36:41,799
Speaker 1: talk a little bit about um Mr Bogel, who, by

650
00:36:41,800 --> 00:36:44,319
Speaker 1: the way, I would love to interview. I would love

651
00:36:44,360 --> 00:36:46,200
Speaker 1: to sit and talk to him because I think he's

652
00:36:46,239 --> 00:36:49,640
Speaker 1: a fascinating guy. I'm sure he would love to do it. Okay,

653
00:36:49,680 --> 00:36:53,000
Speaker 1: well we'll set that up. But what about this E

654
00:36:53,160 --> 00:36:55,840
Speaker 1: t F thing and what about international? So you know,

655
00:36:55,920 --> 00:36:57,440
Speaker 1: E t f S we look at E t S

656
00:36:57,560 --> 00:37:01,520
Speaker 1: is just another product structure for frankly, and what it's

657
00:37:01,560 --> 00:37:04,320
Speaker 1: allowed us to do is to take the indexing story,

658
00:37:04,400 --> 00:37:07,880
Speaker 1: the low cost story, to a much broader group of investors.

659
00:37:08,480 --> 00:37:11,200
Speaker 1: And because of the way e t f S work

660
00:37:12,000 --> 00:37:15,720
Speaker 1: for many advisors from especially if you're on a brokerage platform,

661
00:37:15,760 --> 00:37:18,720
Speaker 1: it's just a lot easier to implement than traditional funds.

662
00:37:19,920 --> 00:37:22,720
Speaker 1: It does not mean that we endorse day trading or

663
00:37:22,880 --> 00:37:25,279
Speaker 1: you know, minute by minute trading of ETFs. In fact,

664
00:37:25,360 --> 00:37:28,480
Speaker 1: just the opposite. We believe very strongly that, you know,

665
00:37:28,719 --> 00:37:32,200
Speaker 1: long term investing is the way to really accumulate wealth.

666
00:37:32,320 --> 00:37:34,800
Speaker 1: There there was an article in the wool Street Journal

667
00:37:35,239 --> 00:37:38,759
Speaker 1: that I remember reading and just falling off my jail

668
00:37:38,840 --> 00:37:43,680
Speaker 1: laughing about somebody wants to park forty million dollars in

669
00:37:43,800 --> 00:37:47,040
Speaker 1: short term bonds and there's a cost to move in

670
00:37:47,080 --> 00:37:49,480
Speaker 1: and out of that, and you guys said no thanks,

671
00:37:49,480 --> 00:37:52,240
Speaker 1: and the person lost their minds. So if you're focused

672
00:37:52,280 --> 00:37:55,000
Speaker 1: on long term and someone says, here's forty million dollars

673
00:37:55,040 --> 00:37:58,239
Speaker 1: from for six months or ninety days, your answer was no,

674
00:37:58,400 --> 00:38:01,560
Speaker 1: Well that all that call comes on the investors, and

675
00:38:01,600 --> 00:38:03,920
Speaker 1: that's wrong to do, comes on the current investors. And

676
00:38:03,960 --> 00:38:07,680
Speaker 1: in that particular case, we were in a declining yield environment,

677
00:38:07,719 --> 00:38:10,440
Speaker 1: so it was gonna also diminish the yield of the

678
00:38:10,480 --> 00:38:15,640
Speaker 1: portfolio pretty dramatically. So our portfolio manager appropriately said no,

679
00:38:15,719 --> 00:38:18,560
Speaker 1: we're not going to accept the money. Actually did end

680
00:38:18,640 --> 00:38:20,759
Speaker 1: up on the front page of the Wall Street Journal. Um.

681
00:38:21,239 --> 00:38:24,239
Speaker 1: The guy went to the sec um, He went to

682
00:38:24,280 --> 00:38:27,840
Speaker 1: every major news publication and it it turned out to

683
00:38:27,920 --> 00:38:30,080
Speaker 1: be actually one of the best things that we couldn't

684
00:38:30,080 --> 00:38:34,160
Speaker 1: have asked for a better story because it really underscored.

685
00:38:34,200 --> 00:38:36,680
Speaker 1: But we believe, which is take care of the existing investor,

686
00:38:37,080 --> 00:38:39,040
Speaker 1: and the next investor will find you if you if

687
00:38:39,080 --> 00:38:41,719
Speaker 1: you have a reputation for doing that. I think one

688
00:38:41,760 --> 00:38:44,879
Speaker 1: of your competitors had come out and said, they're absolutely right.

689
00:38:44,920 --> 00:38:49,239
Speaker 1: Why would you put your existing investors cost structure at risk?

690
00:38:49,680 --> 00:38:52,040
Speaker 1: So someone hey, there were there were mecha, their tools.

691
00:38:52,040 --> 00:38:53,440
Speaker 1: You want to put in a money market fund, you

692
00:38:53,480 --> 00:38:55,719
Speaker 1: want to put it somewhere. There's a place to put it,

693
00:38:56,000 --> 00:38:59,520
Speaker 1: just not short term in that fund, right that I

694
00:38:59,560 --> 00:39:02,920
Speaker 1: always that was pretty amazing because everybody else is so

695
00:39:03,040 --> 00:39:07,040
Speaker 1: desperately chasing assets to turn around and say forty million

696
00:39:07,040 --> 00:39:09,520
Speaker 1: dollars is a chank of money, but no, thanks that

697
00:39:09,520 --> 00:39:12,959
Speaker 1: that just always stayed with me. Well, in that particular time,

698
00:39:13,000 --> 00:39:15,680
Speaker 1: we were a lot littler firm than we are today

699
00:39:15,719 --> 00:39:19,600
Speaker 1: and it was a pretty significant purchase. But again, you know,

700
00:39:19,640 --> 00:39:21,960
Speaker 1: it sounds really simplistic, but if you do the right thing,

701
00:39:22,320 --> 00:39:24,719
Speaker 1: usually in the end, it's a good strategy, not not

702
00:39:24,840 --> 00:39:28,680
Speaker 1: a bad um business mantra um. So I have so

703
00:39:28,719 --> 00:39:31,920
Speaker 1: many questions. I don't even know where to begin. So

704
00:39:32,080 --> 00:39:34,960
Speaker 1: let me let me ask you the question that when

705
00:39:34,960 --> 00:39:39,879
Speaker 1: I was describing this upcoming interview to somebody, someone said

706
00:39:39,880 --> 00:39:42,560
Speaker 1: to me, Hey, you know those guys only fly coach.

707
00:39:43,000 --> 00:39:46,120
Speaker 1: Is this true? So we only book coach and I

708
00:39:46,160 --> 00:39:48,840
Speaker 1: have flown so many miles that I do get upgraded

709
00:39:48,880 --> 00:39:51,400
Speaker 1: every now and then. By the way, for radio listeners,

710
00:39:51,400 --> 00:39:56,000
Speaker 1: you're six two three? How told you? Six five? Okay,

711
00:39:56,160 --> 00:39:59,319
Speaker 1: I'm I'm giving you permission to book a little more

712
00:39:59,400 --> 00:40:03,200
Speaker 1: leg room. Don't have to book coach. I fortunately have

713
00:40:03,360 --> 00:40:06,160
Speaker 1: enough miles on a couple of airlines that it's almost automatic.

714
00:40:06,239 --> 00:40:08,320
Speaker 1: But I you know, we do. Look, it's the shareholders

715
00:40:08,320 --> 00:40:10,440
Speaker 1: money at the end of the day, and you know,

716
00:40:10,480 --> 00:40:14,279
Speaker 1: we're not trying to um be holier than now, but

717
00:40:14,560 --> 00:40:19,040
Speaker 1: you have to always put yourself in the shareholders shoots,

718
00:40:19,120 --> 00:40:21,440
Speaker 1: and you know, basically, is this a good investment or

719
00:40:21,480 --> 00:40:26,000
Speaker 1: is this time well spent for the shareholder? That it's

720
00:40:26,040 --> 00:40:29,840
Speaker 1: a refreshing thing to hear that that is not standard

721
00:40:30,080 --> 00:40:34,120
Speaker 1: standard operating procedure at a lot of places and I

722
00:40:34,520 --> 00:40:36,600
Speaker 1: think the proof is in the pudding. It's pretty clear

723
00:40:36,680 --> 00:40:40,160
Speaker 1: that whatever you guys are doing, it seems to be working.

724
00:40:40,200 --> 00:40:43,400
Speaker 1: And if if it's a matter of putting shareholders first,

725
00:40:43,880 --> 00:40:47,839
Speaker 1: how come everybody isn't doing it? Well? Um, I'd like

726
00:40:47,880 --> 00:40:51,359
Speaker 1: to think that we're hopefully influencing the marketplace so that

727
00:40:51,560 --> 00:40:54,840
Speaker 1: people are are focusing more on it. But look, I

728
00:40:54,880 --> 00:40:58,680
Speaker 1: think in most organizations, to be very fair, there's a

729
00:40:58,760 --> 00:41:01,960
Speaker 1: natural conflict. You know, we're owned by our funds and

730
00:41:02,000 --> 00:41:04,399
Speaker 1: therefore our investors. So for us, when we say we're

731
00:41:04,440 --> 00:41:08,040
Speaker 1: putting shareholders first, we're putting both the shareholders of the company,

732
00:41:08,080 --> 00:41:10,799
Speaker 1: if you will, as well as our clients first. They're

733
00:41:10,800 --> 00:41:15,640
Speaker 1: the same most organizations. They're either privately held or they're

734
00:41:15,680 --> 00:41:19,520
Speaker 1: publicly traded, and so they have their public shareholders that

735
00:41:19,560 --> 00:41:21,200
Speaker 1: they have to earn a return for and then they

736
00:41:21,200 --> 00:41:24,120
Speaker 1: have their clients. By definition, that's a conflict. And how

737
00:41:24,200 --> 00:41:26,840
Speaker 1: you balance that, you know, I'm unfortunately I'm not that smart,

738
00:41:26,920 --> 00:41:31,520
Speaker 1: so I need the simplicity. Well, the simplicity works, um,

739
00:41:31,560 --> 00:41:34,360
Speaker 1: So I mentioned I'm just thrilled you're doing this interview.

740
00:41:34,800 --> 00:41:39,359
Speaker 1: But you guys, really under normal circumstances, aren't out there

741
00:41:39,400 --> 00:41:42,160
Speaker 1: in the media. There's not a lot of talking heads.

742
00:41:42,200 --> 00:41:45,839
Speaker 1: There's not a lot of blah blah blah. By definition,

743
00:41:46,000 --> 00:41:49,680
Speaker 1: you're not gonna be here's my favorite stock, here's where

744
00:41:49,719 --> 00:41:51,319
Speaker 1: we think the market is going to be in a year.

745
00:41:51,400 --> 00:41:57,160
Speaker 1: That's an mathematic to you. Why so so little media generally,

746
00:41:57,360 --> 00:42:00,120
Speaker 1: and what motivated you to say, hey, this is all

747
00:42:00,200 --> 00:42:03,319
Speaker 1: a financial crisis. Let's say a few words. Well, I

748
00:42:03,360 --> 00:42:06,200
Speaker 1: think you know, we we do get it's interesting our

749
00:42:06,239 --> 00:42:08,480
Speaker 1: media coverage sort of waxes and ways. We get a

750
00:42:08,520 --> 00:42:11,239
Speaker 1: lot of nice things written about us and said about us.

751
00:42:11,320 --> 00:42:13,560
Speaker 1: Um but in terms of you know, doing the in

752
00:42:13,600 --> 00:42:17,320
Speaker 1: person stuff, we find we're in demand when there's a crisis.

753
00:42:17,320 --> 00:42:20,200
Speaker 1: When things are really a brilliant people think we're boring

754
00:42:20,200 --> 00:42:22,080
Speaker 1: because we're not going to give them the hot stock

755
00:42:22,120 --> 00:42:24,320
Speaker 1: tip or whatever. But is an investing is supposed to

756
00:42:24,360 --> 00:42:26,480
Speaker 1: be bored? I think it is, and I think it's

757
00:42:26,520 --> 00:42:28,360
Speaker 1: three yards in a cloud of dust, you know, And

758
00:42:28,400 --> 00:42:30,399
Speaker 1: if you can just repeat that over and over, you'll

759
00:42:30,440 --> 00:42:33,439
Speaker 1: be successful. You know. During the crisis, though we were

760
00:42:33,600 --> 00:42:35,480
Speaker 1: we tried to be more front and center. We we

761
00:42:35,600 --> 00:42:39,280
Speaker 1: felt that there was a real need to um stressed

762
00:42:39,280 --> 00:42:40,960
Speaker 1: to people. We did not think the world was going

763
00:42:41,040 --> 00:42:45,359
Speaker 1: to end, and as a result, they needed despite all

764
00:42:45,360 --> 00:42:48,680
Speaker 1: the emotional trauma that was going on due to the market,

765
00:42:48,960 --> 00:42:51,319
Speaker 1: they needed to be able to see through that and

766
00:42:51,600 --> 00:42:53,759
Speaker 1: if we could help that in any way, you know,

767
00:42:53,800 --> 00:42:56,080
Speaker 1: we really felt it was our responsibility to do that.

768
00:42:56,520 --> 00:42:58,640
Speaker 1: And so you guys ventured out and did a little

769
00:42:58,640 --> 00:43:00,920
Speaker 1: more media than usual, and we did a lot more

770
00:43:00,960 --> 00:43:03,960
Speaker 1: media than usual. Um you know, either our own private

771
00:43:03,960 --> 00:43:07,760
Speaker 1: webcasts or you know, um I, our chief investment officer

772
00:43:07,760 --> 00:43:10,120
Speaker 1: at the time, Gus Souder and I probably did half

773
00:43:10,120 --> 00:43:12,600
Speaker 1: a dozen television shows within a month, which would be

774
00:43:12,840 --> 00:43:14,879
Speaker 1: typically more than we would do in a couple of years.

775
00:43:15,080 --> 00:43:17,200
Speaker 1: So let's talk a little bit about Gus. So do we.

776
00:43:17,200 --> 00:43:22,600
Speaker 1: We briefly hinted at at it earlier. UM he's kind

777
00:43:22,640 --> 00:43:25,560
Speaker 1: of a legendary guy, isn't he. Yeah. I love Gus

778
00:43:25,560 --> 00:43:28,400
Speaker 1: and UM I was very blessed. Um I joined Vanguard

779
00:43:28,440 --> 00:43:32,319
Speaker 1: ninety six. Gus joined in nine seven and moved in

780
00:43:32,440 --> 00:43:35,480
Speaker 1: two doors down if you will, from my office, and

781
00:43:35,520 --> 00:43:37,759
Speaker 1: we became really good friends right from the get go.

782
00:43:38,520 --> 00:43:41,200
Speaker 1: And one of the things that really was remarkable about

783
00:43:41,239 --> 00:43:46,840
Speaker 1: Gus is um the the investment guys would all talk about, UM,

784
00:43:46,920 --> 00:43:49,400
Speaker 1: what how great he was with computer science and he

785
00:43:49,440 --> 00:43:52,560
Speaker 1: could sort of translate investment ideas into code, and the

786
00:43:52,600 --> 00:43:54,920
Speaker 1: computer guys were all talking about how Grady was on

787
00:43:54,960 --> 00:43:58,440
Speaker 1: the investment side and math and how he could explain

788
00:43:58,480 --> 00:44:01,080
Speaker 1: all that to them, and he just had this ability

789
00:44:01,280 --> 00:44:04,719
Speaker 1: to get stuff done. He also was a great spokesman

790
00:44:04,760 --> 00:44:06,719
Speaker 1: for us because he got out there and he could

791
00:44:06,719 --> 00:44:09,640
Speaker 1: take really complicated ideas and boil them down to UM,

792
00:44:09,680 --> 00:44:14,160
Speaker 1: you know, sort of their their real basic, most simple concepts.

793
00:44:14,200 --> 00:44:18,759
Speaker 1: So who fills that role today? So UM Fortunately for

794
00:44:18,880 --> 00:44:21,800
Speaker 1: us UM. One of the things gusted was he developed

795
00:44:21,800 --> 00:44:26,000
Speaker 1: an incredibly deep team and we then moved one of

796
00:44:26,000 --> 00:44:29,480
Speaker 1: our key leaders, UM, Tim Buckley, who had run our

797
00:44:29,520 --> 00:44:31,880
Speaker 1: retail business over and some people saw it as a

798
00:44:31,920 --> 00:44:34,319
Speaker 1: non traditional move because Tim hadn't grown up in the

799
00:44:34,360 --> 00:44:37,520
Speaker 1: investment portion of the business, but he had spent his

800
00:44:37,600 --> 00:44:41,319
Speaker 1: whole career getting deep on on the investment side. And

801
00:44:41,320 --> 00:44:44,160
Speaker 1: Gus told me something really interesting right before he retired.

802
00:44:44,200 --> 00:44:46,560
Speaker 1: He said, look, when you're looking for my replacement, you're

803
00:44:46,560 --> 00:44:49,200
Speaker 1: not going to get somebody who came up the way

804
00:44:49,280 --> 00:44:52,000
Speaker 1: I did. You know he started out He traded stocks,

805
00:44:52,040 --> 00:44:55,880
Speaker 1: He he wrote the original code for optimizing our index funds.

806
00:44:55,920 --> 00:44:59,040
Speaker 1: You know, he was very hands on. The group had

807
00:44:59,040 --> 00:45:01,160
Speaker 1: gotten to be very low. Are you know our investment

808
00:45:01,160 --> 00:45:04,200
Speaker 1: team now several hundred people. Um, you know we run

809
00:45:04,400 --> 00:45:08,600
Speaker 1: two plus trillion in Malvern and so um he said,

810
00:45:08,600 --> 00:45:12,120
Speaker 1: you're gonna need somebody who's a great leader of people

811
00:45:12,200 --> 00:45:15,439
Speaker 1: and developer of talent, and you're gonna need somebody who

812
00:45:15,480 --> 00:45:18,960
Speaker 1: can really sort of think, um about the intersection of

813
00:45:19,000 --> 00:45:23,200
Speaker 1: technology and investing going forward. And Tim met both those

814
00:45:23,239 --> 00:45:25,919
Speaker 1: criteria really well. And he's just done a fabulous job.

815
00:45:26,440 --> 00:45:30,560
Speaker 1: So who else has what other investors have influenced your

816
00:45:30,600 --> 00:45:33,959
Speaker 1: thought process? And it's really a two part question. Part

817
00:45:34,000 --> 00:45:37,600
Speaker 1: one is about investing and thinking about managing all the

818
00:45:37,600 --> 00:45:42,279
Speaker 1: people's money. But the second part is about running an

819
00:45:42,280 --> 00:45:45,600
Speaker 1: investment business, which I don't know if people realize, is

820
00:45:45,640 --> 00:45:49,680
Speaker 1: a very unique animal compared to other businesses. So outside

821
00:45:49,680 --> 00:45:52,480
Speaker 1: of Vanguard, because I've had a ton of influences inside

822
00:45:52,520 --> 00:45:57,399
Speaker 1: the company, um, you know, from just a pure investment perspective,

823
00:45:57,920 --> 00:46:01,080
Speaker 1: two of my Actually I run a risk here because

824
00:46:01,080 --> 00:46:03,640
Speaker 1: I have a lot of people I really enjoy talking to.

825
00:46:03,800 --> 00:46:09,080
Speaker 1: But um, there's the original Winsor team John Neff, who

826
00:46:09,120 --> 00:46:13,880
Speaker 1: was the legendary value investor, watching him Um talk about

827
00:46:13,920 --> 00:46:17,400
Speaker 1: stocks and the way he thought about the markets. UM

828
00:46:17,600 --> 00:46:20,799
Speaker 1: is a young UM person in Vanguard. You know, it

829
00:46:20,960 --> 00:46:23,960
Speaker 1: was like a free education. It was unbelievable. It was

830
00:46:24,000 --> 00:46:29,040
Speaker 1: like getting your master's PhD and Advanced PhD all at once.

831
00:46:29,120 --> 00:46:32,439
Speaker 1: Because he just was so insightful. He knew more about

832
00:46:32,440 --> 00:46:34,800
Speaker 1: the companies he was investing in the their own management

833
00:46:34,840 --> 00:46:38,760
Speaker 1: stay UM. I also had the great privilege of watching

834
00:46:38,880 --> 00:46:42,200
Speaker 1: Prime Cap evolved as a firm. We hired prime Cap

835
00:46:42,280 --> 00:46:44,719
Speaker 1: very early, and prime Cap was a group that spun

836
00:46:44,760 --> 00:46:47,719
Speaker 1: out of Capital Research and the founder was Gonna named

837
00:46:47,719 --> 00:46:52,600
Speaker 1: Howe Scow and the original team UM again, they were

838
00:46:52,640 --> 00:46:54,520
Speaker 1: just so talented. They were and they were very different

839
00:46:54,560 --> 00:46:58,320
Speaker 1: than the Windsor team. They weren't nearly, they weren't deep value.

840
00:46:58,360 --> 00:47:01,160
Speaker 1: They were kind of growthy, but growth at a reasonable price.

841
00:47:01,680 --> 00:47:04,120
Speaker 1: But it was more just we're gonna find really good companies,

842
00:47:04,160 --> 00:47:08,600
Speaker 1: invest in them and watch. And what was interesting is UM.

843
00:47:08,640 --> 00:47:10,719
Speaker 1: You know, so we're from NAP, I learned being a

844
00:47:10,760 --> 00:47:14,480
Speaker 1: contrarians never a bad thing. And from Prime Gap I

845
00:47:14,520 --> 00:47:18,120
Speaker 1: learned about patients. UM. They have very low portfolio turnover,

846
00:47:18,600 --> 00:47:21,920
Speaker 1: one of the lowest turnovers of any active manager and

847
00:47:22,160 --> 00:47:26,920
Speaker 1: they would make very concentrated bets as well, which if

848
00:47:26,920 --> 00:47:29,640
Speaker 1: you're going to invest in active, if you can get

849
00:47:29,680 --> 00:47:32,560
Speaker 1: low cost and some concentration, I think it gives you

850
00:47:32,560 --> 00:47:37,640
Speaker 1: your best chance about performing. That's exactly right. So those

851
00:47:37,760 --> 00:47:42,000
Speaker 1: two UM people had huge influence early in my career,

852
00:47:42,760 --> 00:47:46,560
Speaker 1: you know, in terms of running the business UM Uh.

853
00:47:46,800 --> 00:47:50,399
Speaker 1: Charlie Ellis and Bert Malkiel, who you know we're both

854
00:47:50,440 --> 00:47:54,040
Speaker 1: on our board, certainly were very influential, and more at

855
00:47:54,080 --> 00:47:56,799
Speaker 1: a philosophical level. And again it was all about the

856
00:47:56,840 --> 00:48:00,160
Speaker 1: client coming first, and and and and it was so

857
00:48:00,320 --> 00:48:04,439
Speaker 1: around taking a very rigorous academic approach, if you will.

858
00:48:04,600 --> 00:48:06,240
Speaker 1: One of the things we've tried to do advant gardis

859
00:48:06,320 --> 00:48:10,040
Speaker 1: take really complicated ideas and then bring them to the masses.

860
00:48:10,320 --> 00:48:12,960
Speaker 1: So indexing certainly fit that bill. But even the way

861
00:48:13,000 --> 00:48:15,640
Speaker 1: we run active you know, we sub we use subadvisors

862
00:48:15,640 --> 00:48:17,759
Speaker 1: from all around the world. That was very much the

863
00:48:17,760 --> 00:48:22,680
Speaker 1: way pension funds and foundations and endowments worked. Early on

864
00:48:22,719 --> 00:48:25,600
Speaker 1: in the mutual fund business, everybody's active teams were all

865
00:48:25,640 --> 00:48:28,000
Speaker 1: in house, so we were really the only guys doing this.

866
00:48:28,480 --> 00:48:31,200
Speaker 1: And again that the Charlie's and the Berths were very

867
00:48:31,239 --> 00:48:33,920
Speaker 1: influential and helping us think that through. How do you

868
00:48:33,960 --> 00:48:38,359
Speaker 1: go about finding these outside teams to manage a chankamany

869
00:48:38,560 --> 00:48:41,240
Speaker 1: So we have UM. We have a really deep team

870
00:48:41,280 --> 00:48:43,880
Speaker 1: who've grown up doing this and they have a very

871
00:48:44,000 --> 00:48:48,000
Speaker 1: rigorous process and they actually today travel the world looking

872
00:48:48,040 --> 00:48:52,280
Speaker 1: for talent. And so we've got firms all around the world. UM,

873
00:48:52,840 --> 00:48:56,399
Speaker 1: I think thirty plus firms now managing about seventy five

874
00:48:56,440 --> 00:48:59,439
Speaker 1: man dates for us. So let me UM shift gears

875
00:48:59,440 --> 00:49:01,880
Speaker 1: a little bit of on you. You recently had an

876
00:49:01,880 --> 00:49:05,040
Speaker 1: op ed in the Wall Street Journal that I thought

877
00:49:05,120 --> 00:49:08,399
Speaker 1: was very interesting and there were really two parts that

878
00:49:08,880 --> 00:49:13,640
Speaker 1: leapt out. The first was the city issue that's systemically

879
00:49:13,719 --> 00:49:18,600
Speaker 1: important financial institutions. Do we really think mutual fund companies

880
00:49:18,640 --> 00:49:21,400
Speaker 1: are going to end up being citfies? I mean, fifty

881
00:49:21,400 --> 00:49:24,640
Speaker 1: billion dollars is a the minimus cut off. That is

882
00:49:24,680 --> 00:49:27,480
Speaker 1: not a lot of money these days. So UM, the

883
00:49:27,520 --> 00:49:29,440
Speaker 1: short answer is, you would not think it would be

884
00:49:29,520 --> 00:49:32,839
Speaker 1: logical UM because funds are first of all, it's an

885
00:49:32,840 --> 00:49:37,200
Speaker 1: agency based business model, not a proprietary based business model. UM. Second,

886
00:49:37,280 --> 00:49:41,840
Speaker 1: because of the UM prohibitions against leverage, there's no leverage

887
00:49:41,840 --> 00:49:45,920
Speaker 1: and funds so so, how can this be so systemically

888
00:49:46,000 --> 00:49:49,120
Speaker 1: important if you're not leveraged up, you're not trading derivatives,

889
00:49:49,120 --> 00:49:51,879
Speaker 1: you're not You would think it would be of all

890
00:49:51,960 --> 00:49:54,799
Speaker 1: the pushback against Dodd Frank, you would think this is

891
00:49:54,840 --> 00:49:57,920
Speaker 1: the easiest thing in the universe to carve out an

892
00:49:57,920 --> 00:50:04,200
Speaker 1: exception for no leverage, no heavy derivative usage. No. I mean,

893
00:50:04,440 --> 00:50:06,200
Speaker 1: there was an article in The Times the other day

894
00:50:06,239 --> 00:50:09,160
Speaker 1: about how many mutual funds are loading up on these

895
00:50:09,200 --> 00:50:12,080
Speaker 1: pre public companies, and there's a risk because so many

896
00:50:12,080 --> 00:50:14,800
Speaker 1: of those go. But if those go belly yup, there's

897
00:50:14,840 --> 00:50:19,080
Speaker 1: no subsequent domino effect. It's not like subprime house and

898
00:50:19,120 --> 00:50:23,200
Speaker 1: it's not Again, there's idiosyncratic risk there, which you shouldn't

899
00:50:23,239 --> 00:50:25,640
Speaker 1: be trying to prevent because without risk, there's no return.

900
00:50:26,040 --> 00:50:29,200
Speaker 1: But it's not systemic. Um. The reason I wrote the

901
00:50:29,239 --> 00:50:32,200
Speaker 1: op ed in the timing of it was Um. The

902
00:50:32,320 --> 00:50:35,879
Speaker 1: FSB in in the in Europe, in the UK has

903
00:50:36,640 --> 00:50:40,040
Speaker 1: issued its second consultation and there was a huge emphasis

904
00:50:40,080 --> 00:50:43,120
Speaker 1: that big is bad and if funds are big, or

905
00:50:43,160 --> 00:50:46,680
Speaker 1: fun families are big, then they should be deemed systemically important.

906
00:50:47,320 --> 00:50:50,680
Speaker 1: And the consequences of being systemically important is I is

907
00:50:50,719 --> 00:50:54,440
Speaker 1: I pointed out in the editorial, are very asymmetric. If

908
00:50:54,480 --> 00:50:57,600
Speaker 1: you're a shareholder of a fund that's designated as a city,

909
00:50:57,640 --> 00:50:59,880
Speaker 1: you're gonna not gonna get any benefit from that, but

910
00:51:00,040 --> 00:51:03,440
Speaker 1: you potentially could be charged higher fees. You could be

911
00:51:03,800 --> 00:51:07,320
Speaker 1: providing capital to bail out too big to fail firms.

912
00:51:07,440 --> 00:51:11,400
Speaker 1: If one of the competitors of yours uses leverage, engages

913
00:51:11,400 --> 00:51:16,400
Speaker 1: in risks and collapses somehow, it's Vanguard investors responsibility to

914
00:51:17,520 --> 00:51:20,359
Speaker 1: Let's let's make it even simpler. Um we already have

915
00:51:20,840 --> 00:51:23,080
Speaker 1: um City Group. I don't want to pick on City,

916
00:51:23,080 --> 00:51:26,000
Speaker 1: but Citi is a systemically important institution. If City Group,

917
00:51:26,040 --> 00:51:29,439
Speaker 1: for whatever reason failed for the fourth time, fifth time,

918
00:51:29,440 --> 00:51:31,520
Speaker 1: how many times have they been insolvent? But I could

919
00:51:31,560 --> 00:51:33,560
Speaker 1: say that you can't. But if let's look at the

920
00:51:33,600 --> 00:51:37,480
Speaker 1: history of city If if City fails under this underdog frank,

921
00:51:37,960 --> 00:51:42,360
Speaker 1: all cities will be required to help out. So if

922
00:51:42,400 --> 00:51:45,239
Speaker 1: if you're in the forget it's Vanguard, any large fund

923
00:51:45,320 --> 00:51:49,399
Speaker 1: that's been designated systemically important, you're potentially on the hook

924
00:51:49,480 --> 00:51:52,640
Speaker 1: for that. That does not seem right to us, because

925
00:51:53,200 --> 00:51:56,560
Speaker 1: if your fund goes down, we're certainly not going to

926
00:51:56,640 --> 00:52:00,440
Speaker 1: get a capital injection from the banking system to get up,

927
00:52:00,480 --> 00:52:03,000
Speaker 1: because that's the risk you're bearing in the fund. So

928
00:52:03,120 --> 00:52:07,000
Speaker 1: it just it it seems completely irrational to us. So

929
00:52:07,040 --> 00:52:10,160
Speaker 1: what we think, and again I think is you know Advangard,

930
00:52:10,280 --> 00:52:12,680
Speaker 1: you know, um, I did get a couple of I've

931
00:52:12,719 --> 00:52:14,640
Speaker 1: got a lot of fan mail on this. I've gotten

932
00:52:14,640 --> 00:52:16,800
Speaker 1: a few people saying, you know, this is not Vanguard.

933
00:52:16,840 --> 00:52:19,319
Speaker 1: You guys are never anti regulation, and I'm like, we're

934
00:52:19,360 --> 00:52:24,120
Speaker 1: not anti regulation, actually, wet well, we're we want effective regulation.

935
00:52:24,280 --> 00:52:29,239
Speaker 1: And where the concentration should be are what activities, what

936
00:52:29,320 --> 00:52:32,680
Speaker 1: practices are in play that actually could lead to a

937
00:52:32,719 --> 00:52:35,719
Speaker 1: systemic issue. And so those are the sorts of things

938
00:52:35,800 --> 00:52:37,719
Speaker 1: that we'd like to see f stock focused on. So

939
00:52:37,800 --> 00:52:41,640
Speaker 1: you you mentioned earlier, you know companies, you know, funds

940
00:52:41,680 --> 00:52:44,799
Speaker 1: that are buying a lot of liquid securities. All right,

941
00:52:45,080 --> 00:52:47,879
Speaker 1: I think it's perfectly legitimate for f stock to look

942
00:52:47,880 --> 00:52:51,600
Speaker 1: at that and say is that activity going to create

943
00:52:51,640 --> 00:52:53,719
Speaker 1: systemic risk? Now we could have a debate about that,

944
00:52:54,120 --> 00:52:56,319
Speaker 1: but it's a it's a very fair question. And if

945
00:52:56,360 --> 00:52:58,279
Speaker 1: the answer is yes, then okay, then you've got to

946
00:52:58,400 --> 00:53:01,200
Speaker 1: you either you give them the oportunity to de risk

947
00:53:01,280 --> 00:53:03,719
Speaker 1: or designate them. But if the answer is no, then

948
00:53:03,760 --> 00:53:06,440
Speaker 1: you move on. But it's certainly a good line of question.

949
00:53:06,800 --> 00:53:09,840
Speaker 1: But just because the funds big doesn't mean it should

950
00:53:09,840 --> 00:53:12,839
Speaker 1: be automatically systemically important. You get the sense they don't

951
00:53:12,920 --> 00:53:16,400
Speaker 1: understand what different companies do in different roles. Now, if

952
00:53:16,440 --> 00:53:18,759
Speaker 1: you guys suddenly set up, all right, here's our new

953
00:53:18,800 --> 00:53:22,960
Speaker 1: structured products division, and here's our new leverage derivatives division,

954
00:53:23,000 --> 00:53:26,240
Speaker 1: and here's our liquid alts division, that's a different story.

955
00:53:26,400 --> 00:53:29,120
Speaker 1: But and if we were doing proprietary trading for our

956
00:53:29,120 --> 00:53:31,920
Speaker 1: own behalf, absolutely there would be a completely different story.

957
00:53:32,320 --> 00:53:35,040
Speaker 1: And now the other half of that, which I'm not

958
00:53:35,080 --> 00:53:38,800
Speaker 1: sure exactly where you fall on, is the money market funds.

959
00:53:39,280 --> 00:53:42,879
Speaker 1: And I always scratch my head and wondered, why does

960
00:53:42,920 --> 00:53:46,600
Speaker 1: the taxpayer have to backstop money market funds? These are

961
00:53:46,760 --> 00:53:49,319
Speaker 1: risk instruments. Hey, if you want to buy something that's

962
00:53:49,400 --> 00:53:52,360
Speaker 1: risk free, there are lots of short term notes you

963
00:53:52,400 --> 00:53:55,040
Speaker 1: can do, but this is going to generate a yield

964
00:53:55,760 --> 00:53:59,879
Speaker 1: that's above risk free return. Therefore you're assuming some risk.

965
00:54:00,600 --> 00:54:03,759
Speaker 1: So look, the way I look at money funds is

966
00:54:03,880 --> 00:54:07,160
Speaker 1: money funds were essentially a convenience. If you look at

967
00:54:07,440 --> 00:54:12,799
Speaker 1: um a very short term, very short duration portfolio, the

968
00:54:12,880 --> 00:54:18,279
Speaker 1: price fluctuates, you know, point to one point oh one,

969
00:54:19,000 --> 00:54:23,479
Speaker 1: and you know, under lots of different circumstances. And so

970
00:54:23,600 --> 00:54:27,040
Speaker 1: the idea of keeping a constant NAV was a convenience

971
00:54:27,040 --> 00:54:30,399
Speaker 1: that allowed people to use it for transactional purposes. Now,

972
00:54:30,440 --> 00:54:34,200
Speaker 1: what happened over time, and and this is this is

973
00:54:34,280 --> 00:54:37,600
Speaker 1: a very fair criticism of the fund industry, is that

974
00:54:37,840 --> 00:54:43,000
Speaker 1: simple product evolved into something different, especially on the institutional side.

975
00:54:43,040 --> 00:54:45,239
Speaker 1: It became much more of a cash management vehicle. And

976
00:54:45,280 --> 00:54:47,960
Speaker 1: what you saw were you know, multiple na vs being

977
00:54:48,000 --> 00:54:50,720
Speaker 1: struct during the day and so forth, and and lots

978
00:54:50,760 --> 00:54:54,800
Speaker 1: of interesting things being done where it really was away

979
00:54:54,840 --> 00:54:58,759
Speaker 1: from the original spirit of the product. So UM, the

980
00:54:58,840 --> 00:55:01,880
Speaker 1: way the sec forms ended up, we were actually we

981
00:55:01,920 --> 00:55:04,759
Speaker 1: actually thought it was a pretty balanced approach. There were,

982
00:55:04,800 --> 00:55:08,200
Speaker 1: you know, first of all, lots of tightening of UM,

983
00:55:08,239 --> 00:55:10,359
Speaker 1: you know, in potential, you know, what can be in

984
00:55:10,360 --> 00:55:13,800
Speaker 1: in a portfolio and so forth, and durations and whatnot.

985
00:55:14,080 --> 00:55:19,200
Speaker 1: But very importantly, UM institutional funds, institutional prime funds are

986
00:55:19,239 --> 00:55:23,080
Speaker 1: actually no longer constant NAV because of their because of

987
00:55:23,120 --> 00:55:25,520
Speaker 1: their nature the words for for people who may not

988
00:55:25,680 --> 00:55:28,200
Speaker 1: be familiar with money market funds, this used to always

989
00:55:28,719 --> 00:55:31,400
Speaker 1: report as one dollar, right, even if it was worth

990
00:55:31,600 --> 00:55:34,120
Speaker 1: a little over a little less. So there was never

991
00:55:34,160 --> 00:55:36,439
Speaker 1: any concerns. So when you wrote a check, you didn't

992
00:55:36,440 --> 00:55:39,160
Speaker 1: have a taxable event was you know, from a convenient standpoint.

993
00:55:39,200 --> 00:55:42,439
Speaker 1: That's what it was all about. Now, during the crisis, UM,

994
00:55:43,239 --> 00:55:45,400
Speaker 1: the Reserve Fund which broke the buck had a pretty

995
00:55:45,400 --> 00:55:49,400
Speaker 1: big concentration of institutional investors, and the other funds that

996
00:55:49,440 --> 00:55:54,160
Speaker 1: were under duress UM were all institutionally oriented. Now you

997
00:55:54,200 --> 00:55:56,759
Speaker 1: mentioned the taxpayer element. You know, when the Treasury came

998
00:55:56,760 --> 00:56:00,320
Speaker 1: in and put the guarantee on. To be fair, nobody

999
00:56:00,320 --> 00:56:03,400
Speaker 1: asked for that, and actually it was just sort of

1000
00:56:03,440 --> 00:56:06,960
Speaker 1: imposed and you didn't really have a lot of choice,

1001
00:56:07,280 --> 00:56:10,319
Speaker 1: but there was a deep sigh of relief after they

1002
00:56:10,360 --> 00:56:15,920
Speaker 1: did that. So it was but everybody kind of unclenched

1003
00:56:15,960 --> 00:56:17,719
Speaker 1: a little bit. Book. I went out and talked to

1004
00:56:17,880 --> 00:56:21,200
Speaker 1: hundreds of clients afterwards, and they did. And you know,

1005
00:56:21,280 --> 00:56:24,080
Speaker 1: for us UM, you know, I kind of always knew

1006
00:56:24,120 --> 00:56:27,879
Speaker 1: this would circle back though, because UM our prime fund

1007
00:56:27,920 --> 00:56:32,239
Speaker 1: at that point was government and treasury. So unless the

1008
00:56:32,320 --> 00:56:36,040
Speaker 1: US government defaulted, that prime fund could have withstood anything.

1009
00:56:36,200 --> 00:56:40,080
Speaker 1: So shouldn't you guys have been more rewarded by client

1010
00:56:40,200 --> 00:56:44,480
Speaker 1: flows and the people who were more reckless or less

1011
00:56:44,640 --> 00:56:48,400
Speaker 1: astute is really the right word. Should shouldn't the marketplace

1012
00:56:48,440 --> 00:56:51,799
Speaker 1: have been allowed to separate winners or losers? Or was

1013
00:56:51,880 --> 00:56:57,120
Speaker 1: this systemically important? I think it was really you know,

1014
00:56:57,160 --> 00:57:00,520
Speaker 1: it's one of those will never really know. Um. You know,

1015
00:57:00,840 --> 00:57:03,440
Speaker 1: I'm a market space person. I like to let the

1016
00:57:03,480 --> 00:57:07,359
Speaker 1: market shake out. Look the short term, the short term

1017
00:57:07,400 --> 00:57:11,600
Speaker 1: markets were in turmoil, um, and you know, certainly the

1018
00:57:12,000 --> 00:57:14,680
Speaker 1: breaking of the buck by the Reserve Fund contributed to that.

1019
00:57:15,320 --> 00:57:19,560
Speaker 1: But um, you remember Triple A companies were having a

1020
00:57:19,560 --> 00:57:21,760
Speaker 1: hard time rolling over their commercial paper. There was so

1021
00:57:21,880 --> 00:57:25,120
Speaker 1: much uncertainty as to what was going to be allowed

1022
00:57:25,160 --> 00:57:27,960
Speaker 1: and what wasn't not going to be allowed. It's it's

1023
00:57:28,000 --> 00:57:30,680
Speaker 1: really tough to go back and say, well, you know,

1024
00:57:30,800 --> 00:57:33,160
Speaker 1: this would have happened if only these things have been done,

1025
00:57:33,280 --> 00:57:34,880
Speaker 1: or this would have happened if only these things have

1026
00:57:34,960 --> 00:57:37,880
Speaker 1: been done. I'm not sure we'll ever really know. Um.

1027
00:57:38,720 --> 00:57:40,919
Speaker 1: I think I think the regulators did the best they

1028
00:57:40,960 --> 00:57:43,600
Speaker 1: could with the information that they had at the time.

1029
00:57:43,800 --> 00:57:47,120
Speaker 1: We need to run a series of controlled experiments. In

1030
00:57:47,200 --> 00:57:50,480
Speaker 1: one universe, we allow city group to go under, and

1031
00:57:50,520 --> 00:57:53,320
Speaker 1: in another universe we save Leaman and then we run

1032
00:57:53,360 --> 00:57:57,640
Speaker 1: these simulations and see what happens. Unfortunately we didn't get

1033
00:57:57,680 --> 00:57:59,880
Speaker 1: a chance to do that. Let's let's stick with regulation

1034
00:58:00,000 --> 00:58:04,760
Speaker 1: a little bit. I have two related questions. First, what

1035
00:58:04,760 --> 00:58:08,760
Speaker 1: what should the SEC be doing better? What does good

1036
00:58:08,800 --> 00:58:13,240
Speaker 1: financial regulation look like? Yeah, so I think the SEC

1037
00:58:13,600 --> 00:58:17,240
Speaker 1: um has been moving in a in a very constructive

1038
00:58:17,600 --> 00:58:20,360
Speaker 1: UM direction. I think Mary Joe White has put some

1039
00:58:20,440 --> 00:58:24,200
Speaker 1: real um, you know, clear markers in the sand around

1040
00:58:24,240 --> 00:58:26,720
Speaker 1: what her priorities are. And I think she's done a

1041
00:58:26,720 --> 00:58:29,920
Speaker 1: pretty good job. Um. You know, she's tough. I mean

1042
00:58:29,960 --> 00:58:35,640
Speaker 1: she's that's a reputation, and she's long time she's very tough.

1043
00:58:35,680 --> 00:58:38,280
Speaker 1: But I think she's very fair. She's you know, incredibly

1044
00:58:38,760 --> 00:58:41,600
Speaker 1: um open to getting feedback, and she you know, she

1045
00:58:41,680 --> 00:58:46,520
Speaker 1: really processes it very quickly. I think what the SEC

1046
00:58:46,920 --> 00:58:50,919
Speaker 1: is trying to do in terms of gathering UM, doing

1047
00:58:50,920 --> 00:58:54,040
Speaker 1: a better job gathering data UM so that they really

1048
00:58:54,040 --> 00:58:57,320
Speaker 1: have a better view into what's happening into markets is

1049
00:58:57,320 --> 00:58:59,560
Speaker 1: a really good thing. And a lot of it. You know,

1050
00:58:59,600 --> 00:59:03,960
Speaker 1: the fund industry, UM, we're the most transparent. There's all

1051
00:59:04,040 --> 00:59:06,520
Speaker 1: this money outside the fund industry that they need to

1052
00:59:06,560 --> 00:59:10,080
Speaker 1: get their handle hands around what's actually happening, and I

1053
00:59:10,080 --> 00:59:12,080
Speaker 1: think they're actually trying to move in that direction. So

1054
00:59:12,120 --> 00:59:14,680
Speaker 1: to me, that's a top priority. When you say outside

1055
00:59:14,720 --> 00:59:19,640
Speaker 1: the fund industry, private equity, hed hedge funds, private equity, um,

1056
00:59:20,120 --> 00:59:23,280
Speaker 1: but separate accounts, I mean, you know, there's there's more

1057
00:59:23,320 --> 00:59:26,800
Speaker 1: money and separate, separately managed accounts on the institutional side

1058
00:59:26,800 --> 00:59:29,560
Speaker 1: than there is in mutual funds. And that's a big number.

1059
00:59:29,600 --> 00:59:33,120
Speaker 1: It's a huge number. And so, um, they're trying to

1060
00:59:33,120 --> 00:59:35,160
Speaker 1: get their handle on all of that so that they

1061
00:59:35,160 --> 00:59:38,840
Speaker 1: can really appropriately assess, you know, what, where are their

1062
00:59:38,960 --> 00:59:44,160
Speaker 1: risks and so forth. I think, um, they need to Uh,

1063
00:59:44,200 --> 00:59:49,520
Speaker 1: there's still some opportunity for harmonization with the other agencies.

1064
00:59:49,520 --> 00:59:52,120
Speaker 1: I mean, it's it's pretty complicated to figure out who's

1065
00:59:52,120 --> 00:59:54,720
Speaker 1: in charge of what you know, between the CFTC, the SEC,

1066
00:59:55,040 --> 00:59:57,880
Speaker 1: now the d o L and on certain issues, let's

1067
00:59:57,880 --> 00:59:59,840
Speaker 1: talk about the d o L because that's a fast

1068
00:59:59,840 --> 01:00:05,360
Speaker 1: and in conversation. Um. So, after the financial crisis, part

1069
01:00:05,400 --> 01:00:09,520
Speaker 1: of Dodd Frank more or less directed the SEC to

1070
01:00:09,720 --> 01:00:16,200
Speaker 1: review some of the issues that involved brokers, advisors, are as, etcetera.

1071
01:00:16,320 --> 01:00:19,040
Speaker 1: And I think it was the SEC comes out with

1072
01:00:19,080 --> 01:00:23,000
Speaker 1: the report that said, we think the fiduciary standard, which

1073
01:00:23,040 --> 01:00:26,240
Speaker 1: is quote unquote whatever is in the client's best interest,

1074
01:00:26,760 --> 01:00:30,480
Speaker 1: is really the appropriate standard for everybody, and let's enforced

1075
01:00:30,520 --> 01:00:34,640
Speaker 1: this uniformly. And it never made it out of committee.

1076
01:00:34,720 --> 01:00:37,960
Speaker 1: At three to two it lost, But then the Department

1077
01:00:37,960 --> 01:00:41,480
Speaker 1: of Labor kind of said, okay, we'll pick this up

1078
01:00:41,520 --> 01:00:45,240
Speaker 1: backdoor and pretty much mandated that four oh one K

1079
01:00:45,720 --> 01:00:48,640
Speaker 1: management and my wife has a four oh three B

1080
01:00:48,840 --> 01:00:55,200
Speaker 1: which is PS mostly Vanguard m essentially said this new

1081
01:00:55,280 --> 01:00:58,480
Speaker 1: fiduciary or not so new fiduciary standard is now the

1082
01:00:58,520 --> 01:01:02,760
Speaker 1: new standard for anybody was advising on these retirement accounts,

1083
01:01:02,760 --> 01:01:05,480
Speaker 1: which are really under the pur of view of salary,

1084
01:01:05,760 --> 01:01:08,560
Speaker 1: not outside investing. And that's why it's our per of view,

1085
01:01:08,600 --> 01:01:12,200
Speaker 1: not the SEC. So that's a long winded wind up

1086
01:01:12,200 --> 01:01:15,280
Speaker 1: for a question. But where is Vanguard on the issue

1087
01:01:15,320 --> 01:01:19,600
Speaker 1: of fiduciary versus suitability? So at the highest level, we're

1088
01:01:19,640 --> 01:01:24,280
Speaker 1: actually comfortable with the raising the fiduciary standard. I think,

1089
01:01:24,440 --> 01:01:27,080
Speaker 1: as with all new regulation, the devil's going to be

1090
01:01:27,080 --> 01:01:30,520
Speaker 1: in the details. And you know when the d o

1091
01:01:30,760 --> 01:01:33,080
Speaker 1: L actually tried to do this a couple of years ago,

1092
01:01:33,120 --> 01:01:36,200
Speaker 1: as you may recall, and ran into a sort of

1093
01:01:36,240 --> 01:01:40,240
Speaker 1: a hornet's nest because under a RISSA there's some really

1094
01:01:40,280 --> 01:01:45,600
Speaker 1: technical in the weeds UM issues around prohibited transactions. And basically,

1095
01:01:45,600 --> 01:01:48,400
Speaker 1: if you were a four oh one K provider, you

1096
01:01:48,440 --> 01:01:52,160
Speaker 1: would have been prohibited from doing certain really basic things

1097
01:01:52,200 --> 01:01:56,080
Speaker 1: for your investors, such as, UM, potentially you know, giving

1098
01:01:56,080 --> 01:02:01,240
Speaker 1: guidance around rebalancing a portfolio. UM. And I don't think

1099
01:02:01,280 --> 01:02:03,600
Speaker 1: that was the intent. And so what would you do.

1100
01:02:03,680 --> 01:02:06,080
Speaker 1: You'd have to bring in a third party to to

1101
01:02:06,680 --> 01:02:10,600
Speaker 1: you know, be independent and more cost layer another layer exactly.

1102
01:02:10,600 --> 01:02:13,280
Speaker 1: So so it was it was actually counter to what

1103
01:02:13,360 --> 01:02:15,720
Speaker 1: the original intent. So they you know, they stepped back.

1104
01:02:16,360 --> 01:02:19,880
Speaker 1: The new rule is out, UM. You know, the proposal

1105
01:02:20,000 --> 01:02:22,640
Speaker 1: is out and people are studying its four hundred pages.

1106
01:02:23,120 --> 01:02:25,480
Speaker 1: So we're sort of working our way through it as

1107
01:02:25,480 --> 01:02:28,000
Speaker 1: we speak actually right now. So I can't give you

1108
01:02:28,040 --> 01:02:31,880
Speaker 1: a definitive do they have it right? I'm pretty sure

1109
01:02:31,920 --> 01:02:36,760
Speaker 1: they've thought about the prohibited transaction elements UM in in

1110
01:02:36,760 --> 01:02:39,120
Speaker 1: in the in the rules. As we go forward, hopefully

1111
01:02:39,200 --> 01:02:41,560
Speaker 1: they've got that right, because that's going to be important

1112
01:02:42,000 --> 01:02:45,439
Speaker 1: for us. That's really important. UM at the highest level,

1113
01:02:45,480 --> 01:02:49,560
Speaker 1: you know, you know, higher fiduciary standards for people handling

1114
01:02:49,560 --> 01:02:52,200
Speaker 1: money makes a lot of sense. You would think there

1115
01:02:52,320 --> 01:02:57,520
Speaker 1: was some issues that the target date funds somebody had suggested,

1116
01:02:57,720 --> 01:03:02,240
Speaker 1: essentially came about as a solution to some of the

1117
01:03:02,280 --> 01:03:05,800
Speaker 1: four oh one k rules. You guys are pretty substantial

1118
01:03:05,800 --> 01:03:09,000
Speaker 1: footprint and target date funds we haven't really gotten to that.

1119
01:03:09,080 --> 01:03:11,920
Speaker 1: Let's let's talk a little bit about that. Who is

1120
01:03:11,960 --> 01:03:16,240
Speaker 1: that appropriate for? What's the thinking behind these? I've read

1121
01:03:16,320 --> 01:03:20,600
Speaker 1: some criticisms of target date funds, about half of which

1122
01:03:20,680 --> 01:03:23,600
Speaker 1: the criticism is on costs, so I know who I'm

1123
01:03:23,640 --> 01:03:26,960
Speaker 1: speaking with, and the other half is they have a

1124
01:03:27,000 --> 01:03:31,720
Speaker 1: tendency to be a little too conservative given modern lifespans. Yeah,

1125
01:03:32,040 --> 01:03:35,000
Speaker 1: so a couple of things the target date funds really

1126
01:03:35,040 --> 01:03:38,720
Speaker 1: came about, Um, you have. When the Pension Protection Act

1127
01:03:38,840 --> 01:03:41,040
Speaker 1: was passed in two thousand seven, one of the things

1128
01:03:41,040 --> 01:03:43,680
Speaker 1: that allowed it made very clear that you could have

1129
01:03:43,720 --> 01:03:48,000
Speaker 1: a default option that was a more balanced approach. UM.

1130
01:03:48,040 --> 01:03:50,960
Speaker 1: So it sort of gave regulatory permission for something a

1131
01:03:50,960 --> 01:03:53,880
Speaker 1: lot of for forward thinking companies had already been doing.

1132
01:03:54,200 --> 01:03:56,520
Speaker 1: You you guys also, and it may even be closed.

1133
01:03:56,520 --> 01:03:59,880
Speaker 1: Didn't you have just a basic sixty forty portfolio? We do?

1134
01:04:00,000 --> 01:04:05,120
Speaker 1: And one one fun balance index um. People still use it.

1135
01:04:05,200 --> 01:04:08,880
Speaker 1: Is it closed close the name of it balance index funds,

1136
01:04:09,920 --> 01:04:13,480
Speaker 1: And that's perfectly fine. It's it's a perfectly good default.

1137
01:04:13,920 --> 01:04:17,360
Speaker 1: The you know, in the early days of target date funds,

1138
01:04:17,400 --> 01:04:21,320
Speaker 1: what was really fascinating is people said, it's too simplistic.

1139
01:04:21,360 --> 01:04:23,200
Speaker 1: You know, you're only looking at age. And you know,

1140
01:04:23,280 --> 01:04:24,960
Speaker 1: you and I are. You're younger than I am, but

1141
01:04:25,000 --> 01:04:27,920
Speaker 1: we're in the same band. So you may have a

1142
01:04:28,000 --> 01:04:30,840
Speaker 1: much different risk tolerance than I do. And does that

1143
01:04:30,880 --> 01:04:33,920
Speaker 1: mean we should be in different portfolios? And in the

1144
01:04:33,960 --> 01:04:36,680
Speaker 1: short answer that is, of course it does. But when

1145
01:04:36,760 --> 01:04:39,480
Speaker 1: you think about target daid funds were designed for people

1146
01:04:39,520 --> 01:04:42,960
Speaker 1: who did not want to make a decision, nor often

1147
01:04:42,960 --> 01:04:45,520
Speaker 1: they weren't making a decision, so their money was going

1148
01:04:45,520 --> 01:04:48,000
Speaker 1: into a money market fund where they were earning almost nothing,

1149
01:04:48,160 --> 01:04:51,840
Speaker 1: certainly no real return. And so the idea was, you know,

1150
01:04:51,880 --> 01:04:56,000
Speaker 1: could you put together a professionally managed balanced fund that

1151
01:04:56,040 --> 01:05:01,280
Speaker 1: would rebalance periodically that was age appropriate. Um, given somebody's

1152
01:05:01,400 --> 01:05:05,560
Speaker 1: you know, a traditional lifespan, and um, you know what

1153
01:05:05,640 --> 01:05:09,560
Speaker 1: we've done is we've got pretty sophisticated global asset allocation

1154
01:05:09,680 --> 01:05:15,680
Speaker 1: portfolio for people, very low cost periodically rebalances UM. And

1155
01:05:16,400 --> 01:05:19,560
Speaker 1: you know, if somebody wants to talk about their risk

1156
01:05:19,560 --> 01:05:22,560
Speaker 1: tolerance and wants to get into more subtleties, we've got

1157
01:05:22,600 --> 01:05:24,520
Speaker 1: a million different options that we can give them, and

1158
01:05:24,560 --> 01:05:26,680
Speaker 1: we can we can help them with that. But for

1159
01:05:26,720 --> 01:05:28,400
Speaker 1: the person who's like, I don't know what to do,

1160
01:05:29,320 --> 01:05:31,120
Speaker 1: tell me, you're tell me when you want to retire,

1161
01:05:31,240 --> 01:05:33,600
Speaker 1: put your money in that fund and you and and

1162
01:05:33,920 --> 01:05:35,920
Speaker 1: I'll tell you, verry, if you look at the performance

1163
01:05:35,960 --> 01:05:39,040
Speaker 1: of these things over a long period of time, it's

1164
01:05:39,080 --> 01:05:43,480
Speaker 1: it's it's really solid, very difficult um actually for you know,

1165
01:05:43,520 --> 01:05:47,840
Speaker 1: any active managers to beat. And it's a it's one

1166
01:05:47,840 --> 01:05:49,880
Speaker 1: of those things you will always be happy that you

1167
01:05:49,920 --> 01:05:52,960
Speaker 1: put an investor there. So that that's kind of interesting

1168
01:05:53,000 --> 01:05:55,200
Speaker 1: and it's very global by the way, that that was

1169
01:05:55,280 --> 01:05:58,959
Speaker 1: one of the questions that seems to come out of

1170
01:05:59,040 --> 01:06:03,720
Speaker 1: the fiduciary discussion because somehow, I don't know if I'm

1171
01:06:03,840 --> 01:06:06,600
Speaker 1: I'm getting this right. There was an issue of well,

1172
01:06:06,640 --> 01:06:11,240
Speaker 1: if you impose this fiduciary obligation on brokers or other advisors,

1173
01:06:11,280 --> 01:06:13,240
Speaker 1: they won't be able to do this. And I didn't

1174
01:06:13,280 --> 01:06:18,120
Speaker 1: really under the arguments against the fiduciary standard, none of

1175
01:06:18,160 --> 01:06:22,120
Speaker 1: them have been and full disclosure were fiduciaries. We we

1176
01:06:22,200 --> 01:06:26,400
Speaker 1: play in that sandbox. So I'm I'm completely biased. I'm

1177
01:06:26,400 --> 01:06:29,040
Speaker 1: not pretending to be objective, but every time I see

1178
01:06:29,040 --> 01:06:33,240
Speaker 1: an argument against it, it they just seemed to be

1179
01:06:33,360 --> 01:06:37,000
Speaker 1: really working hard to you know, it's zero inches in

1180
01:06:37,040 --> 01:06:40,240
Speaker 1: a cloud of dust. It doesn't seem like they're very persuasive.

1181
01:06:40,600 --> 01:06:44,440
Speaker 1: I think the fear, especially in some of the smaller

1182
01:06:44,480 --> 01:06:47,960
Speaker 1: planned market and where which are sold through many of

1183
01:06:48,000 --> 01:06:52,560
Speaker 1: which are sold through advisors, and for smaller investors, that

1184
01:06:52,800 --> 01:06:56,400
Speaker 1: this will UM, you'll move away from any kind of

1185
01:06:56,440 --> 01:06:59,440
Speaker 1: transaction based and you know, fee based for real little

1186
01:06:59,440 --> 01:07:03,600
Speaker 1: investors can be more expensive sometimes than transaction based. I think,

1187
01:07:03,840 --> 01:07:05,720
Speaker 1: you know, there's a way, you know, people need to

1188
01:07:05,720 --> 01:07:08,560
Speaker 1: think about their costs anyway. So, but that's the argument

1189
01:07:08,600 --> 01:07:11,960
Speaker 1: that you hear some people that works. UM. I love

1190
01:07:12,000 --> 01:07:14,000
Speaker 1: this quote of yours. I want to talk about a

1191
01:07:14,000 --> 01:07:17,720
Speaker 1: little bit. Looking at investments in less than a five

1192
01:07:17,880 --> 01:07:21,240
Speaker 1: to ten year window is time wasted. I know I'm

1193
01:07:21,320 --> 01:07:24,920
Speaker 1: changing gears on you, but let's talk about that concept

1194
01:07:25,000 --> 01:07:29,280
Speaker 1: of this is for the long term. Yeah, I look,

1195
01:07:29,320 --> 01:07:34,000
Speaker 1: I you know, I really I really believe that UM.

1196
01:07:34,040 --> 01:07:36,440
Speaker 1: Actually one of the things I enjoy reading the most

1197
01:07:36,480 --> 01:07:41,720
Speaker 1: of yours is your commentary around short term predictions. And

1198
01:07:41,880 --> 01:07:43,640
Speaker 1: I think you and I are aligned on this that

1199
01:07:44,120 --> 01:07:47,960
Speaker 1: very much. You read. You read these predictions for the year,

1200
01:07:48,200 --> 01:07:51,600
Speaker 1: and you might as well just throw darts. And unfortunately,

1201
01:07:51,640 --> 01:07:55,120
Speaker 1: people do pay attention to them, and they actually occasionally invest,

1202
01:07:55,280 --> 01:07:57,320
Speaker 1: at least on the margin, based on them, and I

1203
01:07:57,320 --> 01:08:00,720
Speaker 1: think they're making a huge mistake. And so we really

1204
01:08:00,760 --> 01:08:03,840
Speaker 1: want people thinking out you know, I say five to ten,

1205
01:08:03,880 --> 01:08:06,280
Speaker 1: but ten, you know, people should be thinking in ten

1206
01:08:06,360 --> 01:08:13,520
Speaker 1: year increments um around their portfolios because it's really difficult

1207
01:08:13,760 --> 01:08:16,599
Speaker 1: to have any sense in the short run what's going

1208
01:08:16,640 --> 01:08:19,080
Speaker 1: to happen, you know, pretty random. I mean, if you

1209
01:08:19,200 --> 01:08:22,880
Speaker 1: believe Burton Burton Malkiel has a clue what he's talking about,

1210
01:08:23,400 --> 01:08:26,200
Speaker 1: it's a fairly random walk, isn't it. You probably remember

1211
01:08:26,240 --> 01:08:28,479
Speaker 1: the article, but I think it was maybe a decade

1212
01:08:28,560 --> 01:08:30,439
Speaker 1: or more ago. The New York Times ran a piece

1213
01:08:30,479 --> 01:08:33,639
Speaker 1: where they looked at twenty year returns and they compared

1214
01:08:33,680 --> 01:08:38,120
Speaker 1: treasury you know, treasury bonds to equities, and I think

1215
01:08:38,120 --> 01:08:40,479
Speaker 1: if I have the stat right, if you took the

1216
01:08:40,600 --> 01:08:44,680
Speaker 1: ten best days out of a twenty year period, your

1217
01:08:44,720 --> 01:08:48,439
Speaker 1: equity returned dropped from roughly ten percent down to the

1218
01:08:48,520 --> 01:08:52,760
Speaker 1: level of a Treasury bond. And so that whole risk premium,

1219
01:08:52,800 --> 01:08:54,439
Speaker 1: if you will, that you were being paid was earned

1220
01:08:54,479 --> 01:08:55,760
Speaker 1: in ten days, not you. And I know it's not

1221
01:08:55,840 --> 01:08:59,280
Speaker 1: quite that simple, but I think the message was are

1222
01:08:59,320 --> 01:09:02,040
Speaker 1: you that good that you're gonna you're gonna be in

1223
01:09:02,080 --> 01:09:06,080
Speaker 1: those ten days? And my view is nobody's that good.

1224
01:09:06,200 --> 01:09:09,000
Speaker 1: And if you look at the distribution those ten days,

1225
01:09:09,040 --> 01:09:13,240
Speaker 1: they tend to come near some of the worst days, right,

1226
01:09:13,280 --> 01:09:16,320
Speaker 1: So if you're stepping aside to miss those worst days,

1227
01:09:16,600 --> 01:09:19,439
Speaker 1: you're also missing some of the best. That's actually a

1228
01:09:19,439 --> 01:09:20,840
Speaker 1: great point in what I hadn't even thought of. But

1229
01:09:20,880 --> 01:09:22,960
Speaker 1: you're absolutely right when I think about that, what what

1230
01:09:22,960 --> 01:09:26,200
Speaker 1: what the periods are? And so again our view is,

1231
01:09:26,600 --> 01:09:30,400
Speaker 1: you know, really be be very long term oriented in

1232
01:09:30,439 --> 01:09:33,960
Speaker 1: what you're doing, and that's actually what gives the ability

1233
01:09:34,479 --> 01:09:37,639
Speaker 1: for you know, and obviously this sounds like I'm talking

1234
01:09:37,840 --> 01:09:40,439
Speaker 1: you know, Vanguard's book, if you will, But you know,

1235
01:09:40,520 --> 01:09:45,320
Speaker 1: low cost the low cost advantage, it's it's that compounding

1236
01:09:45,360 --> 01:09:48,920
Speaker 1: effect over a decade that really shows up. You know that,

1237
01:09:49,000 --> 01:09:51,559
Speaker 1: you know, when you look at say active versus passive

1238
01:09:51,600 --> 01:09:55,240
Speaker 1: as the extreme examples of low cost investing. UM you know,

1239
01:09:55,280 --> 01:09:57,360
Speaker 1: a year to year can be you know, half of

1240
01:09:57,400 --> 01:10:00,000
Speaker 1: your active funds. Some some years will beat your passive funds.

1241
01:10:00,200 --> 01:10:03,040
Speaker 1: But when you look over ten year period, it's consistently

1242
01:10:03,240 --> 01:10:07,680
Speaker 1: you know less than and that's that compounding cost differential

1243
01:10:07,800 --> 01:10:10,240
Speaker 1: over you know, a long period of time. You guys

1244
01:10:10,240 --> 01:10:14,000
Speaker 1: have a research piece which um I mentioned Jay had

1245
01:10:14,080 --> 01:10:16,960
Speaker 1: had fo to j Tenny is the person for Vanguard

1246
01:10:17,000 --> 01:10:19,360
Speaker 1: who I shouldn't say covers us. We just know him

1247
01:10:19,400 --> 01:10:22,280
Speaker 1: personally and he's a great guy. But he sent this

1248
01:10:22,560 --> 01:10:25,280
Speaker 1: research piece and showed the difference between low fee and

1249
01:10:25,360 --> 01:10:29,080
Speaker 1: high fee over thirty years. And if I'm doing the

1250
01:10:29,240 --> 01:10:34,280
Speaker 1: math right at the end of the period, especially thirty

1251
01:10:34,320 --> 01:10:38,000
Speaker 1: if you're looking at three decades, the return difference is

1252
01:10:38,160 --> 01:10:42,519
Speaker 1: an order of magnitude. It's just a tremendous impact. And

1253
01:10:42,680 --> 01:10:46,680
Speaker 1: think about what one percent compounded for thirty years is

1254
01:10:46,720 --> 01:10:49,400
Speaker 1: going to do to uh any sort of PORTFOLI I'll

1255
01:10:49,400 --> 01:10:51,559
Speaker 1: give you an example. So I just did this for

1256
01:10:51,600 --> 01:10:53,679
Speaker 1: somebody where we looked at sort of a high cost

1257
01:10:53,960 --> 01:10:56,479
Speaker 1: versus low cost sort of total cost of investing, if

1258
01:10:56,520 --> 01:10:59,479
Speaker 1: you will. UM so looking at a place where they

1259
01:10:59,520 --> 01:11:03,400
Speaker 1: were getting ice and whatnot. The um the difference in

1260
01:11:03,400 --> 01:11:09,200
Speaker 1: the ending balances UM translated into a difference in an

1261
01:11:10,320 --> 01:11:14,719
Speaker 1: So you know, basically, imagine your your standard of living

1262
01:11:14,920 --> 01:11:19,559
Speaker 1: up or down based on on this effect. That that's

1263
01:11:19,600 --> 01:11:24,480
Speaker 1: a meaningful that's a meaningful swing. Um. Let's talk about valuation.

1264
01:11:25,080 --> 01:11:28,719
Speaker 1: So you guys, if you're thinking long term, I keep

1265
01:11:28,760 --> 01:11:32,320
Speaker 1: hearing from people and reading stocks are high, bonds are high,

1266
01:11:32,320 --> 01:11:36,400
Speaker 1: everything's high. Expect low returns going forward, which is sort

1267
01:11:36,439 --> 01:11:40,280
Speaker 1: of a prediction. Some people say it's really just basic math,

1268
01:11:40,479 --> 01:11:43,240
Speaker 1: but to me, it looks like a prediction that the

1269
01:11:43,280 --> 01:11:47,080
Speaker 1: economy isn't going to accelerate, that earnings aren't going to normalize,

1270
01:11:47,080 --> 01:11:49,640
Speaker 1: that we're not going to eventually come out of this

1271
01:11:49,800 --> 01:11:52,720
Speaker 1: de leveraging period, of which we're still you know, I

1272
01:11:52,760 --> 01:11:57,360
Speaker 1: think the US population is deleveraged about of their excess

1273
01:11:57,720 --> 01:12:01,760
Speaker 1: pre crisis debt, so we could still only be halfway

1274
01:12:01,800 --> 01:12:05,680
Speaker 1: through the healing process. What what's your perspective evaluation and

1275
01:12:06,000 --> 01:12:09,519
Speaker 1: what does it mean to forward expected return? So I'll

1276
01:12:09,520 --> 01:12:13,200
Speaker 1: give you, I'll give you all the appropriate caveats. So one,

1277
01:12:13,360 --> 01:12:16,280
Speaker 1: you know, we're living in a period like none we've

1278
01:12:16,320 --> 01:12:18,080
Speaker 1: ever lived. We've never seen the FED do what it's

1279
01:12:18,120 --> 01:12:20,720
Speaker 1: done in the last six years. And if you put

1280
01:12:20,800 --> 01:12:23,640
Speaker 1: the pre crisis easy money period on top of that,

1281
01:12:23,720 --> 01:12:26,200
Speaker 1: you know we've lived in a decade of a decade

1282
01:12:26,200 --> 01:12:29,160
Speaker 1: of very easy money. I don't know how to think

1283
01:12:29,160 --> 01:12:32,320
Speaker 1: about that, to be perfectly honest, I've killed myself thinking

1284
01:12:32,320 --> 01:12:35,360
Speaker 1: about it all the time, and I don't know when

1285
01:12:35,400 --> 01:12:38,280
Speaker 1: it ends and how it ends. UM, So let me

1286
01:12:39,200 --> 01:12:41,760
Speaker 1: I'll send you an email afterwards explain it all, to

1287
01:12:42,000 --> 01:12:45,200
Speaker 1: which I'm I'm ill. That would be good because nobody knows.

1288
01:12:45,240 --> 01:12:47,920
Speaker 1: This is clearly you're you're nailing it. It worries me

1289
01:12:48,000 --> 01:12:52,240
Speaker 1: a lot. This is clearly uncharted territory. I know you

1290
01:12:52,240 --> 01:12:54,760
Speaker 1: could people have made the argument. You know, you look

1291
01:12:54,840 --> 01:12:58,559
Speaker 1: from nineteen thirty to nineteen fifty rates were low, but

1292
01:12:58,680 --> 01:13:02,360
Speaker 1: you can't say they were. It's zero for six years

1293
01:13:02,479 --> 01:13:06,439
Speaker 1: and and there wasn't QUEI back then. Clearly this is

1294
01:13:07,160 --> 01:13:09,320
Speaker 1: uncharted me if you think, I mean again, I'm going

1295
01:13:09,360 --> 01:13:13,400
Speaker 1: to oversimplify it. But if you think about it UM

1296
01:13:13,600 --> 01:13:16,519
Speaker 1: short term, you know money fund should be yielding about

1297
01:13:16,560 --> 01:13:21,639
Speaker 1: two That's what inflation is. Historically, the money markets UM

1298
01:13:21,680 --> 01:13:25,840
Speaker 1: produce roughly inflation UM no real return and so we've

1299
01:13:25,840 --> 01:13:29,519
Speaker 1: gone through a period of distortion in the markets for

1300
01:13:29,640 --> 01:13:32,840
Speaker 1: this prolonged period of time where essentially the short end

1301
01:13:32,920 --> 01:13:37,559
Speaker 1: we're producing negative real returns. UM. We've never lived through that.

1302
01:13:37,640 --> 01:13:41,760
Speaker 1: And typically, um, when you study history, the longer something

1303
01:13:41,880 --> 01:13:45,160
Speaker 1: is distorted, the less predictable and the and the harsher

1304
01:13:45,200 --> 01:13:49,240
Speaker 1: the outcome is. So that's my big, long winded caveat UM.

1305
01:13:49,479 --> 01:13:51,920
Speaker 1: Not much of a caveat that. We we we look

1306
01:13:52,000 --> 01:13:54,680
Speaker 1: at So we look at um. You know, if you

1307
01:13:54,720 --> 01:13:57,040
Speaker 1: look at let's say ten years, if you look at

1308
01:13:57,120 --> 01:13:59,759
Speaker 1: yield to maturity on a bond, it's your best predictor

1309
01:13:59,760 --> 01:14:02,519
Speaker 1: of your returns um. You know, plus or minus fifty

1310
01:14:02,560 --> 01:14:06,280
Speaker 1: basis points. Typically, so yield to maturity on corporate bonds

1311
01:14:06,360 --> 01:14:08,760
Speaker 1: is less than three right now or right around let's

1312
01:14:08,760 --> 01:14:11,360
Speaker 1: say three, just around the numbers. So that's our best

1313
01:14:11,360 --> 01:14:13,280
Speaker 1: guess is to what bonds are going to return over

1314
01:14:13,320 --> 01:14:16,679
Speaker 1: the next decade. I can dream up a scenario where

1315
01:14:16,680 --> 01:14:18,639
Speaker 1: it's worse. I can dream up a scenario where it's better.

1316
01:14:18,680 --> 01:14:21,760
Speaker 1: Not many that it's better. Um, But if you do

1317
01:14:21,800 --> 01:14:24,360
Speaker 1: sort of we do a we sort of a distribution

1318
01:14:24,400 --> 01:14:28,759
Speaker 1: and returns the in the square, you know, the bulk

1319
01:14:28,800 --> 01:14:31,559
Speaker 1: of the distribution, if you will, is in around that

1320
01:14:31,560 --> 01:14:34,920
Speaker 1: three percent number for a corporate bond. If you look

1321
01:14:34,960 --> 01:14:38,240
Speaker 1: at equities, you know, we're at a pretty high valuation

1322
01:14:38,280 --> 01:14:43,120
Speaker 1: place UM, probably top decile historically. And again when we

1323
01:14:43,240 --> 01:14:45,519
Speaker 1: run we so we run a capital markets model which

1324
01:14:45,600 --> 01:14:50,120
Speaker 1: you know basically runs and Monte Carlos simulation UM. And

1325
01:14:50,640 --> 01:14:54,320
Speaker 1: when historically, when markets have been valued this way, the

1326
01:14:54,439 --> 01:14:57,000
Speaker 1: central tendency would be to be a couple hundred basis

1327
01:14:57,000 --> 01:15:01,200
Speaker 1: points below long term average, and so that would typically

1328
01:15:01,880 --> 01:15:05,840
Speaker 1: you know, and again it's a much flattered distribution with

1329
01:15:06,040 --> 01:15:09,559
Speaker 1: much longer tails, but the central tendency is in the

1330
01:15:09,640 --> 01:15:12,559
Speaker 1: six to eight range. And so we've actually been It's

1331
01:15:12,560 --> 01:15:15,439
Speaker 1: not horrible, No, it's not um and considering what we've

1332
01:15:15,479 --> 01:15:19,200
Speaker 1: lived through all things, if that's the future returns, there's

1333
01:15:19,200 --> 01:15:22,599
Speaker 1: certainly worse scenarios. So yeah, you and I could both

1334
01:15:22,680 --> 01:15:24,519
Speaker 1: dream up a lot of worse ones, and we can

1335
01:15:24,560 --> 01:15:26,760
Speaker 1: certainly what could lead to them, and you can you

1336
01:15:26,760 --> 01:15:28,519
Speaker 1: can dream up a few better. Um. You know, you

1337
01:15:28,600 --> 01:15:32,439
Speaker 1: mentioned some things that could accelerate earnings and whatnot. But

1338
01:15:32,520 --> 01:15:34,439
Speaker 1: if you look at if you look at that, what

1339
01:15:34,560 --> 01:15:37,960
Speaker 1: it says is a sixty portfolio is probably going to

1340
01:15:38,040 --> 01:15:42,639
Speaker 1: be in the five so three fifty reel let's say,

1341
01:15:42,720 --> 01:15:46,439
Speaker 1: just for um estimates, that's on the low end of

1342
01:15:46,439 --> 01:15:50,360
Speaker 1: you you know, but it's not crazy. And so what

1343
01:15:50,760 --> 01:15:53,519
Speaker 1: we've been doing is we've been pretty vocal about this

1344
01:15:54,400 --> 01:15:57,719
Speaker 1: because again, to me, it's an asymmetric risk for an investor.

1345
01:15:58,680 --> 01:16:02,160
Speaker 1: If we're wrong, if we're wrong on the if we're

1346
01:16:02,280 --> 01:16:05,960
Speaker 1: too high, then it's going to be a really rough ride.

1347
01:16:06,479 --> 01:16:10,040
Speaker 1: If we're too low, then great, you know, everybody will

1348
01:16:10,080 --> 01:16:12,360
Speaker 1: be happy at the end, although there'll be some inflation.

1349
01:16:12,439 --> 01:16:17,120
Speaker 1: There'll be some inflation. What um. The real messages, especially

1350
01:16:17,160 --> 01:16:20,280
Speaker 1: for people who are in the bulk of their their

1351
01:16:20,280 --> 01:16:24,200
Speaker 1: earning years and in their savings years, is don't expect

1352
01:16:24,240 --> 01:16:26,400
Speaker 1: the markets to bail you out over the next decade.

1353
01:16:26,840 --> 01:16:28,760
Speaker 1: You need to be saving at a higher rate than

1354
01:16:28,800 --> 01:16:31,519
Speaker 1: you are. And you know, well that's always one of

1355
01:16:31,560 --> 01:16:35,960
Speaker 1: the inputs whenever we whenever our cfps run a scenario

1356
01:16:36,000 --> 01:16:39,679
Speaker 1: with people, it's you have to either plan on spending

1357
01:16:39,760 --> 01:16:43,920
Speaker 1: less when you retire, or working longer or saving more.

1358
01:16:44,000 --> 01:16:46,599
Speaker 1: Those are the three which which is your first choice

1359
01:16:46,600 --> 01:16:49,160
Speaker 1: and there and there're no there're no other levers and

1360
01:16:49,240 --> 01:16:51,240
Speaker 1: so what you've got to do what you have to do.

1361
01:16:51,720 --> 01:16:54,280
Speaker 1: You know, I think it's a very much incumbent on

1362
01:16:54,400 --> 01:16:59,080
Speaker 1: us as professionals to make that case to people. UM.

1363
01:16:59,120 --> 01:17:02,080
Speaker 1: And it's hard, it's not sexy, it's not necessarily a

1364
01:17:02,120 --> 01:17:05,519
Speaker 1: fun message. But the flip side is, um, it's the

1365
01:17:05,560 --> 01:17:09,719
Speaker 1: responsible thing to do. And Charlie Ellis's most recent book,

1366
01:17:09,920 --> 01:17:13,200
Speaker 1: right UM, which is on my it's literally sitting on

1367
01:17:13,280 --> 01:17:19,600
Speaker 1: my night table. That's the next book I'm reviewing, basically describes, Hey,

1368
01:17:19,720 --> 01:17:23,800
Speaker 1: here's the situation and we have a potential problem down

1369
01:17:23,800 --> 01:17:26,120
Speaker 1: the road if we don't take steps immediately to fix it.

1370
01:17:26,400 --> 01:17:29,719
Speaker 1: You just summarize the book perfectly in your three times

1371
01:17:29,760 --> 01:17:32,559
Speaker 1: only I'm only three chapters and you got the levers.

1372
01:17:32,600 --> 01:17:34,599
Speaker 1: That's I mean, that's the book I had that. You know,

1373
01:17:34,720 --> 01:17:36,800
Speaker 1: Charlie was kind enough to send me the book early

1374
01:17:36,920 --> 01:17:39,400
Speaker 1: and I had a chance to review it, and it's

1375
01:17:39,439 --> 01:17:42,920
Speaker 1: exactly his message. And look it's there, it is what

1376
01:17:43,040 --> 01:17:45,040
Speaker 1: it is. And you know it's up to us, I think,

1377
01:17:45,080 --> 01:17:47,840
Speaker 1: to really make that case. You know, look, um, I'll

1378
01:17:47,880 --> 01:17:50,280
Speaker 1: say something, it'll sound sacrilegious and it's not meant to.

1379
01:17:50,360 --> 01:17:54,280
Speaker 1: But you know, if I go back to UM and

1380
01:17:54,360 --> 01:17:57,160
Speaker 1: do I have any regrets, And one of them is, um,

1381
01:17:57,280 --> 01:17:59,719
Speaker 1: you know, we didn't have the sophistication around our capital

1382
01:17:59,760 --> 01:18:02,479
Speaker 1: market model. We you know, we weren't doing all these

1383
01:18:02,520 --> 01:18:05,880
Speaker 1: Monte Carlo simulations and predicting future returns and so forth.

1384
01:18:06,560 --> 01:18:09,360
Speaker 1: But you knew in nine that the next decade couldn't

1385
01:18:09,400 --> 01:18:11,439
Speaker 1: be great. I mean you just knew. I mean when

1386
01:18:11,680 --> 01:18:14,280
Speaker 1: stock when p s were where they were earning. You know,

1387
01:18:14,320 --> 01:18:18,439
Speaker 1: however you want to measure valuation. And I wish we

1388
01:18:18,560 --> 01:18:22,400
Speaker 1: as an industry had done a better job telling people that.

1389
01:18:22,600 --> 01:18:24,240
Speaker 1: And you know, there were people out there who were

1390
01:18:24,280 --> 01:18:29,480
Speaker 1: saying it, but it wasn't the strong voice. And um,

1391
01:18:29,520 --> 01:18:32,479
Speaker 1: you know, to me, I certainly don't want to go

1392
01:18:32,520 --> 01:18:34,639
Speaker 1: through that again. I don't think we're in that territory,

1393
01:18:34,680 --> 01:18:38,240
Speaker 1: by the way. But on the other hand, um, we

1394
01:18:38,240 --> 01:18:41,320
Speaker 1: we're farther along. Let me also point out then, and

1395
01:18:41,560 --> 01:18:45,160
Speaker 1: so I began as a trader in the nineties, and

1396
01:18:45,280 --> 01:18:48,720
Speaker 1: there was no frame of reference for anybody who was

1397
01:18:49,400 --> 01:18:54,599
Speaker 1: buying stocks, actively trading playing the dot com game. Think

1398
01:18:54,640 --> 01:18:59,800
Speaker 1: about it, you you had even you know, people kind

1399
01:18:59,800 --> 01:19:02,439
Speaker 1: of have blanched. I'm guilty of it. Also, when Ronald

1400
01:19:02,479 --> 01:19:05,200
Speaker 1: Reagan came out and said, hey, this is just a correction.

1401
01:19:05,960 --> 01:19:09,000
Speaker 1: People snickered. He turned out to be right. It was

1402
01:19:09,120 --> 01:19:11,960
Speaker 1: just everyone forgets eighty seven finished the year up one

1403
01:19:13,000 --> 01:19:15,880
Speaker 1: so that I don't want to call it a flash crash,

1404
01:19:16,160 --> 01:19:22,120
Speaker 1: that major structural plumbing snaffoo. There was no frame of

1405
01:19:22,160 --> 01:19:25,599
Speaker 1: reference for what would happen in two thousand, maybe seventy three,

1406
01:19:25,680 --> 01:19:29,719
Speaker 1: seventy four. But ham I know that because I'm be calm,

1407
01:19:29,800 --> 01:19:33,400
Speaker 1: I've made myself a student of market history after all

1408
01:19:33,439 --> 01:19:36,720
Speaker 1: these years. But back then I had no idea what night.

1409
01:19:37,680 --> 01:19:40,440
Speaker 1: So you're absolutely right in seventy seventy four is the closest.

1410
01:19:40,520 --> 01:19:43,680
Speaker 1: And you know you asked it an earlier question. You

1411
01:19:43,720 --> 01:19:46,800
Speaker 1: know who were some of my people who influenced me, Well,

1412
01:19:46,880 --> 01:19:48,760
Speaker 1: they all lived through that, so I got to hear

1413
01:19:48,800 --> 01:19:51,640
Speaker 1: their stories. And so even though I was a teenager

1414
01:19:51,720 --> 01:19:54,160
Speaker 1: and somebody I remember sitting in gas lines for my

1415
01:19:54,240 --> 01:19:58,360
Speaker 1: dad too, I got to I got to use the

1416
01:19:58,439 --> 01:20:01,160
Speaker 1: car if I sat in the line, even or not.

1417
01:20:01,400 --> 01:20:05,439
Speaker 1: You know, it was today even but um so I

1418
01:20:05,479 --> 01:20:07,960
Speaker 1: was vaguely aware how bad it was out there. But

1419
01:20:08,720 --> 01:20:11,320
Speaker 1: you know, we didn't live through it as professionals, and so,

1420
01:20:11,800 --> 01:20:14,880
Speaker 1: but some of my early mentors did, and so you

1421
01:20:14,880 --> 01:20:17,680
Speaker 1: you look at that and you say, Okay, what can

1422
01:20:17,720 --> 01:20:21,000
Speaker 1: I learn from them? And yeah, So now I think

1423
01:20:21,000 --> 01:20:23,439
Speaker 1: going forward, I'm hoping we're going to do a much

1424
01:20:23,479 --> 01:20:26,120
Speaker 1: better job with this. So so let me ask a

1425
01:20:26,200 --> 01:20:31,439
Speaker 1: somewhat related question, um, because I've asked similar questions to

1426
01:20:31,560 --> 01:20:35,559
Speaker 1: people who did live through the early part of the

1427
01:20:35,640 --> 01:20:39,000
Speaker 1: eighties and as as professionals. So here we are with

1428
01:20:39,160 --> 01:20:43,000
Speaker 1: six years into this bullmarket. We're up two hundred plus percent,

1429
01:20:44,120 --> 01:20:47,519
Speaker 1: and there's still an awful lot of skepticism the fact

1430
01:20:47,560 --> 01:20:52,080
Speaker 1: that we're talking about, hey, let's lower expectation for future returns.

1431
01:20:52,600 --> 01:20:54,599
Speaker 1: You know, I tell some of the younger guys who

1432
01:20:54,640 --> 01:21:01,479
Speaker 1: weren't on trading or or managing money in housing, you

1433
01:21:01,520 --> 01:21:05,240
Speaker 1: think this is euphoric. There's no euphori now compared to then.

1434
01:21:05,720 --> 01:21:08,840
Speaker 1: It's for every bull, there's a bear and sometimes too.

1435
01:21:09,200 --> 01:21:12,479
Speaker 1: So the question is, six years into this bull market

1436
01:21:13,640 --> 01:21:17,040
Speaker 1: plus two, which is a heck of return, why know

1437
01:21:17,200 --> 01:21:22,599
Speaker 1: you for you yet? Is it still post financial crisis? Uh? Trauma?

1438
01:21:23,240 --> 01:21:25,280
Speaker 1: I think you know, if you think about the last

1439
01:21:25,320 --> 01:21:29,200
Speaker 1: fifteen years, we've had two really bad markets, right, you

1440
01:21:29,200 --> 01:21:32,120
Speaker 1: have the dot com crash and then you have the GFC,

1441
01:21:32,680 --> 01:21:34,559
Speaker 1: and then on top of that you have the housing

1442
01:21:34,600 --> 01:21:36,559
Speaker 1: collapse right in the middle, right in the middle. So

1443
01:21:37,000 --> 01:21:39,720
Speaker 1: you know, to me, I I think the I do

1444
01:21:39,800 --> 01:21:43,680
Speaker 1: think the GFC it certainly didn't have the impact that

1445
01:21:43,720 --> 01:21:46,840
Speaker 1: the depression had on my parents. My parents were born

1446
01:21:46,920 --> 01:21:49,080
Speaker 1: right in the middle of the depression, and you know,

1447
01:21:49,400 --> 01:21:52,479
Speaker 1: have great stories to tell about growing up then. But

1448
01:21:53,640 --> 01:21:56,360
Speaker 1: this is pretty close, you know, in terms of I

1449
01:21:56,400 --> 01:21:59,880
Speaker 1: think a psychic impact on people. It was you know,

1450
01:22:00,040 --> 01:22:02,640
Speaker 1: for people who had been saving their whole life, it

1451
01:22:02,680 --> 01:22:06,640
Speaker 1: was a pretty scary moment and you've certainly seen, you know,

1452
01:22:06,760 --> 01:22:10,040
Speaker 1: some change in behavior as a result. So, um, I

1453
01:22:10,320 --> 01:22:14,920
Speaker 1: think that partly explains the lack of euphoria. UM. But look,

1454
01:22:15,280 --> 01:22:17,479
Speaker 1: you know, I think despite the fact that I don't

1455
01:22:17,479 --> 01:22:19,280
Speaker 1: think the next ten years the markets are going to

1456
01:22:19,360 --> 01:22:22,280
Speaker 1: be as robust is certainly they've been the last five,

1457
01:22:22,640 --> 01:22:26,360
Speaker 1: by almost definition, they can't be. It's still really important

1458
01:22:26,400 --> 01:22:28,960
Speaker 1: to keep investing. It's still really important to have that

1459
01:22:29,000 --> 01:22:32,120
Speaker 1: diversified portfolio. And so I think, actually that's gonna be

1460
01:22:32,120 --> 01:22:35,040
Speaker 1: one of our challenges is to keep people. You know,

1461
01:22:35,120 --> 01:22:37,439
Speaker 1: you're you're putting out this message that's not all that

1462
01:22:38,320 --> 01:22:41,400
Speaker 1: you know, Um, optimistic, but at the same time, don't

1463
01:22:41,400 --> 01:22:44,040
Speaker 1: try to time it, don't try to avoid it, try

1464
01:22:44,080 --> 01:22:46,599
Speaker 1: to keep investing on a regular basis. If anything, try

1465
01:22:46,640 --> 01:22:49,479
Speaker 1: to save a little bit more. The interesting thing is

1466
01:22:49,560 --> 01:22:52,960
Speaker 1: some of the folks we've had through here, like Jeff's

1467
01:22:53,000 --> 01:22:58,080
Speaker 1: out of Raymond James and Laslow Berrini and um Ralph Akumpora,

1468
01:22:58,160 --> 01:23:02,120
Speaker 1: who were all act of money managers or strategists in

1469
01:23:02,120 --> 01:23:05,000
Speaker 1: the early eighties, have made the case that the first

1470
01:23:05,040 --> 01:23:08,400
Speaker 1: five years of this bull market, we're not unlike eighty

1471
01:23:08,439 --> 01:23:11,040
Speaker 1: two to eighty seven, when there was a tremendous amount

1472
01:23:11,040 --> 01:23:14,839
Speaker 1: of skepticism. You had the eighty seven crash and everybody

1473
01:23:14,880 --> 01:23:17,759
Speaker 1: came out and said told you so, and the markets

1474
01:23:17,800 --> 01:23:21,160
Speaker 1: sort of gathered themselves up in the next decade wasn't

1475
01:23:21,200 --> 01:23:25,559
Speaker 1: too shabby. So so we theoretically, I wonder if we're

1476
01:23:26,200 --> 01:23:31,679
Speaker 1: potentially in that sort of secular market, if that's what's

1477
01:23:31,720 --> 01:23:35,200
Speaker 1: developing here. So you know, look, we'd all love it

1478
01:23:35,240 --> 01:23:38,880
Speaker 1: if that were the case. Um, I guess I don't

1479
01:23:39,000 --> 01:23:43,160
Speaker 1: quite yet see the um what's going to accelerate earnings

1480
01:23:43,680 --> 01:23:45,679
Speaker 1: to the level that you would need to see earnings

1481
01:23:45,680 --> 01:23:48,240
Speaker 1: accelerate to sort of make the valuations make sense, which

1482
01:23:48,240 --> 01:23:51,160
Speaker 1: you saw me in the beginning of that period, you

1483
01:23:51,200 --> 01:23:55,000
Speaker 1: certainly saw earnings growing at tremendous rates, and then obviously

1484
01:23:55,040 --> 01:23:58,080
Speaker 1: evaluations got you know, kind of crazy towards the end.

1485
01:23:58,160 --> 01:24:00,080
Speaker 1: But if even if you back out the last a

1486
01:24:00,120 --> 01:24:04,439
Speaker 1: couple of years, companies, you know, companies have done an

1487
01:24:04,439 --> 01:24:07,639
Speaker 1: awful lot to improve margins over the last decade. They

1488
01:24:07,760 --> 01:24:10,840
Speaker 1: you know, they've they've been very conservative and in fact,

1489
01:24:10,920 --> 01:24:12,720
Speaker 1: one could argue in some cases they may have even

1490
01:24:12,800 --> 01:24:16,519
Speaker 1: under invested in in in the future. But what we

1491
01:24:16,680 --> 01:24:20,320
Speaker 1: don't UM, top line growth is getting tougher to come by,

1492
01:24:20,439 --> 01:24:25,240
Speaker 1: and ultimately you need top line growth. And so I'm

1493
01:24:25,280 --> 01:24:28,120
Speaker 1: again I'm not optimistic or pessimistic. I just don't know

1494
01:24:28,240 --> 01:24:32,160
Speaker 1: on that score whether we'll see sort of a revitalization

1495
01:24:32,439 --> 01:24:35,200
Speaker 1: of top line growth that leads to, you know, really

1496
01:24:35,240 --> 01:24:38,439
Speaker 1: sustained earnings growth over the next five six years, which

1497
01:24:38,479 --> 01:24:42,360
Speaker 1: would make the case that you described come true. So

1498
01:24:42,479 --> 01:24:46,760
Speaker 1: let's talk a little bit about UM investors today. What

1499
01:24:46,800 --> 01:24:50,920
Speaker 1: are they doing right? What are they doing wrong? So, look,

1500
01:24:50,960 --> 01:24:55,360
Speaker 1: I think UM at the highest level, we're seeing better

1501
01:24:55,479 --> 01:24:59,000
Speaker 1: behavior UM in in two things. One, they're paying a

1502
01:24:59,000 --> 01:25:00,720
Speaker 1: lot more attention to cost and again I know that

1503
01:25:00,720 --> 01:25:03,519
Speaker 1: sounds self serving, but you know the results of actually

1504
01:25:04,000 --> 01:25:08,879
Speaker 1: boring it out um from a return standpoint, So UM,

1505
01:25:08,920 --> 01:25:12,759
Speaker 1: there's certainly been much more attention to that too. Again,

1506
01:25:12,840 --> 01:25:16,479
Speaker 1: during the crisis, we didn't see, um, you know, a

1507
01:25:16,520 --> 01:25:18,960
Speaker 1: big uptick in transaction vol In fact, we actually saw

1508
01:25:19,120 --> 01:25:23,120
Speaker 1: a decline in transaction volume and people actually stayed the course,

1509
01:25:23,960 --> 01:25:27,519
Speaker 1: which is amazing because most shops did not experience that.

1510
01:25:27,800 --> 01:25:30,040
Speaker 1: So you know, we were we were pleased to see that,

1511
01:25:30,160 --> 01:25:33,680
Speaker 1: and again I think as a result, people benefited from that.

1512
01:25:34,400 --> 01:25:37,639
Speaker 1: You know, you're the the advent of target date funds,

1513
01:25:37,640 --> 01:25:40,519
Speaker 1: which we talked about a little bit earlier. Um, it's

1514
01:25:40,520 --> 01:25:42,640
Speaker 1: amazing how much money is going into those in the

1515
01:25:42,680 --> 01:25:45,639
Speaker 1: four oh one case system. Really now, is that because

1516
01:25:45,680 --> 01:25:49,040
Speaker 1: they've become a default if somebody doesn't select a different portfolio.

1517
01:25:49,600 --> 01:25:52,080
Speaker 1: The default certainly explains some of it, but we've seen

1518
01:25:52,160 --> 01:25:57,160
Speaker 1: people make wholesale changes to really encourage their their folks

1519
01:25:57,160 --> 01:26:00,360
Speaker 1: to go into it. Um as much as fifty percent

1520
01:26:00,439 --> 01:26:03,599
Speaker 1: of a cash flow going into our four oh one

1521
01:26:03,680 --> 01:26:05,680
Speaker 1: case system, and we have four million people on our

1522
01:26:05,680 --> 01:26:07,839
Speaker 1: record keeping system, so we get to watch this closely.

1523
01:26:08,160 --> 01:26:12,080
Speaker 1: Is going into target a funds and so yeah, and

1524
01:26:12,280 --> 01:26:15,120
Speaker 1: we feel great about that because it's highly diversified, you know,

1525
01:26:15,280 --> 01:26:19,719
Speaker 1: very global, very balanced, and you know, you can argue

1526
01:26:19,720 --> 01:26:22,679
Speaker 1: on the margins, but it's a really good UM solution

1527
01:26:22,760 --> 01:26:26,320
Speaker 1: for most people. So I think actually investors are more

1528
01:26:26,439 --> 01:26:30,680
Speaker 1: well diversified, probably even more than they know in some cases. UM.

1529
01:26:30,720 --> 01:26:32,639
Speaker 1: And that's going to really stand them in good stead

1530
01:26:32,720 --> 01:26:37,679
Speaker 1: over the next decade. So what aren't they doing is well, UM,

1531
01:26:37,720 --> 01:26:40,760
Speaker 1: I think the savings rates I've already mentioned. You know,

1532
01:26:40,840 --> 01:26:42,639
Speaker 1: if you look at the average in the four oh

1533
01:26:42,640 --> 01:26:45,280
Speaker 1: one case system is a proxy. Um, they're not where

1534
01:26:45,280 --> 01:26:47,439
Speaker 1: they need to be. UM. I think the average large

1535
01:26:47,439 --> 01:26:50,600
Speaker 1: plan it's about the number needs to be more like

1536
01:26:50,640 --> 01:26:54,840
Speaker 1: twelve or fifteen. So that's one. Two. I do think

1537
01:26:54,840 --> 01:26:58,479
Speaker 1: people still on the margin pay too much attention to

1538
01:26:58,560 --> 01:27:02,640
Speaker 1: macroeconomic factor. Well, it makes for fascinating conversation and it is,

1539
01:27:02,680 --> 01:27:04,120
Speaker 1: and you know, it's one of the things that we

1540
01:27:04,200 --> 01:27:07,400
Speaker 1: found as a provider is we need to put more

1541
01:27:07,479 --> 01:27:11,240
Speaker 1: macro economic information out on our website and arm our

1542
01:27:11,320 --> 01:27:13,840
Speaker 1: reps with that and so forth. But at the same

1543
01:27:13,880 --> 01:27:17,200
Speaker 1: time we're telling people, despite all this really interesting stuff,

1544
01:27:17,240 --> 01:27:19,840
Speaker 1: don't act on it. Well, we we call those folks

1545
01:27:19,920 --> 01:27:23,600
Speaker 1: macro tourists, the hedge funds that suddenly all right, Now

1546
01:27:23,680 --> 01:27:26,519
Speaker 1: I'm an expert expert on the Ukraine, and I'm sure

1547
01:27:26,520 --> 01:27:29,840
Speaker 1: at X y Z and those funds have all gotten

1548
01:27:29,880 --> 01:27:32,519
Speaker 1: show laughed over the past couple of years. Very difficult

1549
01:27:32,560 --> 01:27:34,920
Speaker 1: to do, as you know. And and again I'm not

1550
01:27:34,960 --> 01:27:37,240
Speaker 1: gonna there are firms out there who have made a

1551
01:27:37,880 --> 01:27:40,479
Speaker 1: you know, they this is all they do. But for

1552
01:27:40,520 --> 01:27:42,880
Speaker 1: the average investor it's really tough. But I'll give you

1553
01:27:42,880 --> 01:27:47,120
Speaker 1: an interesting um just this is an anecdote. About a

1554
01:27:47,160 --> 01:27:48,759
Speaker 1: year and a half ago. I did a day on

1555
01:27:48,800 --> 01:27:51,840
Speaker 1: Facebook and Twitter for Vangard, you know, the Vanguard accounts,

1556
01:27:52,520 --> 01:27:56,360
Speaker 1: and I got more macro questions than anything else. And

1557
01:27:56,600 --> 01:27:58,960
Speaker 1: that was very different than what I used to experience,

1558
01:27:59,120 --> 01:28:03,400
Speaker 1: answering phones and so forth. You wait, you answer phones that, Yeah,

1559
01:28:03,439 --> 01:28:06,600
Speaker 1: we we all do a day. Yeah, where you want it.

1560
01:28:06,640 --> 01:28:08,600
Speaker 1: So you want to hear what investors are saying and

1561
01:28:08,640 --> 01:28:11,240
Speaker 1: what they're thinking, and um see what our people are

1562
01:28:11,240 --> 01:28:13,800
Speaker 1: going through as well. Have you ever done to read it?

1563
01:28:13,920 --> 01:28:19,880
Speaker 1: Asked me anything? Um well, basically on the Twitter and

1564
01:28:20,320 --> 01:28:22,559
Speaker 1: Facebook it was and I got to ask all kinds

1565
01:28:22,600 --> 01:28:25,439
Speaker 1: of stuff, you know, from you should you should tag

1566
01:28:25,520 --> 01:28:29,200
Speaker 1: read it because that's a unique community. It's a little

1567
01:28:29,680 --> 01:28:33,479
Speaker 1: it's a little different than Twitter or Facebook because there

1568
01:28:33,479 --> 01:28:37,760
Speaker 1: are these sub communities and they're investing. Group is absolutely

1569
01:28:38,600 --> 01:28:41,719
Speaker 1: robust and articulate and informed, and they'll give you questions

1570
01:28:41,760 --> 01:28:45,080
Speaker 1: that I'm lobbying you softball SMPAD what they're going to

1571
01:28:45,120 --> 01:28:46,840
Speaker 1: throw now, that'd be that would be great. Actually we

1572
01:28:46,960 --> 01:28:49,280
Speaker 1: like doing that. But you know what was interesting is

1573
01:28:49,280 --> 01:28:52,280
Speaker 1: we got so many macro questions that you know, we

1574
01:28:52,320 --> 01:28:54,400
Speaker 1: went back and said, gee, we're not putting enough information

1575
01:28:54,439 --> 01:28:56,920
Speaker 1: out there. Yeah, but people are hearing a lot of it.

1576
01:28:57,080 --> 01:29:00,320
Speaker 1: And look, let's be honest. The newspapers and magazine ends,

1577
01:29:00,360 --> 01:29:03,400
Speaker 1: the television stations, they've got a lot of commentes and

1578
01:29:03,479 --> 01:29:07,160
Speaker 1: a lot of time to fill. I have this argument

1579
01:29:07,200 --> 01:29:10,160
Speaker 1: all the time with people, Hey, how did the sequester

1580
01:29:10,240 --> 01:29:14,919
Speaker 1: affect your your portfolio? No impact? What's the GDP of Ukraine?

1581
01:29:15,080 --> 01:29:17,880
Speaker 1: It's about a year's GDP of Ukraine is about two

1582
01:29:17,960 --> 01:29:20,559
Speaker 1: days a day and a half of US GDP. And

1583
01:29:20,640 --> 01:29:22,960
Speaker 1: every time, oh what's going on with the Israelis and

1584
01:29:23,040 --> 01:29:25,599
Speaker 1: the Syrian every time one of these things come up,

1585
01:29:25,680 --> 01:29:29,040
Speaker 1: not to be Look, there's real human tragedy involved in

1586
01:29:29,080 --> 01:29:32,120
Speaker 1: all these stories. And I'm not I'm not downgrading or

1587
01:29:32,160 --> 01:29:36,639
Speaker 1: annoying that, but from a portfolio manager's perspective, the question

1588
01:29:36,760 --> 01:29:40,400
Speaker 1: is always what is this gonna do to global economic activity?

1589
01:29:40,439 --> 01:29:43,400
Speaker 1: How is this going to impact revenues? Right? So I so,

1590
01:29:43,439 --> 01:29:45,000
Speaker 1: first of all, I couldn't agree with you more and

1591
01:29:45,000 --> 01:29:47,280
Speaker 1: and I actually think that's the education that has to

1592
01:29:47,320 --> 01:29:49,880
Speaker 1: take place. So when I said we were getting more

1593
01:29:49,920 --> 01:29:53,080
Speaker 1: inquiries around it, um, what we've tried to do with

1594
01:29:53,200 --> 01:29:56,440
Speaker 1: it is put out the information with a and here's

1595
01:29:56,479 --> 01:29:59,040
Speaker 1: what it means, and here's what it doesn't mean. And

1596
01:29:59,120 --> 01:30:02,800
Speaker 1: generally it's don't let it change your portfolio allocation at all,

1597
01:30:03,320 --> 01:30:06,720
Speaker 1: which is, you know, sort of your basic message. You know.

1598
01:30:06,920 --> 01:30:09,640
Speaker 1: Art cash And tells this delightful story. He's been on

1599
01:30:09,680 --> 01:30:11,920
Speaker 1: the floor of the New York Exchange for fifty years,

1600
01:30:12,320 --> 01:30:15,920
Speaker 1: and he tells the story about back then, supposedly the

1601
01:30:15,960 --> 01:30:19,759
Speaker 1: specialists all got the inside dope, they got the real story,

1602
01:30:19,840 --> 01:30:23,800
Speaker 1: and and a rumor circulated that the Russians had hit

1603
01:30:23,840 --> 01:30:26,880
Speaker 1: the button the Soviets and that the nukes were on

1604
01:30:26,920 --> 01:30:29,120
Speaker 1: the way and we all had eight minutes to live.

1605
01:30:29,479 --> 01:30:31,880
Speaker 1: So Art runs around and tries to get a short

1606
01:30:31,920 --> 01:30:35,920
Speaker 1: off to sail into the nuclear armageddon, and he go

1607
01:30:36,160 --> 01:30:38,280
Speaker 1: couldn't get it execute. And he comes to his boss

1608
01:30:38,280 --> 01:30:41,080
Speaker 1: and says, I tried to short the market, and in

1609
01:30:41,280 --> 01:30:43,240
Speaker 1: light of the rumor, I couldn't get it done. And

1610
01:30:43,280 --> 01:30:45,960
Speaker 1: the boys says, art, when we find out the nukes

1611
01:30:45,960 --> 01:30:48,320
Speaker 1: are coming, you want to take the other side of

1612
01:30:48,320 --> 01:30:50,320
Speaker 1: that trade. You want to get long. Why do I

1613
01:30:50,360 --> 01:30:53,320
Speaker 1: want to get long? Because if the new kids, who cares?

1614
01:30:53,360 --> 01:30:55,320
Speaker 1: But if the rumor turns out not to be true,

1615
01:30:55,880 --> 01:30:58,880
Speaker 1: we're long and the market comes snapping back. And that's

1616
01:30:59,080 --> 01:31:02,840
Speaker 1: just goes to show how ridiculous those macro trades are.

1617
01:31:04,760 --> 01:31:07,240
Speaker 1: You know, how is anybody going to trade on any

1618
01:31:07,320 --> 01:31:11,120
Speaker 1: of this stuff? You know, it's been a somebody puts

1619
01:31:11,120 --> 01:31:13,519
Speaker 1: this out. I can't remember who it is. I'll dig

1620
01:31:13,560 --> 01:31:15,559
Speaker 1: it up and send it to you where they have

1621
01:31:15,680 --> 01:31:19,400
Speaker 1: this chart of the past fifty years and every year

1622
01:31:19,439 --> 01:31:23,360
Speaker 1: there's a balloon as to what the macro disaster of

1623
01:31:23,439 --> 01:31:25,519
Speaker 1: that year is going to be. And every year the

1624
01:31:25,560 --> 01:31:27,800
Speaker 1: market kind of shrugs it off and keeps going. It's

1625
01:31:27,840 --> 01:31:33,360
Speaker 1: almost like just an annoying distraction with no impact on portfolios. Yeah,

1626
01:31:33,400 --> 01:31:35,680
Speaker 1: we've actually there's a great research paper out on our

1627
01:31:35,720 --> 01:31:41,360
Speaker 1: website that looks at macro economic data and essentially GDP

1628
01:31:41,520 --> 01:31:44,240
Speaker 1: growth and market returns, as you know are there's almost

1629
01:31:44,280 --> 01:31:46,960
Speaker 1: no correlation in the short run, certainly not in real time.

1630
01:31:47,240 --> 01:31:50,960
Speaker 1: You're not gonna see it over the long haul. Growing

1631
01:31:51,200 --> 01:31:53,680
Speaker 1: markets should be growing if a GDP stops growing, like

1632
01:31:53,720 --> 01:31:55,160
Speaker 1: we've seen in some kind. But you know, one of

1633
01:31:55,160 --> 01:31:57,000
Speaker 1: the one of the great, one of the one of

1634
01:31:57,000 --> 01:31:59,040
Speaker 1: the great statistics that it's out there. If you if

1635
01:31:59,040 --> 01:32:03,599
Speaker 1: you went back to UM late eighteen hundreds, so eight nineties,

1636
01:32:03,640 --> 01:32:06,040
Speaker 1: so what was the number one economy? Was the UK

1637
01:32:06,200 --> 01:32:10,639
Speaker 1: and US close on its heels, And then subsequent hundred years,

1638
01:32:10,640 --> 01:32:13,479
Speaker 1: obviously the US economy grew at I think twice the

1639
01:32:13,560 --> 01:32:16,240
Speaker 1: rate of the UK economy. And so the trick question

1640
01:32:16,360 --> 01:32:18,920
Speaker 1: is what were the returns in the equity markets. I

1641
01:32:18,920 --> 01:32:21,400
Speaker 1: think they're almost identical. They're very similar within a tent

1642
01:32:21,680 --> 01:32:23,880
Speaker 1: within a tenth of a percentage point. So much for

1643
01:32:23,920 --> 01:32:26,840
Speaker 1: g d P. Well, and you sort of you sort

1644
01:32:26,880 --> 01:32:29,240
Speaker 1: of peel the onion one level and it's like, well,

1645
01:32:29,560 --> 01:32:33,360
Speaker 1: really smart UK companies made their money in the US

1646
01:32:33,479 --> 01:32:36,439
Speaker 1: of course, became global and that makes a lot of sense.

1647
01:32:36,840 --> 01:32:39,760
Speaker 1: So let's talk a little bit about active management, because

1648
01:32:39,800 --> 01:32:44,800
Speaker 1: that's an active management question. So everybody knows Vanguard for indexing,

1649
01:32:44,880 --> 01:32:48,560
Speaker 1: but we mentioned a third of your funds are active,

1650
01:32:49,360 --> 01:32:53,280
Speaker 1: and the key question is not only active, but very

1651
01:32:53,360 --> 01:32:59,720
Speaker 1: successful track records. So a why has Vanguard active funds

1652
01:32:59,720 --> 01:33:01,599
Speaker 1: been so successful? And I think I know what your

1653
01:33:01,640 --> 01:33:04,200
Speaker 1: ranch is gonna be. But so what makes what makes

1654
01:33:04,240 --> 01:33:07,280
Speaker 1: you're active better than the average active? So I think

1655
01:33:07,320 --> 01:33:11,479
Speaker 1: there are um two big factors. One is we run

1656
01:33:11,479 --> 01:33:13,639
Speaker 1: our active funds at a lower cost than everybody. That's

1657
01:33:13,680 --> 01:33:19,759
Speaker 1: a huge, huge advantage. You're eliminating that drag from from active. Second, um,

1658
01:33:19,920 --> 01:33:22,439
Speaker 1: we didn't think we could attract all the best active

1659
01:33:22,439 --> 01:33:26,160
Speaker 1: talent to Malvern, Pennsylvania, as bucolic and beautiful as it is,

1660
01:33:26,520 --> 01:33:29,760
Speaker 1: And so for all of our active equity funds, we

1661
01:33:29,840 --> 01:33:32,880
Speaker 1: actually travel the world and look for the best subadvisor,

1662
01:33:33,120 --> 01:33:35,800
Speaker 1: so much like a foundation or an endowment would do.

1663
01:33:35,880 --> 01:33:38,320
Speaker 1: If you're looking for a large cap growth manager, who's

1664
01:33:38,320 --> 01:33:40,200
Speaker 1: the best large cap growth manager you can find? So

1665
01:33:40,240 --> 01:33:42,160
Speaker 1: we go and we we have a team that does

1666
01:33:42,200 --> 01:33:45,120
Speaker 1: nothing than but that. So, so how do you set

1667
01:33:45,160 --> 01:33:47,920
Speaker 1: these guys up? It's it's there in London or they're

1668
01:33:47,960 --> 01:33:51,840
Speaker 1: in Hong Kong, or they're in Los Angeles or San Francisco.

1669
01:33:51,880 --> 01:33:55,280
Speaker 1: When you basically say you're gonna run your fund out

1670
01:33:55,280 --> 01:33:58,040
Speaker 1: of the Vanguard San Francisco office, No, so you're gonna

1671
01:33:58,120 --> 01:34:00,720
Speaker 1: run your fund, We're gonna we're gonna do all the

1672
01:34:00,760 --> 01:34:03,960
Speaker 1: back office, all the administration. You're gonna just manage money

1673
01:34:04,720 --> 01:34:08,320
Speaker 1: and um, you know, they'll transmit um data to the

1674
01:34:08,320 --> 01:34:10,639
Speaker 1: custodian and so forth, you know, or you know, they'll

1675
01:34:10,640 --> 01:34:14,080
Speaker 1: do their own trading and so forth, but it'll be

1676
01:34:14,120 --> 01:34:17,880
Speaker 1: a Vanguard fund and will be the distributor. And basically

1677
01:34:17,880 --> 01:34:20,559
Speaker 1: our premise is if you do a really good job

1678
01:34:20,600 --> 01:34:23,080
Speaker 1: over the long run, our clients are really smart, they'll

1679
01:34:23,080 --> 01:34:25,960
Speaker 1: probably invest more with you. And so, you know, the

1680
01:34:26,000 --> 01:34:28,479
Speaker 1: outside managers love it because they don't have to do

1681
01:34:28,520 --> 01:34:31,400
Speaker 1: any service. They don't have to do any marketing, any sales.

1682
01:34:31,720 --> 01:34:34,800
Speaker 1: All they do is run money or like they most

1683
01:34:34,840 --> 01:34:38,439
Speaker 1: of them tell us we're their best institutional account. That's

1684
01:34:38,479 --> 01:34:42,200
Speaker 1: really fascinating. And so what's the team like that goes

1685
01:34:42,240 --> 01:34:45,439
Speaker 1: out looking for these people? So it's it's an experience group.

1686
01:34:45,720 --> 01:34:50,000
Speaker 1: UM typically, um all you know, mostly all c f

1687
01:34:50,000 --> 01:34:53,120
Speaker 1: A s at this point, UM A number of them

1688
01:34:53,120 --> 01:34:55,800
Speaker 1: have actually worked before they came to Vanger. They might

1689
01:34:55,800 --> 01:34:58,360
Speaker 1: have been working for a consultant, so you know an

1690
01:34:58,439 --> 01:35:00,760
Speaker 1: NSCNUP for example, or some any like that who is

1691
01:35:00,800 --> 01:35:03,280
Speaker 1: you know, really good at manager selection. A lot of

1692
01:35:03,280 --> 01:35:06,320
Speaker 1: them have been homegrown though, but UM really highly trained

1693
01:35:06,880 --> 01:35:09,360
Speaker 1: and UM we just put a lot of time and energy.

1694
01:35:09,400 --> 01:35:13,640
Speaker 1: And again this may surprise you, but so we have

1695
01:35:13,840 --> 01:35:18,040
Speaker 1: thirty one firms. They run about seventy five mandates for

1696
01:35:18,120 --> 01:35:23,280
Speaker 1: us UM and there's a small group of UM our

1697
01:35:23,400 --> 01:35:26,960
Speaker 1: executive team, a subset of my executive team, but this

1698
01:35:27,040 --> 01:35:30,720
Speaker 1: includes me along with the senior members of this portfolio

1699
01:35:30,840 --> 01:35:34,519
Speaker 1: review department that I just described. We'll do a hundred

1700
01:35:34,520 --> 01:35:38,960
Speaker 1: manager meetings on campus a year at a minimum. So

1701
01:35:39,320 --> 01:35:43,680
Speaker 1: these firms will come and spend an hour with me

1702
01:35:43,840 --> 01:35:47,280
Speaker 1: and my team and then half a day with the

1703
01:35:47,320 --> 01:35:51,240
Speaker 1: broader portfolio review group, and we'll put them through their paces,

1704
01:35:51,479 --> 01:35:53,479
Speaker 1: and of course we'll do things in their office as well,

1705
01:35:53,520 --> 01:35:56,599
Speaker 1: but we bring them in formally every year, and then

1706
01:35:56,600 --> 01:35:58,719
Speaker 1: of course they're in front of our board on a

1707
01:35:58,840 --> 01:36:02,240
Speaker 1: rotating basis as well. So there's a ton of rigor

1708
01:36:02,320 --> 01:36:05,680
Speaker 1: that goes on and it's very senior management. A lot

1709
01:36:05,680 --> 01:36:08,360
Speaker 1: of senior management time. And I've I've even had a

1710
01:36:08,360 --> 01:36:10,160
Speaker 1: couple of my directors say to me, gosh, you guys

1711
01:36:10,160 --> 01:36:11,640
Speaker 1: spend an awful lot of time, and I said, this

1712
01:36:11,720 --> 01:36:14,080
Speaker 1: is what we do. I mean, this is the most

1713
01:36:14,120 --> 01:36:16,959
Speaker 1: important thing we do on the active side is select managers.

1714
01:36:17,040 --> 01:36:21,360
Speaker 1: And so we're not selecting emerging managers so to speak.

1715
01:36:21,680 --> 01:36:24,679
Speaker 1: These are fairly seasoned people. Yeah, although you know, we've

1716
01:36:24,720 --> 01:36:29,160
Speaker 1: we've we have found a few firms um in early

1717
01:36:29,200 --> 01:36:33,200
Speaker 1: in their in their existence, but they generally were seasoned

1718
01:36:33,200 --> 01:36:36,680
Speaker 1: people who spun out of bigger firms, and you know,

1719
01:36:36,720 --> 01:36:40,560
Speaker 1: some of our most well known managers actually started that way.

1720
01:36:40,760 --> 01:36:44,639
Speaker 1: Do you find active is better in less efficient markets?

1721
01:36:44,640 --> 01:36:48,600
Speaker 1: And what I mean by less efficient emerging markets distressed

1722
01:36:48,720 --> 01:36:51,680
Speaker 1: small cap where there there's not a lot of coverage

1723
01:36:51,680 --> 01:36:55,479
Speaker 1: and there's opportunity there or is there something else going

1724
01:36:55,520 --> 01:36:59,880
Speaker 1: on and you're active? So Um, the short answers, we

1725
01:37:00,080 --> 01:37:03,040
Speaker 1: don't see, you know, we don't see in those quote

1726
01:37:03,080 --> 01:37:06,320
Speaker 1: unquoteless efficient markets. Um. And I think the reason for

1727
01:37:06,400 --> 01:37:08,479
Speaker 1: that is the costs are so much higher there that

1728
01:37:08,880 --> 01:37:12,200
Speaker 1: you know, even trading costs, it's such a drag, you know,

1729
01:37:12,240 --> 01:37:14,840
Speaker 1: when you look at index results versus UM small cap

1730
01:37:14,880 --> 01:37:18,839
Speaker 1: active for example, it's it's it's not quite the same

1731
01:37:18,880 --> 01:37:22,600
Speaker 1: extreme as in the large cap, but it's close. UM.

1732
01:37:22,640 --> 01:37:28,040
Speaker 1: But we UM. The things that we see are they're

1733
01:37:28,120 --> 01:37:32,120
Speaker 1: they're more soft. There's there's one quantitative thing that we see,

1734
01:37:32,200 --> 01:37:35,240
Speaker 1: which is for the most part, they're they're much lower

1735
01:37:35,320 --> 01:37:39,200
Speaker 1: turnover than their counterparts. They they tend to be, you know,

1736
01:37:39,320 --> 01:37:42,200
Speaker 1: very focused on that. But then the UM the other

1737
01:37:42,800 --> 01:37:47,800
Speaker 1: things are they have great, great talent retention, they have

1738
01:37:48,120 --> 01:37:52,679
Speaker 1: great process for UM, they're very consistent in what they do,

1739
01:37:53,360 --> 01:37:57,439
Speaker 1: and they're really good at developing the next generation UM.

1740
01:37:57,560 --> 01:38:00,080
Speaker 1: You know, in our business, so many firms have employed it,

1741
01:38:00,280 --> 01:38:03,639
Speaker 1: going from first to second to third generation. And so

1742
01:38:04,560 --> 01:38:07,479
Speaker 1: what we've seen over time is that people side is

1743
01:38:07,560 --> 01:38:10,479
Speaker 1: really important and that that is a qualitative thing. But

1744
01:38:10,840 --> 01:38:12,320
Speaker 1: when you you know, we've got a group of people

1745
01:38:12,320 --> 01:38:13,800
Speaker 1: have been doing this for a long time. You know,

1746
01:38:13,840 --> 01:38:18,000
Speaker 1: I've been part of this um UH process for almost

1747
01:38:18,200 --> 01:38:20,680
Speaker 1: twenty five years now, so I've seen a lot. It

1748
01:38:20,680 --> 01:38:22,720
Speaker 1: doesn't I'm going to make my share mistakes, but I've

1749
01:38:22,720 --> 01:38:25,599
Speaker 1: seen a lot, and many of my peers have been

1750
01:38:25,640 --> 01:38:29,439
Speaker 1: involved for you know, fifteen twenty years. So hopefully that

1751
01:38:29,600 --> 01:38:32,000
Speaker 1: experience allows you to assess the people side a little

1752
01:38:32,040 --> 01:38:36,200
Speaker 1: bit better. So so you're looking at low turnover, good

1753
01:38:36,360 --> 01:38:39,680
Speaker 1: employee retention because that tells you a lot, and as

1754
01:38:40,160 --> 01:38:44,280
Speaker 1: a succession planning that seems to be well thought out.

1755
01:38:44,760 --> 01:38:48,439
Speaker 1: None of those things really speak directly too, so the

1756
01:38:48,479 --> 01:38:51,559
Speaker 1: investing So so on the investing side, what we're really

1757
01:38:51,600 --> 01:38:56,400
Speaker 1: looking for is an explainable process that's very consistent. And

1758
01:38:56,439 --> 01:38:58,960
Speaker 1: again I'll give you I'll oversimplify, but if if someone

1759
01:38:59,080 --> 01:39:02,680
Speaker 1: says I'm a bottom up stock picker, and you know,

1760
01:39:02,840 --> 01:39:06,639
Speaker 1: we don't think about sector allocation, we don't think about um,

1761
01:39:07,320 --> 01:39:11,640
Speaker 1: the benchmarket all etcetera, etcetera. When you do a portfolio

1762
01:39:11,680 --> 01:39:16,000
Speaker 1: attribution analysis and let's say they've outperformed the outperformed abroad

1763
01:39:16,040 --> 01:39:18,720
Speaker 1: market by two basis points, and you see when you

1764
01:39:18,760 --> 01:39:23,960
Speaker 1: do the attribution analysis, there's no nothing from stock selection,

1765
01:39:24,000 --> 01:39:26,720
Speaker 1: and it's all from sector selection. It's all because of

1766
01:39:26,760 --> 01:39:29,720
Speaker 1: what sectors they were in. Well, you may you may

1767
01:39:29,720 --> 01:39:32,000
Speaker 1: be happy that you have two d basis points about performance,

1768
01:39:32,040 --> 01:39:33,559
Speaker 1: but you have it for the wrong reason. So you're

1769
01:39:34,280 --> 01:39:36,320
Speaker 1: that's something that actually would raise a flag with us.

1770
01:39:36,400 --> 01:39:39,000
Speaker 1: Is that's not what you say you do on the

1771
01:39:39,040 --> 01:39:42,360
Speaker 1: other hand, if you have a manager who, um, you know,

1772
01:39:42,360 --> 01:39:46,040
Speaker 1: maybe their performance is only average because they've had some

1773
01:39:46,120 --> 01:39:48,680
Speaker 1: factor headwinds or whatever. But if they say bottom up

1774
01:39:48,720 --> 01:39:51,080
Speaker 1: stock selection is really what's driving it, and you look

1775
01:39:51,120 --> 01:39:53,559
Speaker 1: at the portfolio attribution and you see stock selections actually

1776
01:39:53,560 --> 01:39:56,120
Speaker 1: added value, well then you know that begins to reinforce

1777
01:39:56,160 --> 01:39:58,720
Speaker 1: what they're saying is what they're doing. And then you know,

1778
01:39:58,760 --> 01:40:00,840
Speaker 1: we really do roll up our sleeves and you know,

1779
01:40:00,880 --> 01:40:03,479
Speaker 1: we meet with the analyst teams and we get into

1780
01:40:03,800 --> 01:40:06,360
Speaker 1: you know, how does a good idea get into the portfolio?

1781
01:40:06,400 --> 01:40:08,439
Speaker 1: How does an idea get out of the portfolio? What?

1782
01:40:08,520 --> 01:40:11,120
Speaker 1: You know, what, what are you looking at next? Etcetera, etcetera.

1783
01:40:11,160 --> 01:40:13,839
Speaker 1: So we actually get into a lot of the weeds

1784
01:40:13,880 --> 01:40:16,600
Speaker 1: around the portfolio. But we what at the end of

1785
01:40:16,600 --> 01:40:18,080
Speaker 1: the day, what we really want to see is a

1786
01:40:18,200 --> 01:40:22,240
Speaker 1: consistency between what they say and what actually happens. So

1787
01:40:22,280 --> 01:40:24,960
Speaker 1: it makes sense, It makes a whole lot of sense. Um,

1788
01:40:25,040 --> 01:40:28,160
Speaker 1: So who are the buyers of the active side. If

1789
01:40:28,200 --> 01:40:33,160
Speaker 1: everybody knows you as the index are in chief, who

1790
01:40:33,400 --> 01:40:38,680
Speaker 1: are the ideal investor buying a vanguard active funds? So

1791
01:40:38,720 --> 01:40:41,080
Speaker 1: we see a lot of um, We see a lot

1792
01:40:41,160 --> 01:40:44,360
Speaker 1: of investors on our retail direct side, UM, you know,

1793
01:40:44,400 --> 01:40:47,400
Speaker 1: the do it yourself investors who do a combination of

1794
01:40:47,479 --> 01:40:51,600
Speaker 1: they'll build a core portfolio around an index strategy, and

1795
01:40:51,600 --> 01:40:53,680
Speaker 1: then they may add one or two or three of

1796
01:40:53,680 --> 01:40:58,240
Speaker 1: our active funds, almost like a course satellite kind of approach. UM.

1797
01:40:58,280 --> 01:41:01,559
Speaker 1: That's become pretty prevalent, and that's most prevalent in the

1798
01:41:01,640 --> 01:41:06,320
Speaker 1: retail side. Before one case side, UM used to follow

1799
01:41:06,439 --> 01:41:09,519
Speaker 1: that trend as well, but certainly the last five years,

1800
01:41:09,560 --> 01:41:12,280
Speaker 1: the advent of target date funds has changed some of that,

1801
01:41:12,320 --> 01:41:15,160
Speaker 1: so we see a little less interest there. You know,

1802
01:41:15,280 --> 01:41:18,200
Speaker 1: on the advisor side, you know, our financial advisors with

1803
01:41:18,240 --> 01:41:22,880
Speaker 1: whom we work UM, many of them employ that kind

1804
01:41:22,880 --> 01:41:27,080
Speaker 1: of strategy where they mix indexing and active, but historically

1805
01:41:27,120 --> 01:41:29,360
Speaker 1: I think they've looked to us more for our indexing

1806
01:41:29,400 --> 01:41:32,519
Speaker 1: prowess than our active prowess. Well, it makes sense because

1807
01:41:32,600 --> 01:41:35,080
Speaker 1: if you're looking for low costs and that's what you wanna,

1808
01:41:35,760 --> 01:41:37,760
Speaker 1: that's what you want to focus on, that that's where

1809
01:41:37,760 --> 01:41:40,200
Speaker 1: you're gonna go. So let's talk a little bit about

1810
01:41:40,800 --> 01:41:42,559
Speaker 1: I know I only have you for so many times,

1811
01:41:42,560 --> 01:41:44,760
Speaker 1: so many minutes left, and I want to get to

1812
01:41:44,760 --> 01:41:49,360
Speaker 1: a few of my favorite questions, So since you've joined Vanguard,

1813
01:41:49,640 --> 01:41:54,400
Speaker 1: what has changed at Vanguard? And since you've become CEO

1814
01:41:54,560 --> 01:41:58,680
Speaker 1: what changes have you implemented? So you know, UM, I

1815
01:41:58,800 --> 01:42:02,120
Speaker 1: joined in eighty six and UM, you know, obviously the

1816
01:42:02,120 --> 01:42:05,640
Speaker 1: biggest changes have been UM. You know that just the

1817
01:42:05,680 --> 01:42:08,760
Speaker 1: growth and scope of the scale that's has to be

1818
01:42:08,800 --> 01:42:11,200
Speaker 1: immense To have had a front row I mean, that's

1819
01:42:11,200 --> 01:42:14,040
Speaker 1: hard to imagine having a front row seat. So when

1820
01:42:14,120 --> 01:42:17,559
Speaker 1: you joined, how big was Vigor was under a thousand

1821
01:42:17,680 --> 01:42:22,160
Speaker 1: crew members people and um less just about twenty billion

1822
01:42:22,200 --> 01:42:25,000
Speaker 1: under management. So you've been there from twenty billion to

1823
01:42:25,120 --> 01:42:31,599
Speaker 1: three point one billion trillion. That's that's unfathomable of a growth.

1824
01:42:32,520 --> 01:42:34,840
Speaker 1: So the breath and scale of what we do is

1825
01:42:35,120 --> 01:42:39,040
Speaker 1: certainly huge. UM. The change in technology has been breathtaking,

1826
01:42:39,080 --> 01:42:41,840
Speaker 1: I mean breath taking. You know, it's the biggest technological

1827
01:42:41,840 --> 01:42:45,040
Speaker 1: innovation when I joined was the eight hundred toll free number.

1828
01:42:45,680 --> 01:42:50,439
Speaker 1: And you know, now all transactions are conducted on the web. UM,

1829
01:42:50,520 --> 01:42:52,840
Speaker 1: and then and and and you see people doing all

1830
01:42:52,840 --> 01:42:56,840
Speaker 1: this stuff with smartphones and tablets and it's just incredible

1831
01:42:56,880 --> 01:42:59,760
Speaker 1: to see. So that's that's been a huge change. You know,

1832
01:42:59,760 --> 01:43:04,479
Speaker 1: the change has been actually the adoption of indexing. So

1833
01:43:04,720 --> 01:43:06,719
Speaker 1: you say, wait a minute, you invented the first index

1834
01:43:06,760 --> 01:43:09,920
Speaker 1: one in seventy six, but we only had one index

1835
01:43:09,960 --> 01:43:11,880
Speaker 1: fund when I joined. We were in the process of

1836
01:43:11,960 --> 01:43:14,439
Speaker 1: rolling out our second one, and no one had really

1837
01:43:14,439 --> 01:43:16,360
Speaker 1: come to the party at that point. Um. You know,

1838
01:43:16,400 --> 01:43:19,920
Speaker 1: we were still primarily an active shop. And to see

1839
01:43:20,040 --> 01:43:23,720
Speaker 1: the adoption of indexing is a major force in the

1840
01:43:23,800 --> 01:43:28,000
Speaker 1: mutual fund space. Um. You know, we always believe it

1841
01:43:28,000 --> 01:43:30,320
Speaker 1: would take hold, but I'm not sure even we saw

1842
01:43:30,360 --> 01:43:33,240
Speaker 1: it taking hold to the level that it's that it's gone,

1843
01:43:33,280 --> 01:43:37,200
Speaker 1: so that that's had a pretty profound change. And then um,

1844
01:43:37,920 --> 01:43:41,479
Speaker 1: probably the last thing, um, and then we'll get the

1845
01:43:41,520 --> 01:43:44,559
Speaker 1: second part of the question is, um, the globalization. And

1846
01:43:44,600 --> 01:43:49,000
Speaker 1: you know we've globalized our investment thinking. Um, so we

1847
01:43:49,080 --> 01:43:53,000
Speaker 1: you know, we we were very heartily recommending people, you know,

1848
01:43:53,400 --> 01:43:57,240
Speaker 1: check their home bias at the door and really diversify globally.

1849
01:43:57,880 --> 01:43:59,519
Speaker 1: And if we if we look at Europe and we

1850
01:43:59,520 --> 01:44:03,880
Speaker 1: look at them markets somewhat less expensive than US markets, yeah,

1851
01:44:03,520 --> 01:44:07,320
Speaker 1: I mean yeah, much even after the most recent run ups,

1852
01:44:07,320 --> 01:44:10,559
Speaker 1: still cheaper than it's Again, it's a great case for

1853
01:44:11,120 --> 01:44:14,080
Speaker 1: why you want to be globally diverse UM in your portfolio,

1854
01:44:14,920 --> 01:44:18,320
Speaker 1: and UM our client base is increasingly becoming global. UM.

1855
01:44:18,360 --> 01:44:21,599
Speaker 1: You know, we've got pretty significant footprint in Australia, Hong Kong,

1856
01:44:22,040 --> 01:44:25,800
Speaker 1: the UK, Canada. UM. You know, we serve Europe from

1857
01:44:26,160 --> 01:44:30,479
Speaker 1: the UK. So we're seeing, you know, our ability to

1858
01:44:30,520 --> 01:44:34,280
Speaker 1: take our story to many disparate markets. UM, and that's

1859
01:44:34,280 --> 01:44:36,120
Speaker 1: been pretty exciting to watch, and that's really happened in

1860
01:44:36,160 --> 01:44:40,560
Speaker 1: the last five years. So you mentioned UM, almost of

1861
01:44:40,640 --> 01:44:44,479
Speaker 1: your transactions are digital. What are you guys doing with

1862
01:44:44,520 --> 01:44:48,400
Speaker 1: all that data? I would imagine that the ability to

1863
01:44:48,640 --> 01:44:52,720
Speaker 1: take the reams of quantitative metrics that are developed in

1864
01:44:52,840 --> 01:44:56,360
Speaker 1: house just from your own client transactions, and look at

1865
01:44:56,360 --> 01:44:59,160
Speaker 1: it geographically in the US, look at the globally, look

1866
01:44:59,200 --> 01:45:04,920
Speaker 1: at how people are using that UM interacting with Vanguard.

1867
01:45:05,200 --> 01:45:08,479
Speaker 1: Have you guys come up with some interesting ways to

1868
01:45:08,520 --> 01:45:12,080
Speaker 1: slicensese that well. So I would tell you we're probably

1869
01:45:13,360 --> 01:45:15,679
Speaker 1: not as far along in that as you would think,

1870
01:45:15,720 --> 01:45:19,200
Speaker 1: and hope in some ways. UM. You know, one, you've

1871
01:45:19,200 --> 01:45:20,680
Speaker 1: got all the privacy issues, so you want to make

1872
01:45:20,680 --> 01:45:24,559
Speaker 1: sure you have your structures to protect privacy. But I

1873
01:45:24,600 --> 01:45:26,760
Speaker 1: think the big data concept that a lot of people

1874
01:45:26,760 --> 01:45:29,920
Speaker 1: are talking about is probably the next going to be

1875
01:45:29,960 --> 01:45:33,000
Speaker 1: a really important thing going forward. You know, we we

1876
01:45:33,000 --> 01:45:36,479
Speaker 1: we certainly look at all the transactional activity and and

1877
01:45:36,760 --> 01:45:39,439
Speaker 1: um we it gives us a very good sense of

1878
01:45:39,439 --> 01:45:41,759
Speaker 1: what investors are thinking and doing. And we can watch

1879
01:45:41,760 --> 01:45:43,439
Speaker 1: what people do on the web, so we know where

1880
01:45:43,479 --> 01:45:46,280
Speaker 1: they're spending time and where they're not and that actually

1881
01:45:46,320 --> 01:45:48,799
Speaker 1: gives us some insights as to how investors are thinking.

1882
01:45:49,400 --> 01:45:53,919
Speaker 1: But um, we probably are in you know, the second

1883
01:45:53,920 --> 01:45:57,240
Speaker 1: inning of that game, if you really Yeah, so I

1884
01:45:57,280 --> 01:45:59,800
Speaker 1: think there's just an immense amount more that can be done.

1885
01:46:00,160 --> 01:46:02,840
Speaker 1: So aside from big data, what do you want to

1886
01:46:02,880 --> 01:46:06,160
Speaker 1: accomplish as CEO of Vanguard for the next five years?

1887
01:46:06,200 --> 01:46:08,760
Speaker 1: And I understand if there are a company secrets you

1888
01:46:08,760 --> 01:46:10,800
Speaker 1: you don't want to share, but you have to have

1889
01:46:10,840 --> 01:46:14,320
Speaker 1: a fairly public set of goals. Yeah, so let me

1890
01:46:14,400 --> 01:46:17,559
Speaker 1: let me just step back to you know, coming out

1891
01:46:17,600 --> 01:46:21,080
Speaker 1: of the crisis, just the context. So you know, we

1892
01:46:21,080 --> 01:46:22,519
Speaker 1: we did a lot of work coming out of the

1893
01:46:22,560 --> 01:46:25,479
Speaker 1: crisis about things that we thought were going to really matter.

1894
01:46:25,680 --> 01:46:27,840
Speaker 1: So you know, one of them was, you know, we

1895
01:46:27,880 --> 01:46:30,479
Speaker 1: thought et f s were gonna be a bigger part

1896
01:46:30,520 --> 01:46:32,519
Speaker 1: of our future, so we put a lot of emphasis there.

1897
01:46:32,560 --> 01:46:34,200
Speaker 1: We thought target date funds in the four oh one

1898
01:46:34,240 --> 01:46:36,040
Speaker 1: K market would be a bigger part of our future.

1899
01:46:36,439 --> 01:46:38,400
Speaker 1: We put a lot of emphasis there. We thought global

1900
01:46:38,439 --> 01:46:40,599
Speaker 1: would be a really much bigger part of what we're

1901
01:46:40,600 --> 01:46:42,840
Speaker 1: going to do um and so we put a lot

1902
01:46:42,880 --> 01:46:45,280
Speaker 1: of emphasis there. There were a lot of internal things

1903
01:46:45,280 --> 01:46:47,280
Speaker 1: that we worked on in terms of developing the next

1904
01:46:47,280 --> 01:46:50,479
Speaker 1: generational leaders and so forth. And what you've seen in

1905
01:46:50,680 --> 01:46:52,640
Speaker 1: you know, the last half dozen years is you know,

1906
01:46:52,680 --> 01:46:54,960
Speaker 1: obviously the E t F side has you know, it's

1907
01:46:54,960 --> 01:46:58,320
Speaker 1: played out pretty much the way we saw it. We

1908
01:46:58,320 --> 01:47:00,960
Speaker 1: weren't in the we we didn't serve people like you

1909
01:47:01,160 --> 01:47:04,639
Speaker 1: financial advisors a decade ago. It's a trillion dollar business

1910
01:47:04,720 --> 01:47:12,040
Speaker 1: today for trillion dollars one trillion dollars um. From a startup.

1911
01:47:12,439 --> 01:47:15,439
Speaker 1: You know, we were late in the target date fund.

1912
01:47:15,439 --> 01:47:17,519
Speaker 1: We're now the largest provider. We we actually are the

1913
01:47:17,600 --> 01:47:19,920
Speaker 1: largest four oh one K manager today, you know, three

1914
01:47:19,960 --> 01:47:22,920
Speaker 1: quarters of a trillion dollars in in four oh one

1915
01:47:23,000 --> 01:47:26,759
Speaker 1: K assets. So and then our global business has gone

1916
01:47:26,840 --> 01:47:29,200
Speaker 1: from you know, I don't know, seventy or eighty billion

1917
01:47:29,320 --> 01:47:33,639
Speaker 1: to two fifty billion in that time frames. So all

1918
01:47:33,640 --> 01:47:39,439
Speaker 1: those sort of strategic pushes UM have paid off to

1919
01:47:39,600 --> 01:47:42,400
Speaker 1: date UM, and then we did a lot of internal things.

1920
01:47:42,400 --> 01:47:46,280
Speaker 1: As I said, so going forward, UM, I think the

1921
01:47:46,320 --> 01:47:48,880
Speaker 1: E t F phenomenon is not done. So I think

1922
01:47:48,920 --> 01:47:52,519
Speaker 1: ETFs UM are not only gonna be front and center

1923
01:47:52,560 --> 01:47:53,880
Speaker 1: in the US. I think they're going to be more

1924
01:47:53,920 --> 01:47:58,280
Speaker 1: prevalent around the world. We're seeing are they not especially

1925
01:47:58,320 --> 01:48:00,920
Speaker 1: prevalent overseas like there and you look at as you

1926
01:48:00,960 --> 01:48:05,200
Speaker 1: look at Europe, are people not in pockets of Europe?

1927
01:48:05,240 --> 01:48:07,920
Speaker 1: They are, but they haven't really taken hold of the

1928
01:48:07,920 --> 01:48:10,600
Speaker 1: way they have here. So we think that's coming. And

1929
01:48:10,640 --> 01:48:14,000
Speaker 1: we think the indexing story broadly is coming around the

1930
01:48:14,000 --> 01:48:16,759
Speaker 1: world because it's still a it's less than five percent

1931
01:48:16,840 --> 01:48:19,840
Speaker 1: of all assets under management outside the US, so I

1932
01:48:19,840 --> 01:48:24,320
Speaker 1: think that's a huge opportunity UM, so the whole global

1933
01:48:24,520 --> 01:48:28,679
Speaker 1: so E t F s global. UM. I think this

1934
01:48:28,960 --> 01:48:33,160
Speaker 1: UM intersection of robo and personal advice that we're calling

1935
01:48:33,160 --> 01:48:35,280
Speaker 1: our personal advisor service is going to be a really

1936
01:48:35,320 --> 01:48:39,240
Speaker 1: big thing for US UM the next five years. And

1937
01:48:39,280 --> 01:48:43,760
Speaker 1: then I think, UM, maybe it may not sound as big.

1938
01:48:43,800 --> 01:48:46,479
Speaker 1: There's a lot to be done on the technology front

1939
01:48:46,479 --> 01:48:49,760
Speaker 1: to make US even easier to deal with, and so

1940
01:48:49,880 --> 01:48:52,760
Speaker 1: some of that will be more evolutionary than revolutionary. But

1941
01:48:53,320 --> 01:48:55,960
Speaker 1: so much of what we did over the last decade

1942
01:48:56,120 --> 01:48:59,080
Speaker 1: was focused on making the PC experience better on our websites,

1943
01:48:59,120 --> 01:49:02,120
Speaker 1: really robust. As you know, we gotta we have to

1944
01:49:02,200 --> 01:49:06,600
Speaker 1: have smartphone and tablet technology that's equally robust. We're I

1945
01:49:06,600 --> 01:49:10,040
Speaker 1: think we're sort of leading in that, but I don't

1946
01:49:10,040 --> 01:49:13,120
Speaker 1: think it's anywhere near where it needs to get, so, um,

1947
01:49:13,280 --> 01:49:16,439
Speaker 1: you should expect a lot there. And then the last

1948
01:49:16,439 --> 01:49:18,479
Speaker 1: thing I would say is, um, we're not done on

1949
01:49:18,479 --> 01:49:21,360
Speaker 1: the cost side. So you think you can extract more

1950
01:49:21,439 --> 01:49:25,919
Speaker 1: costs make things cheaper, I do so more vanguard effect.

1951
01:49:26,040 --> 01:49:28,080
Speaker 1: You're going to raise the bar and make everybody else

1952
01:49:28,320 --> 01:49:31,160
Speaker 1: we come to you. We we we we we think

1953
01:49:31,200 --> 01:49:34,880
Speaker 1: we need to keep raising the bar on that because again, um,

1954
01:49:34,920 --> 01:49:40,519
Speaker 1: it's certainly a institutional in your d N, a part

1955
01:49:40,560 --> 01:49:43,000
Speaker 1: of part of the corporate culture. But you guys have

1956
01:49:43,040 --> 01:49:47,040
Speaker 1: an enormous advantage. You're so far ahead of just about

1957
01:49:47,080 --> 01:49:51,880
Speaker 1: everybody in that space. Why not press that further? Well?

1958
01:49:51,920 --> 01:49:55,320
Speaker 1: And you know the other as I mentioned any Grove

1959
01:49:55,360 --> 01:49:58,240
Speaker 1: earlier in this, you know, um, the idea about the

1960
01:49:58,240 --> 01:50:01,839
Speaker 1: parent only the paranoid surrive. You can't get complacent. Um.

1961
01:50:01,880 --> 01:50:03,960
Speaker 1: You know, there's a lot of tough competitors out there.

1962
01:50:04,000 --> 01:50:05,400
Speaker 1: They're not going to just roll over and say, oh,

1963
01:50:05,479 --> 01:50:08,519
Speaker 1: Vanguard's won the game, it's over. I wish they would. Um,

1964
01:50:08,320 --> 01:50:11,200
Speaker 1: I'd be happy if if market. That's not the way

1965
01:50:11,240 --> 01:50:12,880
Speaker 1: markets work. And that's what I love about you know.

1966
01:50:13,000 --> 01:50:15,559
Speaker 1: I mean, so you have to suit up every day.

1967
01:50:15,680 --> 01:50:18,600
Speaker 1: You you don't sound like a guy. Hey we have

1968
01:50:18,640 --> 01:50:22,400
Speaker 1: three trillion dollars. I'm just gonna kick back and uh,

1969
01:50:22,439 --> 01:50:24,760
Speaker 1: you know we our team goes to bed every night

1970
01:50:24,840 --> 01:50:27,519
Speaker 1: nervous about what tomorrow is gonna bring. And I think

1971
01:50:27,520 --> 01:50:30,439
Speaker 1: it's a really healthy, um, healthy thing for us. So

1972
01:50:30,800 --> 01:50:33,479
Speaker 1: you know you can't um. Jack Brennan, who I know

1973
01:50:33,560 --> 01:50:36,679
Speaker 1: you you you spent some time on this very doing

1974
01:50:36,720 --> 01:50:40,160
Speaker 1: the same thing. Jack had his favorite saying, I think

1975
01:50:40,479 --> 01:50:46,240
Speaker 1: um was complacencies the seven deadly sins all rolled into one,

1976
01:50:46,360 --> 01:50:48,760
Speaker 1: which I think is a justice brand. Ice I think

1977
01:50:48,880 --> 01:50:51,439
Speaker 1: was the originator of it. And Jack used to preach

1978
01:50:51,479 --> 01:50:53,639
Speaker 1: that to us, and you know, I think it's part

1979
01:50:53,640 --> 01:50:55,800
Speaker 1: of our d n A at this point. So in

1980
01:50:55,840 --> 01:50:59,120
Speaker 1: the last few minutes we have before because I know, um,

1981
01:51:00,040 --> 01:51:02,360
Speaker 1: your associate is gonna be jumping up and down a second.

1982
01:51:02,439 --> 01:51:05,080
Speaker 1: Let me let me give you my final three or

1983
01:51:05,120 --> 01:51:09,760
Speaker 1: four questions that I ask everybody. And I know this

1984
01:51:09,800 --> 01:51:13,720
Speaker 1: is gonna be, um, really interesting. First, what sort of

1985
01:51:13,760 --> 01:51:17,080
Speaker 1: advice would you give to a millennial or someone just

1986
01:51:17,160 --> 01:51:20,759
Speaker 1: starting out their career, whether it's in the investment business

1987
01:51:20,960 --> 01:51:25,120
Speaker 1: or just more broadly, so more broadly, um, you know,

1988
01:51:25,160 --> 01:51:30,360
Speaker 1: it's to me, it's all about save early. You know. Actually,

1989
01:51:30,400 --> 01:51:33,400
Speaker 1: let me back it up. Live below your means, you know,

1990
01:51:33,600 --> 01:51:35,920
Speaker 1: whatever you think you can afford, just notch it down

1991
01:51:35,960 --> 01:51:39,080
Speaker 1: a little bit, save more than you you think you're

1992
01:51:39,080 --> 01:51:43,280
Speaker 1: gonna need to be very aggressive early and then get

1993
01:51:43,439 --> 01:51:47,320
Speaker 1: exposure um to you know, a highly diversified portfolio. If

1994
01:51:47,320 --> 01:51:49,280
Speaker 1: you're young, if you're a young millennial, you should be

1995
01:51:49,320 --> 01:51:52,960
Speaker 1: mostly equities, um volatilities your friend, it's not your enemy

1996
01:51:53,000 --> 01:51:56,320
Speaker 1: at this point. Be very global and and and then

1997
01:51:56,400 --> 01:51:57,840
Speaker 1: you know, obviously we're gonna say, pay a lot of

1998
01:51:57,840 --> 01:52:00,639
Speaker 1: attention to cost, but I would I would really start

1999
01:52:00,640 --> 01:52:03,479
Speaker 1: early and try to save as much as you can early.

2000
01:52:03,640 --> 01:52:05,640
Speaker 1: It makes a huge difference, you know. We just have

2001
01:52:05,800 --> 01:52:09,640
Speaker 1: this conversation the other day. I think back about my

2002
01:52:10,000 --> 01:52:13,200
Speaker 1: cars that I had when I was I'm a car guy.

2003
01:52:13,320 --> 01:52:17,599
Speaker 1: Early in my career and in hindsight, who really cares

2004
01:52:17,640 --> 01:52:20,919
Speaker 1: what you're driving when you're just starting out. You're supposed

2005
01:52:20,960 --> 01:52:23,200
Speaker 1: to be broke and and and it's just you know,

2006
01:52:23,640 --> 01:52:26,599
Speaker 1: if you do it on the front end, the compounding

2007
01:52:26,640 --> 01:52:30,080
Speaker 1: effect is just amazing. You know, for somebody coming into

2008
01:52:30,160 --> 01:52:35,759
Speaker 1: our business. UM, I would say, really important to develop

2009
01:52:35,760 --> 01:52:39,280
Speaker 1: a global perspective. UM, I still see it. It's it's

2010
01:52:39,479 --> 01:52:42,640
Speaker 1: getting better and home country biases everywhere. It's it's not

2011
01:52:42,760 --> 01:52:45,200
Speaker 1: just here. And in the US it's not as bad

2012
01:52:45,240 --> 01:52:48,120
Speaker 1: because the US is about half of the global markets,

2013
01:52:48,160 --> 01:52:50,720
Speaker 1: so it doesn't grow as much. But if you're in

2014
01:52:50,720 --> 01:52:53,120
Speaker 1: the UK, where you're six or seven percent of the

2015
01:52:53,160 --> 01:52:58,280
Speaker 1: global markets and of your equity exposure is local, that's

2016
01:52:58,280 --> 01:52:59,800
Speaker 1: a problem. So if you're going to be if you're

2017
01:52:59,800 --> 01:53:02,040
Speaker 1: going to be in our business, you've got to develop

2018
01:53:02,040 --> 01:53:05,720
Speaker 1: a global mindset to UM, you've gotta work really hard.

2019
01:53:06,000 --> 01:53:07,719
Speaker 1: UM I think it's you know, I think it's gonna

2020
01:53:07,720 --> 01:53:09,840
Speaker 1: get even harder. And you know, whether you're on the

2021
01:53:09,880 --> 01:53:13,160
Speaker 1: business side or the investment side, hard work really really

2022
01:53:13,200 --> 01:53:17,840
Speaker 1: separates people. UM. And then three, UM, you know, line

2023
01:53:17,880 --> 01:53:24,280
Speaker 1: yourself up with organizations that really put integrity above all else.

2024
01:53:25,040 --> 01:53:28,000
Speaker 1: Our business. Um, you know a lot of really good people,

2025
01:53:28,000 --> 01:53:29,559
Speaker 1: a lot of really good firms, but you know there

2026
01:53:29,560 --> 01:53:32,120
Speaker 1: are some stuff on the margin that you just is

2027
01:53:32,160 --> 01:53:35,120
Speaker 1: not good. And I think if you're young, pay a

2028
01:53:35,160 --> 01:53:39,160
Speaker 1: lot of attention to that early on. UM, and you know,

2029
01:53:39,280 --> 01:53:42,040
Speaker 1: try to find the firm who's got a value system

2030
01:53:42,080 --> 01:53:44,720
Speaker 1: that really matches up with your own. So my my

2031
01:53:44,920 --> 01:53:47,479
Speaker 1: second to last question, I kind of asked you already,

2032
01:53:47,520 --> 01:53:49,760
Speaker 1: so I'm gonna change it up. I was gonna say

2033
01:53:49,800 --> 01:53:52,080
Speaker 1: what has changed for better or worse since you've joined

2034
01:53:52,120 --> 01:53:55,040
Speaker 1: the industry. But we've really talked about that a lot,

2035
01:53:55,439 --> 01:53:58,040
Speaker 1: So let me mix it up a little bit and

2036
01:53:58,120 --> 01:54:01,040
Speaker 1: say what changes would you lie to see take place

2037
01:54:01,120 --> 01:54:05,640
Speaker 1: going forward in the industry. So look, I think the industry,

2038
01:54:05,960 --> 01:54:10,840
Speaker 1: uh again, it's not gonna shock you the cost side, um.

2039
01:54:10,920 --> 01:54:13,040
Speaker 1: And and it's it's not just about price, by the way,

2040
01:54:13,080 --> 01:54:16,400
Speaker 1: it's about value. The industry really needs to think about

2041
01:54:16,439 --> 01:54:20,240
Speaker 1: what value are we providing? And um, there's there's an

2042
01:54:20,240 --> 01:54:24,520
Speaker 1: immediate reaction when you say low costs to you know, um,

2043
01:54:24,800 --> 01:54:28,439
Speaker 1: people people flinch. I think the value you know, you

2044
01:54:28,479 --> 01:54:31,080
Speaker 1: have to understand your value proposition, and I don't think

2045
01:54:31,080 --> 01:54:34,200
Speaker 1: everybody does that. As well as they should. Um. You know,

2046
01:54:34,040 --> 01:54:35,840
Speaker 1: you don't have to be the low price guy all

2047
01:54:35,840 --> 01:54:39,600
Speaker 1: the time if you're really adding something, um that's valuable

2048
01:54:39,600 --> 01:54:41,720
Speaker 1: to a client at the end of the day. So

2049
01:54:41,720 --> 01:54:44,600
Speaker 1: I think people need to really understand the value of

2050
01:54:44,640 --> 01:54:47,760
Speaker 1: the side of their equations better. I'd also like to

2051
01:54:47,800 --> 01:54:52,560
Speaker 1: see um uh, the industry a little bit more focused

2052
01:54:53,000 --> 01:54:55,879
Speaker 1: on the long term. Um. You know, a lot of firms,

2053
01:54:56,720 --> 01:54:59,080
Speaker 1: despite the fact that they talk long term from an

2054
01:54:59,120 --> 01:55:02,600
Speaker 1: investment perspective, they run themselves very short term with a

2055
01:55:02,680 --> 01:55:05,400
Speaker 1: very short term orientation. You know. One of the things

2056
01:55:05,440 --> 01:55:08,040
Speaker 1: we really pride ourselves on is trying to run ourselves

2057
01:55:08,040 --> 01:55:10,200
Speaker 1: the same way we tell people to invest, which was

2058
01:55:10,720 --> 01:55:13,320
Speaker 1: you know, don't think in terms of quarters or even years,

2059
01:55:13,320 --> 01:55:17,280
Speaker 1: think in terms of you know, five, ten, twenty year blocks.

2060
01:55:17,320 --> 01:55:21,240
Speaker 1: And I think the industry is still too short term oriented,

2061
01:55:21,280 --> 01:55:23,520
Speaker 1: and you see that in some of the discussions around

2062
01:55:23,520 --> 01:55:26,240
Speaker 1: regulation and things like that. You know, I think the

2063
01:55:26,320 --> 01:55:29,560
Speaker 1: third thing, um, you know, for the industry um to

2064
01:55:29,720 --> 01:55:33,200
Speaker 1: really to really focus on is the people's side. Um.

2065
01:55:33,280 --> 01:55:37,320
Speaker 1: And this is going to sound a little bit um

2066
01:55:36,800 --> 01:55:41,040
Speaker 1: uh paternalistic perhaps, but you know, when I talked to

2067
01:55:41,080 --> 01:55:44,360
Speaker 1: a lot of young professionals in the business, and it's

2068
01:55:44,400 --> 01:55:48,160
Speaker 1: a wide distribution of experiences in terms of whether they

2069
01:55:48,200 --> 01:55:51,840
Speaker 1: really feel satisfied or not. And I think it's really

2070
01:55:51,880 --> 01:55:55,400
Speaker 1: important that, um, for you know, you know, you know,

2071
01:55:55,480 --> 01:55:59,080
Speaker 1: in your own work, having a purpose that matters really

2072
01:55:59,120 --> 01:56:01,880
Speaker 1: makes coming to work every day better. I think more

2073
01:56:01,960 --> 01:56:04,920
Speaker 1: firms need to think about what's our real purpose? Why

2074
01:56:05,040 --> 01:56:07,920
Speaker 1: why do we exist? And why does somebody want to

2075
01:56:07,920 --> 01:56:09,880
Speaker 1: work here? Not just for the paycheck. As the paycheck

2076
01:56:09,960 --> 01:56:12,360
Speaker 1: is important, but it's not it's not actually what you're

2077
01:56:12,360 --> 01:56:15,840
Speaker 1: going to remember, you know after thirty five years. Um,

2078
01:56:15,880 --> 01:56:18,000
Speaker 1: you know, what I'll remember in Vanguard are the people

2079
01:56:18,440 --> 01:56:21,680
Speaker 1: and the clients and the culture and you know, the

2080
01:56:21,680 --> 01:56:25,080
Speaker 1: compensation and all that will be nice, but that that's

2081
01:56:25,080 --> 01:56:27,560
Speaker 1: what I'm going to remember. One of the things we've

2082
01:56:27,600 --> 01:56:31,240
Speaker 1: talked about, and when we sit around and have a

2083
01:56:31,320 --> 01:56:34,760
Speaker 1: couple of glasses of wine or beer, is how things

2084
01:56:34,800 --> 01:56:37,520
Speaker 1: have changed. And and so I'm the oldest guy in

2085
01:56:37,560 --> 01:56:40,440
Speaker 1: my office. I'm a couple of years younger than you,

2086
01:56:40,600 --> 01:56:45,120
Speaker 1: but mostly young younger folks. And the conversation is, when

2087
01:56:45,160 --> 01:56:49,440
Speaker 1: I was coming up, it was very much a mentorship

2088
01:56:49,960 --> 01:56:55,720
Speaker 1: philosophy that was very widespread and maybe this is someone anecdotal,

2089
01:56:55,760 --> 01:56:59,440
Speaker 1: but I don't see as much of that around today

2090
01:56:59,480 --> 01:57:02,960
Speaker 1: as I used to. And it was a very very

2091
01:57:03,040 --> 01:57:07,160
Speaker 1: big thing to have someone taking onto the kid Camille.

2092
01:57:07,200 --> 01:57:09,240
Speaker 1: Let me let me you're doing it wrong. Let me

2093
01:57:09,360 --> 01:57:12,080
Speaker 1: let me show you the ropes. And I know there's

2094
01:57:12,080 --> 01:57:15,520
Speaker 1: still some of them around. But I'm not sure if

2095
01:57:15,600 --> 01:57:19,440
Speaker 1: the people who are twenty five or so, we're thirty

2096
01:57:19,920 --> 01:57:22,760
Speaker 1: arguing able to answer the same question in twenty five

2097
01:57:22,840 --> 01:57:26,640
Speaker 1: years who your influences, who your mentors, who really affected

2098
01:57:27,040 --> 01:57:29,960
Speaker 1: the way you think? And I think that's a great

2099
01:57:30,000 --> 01:57:32,360
Speaker 1: loss these days. Yeah, you know, and and and some

2100
01:57:32,440 --> 01:57:35,360
Speaker 1: of that you know, you you earlier you talked a

2101
01:57:35,400 --> 01:57:37,960
Speaker 1: little bit about the change in the industry composition. I mean,

2102
01:57:37,960 --> 01:57:40,640
Speaker 1: you know, there's a lot of more money with you know,

2103
01:57:41,240 --> 01:57:44,520
Speaker 1: a handful of bigger firms. And what you hope is

2104
01:57:44,560 --> 01:57:47,160
Speaker 1: the big firms don't lose that. I think some of

2105
01:57:47,200 --> 01:57:50,160
Speaker 1: them do. And you know, investment management for some firms,

2106
01:57:50,160 --> 01:57:52,440
Speaker 1: it's just a little piece of a bigger set of

2107
01:57:52,480 --> 01:57:56,640
Speaker 1: financial services they're providing. And we've definitely seen that. Um

2108
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Speaker 1: when we hire people from some of those firms, you

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01:58:01,160 --> 01:58:03,080
Speaker 1: know they're they're after they've been with us for a

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01:58:03,160 --> 01:58:06,080
Speaker 1: year to tack aground. This is really different and I

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Speaker 1: think maybe it's getting to what you're describing, and I

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Speaker 1: think again it's the human element side of this business

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01:58:14,200 --> 01:58:17,080
Speaker 1: is really important if you're going to really add value.

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01:58:17,160 --> 01:58:18,680
Speaker 1: You know, one of the ways you add values through

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01:58:18,680 --> 01:58:22,040
Speaker 1: your people, and you need to put a lot of

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01:58:22,040 --> 01:58:24,360
Speaker 1: time and energy into that. And you can't treat people

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01:58:24,440 --> 01:58:27,120
Speaker 1: just as another asset on the books. Um, who you

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01:58:27,120 --> 01:58:29,160
Speaker 1: know that happens to walk out at night. You gotta

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01:58:29,200 --> 01:58:32,360
Speaker 1: really treat it specially. And finally we get to our

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Speaker 1: last question. I asked this of all of my guests,

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01:58:36,160 --> 01:58:39,000
Speaker 1: what do you know today about investing that you wish

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01:58:39,000 --> 01:58:42,040
Speaker 1: you knew thirty years ago when you started your career?

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Speaker 1: Global is good. That's the big change from thirty years ago.

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01:58:47,760 --> 01:58:50,680
Speaker 1: So are you saying thirty years you were domestic focused

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01:58:50,680 --> 01:58:53,480
Speaker 1: and you weren't thinking globally. Yeah. I would not have

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01:58:53,960 --> 01:58:56,160
Speaker 1: thirty years ago. It just would not have occurred to

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01:58:56,200 --> 01:58:58,880
Speaker 1: me to be thinking nearly as globally. And that's the

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01:58:58,880 --> 01:59:02,000
Speaker 1: big change for me. It's been. Um, you know, uh,

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Speaker 1: I'd like to think thirty years ago, you know, I

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01:59:04,720 --> 01:59:07,040
Speaker 1: believed in low costs because I joined Vanguard. I believed

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01:59:07,040 --> 01:59:11,120
Speaker 1: in indexing because we are a pioneer, um, you know,

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01:59:11,480 --> 01:59:14,000
Speaker 1: getting acid allocation right with something we preach right from

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Speaker 1: the get go. But I was not nearly as global

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01:59:16,520 --> 01:59:18,600
Speaker 1: in my thinking as I needed to be. And and

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Speaker 1: that's really a fascinating change. Hey, Listen, when we look

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Speaker 1: around the world, the US is more than a developed economy,

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01:59:24,640 --> 01:59:27,720
Speaker 1: it's a mature economy. The same thing with Japan and Europe.

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01:59:27,760 --> 01:59:31,720
Speaker 1: When you look globally, the developing markets and the emerging

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01:59:31,760 --> 01:59:34,560
Speaker 1: markets are where all the global growth is likely to

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01:59:34,600 --> 01:59:38,360
Speaker 1: come from. So, uh, you're you're I'm drinking from the

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01:59:38,400 --> 01:59:41,320
Speaker 1: same cup that you are. There's little doubt that that's

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Speaker 1: what the future has been. Bill I. I can't thank

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01:59:43,760 --> 01:59:46,360
Speaker 1: you enough for being so generous with your time. This

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01:59:46,440 --> 01:59:51,080
Speaker 1: has really been absolutely fascinating. UM. I just want to review.

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01:59:51,720 --> 01:59:54,560
Speaker 1: People want to find your your research and your work.

2146
01:59:54,760 --> 01:59:58,960
Speaker 1: It's at Vanguard Vanguard dot com. UM. I meant to

2147
01:59:59,000 --> 02:00:01,120
Speaker 1: ask you about the no whole theme? Is it true?

2148
02:00:01,160 --> 02:00:04,640
Speaker 1: Everything is everything? So the galley we have a galley,

2149
02:00:05,040 --> 02:00:06,880
Speaker 1: or we don't have a gym. We have ship shape.

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02:00:07,760 --> 02:00:10,920
Speaker 1: We don't have employees, we have crew members. You hinted

2151
02:00:10,920 --> 02:00:13,880
Speaker 1: at that in the last answer. That's what checking it off.

2152
02:00:13,920 --> 02:00:16,480
Speaker 1: It's it's it's very nautical, but it builds a strong

2153
02:00:16,520 --> 02:00:19,800
Speaker 1: culture to say the very least. Well, this has been

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02:00:19,880 --> 02:00:23,560
Speaker 1: absolutely delightful. Thank you so much for spending so much

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02:00:23,600 --> 02:00:27,000
Speaker 1: time with us. You've been listening to my interview with

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02:00:27,080 --> 02:00:31,720
Speaker 1: Bill McNabb. He's the chairman and CEO of Vanguard Group.

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02:00:32,080 --> 02:00:34,720
Speaker 1: If you'd like more information, you know what, you can

2158
02:00:34,800 --> 02:00:36,960
Speaker 1: check it out. Be sure and listen to all our

2159
02:00:37,000 --> 02:00:40,480
Speaker 1: other podcasts and by this point, if you're still with us,

2160
02:00:40,520 --> 02:00:43,000
Speaker 1: just look an inch or two above or below on

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02:00:43,080 --> 02:00:46,839
Speaker 1: iTunes and you can see all the rest. I'm Barry Ridhults.

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02:00:46,880 --> 02:00:50,160
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.