WEBVTT - Vanguard CEO Bill McNabb: Masters in Business (Audio) 0:00:03.240 --> 0:00:07.560 This is Masters in Business with Barry Ridholts on Bloomberg Radio. 0:00:08.119 --> 0:00:13.320 I am just beyond thrilled to introduce our special guest today. 0:00:13.320 --> 0:00:15.920 And I know I say this every week we have 0:00:15.920 --> 0:00:19.799 a special guest. Today we have a special guest. His 0:00:19.880 --> 0:00:24.320 name is Bill McNab. He is the chief executive officer 0:00:24.360 --> 0:00:27.960 and chairman of the Vanguard Group, which is one of 0:00:27.960 --> 0:00:33.479 the world's largest investment firms managing three point one trillion dollars. 0:00:34.120 --> 0:00:38.320 Everybody knows who Vanguard is. They are essentially the father 0:00:38.560 --> 0:00:43.400 of indexing UM and have have really just made a 0:00:43.640 --> 0:00:47.920 tremendous dent on the world of investing. Uh. Bill was 0:00:48.040 --> 0:00:50.880 really generous with his time. He spoke to hung out 0:00:50.920 --> 0:00:54.960 for almost two hours and we talked about everything from 0:00:54.960 --> 0:00:57.960 what Vanguard was like in the old days too, who 0:00:58.000 --> 0:01:01.520 influenced him, and where van Art is going in the future. 0:01:02.320 --> 0:01:06.920 I thought this was a master class in exactly what 0:01:07.160 --> 0:01:10.440 is happening in the world of investing today and what 0:01:10.680 --> 0:01:15.880 is the right approach to either being an investor or 0:01:16.000 --> 0:01:20.880 being an investment management firm. UM. He is incredibly accomplished. 0:01:20.959 --> 0:01:25.120 He joins Vanguard thirty years ago. Next month is his 0:01:25.200 --> 0:01:30.720 thirty year anniversary. He became CEO just before the financial 0:01:30.720 --> 0:01:34.120 crisis blew up. A month before Lehman and A I 0:01:34.240 --> 0:01:36.840 G and City and everybody else blew up. He was 0:01:36.959 --> 0:01:41.800 named UH CEO and really talk about having a front 0:01:41.959 --> 0:01:45.760 seat on the past thirty years of changes in the 0:01:45.840 --> 0:01:51.640 financial world. For those of you who are either investors 0:01:51.760 --> 0:01:55.600 or work in the world of investing, this is a 0:01:55.600 --> 0:01:59.360 absolute master class. We spoke for so long I think 0:01:59.400 --> 0:02:01.320 you may want to listen to this in two halfs. 0:02:01.840 --> 0:02:06.960 All of it is absolutely fascinating. He's really an incredibly insightful, 0:02:07.240 --> 0:02:11.320 accomplished guy, and um, I think you're in for a treat. So, 0:02:11.360 --> 0:02:15.960 without any further ado, here is my interview with Vanguard 0:02:16.040 --> 0:02:24.400 CEO Bill McNabb. This is Masters in Business with Barry 0:02:24.480 --> 0:02:28.840 Ridholds on Bloomberg Radio. My special guest today and I 0:02:28.960 --> 0:02:31.600 say special guest every week, but this is really a 0:02:31.680 --> 0:02:35.800 special guest is Bill McNabb. He is the CEO and 0:02:35.960 --> 0:02:39.680 chairman of the Vanguard Group, which manages a little over 0:02:39.760 --> 0:02:43.840 three point one trillion dollars. Bill, Welcome to the show. 0:02:43.960 --> 0:02:47.040 Thanks Berry. It's a privilege to be here. So let's 0:02:47.080 --> 0:02:49.200 give a quick I don't want to spend too much 0:02:49.200 --> 0:02:52.560 time on your cv UM. But a quick background. You've 0:02:52.560 --> 0:02:57.240 been with Vanguard since June. That means you're thirty year 0:02:57.240 --> 0:03:01.720 anniversary coming up next month. That's that's amazing, it's been. 0:03:02.240 --> 0:03:05.480 It was really a remarkable turn of good luck. I 0:03:05.520 --> 0:03:08.080 was working for a firm here which is now JP 0:03:08.240 --> 0:03:11.519 Morgan Chase, and UH got a call to go to 0:03:11.600 --> 0:03:15.000 Vanguard and Vangard was this little tiny mutual fund firm 0:03:15.040 --> 0:03:19.640 in n and I went down, loved it. And you know, 0:03:19.960 --> 0:03:23.040 sometimes better to be lucky than smart. That that's certainly 0:03:23.120 --> 0:03:27.280 for sure. Today you are the third CEO in Vanguard history, 0:03:27.320 --> 0:03:30.400 following Jack Brennan, who was actually a prior guest on 0:03:30.440 --> 0:03:34.560 the show, and some guy named John Bogel, some some 0:03:34.639 --> 0:03:37.120 guy who's sort of legendary out there, to say the 0:03:37.200 --> 0:03:40.080 least legendary. I would love to bring him. In fact, 0:03:40.160 --> 0:03:41.720 he may be one of the few people I'm willing 0:03:41.760 --> 0:03:45.200 to travel to him with a recorder and interview him, 0:03:45.200 --> 0:03:48.680 because he is truly one of the giants, the legends 0:03:48.720 --> 0:03:52.960 in finance. Absolutely, um, you know, founder of the firm. 0:03:53.000 --> 0:03:55.160 What was it like to work with Bogel? That had 0:03:55.200 --> 0:03:58.160 to be mind blowing. Well, I think the great thing 0:03:58.240 --> 0:04:01.040 Jack did was at the beginning of the firm, and 0:04:01.120 --> 0:04:02.880 I was there, you know, a few years after the 0:04:02.920 --> 0:04:07.920 founding was he created this corporate structure which is very 0:04:07.960 --> 0:04:09.880 different than anything else. As you know, we're owned by 0:04:09.880 --> 0:04:13.000 our funds and therefore our investors, in other words, people 0:04:13.120 --> 0:04:17.360 by Vanguard mutual funds essentially are the owners of Vanguard Group. 0:04:17.400 --> 0:04:21.719 That's right, And we have a saying that Jack promoted 0:04:21.760 --> 0:04:24.520 a lot in the early days that strategy follows structure, 0:04:24.600 --> 0:04:27.960 so everything we do had to be had to reflect 0:04:28.000 --> 0:04:30.600 that structure, which basically means just put the investor first 0:04:30.600 --> 0:04:34.800 and everything you do. And that culture really permeated the 0:04:34.920 --> 0:04:37.680 organization right from the get go. And the other thing 0:04:37.800 --> 0:04:41.160 Jack did a really good job of was the internal culture, 0:04:41.400 --> 0:04:45.080 which was, for lack of a better phrase, lived by 0:04:45.080 --> 0:04:47.800 the Golden rule. And so they're really not a lot 0:04:47.800 --> 0:04:50.400 of hierarchy at Vanguard. I'm certainly you know, we pay 0:04:50.400 --> 0:04:54.800 our you know, best performing portfolio managers higher than those 0:04:54.839 --> 0:04:56.800 who aren't. And you know, you have all kinds of 0:04:56.800 --> 0:04:59.680 different compensation arrangements, but at the end of the day, 0:04:59.680 --> 0:05:03.040 everybody treats each other um peer to peer, and it 0:05:03.120 --> 0:05:05.479 doesn't matter what your role is and you know, it 0:05:05.520 --> 0:05:09.039 makes it very different than most firms where there's often 0:05:09.080 --> 0:05:12.160 an all star kind of cast to it. And uh, 0:05:12.480 --> 0:05:14.680 it makes it coming to work every day up last 0:05:14.960 --> 0:05:18.279 because of the people's side that that must be um, 0:05:18.640 --> 0:05:22.360 a crazy fantastic environment. So let's talk a little bit 0:05:22.360 --> 0:05:26.680 about your background. Undergraduate government major at Dartmouth and then 0:05:26.680 --> 0:05:29.600 you end up getting an NBA from Wharton. How did 0:05:29.640 --> 0:05:31.760 you find your way to finance? What did you do 0:05:31.960 --> 0:05:34.240 in between? So there was a little bit of a 0:05:34.320 --> 0:05:38.200 side tour there. Um. After I graduated from Dartmouth, I think, 0:05:38.279 --> 0:05:41.480 much to my mom's chagrin, instead of coming to work 0:05:41.480 --> 0:05:46.080 in New York, I ended up going to teach first 0:05:46.160 --> 0:05:49.320 year of Latin at a boys school. First year Latin? 0:05:49.720 --> 0:05:54.159 Are you fluent in Latin? Not anymore? I think back 0:05:54.160 --> 0:05:56.320 in the day I was reasonably good at it. But 0:05:56.480 --> 0:05:59.080 I think the real thing was it was a private school. 0:05:59.440 --> 0:06:02.159 I could coach three sports, so I was looked at 0:06:02.240 --> 0:06:04.400 as a very cheap asset. You know. I could do 0:06:04.800 --> 0:06:06.320 a lot of things for not a lot of money. 0:06:06.360 --> 0:06:10.880 It was a recession when I graduated, and I remember, 0:06:11.000 --> 0:06:13.200 you know, so any any any, any kind of work 0:06:13.320 --> 0:06:15.599 was good work as far as I was concerned, but 0:06:15.680 --> 0:06:18.679 those couple of years of teaching actually were really um 0:06:18.720 --> 0:06:21.680 in some ways, very instrumental in terms of shaping the 0:06:21.720 --> 0:06:25.440 way I think about the world. I then went to Wharton, UM, 0:06:25.800 --> 0:06:28.200 you know, got a great education there. I spent a 0:06:28.200 --> 0:06:31.720 couple of years at what's now JP Morgan Chase, and 0:06:31.760 --> 0:06:34.440 then found my way back to Vanguard. So was it 0:06:34.520 --> 0:06:37.800 kind of surprised to get a phone call from a 0:06:37.880 --> 0:06:40.839 Vanguard How how many years have you been with JP Morgan? 0:06:40.880 --> 0:06:43.479 So I've been with I've been I've been at the 0:06:43.480 --> 0:06:46.320 bank for three years and I was working basically in 0:06:46.320 --> 0:06:51.400 a group that was undoing bad leverage buyouts and UM 0:06:51.480 --> 0:06:54.160 we were sort of the precursor to what became the 0:06:54.200 --> 0:06:58.080 private equity desk farther down the road, and it was 0:06:58.120 --> 0:07:00.760 really fascinating work. I I love the work. I actually 0:07:00.760 --> 0:07:02.919 liked the team I was on, but it was a 0:07:02.920 --> 0:07:06.479 little dissatisfied with the bank's overall strategy and some of 0:07:06.480 --> 0:07:10.240 the cultural aspects. And I my wife was from Philly. 0:07:10.320 --> 0:07:12.800 I had gone to grad school there, so we thought 0:07:12.840 --> 0:07:16.080 about UM going back and I get this call from 0:07:16.120 --> 0:07:19.600 this upstart firm, UM, they were looking to hire a 0:07:19.840 --> 0:07:23.520 G I c product manager. I had no idea what 0:07:23.560 --> 0:07:27.160 that was before the internet, and it's guaranteed investment contracts, 0:07:27.800 --> 0:07:31.360 which were early on the biggest asset class in four 0:07:31.360 --> 0:07:34.240 oh one K plans. Really, so this is before a 0:07:34.320 --> 0:07:38.600 number of tax changes that kinda yeah they that go away, yeah, 0:07:38.680 --> 0:07:41.520 and and and really you know what happened when when 0:07:41.520 --> 0:07:43.880 as interest rates came down, g I sees were a 0:07:43.880 --> 0:07:47.680 great deal. You could basically when i UH was investing 0:07:47.720 --> 0:07:49.520 in them, you could get an eight or nine percent 0:07:49.680 --> 0:07:52.920 yield and you could keep a constant dollar price because 0:07:52.960 --> 0:07:56.240 it was an insurance contract. So you know, basically investors 0:07:56.240 --> 0:08:00.680 were getting three year bonds with a money market price. 0:08:01.200 --> 0:08:02.960 And so for the four oh one K investor, it 0:08:03.000 --> 0:08:05.320 was a godsend. And you know, it's these plans were 0:08:05.400 --> 0:08:08.760 just you know, beginning, Um, this was really a very 0:08:08.800 --> 0:08:12.080 popular asset class. I didn't know anything about it though. 0:08:13.480 --> 0:08:15.560 In the last minute we have left in this segment 0:08:15.800 --> 0:08:18.360 there there are a number of new products will talk 0:08:18.400 --> 0:08:22.920 about a little later in the conversation. But aside from Bogel, 0:08:22.960 --> 0:08:26.679 who were your early mentors, so, um, a couple um, 0:08:26.720 --> 0:08:29.280 you know Jack Brennan who was my predecessor. He and 0:08:29.320 --> 0:08:32.000 I struck up a pretty good friendship early on, and 0:08:32.320 --> 0:08:34.160 you know, he ended up being a little bit of 0:08:34.200 --> 0:08:36.680 a mentor before I went to work for him directly. 0:08:37.080 --> 0:08:40.000 There was another fellow, Jim Gately, who um one of 0:08:40.000 --> 0:08:42.800 our great leaders at Vanguard, who I would tell you 0:08:42.920 --> 0:08:45.800 I learned a ton from him. He he was a 0:08:45.840 --> 0:08:49.360 guy who had been at Prudential Asset Management and had 0:08:49.400 --> 0:08:52.720 bought a lot of boutiques, and he brought with him 0:08:52.720 --> 0:08:56.839 a worldliness that I had never experienced before and really 0:08:56.880 --> 0:08:59.040 taught me what it was like to be a professional. 0:08:59.679 --> 0:09:02.160 I'm are Ridholts. You're listening to Masters in Business on 0:09:02.200 --> 0:09:05.760 Bloomberg Radio. My guest today is Bill McNabb. He is 0:09:05.800 --> 0:09:08.880 the chairman and chief executive officer of a little shop 0:09:08.920 --> 0:09:13.520 called the Vanguard Group. They manage about three trillion, that's trillion, 0:09:13.559 --> 0:09:17.520 with the t three trillion dollars. Let's talk a little 0:09:17.520 --> 0:09:20.840 bit about what took place over the past five years. 0:09:21.679 --> 0:09:26.120 Vanguard garnered somewhere around six hundred and fifty billion dollars 0:09:26.720 --> 0:09:30.560 in inflows and net cash flows. That's more than the 0:09:30.640 --> 0:09:35.480 next six companies combined. And and there are some estimates 0:09:35.520 --> 0:09:40.079 that say about a billion dollars per day flow into Vanguard. 0:09:40.679 --> 0:09:43.720 What is that about? Well, I think you know, our 0:09:44.800 --> 0:09:47.679 focus on cost and doing the right thing for investors 0:09:47.720 --> 0:09:50.840 has resonated at a level that even we are surprised by. 0:09:50.920 --> 0:09:54.640 And uh, it's been very gratifying um to say the least. 0:09:54.760 --> 0:09:58.280 But we think we're we think we're again all humility aside. 0:09:58.320 --> 0:10:00.560 We think we're winning for the right re sasons. You know, 0:10:00.600 --> 0:10:03.400 we're not out there trying to promote something that we're not. 0:10:04.200 --> 0:10:07.480 So let's I'm gonna skip ahead to another question about cost. 0:10:08.120 --> 0:10:12.640 Why is it that managing costs is so effective UM 0:10:12.840 --> 0:10:15.400 for investors? So when you look at all the work 0:10:15.480 --> 0:10:17.559 that's been done, and you know, Morning started a pretty 0:10:17.559 --> 0:10:21.240 seminal piece to three years ago where they broke off 0:10:21.360 --> 0:10:26.360 funds into quartiles and the highest expense quartile had the 0:10:26.400 --> 0:10:30.079 worst performance and the lowest expense quartile had the best performance. 0:10:30.440 --> 0:10:34.160 And the performance was very consistent and persistent. And so 0:10:34.240 --> 0:10:36.640 it just reinforced a notion that we've had cost is 0:10:36.640 --> 0:10:40.440 the one thing you can control and it's not like 0:10:40.559 --> 0:10:43.679 other consumer goods where you know, you pay more, you 0:10:43.720 --> 0:10:46.560 in theory get more UM and investing that has not 0:10:46.640 --> 0:10:50.400 been the case. Right, So a BMW and a Volkswagen. 0:10:50.480 --> 0:10:52.360 The BMW may costs more and maybe you get a 0:10:52.360 --> 0:10:56.000 little more, but it's the opposite in investing. So let's 0:10:56.040 --> 0:10:59.720 talk about what some people have called the vanguard effect. 0:11:00.760 --> 0:11:06.040 Well again this was dubbed um. As we enter new markets, 0:11:06.520 --> 0:11:10.200 you immediately see prices fall. In fact, I think what's 0:11:10.240 --> 0:11:12.680 happening here is our competitors are getting a little bit smarter. 0:11:12.920 --> 0:11:16.000 Rather than waiting for us to take a lot of 0:11:16.000 --> 0:11:18.480 market share, they're actually trying to meet us more quickly. 0:11:19.040 --> 0:11:21.240 A couple of my colleagues at Vangardive said, you know, 0:11:21.280 --> 0:11:23.480 are you worried about it? And I said, not really, 0:11:23.559 --> 0:11:25.600 because at the end of the day, first of all, 0:11:25.640 --> 0:11:27.839 we're built to do this every day um, and we're 0:11:27.880 --> 0:11:29.800 built to get better and better. But second of all, 0:11:30.000 --> 0:11:33.120 it's great for investors. So if investors have more choice, 0:11:33.600 --> 0:11:35.880 low costs, then we've got to get smarter and more 0:11:35.920 --> 0:11:39.360 innovative and quicker as to how we compete on that 0:11:39.880 --> 0:11:42.600 at that level, Who asked you if if you're worried 0:11:42.640 --> 0:11:46.000 about it, clearly a billion a day. Hey, you guys 0:11:46.040 --> 0:11:48.200 are doing this wrong. You're only getting a billion a 0:11:48.280 --> 0:11:50.880 day and new inflows. You gotta mix it all up. 0:11:51.360 --> 0:11:54.400 It seems like you guys have cracked the code. You know. 0:11:55.080 --> 0:11:58.480 I think it's again. We we feel great about what's 0:11:58.559 --> 0:12:01.840 been going on. But um, Indy Grove is one of 0:12:01.840 --> 0:12:05.520 my favorite executives and he has this phrase, only the 0:12:05.559 --> 0:12:09.920 paranoid survive, and uh, I really believe that. So the 0:12:09.960 --> 0:12:13.480 minute minute any complacency starts to show itself at Vanguard, 0:12:13.520 --> 0:12:16.959 we get very skittish. So let's go back to your 0:12:17.000 --> 0:12:20.640 original principles. There are four principles which I really like, 0:12:21.440 --> 0:12:24.120 and this will give people a sense of how you 0:12:24.160 --> 0:12:28.400 approach the world. Have a goal, maintain a balanced and 0:12:28.440 --> 0:12:33.320 diversified portfolio, pay attention to costs, and focus on the 0:12:33.400 --> 0:12:37.439 long term. How did these four principles come about? So 0:12:38.040 --> 0:12:41.600 I would say these four principles have been present since 0:12:41.640 --> 0:12:44.960 our founding and and we had talked about him in 0:12:45.000 --> 0:12:47.960 different ways. But about four or five years ago, as 0:12:48.000 --> 0:12:51.480 we were kind of rethinking our message to the world, 0:12:52.120 --> 0:12:54.040 it became clear to us that we needed needed to 0:12:54.080 --> 0:12:57.960 distill it in even simpler English for people and really 0:12:58.000 --> 0:13:01.600 make it stark. And I think these do that and 0:13:02.320 --> 0:13:04.360 people look at it and they say, boy, it's not 0:13:04.400 --> 0:13:06.600 complicated and I say, yeah, but how many people don't 0:13:06.640 --> 0:13:11.200 follow this? And you know, for me, especially the goal setting, 0:13:11.240 --> 0:13:14.240 this is the place where I see most investors miss. 0:13:14.360 --> 0:13:17.360 They don't have very clear, well defined goals, and you 0:13:17.440 --> 0:13:20.360 need to know that if you're gonna, you know, construct 0:13:20.360 --> 0:13:23.640 an appropriate portfolio. One of the comments that I often 0:13:23.720 --> 0:13:27.120 hear from people who have already accumulated a lot of 0:13:27.160 --> 0:13:29.559 wealth is all right, what am I going to need 0:13:29.600 --> 0:13:31.800 to do to beat the benchmarks over the next couple 0:13:31.800 --> 0:13:34.840 of years? And the response is always why do you 0:13:34.920 --> 0:13:37.960 feel you've already won? You've got enough money, you can 0:13:38.000 --> 0:13:40.240 never spend it all. Why do you feel the need 0:13:40.320 --> 0:13:43.560 to keep competing? You have to that pivot from wealth 0:13:43.600 --> 0:13:47.280 accumulation to okay, now we have to preserve this and 0:13:47.320 --> 0:13:50.160 eventually distribute it, whether it's philanthropy or what have you. 0:13:50.520 --> 0:13:52.600 People have a hard time wrapping their heads around that. 0:13:52.720 --> 0:13:54.560 I could agree more. You know, at the end of 0:13:54.559 --> 0:13:57.440 the day, it's it's define what you're trying to do, 0:13:57.600 --> 0:13:59.520 and then we want to be able to help you 0:13:59.559 --> 0:14:03.600 get there. So let's talk about something that's really quite fascinating. 0:14:03.640 --> 0:14:07.440 You're probably best known for indexing, although we'll get to 0:14:07.480 --> 0:14:11.920 some of the active funds, which is about a third UM. 0:14:11.960 --> 0:14:16.280 But the story of indexing is really quite fascinating. It 0:14:16.520 --> 0:14:20.320 came out of Wells Fargo, which had created it for 0:14:20.440 --> 0:14:24.600 institutional clients. How did you guys end up taking over 0:14:24.680 --> 0:14:28.840 the Wells Fargo index product and turning it around and 0:14:28.920 --> 0:14:32.320 offering it to retail investors. So when when Vanguard was 0:14:32.440 --> 0:14:37.760 founded formally in nive Um, Jack Bogel and the team 0:14:37.800 --> 0:14:41.720 I think correctly identified that cost was a differentiator. So 0:14:42.080 --> 0:14:45.400 even before indexing, we were talking about costs, and we 0:14:45.400 --> 0:14:47.720 weren't particularly low cost at that point, but we were 0:14:48.400 --> 0:14:54.040 aspiring to be. So um this idea about indexing seemed 0:14:54.080 --> 0:14:56.920 to be the perfect manifestation of a low cost, very 0:14:56.960 --> 0:15:00.480 efficient way to invest. And you had the Wells phenomenon 0:15:00.520 --> 0:15:03.040 in the pension side. You had you know, Burt mal 0:15:03.120 --> 0:15:05.800 Kill's Random Walk Down Wall Street, which was written around 0:15:05.800 --> 0:15:08.240 the same time. You had Charlie ellis Is Winning The 0:15:08.280 --> 0:15:11.360 Loser's Game, which was written, you know, around the same time. 0:15:11.440 --> 0:15:14.880 Charlie also on your board of directors and he was 0:15:14.920 --> 0:15:18.680 a guest here. What a tremendous gentleman, tremendous, tremendous person, 0:15:19.000 --> 0:15:22.720 And I think the genius was to say, if this 0:15:22.800 --> 0:15:26.680 idea is good enough for a sophisticated institution, why isn't 0:15:26.680 --> 0:15:29.560 it good enough for the average small investor? And so 0:15:29.680 --> 0:15:32.600 we took the indexing concept and turned it into a 0:15:32.680 --> 0:15:34.960 mutual fund, which no one had done. So in the 0:15:35.040 --> 0:15:39.080 last minute we have left, Let's talk about what percentage 0:15:39.240 --> 0:15:43.640 of the investable universe is now indexed? Um, how big 0:15:43.760 --> 0:15:46.160 is too big for indexes? I've I've read some things 0:15:46.200 --> 0:15:48.520 by people I don't agree with it, that say, hey, 0:15:48.520 --> 0:15:51.360 at a certain point, you know, indexing is just too 0:15:51.360 --> 0:15:54.400 big and you need to be more active. Yeah, So, 0:15:55.040 --> 0:15:56.840 first of all, I don't agree with the premise, but 0:15:57.040 --> 0:15:59.640 even if you did, indexing is still a very small 0:15:59.680 --> 0:16:03.440 per centage of the world's market cap. So in the US, 0:16:03.560 --> 0:16:05.760 the you know, the big change in mutual funds has 0:16:05.800 --> 0:16:09.840 been indexing has now risen to be about US mutual funds. 0:16:10.240 --> 0:16:13.440 But mutual funds on the equity side only represent about 0:16:14.280 --> 0:16:18.000 of the equity market, and in the institutional side it's 0:16:18.000 --> 0:16:20.960 it's a much smaller percentage. So indexing is still less 0:16:20.960 --> 0:16:24.600 than twenty overall in the US, and if you go abroad, 0:16:24.640 --> 0:16:28.200 it's a couple of percentage points. So there's a huge 0:16:28.240 --> 0:16:32.120 opportunity for it to become much more significant. I'm Barry Ridhults. 0:16:32.120 --> 0:16:34.880 You're listening to Masters in Business on Bloomberg Radio. My 0:16:34.920 --> 0:16:38.520 special guest today is Bill McNabb, who took over as 0:16:38.600 --> 0:16:42.520 CEO of the Vanguard Group. How's this for timing? August 0:16:42.600 --> 0:16:45.160 two thousand and eight, and in case you forgot, that 0:16:45.240 --> 0:16:48.960 was about a month before the world's really blew up. 0:16:49.440 --> 0:16:53.320 What was it like running an asset management shop in 0:16:53.360 --> 0:16:57.320 the middle of that turmoil? In a word, it was frightening, 0:16:57.760 --> 0:17:01.520 to be very honest. It was at the same time, 0:17:03.160 --> 0:17:05.479 probably will be one of the defining parts of my 0:17:05.600 --> 0:17:08.840 career in that the team that I worked with we 0:17:08.960 --> 0:17:11.280 got a chance to experience things I hope no one 0:17:11.280 --> 0:17:14.280 else ever gets to experience, and we got a chance 0:17:14.359 --> 0:17:18.800 to i think, influence events a little bit um and 0:17:18.840 --> 0:17:21.600 hopefully move things in a good direction for our clients. 0:17:22.000 --> 0:17:24.679 But it was it was amazing to to watch it 0:17:24.720 --> 0:17:27.719 all unfold. So what were the some of the specific 0:17:27.840 --> 0:17:31.959 challenges both you personally as a new CEO. I mean, 0:17:31.960 --> 0:17:35.240 you had been with Vanguard since six but you're taking 0:17:35.280 --> 0:17:38.280 over running the shop. What challenges did you face and 0:17:38.320 --> 0:17:40.640 what sort of challenges did the staff have to deal 0:17:40.680 --> 0:17:43.720 with in the midst of that. So there were sort 0:17:43.720 --> 0:17:47.439 of three levels of challenges. So the first was pretty 0:17:47.440 --> 0:17:50.560 tactical but big. The whole money fund industry was under 0:17:50.720 --> 0:17:53.520 UM you know, fire, and what were we going to 0:17:53.640 --> 0:17:57.040 do with UM the money market funds that we were managing, 0:17:57.080 --> 0:18:01.119 and how was the Treasury's rules and and and the 0:18:01.200 --> 0:18:03.840 intervention that was occurring, So you know, that was a 0:18:03.840 --> 0:18:06.920 big topic. The second that that was the whole breaking 0:18:06.920 --> 0:18:10.199 the buck situation Reserve fund broke the dollar, and the 0:18:10.280 --> 0:18:13.080 question was would anybody else? You know, we believe very 0:18:13.119 --> 0:18:16.600 strongly that our funds were incredibly well positioned. UM our 0:18:16.680 --> 0:18:19.760 Prime Fund, which you know is supposed to be in 0:18:19.760 --> 0:18:22.480 commercial paper CDs and so forth. We were sixty percent 0:18:22.600 --> 0:18:25.119 government treasury at that point, so it was super safe. 0:18:25.560 --> 0:18:27.760 We had been very worried about what was going on 0:18:27.800 --> 0:18:31.000 in the housing market, but they were still you were 0:18:31.040 --> 0:18:33.679 watching the rest of the industry UM struggle with it. 0:18:34.040 --> 0:18:36.000 You know. The second thing was we were watching our 0:18:36.040 --> 0:18:43.040 investors behavior and and listening to them call and ask us, 0:18:43.240 --> 0:18:45.680 you know, what's happening, and you know, what should we do? 0:18:45.840 --> 0:18:48.679 That was the biggest question, what should we do? And 0:18:48.680 --> 0:18:51.160 then the third thing, we actually had our staff saying 0:18:51.200 --> 0:18:53.199 what's this mean to all of us? Because, as you 0:18:53.240 --> 0:18:57.080 may recall, it was arm again in financial services and 0:18:57.119 --> 0:19:01.160 people were laying um, thousands of workers off. And so 0:19:01.200 --> 0:19:04.160 we we did, you know, three really important things. One 0:19:04.240 --> 0:19:06.280 we you know, on the money fund side, we knew 0:19:06.280 --> 0:19:10.359 we were we were in really good shape, um, and 0:19:10.400 --> 0:19:13.920 we got engaged with the SEC in terms of beginning 0:19:13.920 --> 0:19:17.880 to move the reforms forward right from the get go. Second, 0:19:18.200 --> 0:19:21.720 in terms of our investors, UM, most of our competitors 0:19:21.760 --> 0:19:24.760 actually stopped talking, you know, to the press, and stopped 0:19:24.800 --> 0:19:27.879 going out and meeting with clients. At least that's what 0:19:27.920 --> 0:19:31.280 we heard. We were very vocal and very visible, and 0:19:31.480 --> 0:19:33.119 we were very clear that we didn't know how this 0:19:33.160 --> 0:19:35.800 was going to all unfold, but that you had to 0:19:35.880 --> 0:19:38.679 step back and again sort of go back to basic 0:19:38.800 --> 0:19:42.679 investment principles here. And what we saw was it had 0:19:42.720 --> 0:19:45.760 a real calming influence on our investors. And I did 0:19:46.040 --> 0:19:50.680 a webcast um probably October of oh nine or oh eight, 0:19:51.320 --> 0:19:54.080 and I think it was downloaded a hundred thousand times 0:19:54.119 --> 0:19:56.720 in twenty four hours. It was it was a remarkable number. 0:19:57.119 --> 0:20:00.840 People were hungry for information right they wanted, and not 0:20:00.920 --> 0:20:04.360 just hand waving people running around screaming. But you come 0:20:04.400 --> 0:20:07.960 across as a if I may say this personally, rather 0:20:08.200 --> 0:20:11.840 calm collected individual, You're not one of these people that 0:20:11.880 --> 0:20:14.200 are gonna be running around with your quote unquote hair 0:20:14.280 --> 0:20:16.760 on fire. I think it was really important to project 0:20:16.800 --> 0:20:19.480 that because you know, there were certainly lots of commentary 0:20:19.480 --> 0:20:21.280 out there that the world was ending as we knew it. 0:20:21.440 --> 0:20:23.159 We didn't see it that way, but we knew it 0:20:23.160 --> 0:20:25.400 was going to be rough. And then the third thing 0:20:25.440 --> 0:20:27.679 we did um which again will seem tactical, but it 0:20:27.760 --> 0:20:30.040 was really important. We said to our people, don't worry 0:20:30.040 --> 0:20:32.800 about your jobs. You all have jobs and you're you're 0:20:32.880 --> 0:20:36.760 here to serve the client, and stop worrying about nobody's 0:20:36.760 --> 0:20:39.120 gonna lose their job over this. We want you focused 0:20:39.200 --> 0:20:41.480 on being here for the client, and boy, that set 0:20:41.480 --> 0:20:44.399 a tone inside. I also think it really helped with 0:20:44.400 --> 0:20:47.080 the client interactions because people had confidence when they were 0:20:47.119 --> 0:20:49.440 talking to clients. I was gonna say that really has 0:20:49.480 --> 0:20:53.160 to come across in all sorts of subliminal ways. If 0:20:53.200 --> 0:20:54.760 you can tell when you're on the phone with someone 0:20:54.800 --> 0:20:58.640 who's worried about their job I've never heard or read 0:20:58.680 --> 0:21:01.240 that before. Has that been publicly disclosed? Now, I haven't 0:21:01.280 --> 0:21:03.639 really talked much about it, but in the midst of 0:21:03.640 --> 0:21:05.800 the crisis, you said, so, how many people work at 0:21:05.840 --> 0:21:09.160 Vanguard back then? Back then it was about twelve thousand, 0:21:09.200 --> 0:21:12.240 five hundred. So you said, nobody's getting fired, there are 0:21:12.240 --> 0:21:14.600 no layoffs. We're good, We're going to make it through 0:21:14.600 --> 0:21:17.359 this five And I think what it allowed us to 0:21:17.480 --> 0:21:20.200 do was to be really well positioned as the markets 0:21:20.240 --> 0:21:23.440 began to turn and you know, activity began to pick up. 0:21:23.840 --> 0:21:27.040 We were firing on all cylinders and we were ready 0:21:27.080 --> 0:21:30.119 to serve clients. We were We actually kept our investment 0:21:30.200 --> 0:21:33.200 in the business going during this period. So in our 0:21:33.280 --> 0:21:36.240 last minute or so in this in the segment, the 0:21:36.280 --> 0:21:40.320 one data point that really stunned me, would really surprised me, 0:21:41.000 --> 0:21:45.080 transaction levels during the Great Financial Crisis at Vanguard were 0:21:45.240 --> 0:21:49.919 actually much lower than normal. What does that say about 0:21:50.040 --> 0:21:52.520 the firm and what does that say about your investors? Well, 0:21:52.560 --> 0:21:54.439 I think it says a couple of things. One um 0:21:54.560 --> 0:21:59.000 our our investors were listening to um all of the 0:21:59.000 --> 0:22:01.639 things we've been trying to put forth over the years 0:22:01.680 --> 0:22:04.679 that you have to think long term to UM. We 0:22:04.760 --> 0:22:08.240 have a lot of four oh n K investors and UM, 0:22:08.720 --> 0:22:12.480 they were saving for retirements long term. So don't react. 0:22:13.160 --> 0:22:15.840 I'm Barry Rehults. You're listening to Masters in Business on 0:22:15.840 --> 0:22:19.520 Bloomberg Radio. My guest today Bill McNabb. He is the 0:22:19.640 --> 0:22:24.120 chairman and CEO of the Vanguard Group, which manages three 0:22:24.119 --> 0:22:26.840 point one trillion. Is that right? That's right, three point 0:22:26.840 --> 0:22:29.679 one trillion. That's trillion with a T. I have to 0:22:29.760 --> 0:22:33.760 keep emphasizing that. And let's talk a little bit about 0:22:34.200 --> 0:22:36.800 the future of investing in the way things have been 0:22:37.560 --> 0:22:40.880 developing changing. You had you had a comment not too 0:22:40.920 --> 0:22:45.160 long ago about some of the worst products that Wall 0:22:45.200 --> 0:22:47.439 Street has thought of. I have a few of them. 0:22:47.520 --> 0:22:49.639 I want to bounce them off off. You see what 0:22:49.680 --> 0:22:52.480 you think. I assume you're not a big fan of 0:22:52.520 --> 0:22:56.280 the liquid alts. What do you think of those? So again, 0:22:56.440 --> 0:22:59.719 everything in theory can have its place, But in general, 0:22:59.760 --> 0:23:02.760 what we're seeing in the liquid all spaces UM not 0:23:02.880 --> 0:23:06.000 all that attractive from an investor perspective. It's really expensive 0:23:06.080 --> 0:23:08.160 and I'm not sure it's providing any kind of real 0:23:08.240 --> 0:23:11.600 value add and not especially liquid, not especially liquid, and 0:23:11.880 --> 0:23:13.639 maybe not as much of a diverse fire as you 0:23:13.640 --> 0:23:16.240 would hope. It doesn't mean it can't be done, okay, 0:23:16.320 --> 0:23:21.080 unconstrained bond funds. So predicting which way interest rates are 0:23:21.119 --> 0:23:23.520 going to go and currencies are going to go really 0:23:23.560 --> 0:23:26.040 difficult to do. I haven't seen more than a couple 0:23:26.040 --> 0:23:28.200 of human beings do it, and it's a question whether 0:23:28.240 --> 0:23:30.959 they're lucky or whether they're actually doing it well. So 0:23:31.160 --> 0:23:34.199 we're big fans of define what you're trying to do 0:23:34.280 --> 0:23:37.840 in the bond market and stick to it. Hedge funds 0:23:37.880 --> 0:23:42.920 with a mutual fund wrapper, in other words, allowing individuals 0:23:42.960 --> 0:23:46.720 to buy what we've called muppet funds, buying hedge funds 0:23:46.760 --> 0:23:50.040 through a mutual funds. It's a compensation scheme as far 0:23:50.080 --> 0:23:52.640 as I'm concerned. You know, people are just figuring out 0:23:52.680 --> 0:23:54.720 how to get paid a lot for I'm not adding 0:23:54.720 --> 0:23:59.920 a lot of value. How about structured derivatives. Structured derivatives, 0:23:59.760 --> 0:24:04.280 it's so again, in general, I think not a good idea. Um, 0:24:04.560 --> 0:24:08.880 these are instruments that derivatives in general are incredibly helpful 0:24:09.080 --> 0:24:14.399 in de risking portfolios and managing um subtle changes to 0:24:14.400 --> 0:24:16.439 a portfolio. But what you see in a lot of 0:24:16.480 --> 0:24:18.639 these is a lot of leverage or a lot of 0:24:18.640 --> 0:24:22.800 implicit leverage, and not clear to be um that the 0:24:22.840 --> 0:24:25.320 investors really understand the risk they're taking, not not a 0:24:25.320 --> 0:24:29.240 whole lot of d risking in these instruments. So, but 0:24:29.359 --> 0:24:33.320 old technology isn't bad. And very recently you guys launched 0:24:33.600 --> 0:24:37.199 what some people have derisively called a robo advisor, but 0:24:37.320 --> 0:24:45.760 essentially a software algorithm driven online advisor which immediately leapt 0:24:45.840 --> 0:24:48.399 over all the other advisors and at the time of 0:24:48.400 --> 0:24:51.919 the announcement or shortly thereafter, it had eight billion in 0:24:51.960 --> 0:24:54.920 it um. What what do you call that? And let's 0:24:54.960 --> 0:24:57.720 talk a little bit about We call it Personal Advisor Services. 0:24:58.320 --> 0:25:01.320 And the idea here was we had been running an 0:25:01.359 --> 0:25:05.720 advisory service for clients with a million dollars and we'd 0:25:05.760 --> 0:25:07.879 actually dropped the minimum to half a million. But you know, 0:25:07.920 --> 0:25:10.119 it's a big number for a lot of people, and 0:25:10.160 --> 0:25:12.199 so the challenge we put out to our team was, 0:25:12.320 --> 0:25:15.280 can we take the same quality that we're providing our 0:25:15.359 --> 0:25:17.640 millionaire clients, can we take it all the way down 0:25:17.680 --> 0:25:22.040 to a fifty client. And so we invested tens of 0:25:22.080 --> 0:25:25.800 millions of dollars in the technology. We trained an awful 0:25:25.800 --> 0:25:28.040 lot of people because what we're doing is really a 0:25:28.080 --> 0:25:31.800 combination of technology with a personal touch and the and 0:25:31.840 --> 0:25:34.359 the the stark objective was to get this to a 0:25:34.440 --> 0:25:38.720 price where all in so advice fee plus the underlying 0:25:38.760 --> 0:25:41.879 product would be roughly in the half a percentage point 0:25:42.119 --> 0:25:46.919 range and it would be really high quality. And so 0:25:47.000 --> 0:25:49.080 we're very excited about this. I think it's going to 0:25:49.200 --> 0:25:53.080 redefine for certain type of client how advice is provided. 0:25:53.640 --> 0:25:57.600 And you know, it's not going to supplant um the 0:25:57.640 --> 0:26:01.840 whole advisor world, um, but it gives small investors in particular, 0:26:02.240 --> 0:26:06.560 a really professional choice which they don't have today. I 0:26:06.600 --> 0:26:09.159 spoke to some of the group in your office who 0:26:09.200 --> 0:26:12.160 actually put that together. They had some questions for us, 0:26:12.160 --> 0:26:14.160 and I made them a bet that you guys would 0:26:14.200 --> 0:26:16.920 have that at a hundred billion dollars within a year 0:26:17.040 --> 0:26:18.960 or two. And they kind of this was just as 0:26:18.960 --> 0:26:22.399 it was launching, and they kind of laughed. Um, but 0:26:22.480 --> 0:26:25.439 you launched with eight billion in the first week. What 0:26:25.640 --> 0:26:28.000 is this up to already? So you know, we had 0:26:28.040 --> 0:26:31.639 some existing client business move over, so it's up to 0:26:31.640 --> 0:26:34.280 about seventeen or eighteen billion, So it's a pretty big 0:26:34.520 --> 0:26:37.400 thing already. Not not so I'm really not out there 0:26:37.400 --> 0:26:39.440 on a limb. This is a hundred billion dollar business 0:26:39.480 --> 0:26:42.720 for you guys relatively soon. The team gets very nervous 0:26:42.720 --> 0:26:44.480 when I talk about it as well, because I've been 0:26:45.520 --> 0:26:47.840 a real promoter of the concept. In fact, they're they're 0:26:47.960 --> 0:26:51.600 really happy that they're officially launched, since I've pre announced 0:26:51.600 --> 0:26:54.840 to launch about three different times by accidents. So so 0:26:54.920 --> 0:26:58.600 that that's pretty fascinating. And clearly you're looking at at 0:26:58.640 --> 0:27:04.040 that technology and using software as a future product. That's 0:27:04.240 --> 0:27:06.760 that's gonna just do nothing but grow in terms of 0:27:07.920 --> 0:27:11.120 asset management. So let's talk about some of the other 0:27:11.160 --> 0:27:14.080 products that are out there. Some people use the UM 0:27:14.280 --> 0:27:18.920 phrase fundamental indexing. Other people call it smart beta. Smart 0:27:18.920 --> 0:27:22.800 beta has almost become a buzzword. You guys really don't 0:27:23.080 --> 0:27:26.239 play in that sandbox, but I have a feeling that 0:27:26.320 --> 0:27:29.879 one day you're eventually going to end up there. Yes, so, UM, 0:27:30.400 --> 0:27:34.199 very fair point. And in implicit question there so a 0:27:34.240 --> 0:27:37.359 couple of things. UM. You know, we had growth and 0:27:37.440 --> 0:27:41.159 value index funds a long time, which you could argue 0:27:41.200 --> 0:27:45.440 were sort of a version of UM. Some of these 0:27:45.480 --> 0:27:48.520 factor based funds is the way I think about them. So, look, 0:27:48.640 --> 0:27:51.560 I don't have a problem with the concept UM as 0:27:51.560 --> 0:27:55.480 long as you understand what you're investing in UM smart 0:27:55.480 --> 0:27:57.879 bata is one of the great marketing terms of all time. 0:27:58.440 --> 0:28:00.960 You know, it implies that it's a better way of indexing. 0:28:01.080 --> 0:28:04.280 To me, all it is is you're taking an active bet, 0:28:04.760 --> 0:28:07.439 and you're betting on either a single factor or a 0:28:07.480 --> 0:28:09.879 series of factors, and you're betting that those factors are 0:28:09.880 --> 0:28:13.600 going to outperform the broad market over some particular period 0:28:13.640 --> 0:28:16.320 of time. And you know, right now, you know, MidCap, 0:28:16.680 --> 0:28:19.399 you know, MidCap value over the last fifteen year has 0:28:19.400 --> 0:28:23.560 been a really good place to be. But all of 0:28:23.600 --> 0:28:26.440 the value oriented investors were scratching their head saying is 0:28:26.520 --> 0:28:30.720 value investing dead? Because large cap growth was dominating. And 0:28:30.800 --> 0:28:34.080 so you go through these market cycles where different factors 0:28:34.119 --> 0:28:37.200 seem to work, and they work for you know, fairly 0:28:37.240 --> 0:28:39.920 long periods of time, and then they don't. So to me, 0:28:40.000 --> 0:28:42.640 it's a bet. And as long as the investor knows 0:28:42.680 --> 0:28:45.160 that they're taking a bet they're either overexposed to value, 0:28:45.240 --> 0:28:50.040 they're overexposed to growth, or some combination UM, then I 0:28:50.040 --> 0:28:52.479 think it can be a legitimate, low cost way for 0:28:52.520 --> 0:28:56.360 somebody to make that investment bet. And you know, in 0:28:56.360 --> 0:28:58.920 a sense, if you're if instead of investing in a 0:28:59.000 --> 0:29:02.880 traditional act of growth manager, if you're buying if you're 0:29:02.880 --> 0:29:06.720 buying a factor based fund that's growth oriented, you're hopefully 0:29:06.760 --> 0:29:09.000 doing it at a much lower cost and you're getting 0:29:09.040 --> 0:29:12.080 the same factor exposure that you would from that traditional 0:29:12.080 --> 0:29:17.480 growth manager. So you guys don't offer anything that's fundamentally index. 0:29:17.560 --> 0:29:22.240 There have been pretty I thought significant criticisms about market 0:29:22.280 --> 0:29:26.120 cap waiting an index. Um, any chance we're going to 0:29:26.160 --> 0:29:29.480 see a factor based vanguard fund anytime in the next 0:29:29.520 --> 0:29:32.840 few years. So two things there so on on the 0:29:32.880 --> 0:29:36.760 market cap index. The reason we're so passionate about that 0:29:37.000 --> 0:29:39.640 is it's just math at the end of the day. 0:29:39.760 --> 0:29:42.720 And you know, if you add up everybody in the world, 0:29:42.840 --> 0:29:44.960 all investors, let's just use the US for now to 0:29:45.040 --> 0:29:47.320 keep it simple, you add up to the market and 0:29:47.360 --> 0:29:50.520 it that is a market capped market. If you take 0:29:50.520 --> 0:29:52.960 all your active managers and put them in a box, 0:29:53.000 --> 0:29:54.920 and then you take all your passive managers and put 0:29:54.960 --> 0:29:58.520 them in a box. Um, there's really no third category 0:29:58.680 --> 0:30:01.560 right there. There's it used to be individuals were a 0:30:01.600 --> 0:30:05.600 big group, but today that's di minimous. All your active 0:30:05.600 --> 0:30:08.479 managers by definition have to add up to the market, 0:30:09.400 --> 0:30:14.400 and so it's a market minus costs. Indexers by definition 0:30:14.440 --> 0:30:16.920 add up to the market minus cost and so it's 0:30:16.960 --> 0:30:18.479 a zero sum game at the end of the day. 0:30:18.520 --> 0:30:21.320 And that's why indexing works. It's just lower costs. It's 0:30:21.320 --> 0:30:24.760 not that markets are more efficient or whatever. Um. When 0:30:24.760 --> 0:30:28.120 you're doing factor based stuff, you are making a bet 0:30:28.160 --> 0:30:31.480 against that broad market, and for every winner, there's a 0:30:31.520 --> 0:30:33.240 loser because in the end it all adds up to 0:30:33.280 --> 0:30:37.640 the market. And so to us, if you're going to 0:30:38.000 --> 0:30:41.280 truly index, you want to take advantage of the cost side, 0:30:41.880 --> 0:30:45.719 and that's why market cap makes sense. Now, if you 0:30:45.760 --> 0:30:49.120 want to make an active bet, you have a view 0:30:49.240 --> 0:30:53.680 that you know value is is cheap today versus growth, 0:30:54.600 --> 0:30:57.719 then you could argue that a factor based fund can 0:30:57.760 --> 0:31:01.040 be a really efficient way of doing that. And as 0:31:01.040 --> 0:31:03.880 we think that through, I think that is gonna perhaps 0:31:03.920 --> 0:31:07.080 influence our product development in the future because it could 0:31:07.160 --> 0:31:09.520 very well be a good way for a manager to 0:31:10.160 --> 0:31:14.160 make you know, an advisor in particular like yourself, make 0:31:14.240 --> 0:31:17.200 that kind of um bad if that's something that you 0:31:17.240 --> 0:31:19.840 wanted to do. You know, we've had rob are not 0:31:20.200 --> 0:31:23.640 of a research affiliates on And the argument that he's 0:31:23.680 --> 0:31:26.320 made is, hey, towards the end of the cycle, when 0:31:26.360 --> 0:31:28.400 things get a little crazy, and you could think of 0:31:30.080 --> 0:31:34.480 as a perfect example, all of the cap weighted items 0:31:34.680 --> 0:31:37.959 just went berserk and then got crushed on the other 0:31:38.000 --> 0:31:42.560 side of the cycle. A index that was weighted on 0:31:42.720 --> 0:31:47.720 earnings or sales or some proportionate measure to the impact 0:31:47.760 --> 0:31:50.960 they have on the economy may not quite go quite 0:31:51.000 --> 0:31:52.880 as high, but it also won't go quite as low. 0:31:52.920 --> 0:31:55.440 And over the long haul, reducing a little bit of 0:31:55.480 --> 0:31:59.440 volatility might add some performance. Um. And he's got you know, 0:31:59.480 --> 0:32:01.840 a number of papers on it, and you, of all 0:32:01.880 --> 0:32:05.800 the people who actually offer that sort of fundamental based index, 0:32:06.560 --> 0:32:10.000 you're the notable emission. And why why I kind of think, hey, 0:32:10.040 --> 0:32:13.120 that's a huge, potentially huge marketplace and if anyone could 0:32:13.120 --> 0:32:17.600 do it inexpensively, it would be you guys. And that's 0:32:17.600 --> 0:32:20.480 a very fair point, I would say. Um. And again, 0:32:20.520 --> 0:32:22.080 we have a lot of respect for what Rob and 0:32:22.120 --> 0:32:25.720 his team have done. And look, you know, you when 0:32:25.720 --> 0:32:30.040 you look at the data, it's so time dependent. Um. 0:32:30.080 --> 0:32:34.480 And you may get a little reduction and volatility depending 0:32:34.520 --> 0:32:36.240 when you start your period and when you end it. 0:32:36.880 --> 0:32:39.680 I'm not convinced that over very long market cycles that 0:32:39.760 --> 0:32:42.640 really matters. And you know, to me, then it becomes 0:32:42.640 --> 0:32:47.000 the cost get the lowest cost index fund you can 0:32:47.520 --> 0:32:50.000 and that's really what's going to drive performance. So in 0:32:50.040 --> 0:32:52.600 the last minute we have in this segment, let's talk 0:32:52.640 --> 0:32:55.719 a little bit about high frequency trading UM. Your predecessor 0:32:55.840 --> 0:32:58.880 Jack Brennan said, you know, I've been somewhat critical of 0:32:59.000 --> 0:33:03.680 h f T s running Grandma's mutual fund, but Jack 0:33:03.720 --> 0:33:06.960 tells me and told me it helps bring costs down. 0:33:07.000 --> 0:33:10.160 What what's your perspective? So you know, net net it 0:33:10.200 --> 0:33:12.560 has brought costs down. And the way you can look 0:33:12.560 --> 0:33:15.120 at this is you can you can look at the 0:33:15.200 --> 0:33:19.160 history of our index funds and our traders have actually 0:33:19.160 --> 0:33:23.320 done this, and we can see that the costum of 0:33:23.400 --> 0:33:27.280 trading has been reduced dramatically, and you see that in 0:33:27.360 --> 0:33:31.080 terms of our tracking error and so forth. UM and 0:33:31.160 --> 0:33:33.560 you know, again the data are actually overwhelming over the 0:33:33.600 --> 0:33:36.719 last fifteen years. It doesn't mean that there aren't practices 0:33:36.800 --> 0:33:40.320 within the high frequency trading community that we don't UM. 0:33:40.560 --> 0:33:42.880 You know that we're not critical of. But one of 0:33:42.920 --> 0:33:46.880 the things during sort of the flash crash aftermath there 0:33:46.960 --> 0:33:49.200 was a lot of let's just ban high frequency trading, 0:33:49.400 --> 0:33:51.600 and what we were very afraid of is if you 0:33:51.640 --> 0:33:55.480 pull that thread, not quite clear what would be left. UM, 0:33:55.520 --> 0:33:59.000 because the high frequency trading actually does knit together. That's 0:33:59.160 --> 0:34:03.280 very you know, this very granular, disparate market that we have. 0:34:03.800 --> 0:34:06.760 So again we'd like to see I'd like to see 0:34:06.760 --> 0:34:09.359 some guardrails put in place to protect people from the 0:34:09.360 --> 0:34:12.120 front running. UM. You know, again, I've never been a 0:34:12.120 --> 0:34:15.680 fan that, you know, latency should give you an advantage 0:34:16.360 --> 0:34:19.560 versus somebody who's a mile further away. It doesn't really 0:34:19.560 --> 0:34:22.120 make any logical sense. I don't think it's making markets better, 0:34:22.719 --> 0:34:26.560 but I do think conceptually, UM, you've got to be 0:34:26.640 --> 0:34:31.320 careful around um being too critical or you know, undoing everything, 0:34:31.760 --> 0:34:33.680 or the markets aren't going to be knit together the 0:34:33.719 --> 0:34:35.640 way they need to be knitted together. I mean, I'm 0:34:35.680 --> 0:34:38.200 not sure anybody would design the markets with a blank 0:34:38.239 --> 0:34:40.960 sheet of paper the way they are. But since we've 0:34:41.000 --> 0:34:43.719 had UM, you know, really since the late nineties, UM, 0:34:44.040 --> 0:34:47.120 when we've seen this tremendous expansion of pools of trading, 0:34:47.520 --> 0:34:49.839 you know, we've really seen a pre it's a very 0:34:49.840 --> 0:34:53.520 different market than when I started out to say the least. Bill, 0:34:53.560 --> 0:34:55.520 Thank you so much for spending so much time. You 0:34:55.560 --> 0:34:58.120 can hang around a little bit. We'll continue this conversation. 0:34:58.600 --> 0:35:03.000 Be sure and check out daily column on Bloomberg View 0:35:03.040 --> 0:35:06.200 dot com, follow me on Twitter at rid Holts, and 0:35:06.360 --> 0:35:08.600 check out the rest of our conversation. You could see 0:35:08.600 --> 0:35:12.680 that at Bloomberg dot com or on Apple iTunes. I'm 0:35:12.719 --> 0:35:15.799 Barry Ridholtz. You've been listening to Masters in Business on 0:35:15.880 --> 0:35:21.360 Bloomberg Radio. Welcome back to the podcast portion of our interview, 0:35:21.400 --> 0:35:23.399 where I basically take the mic out of my ear 0:35:23.480 --> 0:35:27.200 and not worry about radio segments and loosen my tie. 0:35:27.239 --> 0:35:32.799 I'm literally literally doing that. Goes my subway card bill. 0:35:32.840 --> 0:35:34.719 Thank you so much for doing this. I'll tell you 0:35:34.760 --> 0:35:37.600 I was really looking forward to this. You guys know 0:35:38.320 --> 0:35:42.960 I'm a huge Vanguard fan. I'm a big Jack Brennan fan. 0:35:43.920 --> 0:35:46.440 I'm somewhat of a Bogel fan, although I do have 0:35:46.719 --> 0:35:48.080 uh I have a little bit of a beef with 0:35:48.760 --> 0:35:52.120 with Mr Bogel. And by the way, I think I 0:35:52.200 --> 0:35:55.040 know where that one's going. If you, if you ever 0:35:55.160 --> 0:35:59.640 wanna have like a miserable couple of days, write something 0:35:59.719 --> 0:36:02.719 really negative about Apple. Not that I do that. I've 0:36:02.760 --> 0:36:05.839 been a Mac fanboy forever, and the emails light up. 0:36:06.280 --> 0:36:10.000 I wrote what I thought was a very measured, very 0:36:10.120 --> 0:36:15.439 circumspect I don't even want to call it critique. Just hey. 0:36:15.560 --> 0:36:18.840 You know, Jack Bogel is a legend, and he created 0:36:19.239 --> 0:36:22.760 one one of the most successful investing companies in the world. 0:36:23.760 --> 0:36:26.319 But he's kind of anti e t f s. He 0:36:26.400 --> 0:36:31.120 thinks people potentially overtrade them, and he's not a big 0:36:31.160 --> 0:36:35.000 fan of international. And you and I both you you 0:36:35.200 --> 0:36:38.640 really have expanded the whole international business. So so let's 0:36:38.680 --> 0:36:41.799 talk a little bit about um Mr Bogel, who, by 0:36:41.800 --> 0:36:44.319 the way, I would love to interview. I would love 0:36:44.360 --> 0:36:46.200 to sit and talk to him because I think he's 0:36:46.239 --> 0:36:49.640 a fascinating guy. I'm sure he would love to do it. Okay, 0:36:49.680 --> 0:36:53.000 well we'll set that up. But what about this E 0:36:53.160 --> 0:36:55.840 t F thing and what about international? So you know, 0:36:55.920 --> 0:36:57.440 E t f S we look at E t S 0:36:57.560 --> 0:37:01.520 is just another product structure for frankly, and what it's 0:37:01.560 --> 0:37:04.320 allowed us to do is to take the indexing story, 0:37:04.400 --> 0:37:07.880 the low cost story, to a much broader group of investors. 0:37:08.480 --> 0:37:11.200 And because of the way e t f S work 0:37:12.000 --> 0:37:15.720 for many advisors from especially if you're on a brokerage platform, 0:37:15.760 --> 0:37:18.720 it's just a lot easier to implement than traditional funds. 0:37:19.920 --> 0:37:22.720 It does not mean that we endorse day trading or 0:37:22.880 --> 0:37:25.279 you know, minute by minute trading of ETFs. In fact, 0:37:25.360 --> 0:37:28.480 just the opposite. We believe very strongly that, you know, 0:37:28.719 --> 0:37:32.200 long term investing is the way to really accumulate wealth. 0:37:32.320 --> 0:37:34.800 There there was an article in the wool Street Journal 0:37:35.239 --> 0:37:38.759 that I remember reading and just falling off my jail 0:37:38.840 --> 0:37:43.680 laughing about somebody wants to park forty million dollars in 0:37:43.800 --> 0:37:47.040 short term bonds and there's a cost to move in 0:37:47.080 --> 0:37:49.480 and out of that, and you guys said no thanks, 0:37:49.480 --> 0:37:52.240 and the person lost their minds. So if you're focused 0:37:52.280 --> 0:37:55.000 on long term and someone says, here's forty million dollars 0:37:55.040 --> 0:37:58.239 from for six months or ninety days, your answer was no, 0:37:58.400 --> 0:38:01.560 Well that all that call comes on the investors, and 0:38:01.600 --> 0:38:03.920 that's wrong to do, comes on the current investors. And 0:38:03.960 --> 0:38:07.680 in that particular case, we were in a declining yield environment, 0:38:07.719 --> 0:38:10.440 so it was gonna also diminish the yield of the 0:38:10.480 --> 0:38:15.640 portfolio pretty dramatically. So our portfolio manager appropriately said no, 0:38:15.719 --> 0:38:18.560 we're not going to accept the money. Actually did end 0:38:18.640 --> 0:38:20.759 up on the front page of the Wall Street Journal. Um. 0:38:21.239 --> 0:38:24.239 The guy went to the sec um, He went to 0:38:24.280 --> 0:38:27.840 every major news publication and it it turned out to 0:38:27.920 --> 0:38:30.080 be actually one of the best things that we couldn't 0:38:30.080 --> 0:38:34.160 have asked for a better story because it really underscored. 0:38:34.200 --> 0:38:36.680 But we believe, which is take care of the existing investor, 0:38:37.080 --> 0:38:39.040 and the next investor will find you if you if 0:38:39.080 --> 0:38:41.719 you have a reputation for doing that. I think one 0:38:41.760 --> 0:38:44.879 of your competitors had come out and said, they're absolutely right. 0:38:44.920 --> 0:38:49.239 Why would you put your existing investors cost structure at risk? 0:38:49.680 --> 0:38:52.040 So someone hey, there were there were mecha, their tools. 0:38:52.040 --> 0:38:53.440 You want to put in a money market fund, you 0:38:53.480 --> 0:38:55.719 want to put it somewhere. There's a place to put it, 0:38:56.000 --> 0:38:59.520 just not short term in that fund, right that I 0:38:59.560 --> 0:39:02.920 always that was pretty amazing because everybody else is so 0:39:03.040 --> 0:39:07.040 desperately chasing assets to turn around and say forty million 0:39:07.040 --> 0:39:09.520 dollars is a chank of money, but no, thanks that 0:39:09.520 --> 0:39:12.959 that just always stayed with me. Well, in that particular time, 0:39:13.000 --> 0:39:15.680 we were a lot littler firm than we are today 0:39:15.719 --> 0:39:19.600 and it was a pretty significant purchase. But again, you know, 0:39:19.640 --> 0:39:21.960 it sounds really simplistic, but if you do the right thing, 0:39:22.320 --> 0:39:24.719 usually in the end, it's a good strategy, not not 0:39:24.840 --> 0:39:28.680 a bad um business mantra um. So I have so 0:39:28.719 --> 0:39:31.920 many questions. I don't even know where to begin. So 0:39:32.080 --> 0:39:34.960 let me let me ask you the question that when 0:39:34.960 --> 0:39:39.879 I was describing this upcoming interview to somebody, someone said 0:39:39.880 --> 0:39:42.560 to me, Hey, you know those guys only fly coach. 0:39:43.000 --> 0:39:46.120 Is this true? So we only book coach and I 0:39:46.160 --> 0:39:48.840 have flown so many miles that I do get upgraded 0:39:48.880 --> 0:39:51.400 every now and then. By the way, for radio listeners, 0:39:51.400 --> 0:39:56.000 you're six two three? How told you? Six five? Okay, 0:39:56.160 --> 0:39:59.319 I'm I'm giving you permission to book a little more 0:39:59.400 --> 0:40:03.200 leg room. Don't have to book coach. I fortunately have 0:40:03.360 --> 0:40:06.160 enough miles on a couple of airlines that it's almost automatic. 0:40:06.239 --> 0:40:08.320 But I you know, we do. Look, it's the shareholders 0:40:08.320 --> 0:40:10.440 money at the end of the day, and you know, 0:40:10.480 --> 0:40:14.279 we're not trying to um be holier than now, but 0:40:14.560 --> 0:40:19.040 you have to always put yourself in the shareholders shoots, 0:40:19.120 --> 0:40:21.440 and you know, basically, is this a good investment or 0:40:21.480 --> 0:40:26.000 is this time well spent for the shareholder? That it's 0:40:26.040 --> 0:40:29.840 a refreshing thing to hear that that is not standard 0:40:30.080 --> 0:40:34.120 standard operating procedure at a lot of places and I 0:40:34.520 --> 0:40:36.600 think the proof is in the pudding. It's pretty clear 0:40:36.680 --> 0:40:40.160 that whatever you guys are doing, it seems to be working. 0:40:40.200 --> 0:40:43.400 And if if it's a matter of putting shareholders first, 0:40:43.880 --> 0:40:47.839 how come everybody isn't doing it? Well? Um, I'd like 0:40:47.880 --> 0:40:51.359 to think that we're hopefully influencing the marketplace so that 0:40:51.560 --> 0:40:54.840 people are are focusing more on it. But look, I 0:40:54.880 --> 0:40:58.680 think in most organizations, to be very fair, there's a 0:40:58.760 --> 0:41:01.960 natural conflict. You know, we're owned by our funds and 0:41:02.000 --> 0:41:04.399 therefore our investors. So for us, when we say we're 0:41:04.440 --> 0:41:08.040 putting shareholders first, we're putting both the shareholders of the company, 0:41:08.080 --> 0:41:10.799 if you will, as well as our clients first. They're 0:41:10.800 --> 0:41:15.640 the same most organizations. They're either privately held or they're 0:41:15.680 --> 0:41:19.520 publicly traded, and so they have their public shareholders that 0:41:19.560 --> 0:41:21.200 they have to earn a return for and then they 0:41:21.200 --> 0:41:24.120 have their clients. By definition, that's a conflict. And how 0:41:24.200 --> 0:41:26.840 you balance that, you know, I'm unfortunately I'm not that smart, 0:41:26.920 --> 0:41:31.520 so I need the simplicity. Well, the simplicity works, um, 0:41:31.560 --> 0:41:34.360 So I mentioned I'm just thrilled you're doing this interview. 0:41:34.800 --> 0:41:39.359 But you guys, really under normal circumstances, aren't out there 0:41:39.400 --> 0:41:42.160 in the media. There's not a lot of talking heads. 0:41:42.200 --> 0:41:45.839 There's not a lot of blah blah blah. By definition, 0:41:46.000 --> 0:41:49.680 you're not gonna be here's my favorite stock, here's where 0:41:49.719 --> 0:41:51.319 we think the market is going to be in a year. 0:41:51.400 --> 0:41:57.160 That's an mathematic to you. Why so so little media generally, 0:41:57.360 --> 0:42:00.120 and what motivated you to say, hey, this is all 0:42:00.200 --> 0:42:03.319 a financial crisis. Let's say a few words. Well, I 0:42:03.360 --> 0:42:06.200 think you know, we we do get it's interesting our 0:42:06.239 --> 0:42:08.480 media coverage sort of waxes and ways. We get a 0:42:08.520 --> 0:42:11.239 lot of nice things written about us and said about us. 0:42:11.320 --> 0:42:13.560 Um but in terms of you know, doing the in 0:42:13.600 --> 0:42:17.320 person stuff, we find we're in demand when there's a crisis. 0:42:17.320 --> 0:42:20.200 When things are really a brilliant people think we're boring 0:42:20.200 --> 0:42:22.080 because we're not going to give them the hot stock 0:42:22.120 --> 0:42:24.320 tip or whatever. But is an investing is supposed to 0:42:24.360 --> 0:42:26.480 be bored? I think it is, and I think it's 0:42:26.520 --> 0:42:28.360 three yards in a cloud of dust, you know, And 0:42:28.400 --> 0:42:30.399 if you can just repeat that over and over, you'll 0:42:30.440 --> 0:42:33.439 be successful. You know. During the crisis, though we were 0:42:33.600 --> 0:42:35.480 we tried to be more front and center. We we 0:42:35.600 --> 0:42:39.280 felt that there was a real need to um stressed 0:42:39.280 --> 0:42:40.960 to people. We did not think the world was going 0:42:41.040 --> 0:42:45.359 to end, and as a result, they needed despite all 0:42:45.360 --> 0:42:48.680 the emotional trauma that was going on due to the market, 0:42:48.960 --> 0:42:51.319 they needed to be able to see through that and 0:42:51.600 --> 0:42:53.759 if we could help that in any way, you know, 0:42:53.800 --> 0:42:56.080 we really felt it was our responsibility to do that. 0:42:56.520 --> 0:42:58.640 And so you guys ventured out and did a little 0:42:58.640 --> 0:43:00.920 more media than usual, and we did a lot more 0:43:00.960 --> 0:43:03.960 media than usual. Um you know, either our own private 0:43:03.960 --> 0:43:07.760 webcasts or you know, um I, our chief investment officer 0:43:07.760 --> 0:43:10.120 at the time, Gus Souder and I probably did half 0:43:10.120 --> 0:43:12.600 a dozen television shows within a month, which would be 0:43:12.840 --> 0:43:14.879 typically more than we would do in a couple of years. 0:43:15.080 --> 0:43:17.200 So let's talk a little bit about Gus. So do we. 0:43:17.200 --> 0:43:22.600 We briefly hinted at at it earlier. UM he's kind 0:43:22.640 --> 0:43:25.560 of a legendary guy, isn't he. Yeah. I love Gus 0:43:25.560 --> 0:43:28.400 and UM I was very blessed. Um I joined Vanguard 0:43:28.440 --> 0:43:32.319 ninety six. Gus joined in nine seven and moved in 0:43:32.440 --> 0:43:35.480 two doors down if you will, from my office, and 0:43:35.520 --> 0:43:37.759 we became really good friends right from the get go. 0:43:38.520 --> 0:43:41.200 And one of the things that really was remarkable about 0:43:41.239 --> 0:43:46.840 Gus is um the the investment guys would all talk about, UM, 0:43:46.920 --> 0:43:49.400 what how great he was with computer science and he 0:43:49.440 --> 0:43:52.560 could sort of translate investment ideas into code, and the 0:43:52.600 --> 0:43:54.920 computer guys were all talking about how Grady was on 0:43:54.960 --> 0:43:58.440 the investment side and math and how he could explain 0:43:58.480 --> 0:44:01.080 all that to them, and he just had this ability 0:44:01.280 --> 0:44:04.719 to get stuff done. He also was a great spokesman 0:44:04.760 --> 0:44:06.719 for us because he got out there and he could 0:44:06.719 --> 0:44:09.640 take really complicated ideas and boil them down to UM, 0:44:09.680 --> 0:44:14.160 you know, sort of their their real basic, most simple concepts. 0:44:14.200 --> 0:44:18.759 So who fills that role today? So UM Fortunately for 0:44:18.880 --> 0:44:21.800 us UM. One of the things gusted was he developed 0:44:21.800 --> 0:44:26.000 an incredibly deep team and we then moved one of 0:44:26.000 --> 0:44:29.480 our key leaders, UM, Tim Buckley, who had run our 0:44:29.520 --> 0:44:31.880 retail business over and some people saw it as a 0:44:31.920 --> 0:44:34.319 non traditional move because Tim hadn't grown up in the 0:44:34.360 --> 0:44:37.520 investment portion of the business, but he had spent his 0:44:37.600 --> 0:44:41.319 whole career getting deep on on the investment side. And 0:44:41.320 --> 0:44:44.160 Gus told me something really interesting right before he retired. 0:44:44.200 --> 0:44:46.560 He said, look, when you're looking for my replacement, you're 0:44:46.560 --> 0:44:49.200 not going to get somebody who came up the way 0:44:49.280 --> 0:44:52.000 I did. You know he started out He traded stocks, 0:44:52.040 --> 0:44:55.880 He he wrote the original code for optimizing our index funds. 0:44:55.920 --> 0:44:59.040 You know, he was very hands on. The group had 0:44:59.040 --> 0:45:01.160 gotten to be very low. Are you know our investment 0:45:01.160 --> 0:45:04.200 team now several hundred people. Um, you know we run 0:45:04.400 --> 0:45:08.600 two plus trillion in Malvern and so um he said, 0:45:08.600 --> 0:45:12.120 you're gonna need somebody who's a great leader of people 0:45:12.200 --> 0:45:15.439 and developer of talent, and you're gonna need somebody who 0:45:15.480 --> 0:45:18.960 can really sort of think, um about the intersection of 0:45:19.000 --> 0:45:23.200 technology and investing going forward. And Tim met both those 0:45:23.239 --> 0:45:25.919 criteria really well. And he's just done a fabulous job. 0:45:26.440 --> 0:45:30.560 So who else has what other investors have influenced your 0:45:30.600 --> 0:45:33.959 thought process? And it's really a two part question. Part 0:45:34.000 --> 0:45:37.600 one is about investing and thinking about managing all the 0:45:37.600 --> 0:45:42.279 people's money. But the second part is about running an 0:45:42.280 --> 0:45:45.600 investment business, which I don't know if people realize, is 0:45:45.640 --> 0:45:49.680 a very unique animal compared to other businesses. So outside 0:45:49.680 --> 0:45:52.480 of Vanguard, because I've had a ton of influences inside 0:45:52.520 --> 0:45:57.399 the company, um, you know, from just a pure investment perspective, 0:45:57.920 --> 0:46:01.080 two of my Actually I run a risk here because 0:46:01.080 --> 0:46:03.640 I have a lot of people I really enjoy talking to. 0:46:03.800 --> 0:46:09.080 But um, there's the original Winsor team John Neff, who 0:46:09.120 --> 0:46:13.880 was the legendary value investor, watching him Um talk about 0:46:13.920 --> 0:46:17.400 stocks and the way he thought about the markets. UM 0:46:17.600 --> 0:46:20.799 is a young UM person in Vanguard. You know, it 0:46:20.960 --> 0:46:23.960 was like a free education. It was unbelievable. It was 0:46:24.000 --> 0:46:29.040 like getting your master's PhD and Advanced PhD all at once. 0:46:29.120 --> 0:46:32.439 Because he just was so insightful. He knew more about 0:46:32.440 --> 0:46:34.800 the companies he was investing in the their own management 0:46:34.840 --> 0:46:38.760 stay UM. I also had the great privilege of watching 0:46:38.880 --> 0:46:42.200 Prime Cap evolved as a firm. We hired prime Cap 0:46:42.280 --> 0:46:44.719 very early, and prime Cap was a group that spun 0:46:44.760 --> 0:46:47.719 out of Capital Research and the founder was Gonna named 0:46:47.719 --> 0:46:52.600 Howe Scow and the original team UM again, they were 0:46:52.640 --> 0:46:54.520 just so talented. They were and they were very different 0:46:54.560 --> 0:46:58.320 than the Windsor team. They weren't nearly, they weren't deep value. 0:46:58.360 --> 0:47:01.160 They were kind of growthy, but growth at a reasonable price. 0:47:01.680 --> 0:47:04.120 But it was more just we're gonna find really good companies, 0:47:04.160 --> 0:47:08.600 invest in them and watch. And what was interesting is UM. 0:47:08.640 --> 0:47:10.719 You know, so we're from NAP, I learned being a 0:47:10.760 --> 0:47:14.480 contrarians never a bad thing. And from Prime Gap I 0:47:14.520 --> 0:47:18.120 learned about patients. UM. They have very low portfolio turnover, 0:47:18.600 --> 0:47:21.920 one of the lowest turnovers of any active manager and 0:47:22.160 --> 0:47:26.920 they would make very concentrated bets as well, which if 0:47:26.920 --> 0:47:29.640 you're going to invest in active, if you can get 0:47:29.680 --> 0:47:32.560 low cost and some concentration, I think it gives you 0:47:32.560 --> 0:47:37.640 your best chance about performing. That's exactly right. So those 0:47:37.760 --> 0:47:42.000 two UM people had huge influence early in my career, 0:47:42.760 --> 0:47:46.560 you know, in terms of running the business UM Uh. 0:47:46.800 --> 0:47:50.399 Charlie Ellis and Bert Malkiel, who you know we're both 0:47:50.440 --> 0:47:54.040 on our board, certainly were very influential, and more at 0:47:54.080 --> 0:47:56.799 a philosophical level. And again it was all about the 0:47:56.840 --> 0:48:00.160 client coming first, and and and and it was so 0:48:00.320 --> 0:48:04.439 around taking a very rigorous academic approach, if you will. 0:48:04.600 --> 0:48:06.240 One of the things we've tried to do advant gardis 0:48:06.320 --> 0:48:10.040 take really complicated ideas and then bring them to the masses. 0:48:10.320 --> 0:48:12.960 So indexing certainly fit that bill. But even the way 0:48:13.000 --> 0:48:15.640 we run active you know, we sub we use subadvisors 0:48:15.640 --> 0:48:17.759 from all around the world. That was very much the 0:48:17.760 --> 0:48:22.680 way pension funds and foundations and endowments worked. Early on 0:48:22.719 --> 0:48:25.600 in the mutual fund business, everybody's active teams were all 0:48:25.640 --> 0:48:28.000 in house, so we were really the only guys doing this. 0:48:28.480 --> 0:48:31.200 And again that the Charlie's and the Berths were very 0:48:31.239 --> 0:48:33.920 influential and helping us think that through. How do you 0:48:33.960 --> 0:48:38.359 go about finding these outside teams to manage a chankamany 0:48:38.560 --> 0:48:41.240 So we have UM. We have a really deep team 0:48:41.280 --> 0:48:43.880 who've grown up doing this and they have a very 0:48:44.000 --> 0:48:48.000 rigorous process and they actually today travel the world looking 0:48:48.040 --> 0:48:52.280 for talent. And so we've got firms all around the world. UM, 0:48:52.840 --> 0:48:56.399 I think thirty plus firms now managing about seventy five 0:48:56.440 --> 0:48:59.439 man dates for us. So let me UM shift gears 0:48:59.440 --> 0:49:01.880 a little bit of on you. You recently had an 0:49:01.880 --> 0:49:05.040 op ed in the Wall Street Journal that I thought 0:49:05.120 --> 0:49:08.399 was very interesting and there were really two parts that 0:49:08.880 --> 0:49:13.640 leapt out. The first was the city issue that's systemically 0:49:13.719 --> 0:49:18.600 important financial institutions. Do we really think mutual fund companies 0:49:18.640 --> 0:49:21.400 are going to end up being citfies? I mean, fifty 0:49:21.400 --> 0:49:24.640 billion dollars is a the minimus cut off. That is 0:49:24.680 --> 0:49:27.480 not a lot of money these days. So UM, the 0:49:27.520 --> 0:49:29.440 short answer is, you would not think it would be 0:49:29.520 --> 0:49:32.839 logical UM because funds are first of all, it's an 0:49:32.840 --> 0:49:37.200 agency based business model, not a proprietary based business model. UM. Second, 0:49:37.280 --> 0:49:41.840 because of the UM prohibitions against leverage, there's no leverage 0:49:41.840 --> 0:49:45.920 and funds so so, how can this be so systemically 0:49:46.000 --> 0:49:49.120 important if you're not leveraged up, you're not trading derivatives, 0:49:49.120 --> 0:49:51.879 you're not You would think it would be of all 0:49:51.960 --> 0:49:54.799 the pushback against Dodd Frank, you would think this is 0:49:54.840 --> 0:49:57.920 the easiest thing in the universe to carve out an 0:49:57.920 --> 0:50:04.200 exception for no leverage, no heavy derivative usage. No. I mean, 0:50:04.440 --> 0:50:06.200 there was an article in The Times the other day 0:50:06.239 --> 0:50:09.160 about how many mutual funds are loading up on these 0:50:09.200 --> 0:50:12.080 pre public companies, and there's a risk because so many 0:50:12.080 --> 0:50:14.800 of those go. But if those go belly yup, there's 0:50:14.840 --> 0:50:19.080 no subsequent domino effect. It's not like subprime house and 0:50:19.120 --> 0:50:23.200 it's not Again, there's idiosyncratic risk there, which you shouldn't 0:50:23.239 --> 0:50:25.640 be trying to prevent because without risk, there's no return. 0:50:26.040 --> 0:50:29.200 But it's not systemic. Um. The reason I wrote the 0:50:29.239 --> 0:50:32.200 op ed in the timing of it was Um. The 0:50:32.320 --> 0:50:35.879 FSB in in the in Europe, in the UK has 0:50:36.640 --> 0:50:40.040 issued its second consultation and there was a huge emphasis 0:50:40.080 --> 0:50:43.120 that big is bad and if funds are big, or 0:50:43.160 --> 0:50:46.680 fun families are big, then they should be deemed systemically important. 0:50:47.320 --> 0:50:50.680 And the consequences of being systemically important is I is 0:50:50.719 --> 0:50:54.440 I pointed out in the editorial, are very asymmetric. If 0:50:54.480 --> 0:50:57.600 you're a shareholder of a fund that's designated as a city, 0:50:57.640 --> 0:50:59.880 you're gonna not gonna get any benefit from that, but 0:51:00.040 --> 0:51:03.440 you potentially could be charged higher fees. You could be 0:51:03.800 --> 0:51:07.320 providing capital to bail out too big to fail firms. 0:51:07.440 --> 0:51:11.400 If one of the competitors of yours uses leverage, engages 0:51:11.400 --> 0:51:16.400 in risks and collapses somehow, it's Vanguard investors responsibility to 0:51:17.520 --> 0:51:20.359 Let's let's make it even simpler. Um we already have 0:51:20.840 --> 0:51:23.080 um City Group. I don't want to pick on City, 0:51:23.080 --> 0:51:26.000 but Citi is a systemically important institution. If City Group, 0:51:26.040 --> 0:51:29.439 for whatever reason failed for the fourth time, fifth time, 0:51:29.440 --> 0:51:31.520 how many times have they been insolvent? But I could 0:51:31.560 --> 0:51:33.560 say that you can't. But if let's look at the 0:51:33.600 --> 0:51:37.480 history of city If if City fails under this underdog frank, 0:51:37.960 --> 0:51:42.360 all cities will be required to help out. So if 0:51:42.400 --> 0:51:45.239 if you're in the forget it's Vanguard, any large fund 0:51:45.320 --> 0:51:49.399 that's been designated systemically important, you're potentially on the hook 0:51:49.480 --> 0:51:52.640 for that. That does not seem right to us, because 0:51:53.200 --> 0:51:56.560 if your fund goes down, we're certainly not going to 0:51:56.640 --> 0:52:00.440 get a capital injection from the banking system to get up, 0:52:00.480 --> 0:52:03.000 because that's the risk you're bearing in the fund. So 0:52:03.120 --> 0:52:07.000 it just it it seems completely irrational to us. So 0:52:07.040 --> 0:52:10.160 what we think, and again I think is you know Advangard, 0:52:10.280 --> 0:52:12.680 you know, um, I did get a couple of I've 0:52:12.719 --> 0:52:14.640 got a lot of fan mail on this. I've gotten 0:52:14.640 --> 0:52:16.800 a few people saying, you know, this is not Vanguard. 0:52:16.840 --> 0:52:19.319 You guys are never anti regulation, and I'm like, we're 0:52:19.360 --> 0:52:24.120 not anti regulation, actually, wet well, we're we want effective regulation. 0:52:24.280 --> 0:52:29.239 And where the concentration should be are what activities, what 0:52:29.320 --> 0:52:32.680 practices are in play that actually could lead to a 0:52:32.719 --> 0:52:35.719 systemic issue. And so those are the sorts of things 0:52:35.800 --> 0:52:37.719 that we'd like to see f stock focused on. So 0:52:37.800 --> 0:52:41.640 you you mentioned earlier, you know companies, you know, funds 0:52:41.680 --> 0:52:44.799 that are buying a lot of liquid securities. All right, 0:52:45.080 --> 0:52:47.879 I think it's perfectly legitimate for f stock to look 0:52:47.880 --> 0:52:51.600 at that and say is that activity going to create 0:52:51.640 --> 0:52:53.719 systemic risk? Now we could have a debate about that, 0:52:54.120 --> 0:52:56.319 but it's a it's a very fair question. And if 0:52:56.360 --> 0:52:58.279 the answer is yes, then okay, then you've got to 0:52:58.400 --> 0:53:01.200 you either you give them the oportunity to de risk 0:53:01.280 --> 0:53:03.719 or designate them. But if the answer is no, then 0:53:03.760 --> 0:53:06.440 you move on. But it's certainly a good line of question. 0:53:06.800 --> 0:53:09.840 But just because the funds big doesn't mean it should 0:53:09.840 --> 0:53:12.839 be automatically systemically important. You get the sense they don't 0:53:12.920 --> 0:53:16.400 understand what different companies do in different roles. Now, if 0:53:16.440 --> 0:53:18.759 you guys suddenly set up, all right, here's our new 0:53:18.800 --> 0:53:22.960 structured products division, and here's our new leverage derivatives division, 0:53:23.000 --> 0:53:26.240 and here's our liquid alts division, that's a different story. 0:53:26.400 --> 0:53:29.120 But and if we were doing proprietary trading for our 0:53:29.120 --> 0:53:31.920 own behalf, absolutely there would be a completely different story. 0:53:32.320 --> 0:53:35.040 And now the other half of that, which I'm not 0:53:35.080 --> 0:53:38.800 sure exactly where you fall on, is the money market funds. 0:53:39.280 --> 0:53:42.879 And I always scratch my head and wondered, why does 0:53:42.920 --> 0:53:46.600 the taxpayer have to backstop money market funds? These are 0:53:46.760 --> 0:53:49.319 risk instruments. Hey, if you want to buy something that's 0:53:49.400 --> 0:53:52.360 risk free, there are lots of short term notes you 0:53:52.400 --> 0:53:55.040 can do, but this is going to generate a yield 0:53:55.760 --> 0:53:59.879 that's above risk free return. Therefore you're assuming some risk. 0:54:00.600 --> 0:54:03.759 So look, the way I look at money funds is 0:54:03.880 --> 0:54:07.160 money funds were essentially a convenience. If you look at 0:54:07.440 --> 0:54:12.799 um a very short term, very short duration portfolio, the 0:54:12.880 --> 0:54:18.279 price fluctuates, you know, point to one point oh one, 0:54:19.000 --> 0:54:23.479 and you know, under lots of different circumstances. And so 0:54:23.600 --> 0:54:27.040 the idea of keeping a constant NAV was a convenience 0:54:27.040 --> 0:54:30.399 that allowed people to use it for transactional purposes. Now, 0:54:30.440 --> 0:54:34.200 what happened over time, and and this is this is 0:54:34.280 --> 0:54:37.600 a very fair criticism of the fund industry, is that 0:54:37.840 --> 0:54:43.000 simple product evolved into something different, especially on the institutional side. 0:54:43.040 --> 0:54:45.239 It became much more of a cash management vehicle. And 0:54:45.280 --> 0:54:47.960 what you saw were you know, multiple na vs being 0:54:48.000 --> 0:54:50.720 struct during the day and so forth, and and lots 0:54:50.760 --> 0:54:54.800 of interesting things being done where it really was away 0:54:54.840 --> 0:54:58.759 from the original spirit of the product. So UM, the 0:54:58.840 --> 0:55:01.880 way the sec forms ended up, we were actually we 0:55:01.920 --> 0:55:04.759 actually thought it was a pretty balanced approach. There were, 0:55:04.800 --> 0:55:08.200 you know, first of all, lots of tightening of UM, 0:55:08.239 --> 0:55:10.359 you know, in potential, you know, what can be in 0:55:10.360 --> 0:55:13.800 in a portfolio and so forth, and durations and whatnot. 0:55:14.080 --> 0:55:19.200 But very importantly, UM institutional funds, institutional prime funds are 0:55:19.239 --> 0:55:23.080 actually no longer constant NAV because of their because of 0:55:23.120 --> 0:55:25.520 their nature the words for for people who may not 0:55:25.680 --> 0:55:28.200 be familiar with money market funds, this used to always 0:55:28.719 --> 0:55:31.400 report as one dollar, right, even if it was worth 0:55:31.600 --> 0:55:34.120 a little over a little less. So there was never 0:55:34.160 --> 0:55:36.439 any concerns. So when you wrote a check, you didn't 0:55:36.440 --> 0:55:39.160 have a taxable event was you know, from a convenient standpoint. 0:55:39.200 --> 0:55:42.439 That's what it was all about. Now, during the crisis, UM, 0:55:43.239 --> 0:55:45.400 the Reserve Fund which broke the buck had a pretty 0:55:45.400 --> 0:55:49.400 big concentration of institutional investors, and the other funds that 0:55:49.440 --> 0:55:54.160 were under duress UM were all institutionally oriented. Now you 0:55:54.200 --> 0:55:56.759 mentioned the taxpayer element. You know, when the Treasury came 0:55:56.760 --> 0:56:00.320 in and put the guarantee on. To be fair, nobody 0:56:00.320 --> 0:56:03.400 asked for that, and actually it was just sort of 0:56:03.440 --> 0:56:06.960 imposed and you didn't really have a lot of choice, 0:56:07.280 --> 0:56:10.319 but there was a deep sigh of relief after they 0:56:10.360 --> 0:56:15.920 did that. So it was but everybody kind of unclenched 0:56:15.960 --> 0:56:17.719 a little bit. Book. I went out and talked to 0:56:17.880 --> 0:56:21.200 hundreds of clients afterwards, and they did. And you know, 0:56:21.280 --> 0:56:24.080 for us UM, you know, I kind of always knew 0:56:24.120 --> 0:56:27.879 this would circle back though, because UM our prime fund 0:56:27.920 --> 0:56:32.239 at that point was government and treasury. So unless the 0:56:32.320 --> 0:56:36.040 US government defaulted, that prime fund could have withstood anything. 0:56:36.200 --> 0:56:40.080 So shouldn't you guys have been more rewarded by client 0:56:40.200 --> 0:56:44.480 flows and the people who were more reckless or less 0:56:44.640 --> 0:56:48.400 astute is really the right word. Should shouldn't the marketplace 0:56:48.440 --> 0:56:51.799 have been allowed to separate winners or losers? Or was 0:56:51.880 --> 0:56:57.120 this systemically important? I think it was really you know, 0:56:57.160 --> 0:57:00.520 it's one of those will never really know. Um. You know, 0:57:00.840 --> 0:57:03.440 I'm a market space person. I like to let the 0:57:03.480 --> 0:57:07.359 market shake out. Look the short term, the short term 0:57:07.400 --> 0:57:11.600 markets were in turmoil, um, and you know, certainly the 0:57:12.000 --> 0:57:14.680 breaking of the buck by the Reserve Fund contributed to that. 0:57:15.320 --> 0:57:19.560 But um, you remember Triple A companies were having a 0:57:19.560 --> 0:57:21.760 hard time rolling over their commercial paper. There was so 0:57:21.880 --> 0:57:25.120 much uncertainty as to what was going to be allowed 0:57:25.160 --> 0:57:27.960 and what wasn't not going to be allowed. It's it's 0:57:28.000 --> 0:57:30.680 really tough to go back and say, well, you know, 0:57:30.800 --> 0:57:33.160 this would have happened if only these things have been done, 0:57:33.280 --> 0:57:34.880 or this would have happened if only these things have 0:57:34.960 --> 0:57:37.880 been done. I'm not sure we'll ever really know. Um. 0:57:38.720 --> 0:57:40.919 I think I think the regulators did the best they 0:57:40.960 --> 0:57:43.600 could with the information that they had at the time. 0:57:43.800 --> 0:57:47.120 We need to run a series of controlled experiments. In 0:57:47.200 --> 0:57:50.480 one universe, we allow city group to go under, and 0:57:50.520 --> 0:57:53.320 in another universe we save Leaman and then we run 0:57:53.360 --> 0:57:57.640 these simulations and see what happens. Unfortunately we didn't get 0:57:57.680 --> 0:57:59.880 a chance to do that. Let's let's stick with regulation 0:58:00.000 --> 0:58:04.760 a little bit. I have two related questions. First, what 0:58:04.760 --> 0:58:08.760 what should the SEC be doing better? What does good 0:58:08.800 --> 0:58:13.240 financial regulation look like? Yeah, so I think the SEC 0:58:13.600 --> 0:58:17.240 um has been moving in a in a very constructive 0:58:17.600 --> 0:58:20.360 UM direction. I think Mary Joe White has put some 0:58:20.440 --> 0:58:24.200 real um, you know, clear markers in the sand around 0:58:24.240 --> 0:58:26.720 what her priorities are. And I think she's done a 0:58:26.720 --> 0:58:29.920 pretty good job. Um. You know, she's tough. I mean 0:58:29.960 --> 0:58:35.640 she's that's a reputation, and she's long time she's very tough. 0:58:35.680 --> 0:58:38.280 But I think she's very fair. She's you know, incredibly 0:58:38.760 --> 0:58:41.600 um open to getting feedback, and she you know, she 0:58:41.680 --> 0:58:46.520 really processes it very quickly. I think what the SEC 0:58:46.920 --> 0:58:50.919 is trying to do in terms of gathering UM, doing 0:58:50.920 --> 0:58:54.040 a better job gathering data UM so that they really 0:58:54.040 --> 0:58:57.320 have a better view into what's happening into markets is 0:58:57.320 --> 0:58:59.560 a really good thing. And a lot of it. You know, 0:58:59.600 --> 0:59:03.960 the fund industry, UM, we're the most transparent. There's all 0:59:04.040 --> 0:59:06.520 this money outside the fund industry that they need to 0:59:06.560 --> 0:59:10.080 get their handle hands around what's actually happening, and I 0:59:10.080 --> 0:59:12.080 think they're actually trying to move in that direction. So 0:59:12.120 --> 0:59:14.680 to me, that's a top priority. When you say outside 0:59:14.720 --> 0:59:19.640 the fund industry, private equity, hed hedge funds, private equity, um, 0:59:20.120 --> 0:59:23.280 but separate accounts, I mean, you know, there's there's more 0:59:23.320 --> 0:59:26.800 money and separate, separately managed accounts on the institutional side 0:59:26.800 --> 0:59:29.560 than there is in mutual funds. And that's a big number. 0:59:29.600 --> 0:59:33.120 It's a huge number. And so, um, they're trying to 0:59:33.120 --> 0:59:35.160 get their handle on all of that so that they 0:59:35.160 --> 0:59:38.840 can really appropriately assess, you know, what, where are their 0:59:38.960 --> 0:59:44.160 risks and so forth. I think, um, they need to Uh, 0:59:44.200 --> 0:59:49.520 there's still some opportunity for harmonization with the other agencies. 0:59:49.520 --> 0:59:52.120 I mean, it's it's pretty complicated to figure out who's 0:59:52.120 --> 0:59:54.720 in charge of what you know, between the CFTC, the SEC, 0:59:55.040 --> 0:59:57.880 now the d o L and on certain issues, let's 0:59:57.880 --> 0:59:59.840 talk about the d o L because that's a fast 0:59:59.840 --> 1:00:05.360 and in conversation. Um. So, after the financial crisis, part 1:00:05.400 --> 1:00:09.520 of Dodd Frank more or less directed the SEC to 1:00:09.720 --> 1:00:16.200 review some of the issues that involved brokers, advisors, are as, etcetera. 1:00:16.320 --> 1:00:19.040 And I think it was the SEC comes out with 1:00:19.080 --> 1:00:23.000 the report that said, we think the fiduciary standard, which 1:00:23.040 --> 1:00:26.240 is quote unquote whatever is in the client's best interest, 1:00:26.760 --> 1:00:30.480 is really the appropriate standard for everybody, and let's enforced 1:00:30.520 --> 1:00:34.640 this uniformly. And it never made it out of committee. 1:00:34.720 --> 1:00:37.960 At three to two it lost, But then the Department 1:00:37.960 --> 1:00:41.480 of Labor kind of said, okay, we'll pick this up 1:00:41.520 --> 1:00:45.240 backdoor and pretty much mandated that four oh one K 1:00:45.720 --> 1:00:48.640 management and my wife has a four oh three B 1:00:48.840 --> 1:00:55.200 which is PS mostly Vanguard m essentially said this new 1:00:55.280 --> 1:00:58.480 fiduciary or not so new fiduciary standard is now the 1:00:58.520 --> 1:01:02.760 new standard for anybody was advising on these retirement accounts, 1:01:02.760 --> 1:01:05.480 which are really under the pur of view of salary, 1:01:05.760 --> 1:01:08.560 not outside investing. And that's why it's our per of view, 1:01:08.600 --> 1:01:12.200 not the SEC. So that's a long winded wind up 1:01:12.200 --> 1:01:15.280 for a question. But where is Vanguard on the issue 1:01:15.320 --> 1:01:19.600 of fiduciary versus suitability? So at the highest level, we're 1:01:19.640 --> 1:01:24.280 actually comfortable with the raising the fiduciary standard. I think, 1:01:24.440 --> 1:01:27.080 as with all new regulation, the devil's going to be 1:01:27.080 --> 1:01:30.520 in the details. And you know when the d o 1:01:30.760 --> 1:01:33.080 L actually tried to do this a couple of years ago, 1:01:33.120 --> 1:01:36.200 as you may recall, and ran into a sort of 1:01:36.240 --> 1:01:40.240 a hornet's nest because under a RISSA there's some really 1:01:40.280 --> 1:01:45.600 technical in the weeds UM issues around prohibited transactions. And basically, 1:01:45.600 --> 1:01:48.400 if you were a four oh one K provider, you 1:01:48.440 --> 1:01:52.160 would have been prohibited from doing certain really basic things 1:01:52.200 --> 1:01:56.080 for your investors, such as, UM, potentially you know, giving 1:01:56.080 --> 1:02:01.240 guidance around rebalancing a portfolio. UM. And I don't think 1:02:01.280 --> 1:02:03.600 that was the intent. And so what would you do. 1:02:03.680 --> 1:02:06.080 You'd have to bring in a third party to to 1:02:06.680 --> 1:02:10.600 you know, be independent and more cost layer another layer exactly. 1:02:10.600 --> 1:02:13.280 So so it was it was actually counter to what 1:02:13.360 --> 1:02:15.720 the original intent. So they you know, they stepped back. 1:02:16.360 --> 1:02:19.880 The new rule is out, UM. You know, the proposal 1:02:20.000 --> 1:02:22.640 is out and people are studying its four hundred pages. 1:02:23.120 --> 1:02:25.480 So we're sort of working our way through it as 1:02:25.480 --> 1:02:28.000 we speak actually right now. So I can't give you 1:02:28.040 --> 1:02:31.880 a definitive do they have it right? I'm pretty sure 1:02:31.920 --> 1:02:36.760 they've thought about the prohibited transaction elements UM in in 1:02:36.760 --> 1:02:39.120 in the in the rules. As we go forward, hopefully 1:02:39.200 --> 1:02:41.560 they've got that right, because that's going to be important 1:02:42.000 --> 1:02:45.439 for us. That's really important. UM at the highest level, 1:02:45.480 --> 1:02:49.560 you know, you know, higher fiduciary standards for people handling 1:02:49.560 --> 1:02:52.200 money makes a lot of sense. You would think there 1:02:52.320 --> 1:02:57.520 was some issues that the target date funds somebody had suggested, 1:02:57.720 --> 1:03:02.240 essentially came about as a solution to some of the 1:03:02.280 --> 1:03:05.800 four oh one k rules. You guys are pretty substantial 1:03:05.800 --> 1:03:09.000 footprint and target date funds we haven't really gotten to that. 1:03:09.080 --> 1:03:11.920 Let's let's talk a little bit about that. Who is 1:03:11.960 --> 1:03:16.240 that appropriate for? What's the thinking behind these? I've read 1:03:16.320 --> 1:03:20.600 some criticisms of target date funds, about half of which 1:03:20.680 --> 1:03:23.600 the criticism is on costs, so I know who I'm 1:03:23.640 --> 1:03:26.960 speaking with, and the other half is they have a 1:03:27.000 --> 1:03:31.720 tendency to be a little too conservative given modern lifespans. Yeah, 1:03:32.040 --> 1:03:35.000 so a couple of things the target date funds really 1:03:35.040 --> 1:03:38.720 came about, Um, you have. When the Pension Protection Act 1:03:38.840 --> 1:03:41.040 was passed in two thousand seven, one of the things 1:03:41.040 --> 1:03:43.680 that allowed it made very clear that you could have 1:03:43.720 --> 1:03:48.000 a default option that was a more balanced approach. UM. 1:03:48.040 --> 1:03:50.960 So it sort of gave regulatory permission for something a 1:03:50.960 --> 1:03:53.880 lot of for forward thinking companies had already been doing. 1:03:54.200 --> 1:03:56.520 You you guys also, and it may even be closed. 1:03:56.520 --> 1:03:59.880 Didn't you have just a basic sixty forty portfolio? We do? 1:04:00.000 --> 1:04:05.120 And one one fun balance index um. People still use it. 1:04:05.200 --> 1:04:08.880 Is it closed close the name of it balance index funds, 1:04:09.920 --> 1:04:13.480 And that's perfectly fine. It's it's a perfectly good default. 1:04:13.920 --> 1:04:17.360 The you know, in the early days of target date funds, 1:04:17.400 --> 1:04:21.320 what was really fascinating is people said, it's too simplistic. 1:04:21.360 --> 1:04:23.200 You know, you're only looking at age. And you know, 1:04:23.280 --> 1:04:24.960 you and I are. You're younger than I am, but 1:04:25.000 --> 1:04:27.920 we're in the same band. So you may have a 1:04:28.000 --> 1:04:30.840 much different risk tolerance than I do. And does that 1:04:30.880 --> 1:04:33.920 mean we should be in different portfolios? And in the 1:04:33.960 --> 1:04:36.680 short answer that is, of course it does. But when 1:04:36.760 --> 1:04:39.480 you think about target daid funds were designed for people 1:04:39.520 --> 1:04:42.960 who did not want to make a decision, nor often 1:04:42.960 --> 1:04:45.520 they weren't making a decision, so their money was going 1:04:45.520 --> 1:04:48.000 into a money market fund where they were earning almost nothing, 1:04:48.160 --> 1:04:51.840 certainly no real return. And so the idea was, you know, 1:04:51.880 --> 1:04:56.000 could you put together a professionally managed balanced fund that 1:04:56.040 --> 1:05:01.280 would rebalance periodically that was age appropriate. Um, given somebody's 1:05:01.400 --> 1:05:05.560 you know, a traditional lifespan, and um, you know what 1:05:05.640 --> 1:05:09.560 we've done is we've got pretty sophisticated global asset allocation 1:05:09.680 --> 1:05:15.680 portfolio for people, very low cost periodically rebalances UM. And 1:05:16.400 --> 1:05:19.560 you know, if somebody wants to talk about their risk 1:05:19.560 --> 1:05:22.560 tolerance and wants to get into more subtleties, we've got 1:05:22.600 --> 1:05:24.520 a million different options that we can give them, and 1:05:24.560 --> 1:05:26.680 we can we can help them with that. But for 1:05:26.720 --> 1:05:28.400 the person who's like, I don't know what to do, 1:05:29.320 --> 1:05:31.120 tell me, you're tell me when you want to retire, 1:05:31.240 --> 1:05:33.600 put your money in that fund and you and and 1:05:33.920 --> 1:05:35.920 I'll tell you, verry, if you look at the performance 1:05:35.960 --> 1:05:39.040 of these things over a long period of time, it's 1:05:39.080 --> 1:05:43.480 it's it's really solid, very difficult um actually for you know, 1:05:43.520 --> 1:05:47.840 any active managers to beat. And it's a it's one 1:05:47.840 --> 1:05:49.880 of those things you will always be happy that you 1:05:49.920 --> 1:05:52.960 put an investor there. So that that's kind of interesting 1:05:53.000 --> 1:05:55.200 and it's very global by the way, that that was 1:05:55.280 --> 1:05:58.959 one of the questions that seems to come out of 1:05:59.040 --> 1:06:03.720 the fiduciary discussion because somehow, I don't know if I'm 1:06:03.840 --> 1:06:06.600 I'm getting this right. There was an issue of well, 1:06:06.640 --> 1:06:11.240 if you impose this fiduciary obligation on brokers or other advisors, 1:06:11.280 --> 1:06:13.240 they won't be able to do this. And I didn't 1:06:13.280 --> 1:06:18.120 really under the arguments against the fiduciary standard, none of 1:06:18.160 --> 1:06:22.120 them have been and full disclosure were fiduciaries. We we 1:06:22.200 --> 1:06:26.400 play in that sandbox. So I'm I'm completely biased. I'm 1:06:26.400 --> 1:06:29.040 not pretending to be objective, but every time I see 1:06:29.040 --> 1:06:33.240 an argument against it, it they just seemed to be 1:06:33.360 --> 1:06:37.000 really working hard to you know, it's zero inches in 1:06:37.040 --> 1:06:40.240 a cloud of dust. It doesn't seem like they're very persuasive. 1:06:40.600 --> 1:06:44.440 I think the fear, especially in some of the smaller 1:06:44.480 --> 1:06:47.960 planned market and where which are sold through many of 1:06:48.000 --> 1:06:52.560 which are sold through advisors, and for smaller investors, that 1:06:52.800 --> 1:06:56.400 this will UM, you'll move away from any kind of 1:06:56.440 --> 1:06:59.440 transaction based and you know, fee based for real little 1:06:59.440 --> 1:07:03.600 investors can be more expensive sometimes than transaction based. I think, 1:07:03.840 --> 1:07:05.720 you know, there's a way, you know, people need to 1:07:05.720 --> 1:07:08.560 think about their costs anyway. So, but that's the argument 1:07:08.600 --> 1:07:11.960 that you hear some people that works. UM. I love 1:07:12.000 --> 1:07:14.000 this quote of yours. I want to talk about a 1:07:14.000 --> 1:07:17.720 little bit. Looking at investments in less than a five 1:07:17.880 --> 1:07:21.240 to ten year window is time wasted. I know I'm 1:07:21.320 --> 1:07:24.920 changing gears on you, but let's talk about that concept 1:07:25.000 --> 1:07:29.280 of this is for the long term. Yeah, I look, 1:07:29.320 --> 1:07:34.000 I you know, I really I really believe that UM. 1:07:34.040 --> 1:07:36.440 Actually one of the things I enjoy reading the most 1:07:36.480 --> 1:07:41.720 of yours is your commentary around short term predictions. And 1:07:41.880 --> 1:07:43.640 I think you and I are aligned on this that 1:07:44.120 --> 1:07:47.960 very much. You read. You read these predictions for the year, 1:07:48.200 --> 1:07:51.600 and you might as well just throw darts. And unfortunately, 1:07:51.640 --> 1:07:55.120 people do pay attention to them, and they actually occasionally invest, 1:07:55.280 --> 1:07:57.320 at least on the margin, based on them, and I 1:07:57.320 --> 1:08:00.720 think they're making a huge mistake. And so we really 1:08:00.760 --> 1:08:03.840 want people thinking out you know, I say five to ten, 1:08:03.880 --> 1:08:06.280 but ten, you know, people should be thinking in ten 1:08:06.360 --> 1:08:13.520 year increments um around their portfolios because it's really difficult 1:08:13.760 --> 1:08:16.599 to have any sense in the short run what's going 1:08:16.640 --> 1:08:19.080 to happen, you know, pretty random. I mean, if you 1:08:19.200 --> 1:08:22.880 believe Burton Burton Malkiel has a clue what he's talking about, 1:08:23.400 --> 1:08:26.200 it's a fairly random walk, isn't it. You probably remember 1:08:26.240 --> 1:08:28.479 the article, but I think it was maybe a decade 1:08:28.560 --> 1:08:30.439 or more ago. The New York Times ran a piece 1:08:30.479 --> 1:08:33.639 where they looked at twenty year returns and they compared 1:08:33.680 --> 1:08:38.120 treasury you know, treasury bonds to equities, and I think 1:08:38.120 --> 1:08:40.479 if I have the stat right, if you took the 1:08:40.600 --> 1:08:44.680 ten best days out of a twenty year period, your 1:08:44.720 --> 1:08:48.439 equity returned dropped from roughly ten percent down to the 1:08:48.520 --> 1:08:52.760 level of a Treasury bond. And so that whole risk premium, 1:08:52.800 --> 1:08:54.439 if you will, that you were being paid was earned 1:08:54.479 --> 1:08:55.760 in ten days, not you. And I know it's not 1:08:55.840 --> 1:08:59.280 quite that simple, but I think the message was are 1:08:59.320 --> 1:09:02.040 you that good that you're gonna you're gonna be in 1:09:02.080 --> 1:09:06.080 those ten days? And my view is nobody's that good. 1:09:06.200 --> 1:09:09.000 And if you look at the distribution those ten days, 1:09:09.040 --> 1:09:13.240 they tend to come near some of the worst days, right, 1:09:13.280 --> 1:09:16.320 So if you're stepping aside to miss those worst days, 1:09:16.600 --> 1:09:19.439 you're also missing some of the best. That's actually a 1:09:19.439 --> 1:09:20.840 great point in what I hadn't even thought of. But 1:09:20.880 --> 1:09:22.960 you're absolutely right when I think about that, what what 1:09:22.960 --> 1:09:26.200 what the periods are? And so again our view is, 1:09:26.600 --> 1:09:30.400 you know, really be be very long term oriented in 1:09:30.439 --> 1:09:33.960 what you're doing, and that's actually what gives the ability 1:09:34.479 --> 1:09:37.639 for you know, and obviously this sounds like I'm talking 1:09:37.840 --> 1:09:40.439 you know, Vanguard's book, if you will, But you know, 1:09:40.520 --> 1:09:45.320 low cost the low cost advantage, it's it's that compounding 1:09:45.360 --> 1:09:48.920 effect over a decade that really shows up. You know that, 1:09:49.000 --> 1:09:51.559 you know, when you look at say active versus passive 1:09:51.600 --> 1:09:55.240 as the extreme examples of low cost investing. UM you know, 1:09:55.280 --> 1:09:57.360 a year to year can be you know, half of 1:09:57.400 --> 1:10:00.000 your active funds. Some some years will beat your passive funds. 1:10:00.200 --> 1:10:03.040 But when you look over ten year period, it's consistently 1:10:03.240 --> 1:10:07.680 you know less than and that's that compounding cost differential 1:10:07.800 --> 1:10:10.240 over you know, a long period of time. You guys 1:10:10.240 --> 1:10:14.000 have a research piece which um I mentioned Jay had 1:10:14.080 --> 1:10:16.960 had fo to j Tenny is the person for Vanguard 1:10:17.000 --> 1:10:19.360 who I shouldn't say covers us. We just know him 1:10:19.400 --> 1:10:22.280 personally and he's a great guy. But he sent this 1:10:22.560 --> 1:10:25.280 research piece and showed the difference between low fee and 1:10:25.360 --> 1:10:29.080 high fee over thirty years. And if I'm doing the 1:10:29.240 --> 1:10:34.280 math right at the end of the period, especially thirty 1:10:34.320 --> 1:10:38.000 if you're looking at three decades, the return difference is 1:10:38.160 --> 1:10:42.519 an order of magnitude. It's just a tremendous impact. And 1:10:42.680 --> 1:10:46.680 think about what one percent compounded for thirty years is 1:10:46.720 --> 1:10:49.400 going to do to uh any sort of PORTFOLI I'll 1:10:49.400 --> 1:10:51.559 give you an example. So I just did this for 1:10:51.600 --> 1:10:53.679 somebody where we looked at sort of a high cost 1:10:53.960 --> 1:10:56.479 versus low cost sort of total cost of investing, if 1:10:56.520 --> 1:10:59.479 you will. UM so looking at a place where they 1:10:59.520 --> 1:11:03.400 were getting ice and whatnot. The um the difference in 1:11:03.400 --> 1:11:09.200 the ending balances UM translated into a difference in an 1:11:10.320 --> 1:11:14.719 So you know, basically, imagine your your standard of living 1:11:14.920 --> 1:11:19.559 up or down based on on this effect. That that's 1:11:19.600 --> 1:11:24.480 a meaningful that's a meaningful swing. Um. Let's talk about valuation. 1:11:25.080 --> 1:11:28.719 So you guys, if you're thinking long term, I keep 1:11:28.760 --> 1:11:32.320 hearing from people and reading stocks are high, bonds are high, 1:11:32.320 --> 1:11:36.400 everything's high. Expect low returns going forward, which is sort 1:11:36.439 --> 1:11:40.280 of a prediction. Some people say it's really just basic math, 1:11:40.479 --> 1:11:43.240 but to me, it looks like a prediction that the 1:11:43.280 --> 1:11:47.080 economy isn't going to accelerate, that earnings aren't going to normalize, 1:11:47.080 --> 1:11:49.640 that we're not going to eventually come out of this 1:11:49.800 --> 1:11:52.720 de leveraging period, of which we're still you know, I 1:11:52.760 --> 1:11:57.360 think the US population is deleveraged about of their excess 1:11:57.720 --> 1:12:01.760 pre crisis debt, so we could still only be halfway 1:12:01.800 --> 1:12:05.680 through the healing process. What what's your perspective evaluation and 1:12:06.000 --> 1:12:09.519 what does it mean to forward expected return? So I'll 1:12:09.520 --> 1:12:13.200 give you, I'll give you all the appropriate caveats. So one, 1:12:13.360 --> 1:12:16.280 you know, we're living in a period like none we've 1:12:16.320 --> 1:12:18.080 ever lived. We've never seen the FED do what it's 1:12:18.120 --> 1:12:20.720 done in the last six years. And if you put 1:12:20.800 --> 1:12:23.640 the pre crisis easy money period on top of that, 1:12:23.720 --> 1:12:26.200 you know we've lived in a decade of a decade 1:12:26.200 --> 1:12:29.160 of very easy money. I don't know how to think 1:12:29.160 --> 1:12:32.320 about that, to be perfectly honest, I've killed myself thinking 1:12:32.320 --> 1:12:35.360 about it all the time, and I don't know when 1:12:35.400 --> 1:12:38.280 it ends and how it ends. UM, So let me 1:12:39.200 --> 1:12:41.760 I'll send you an email afterwards explain it all, to 1:12:42.000 --> 1:12:45.200 which I'm I'm ill. That would be good because nobody knows. 1:12:45.240 --> 1:12:47.920 This is clearly you're you're nailing it. It worries me 1:12:48.000 --> 1:12:52.240 a lot. This is clearly uncharted territory. I know you 1:12:52.240 --> 1:12:54.760 could people have made the argument. You know, you look 1:12:54.840 --> 1:12:58.559 from nineteen thirty to nineteen fifty rates were low, but 1:12:58.680 --> 1:13:02.360 you can't say they were. It's zero for six years 1:13:02.479 --> 1:13:06.439 and and there wasn't QUEI back then. Clearly this is 1:13:07.160 --> 1:13:09.320 uncharted me if you think, I mean again, I'm going 1:13:09.360 --> 1:13:13.400 to oversimplify it. But if you think about it UM 1:13:13.600 --> 1:13:16.519 short term, you know money fund should be yielding about 1:13:16.560 --> 1:13:21.639 two That's what inflation is. Historically, the money markets UM 1:13:21.680 --> 1:13:25.840 produce roughly inflation UM no real return and so we've 1:13:25.840 --> 1:13:29.519 gone through a period of distortion in the markets for 1:13:29.640 --> 1:13:32.840 this prolonged period of time where essentially the short end 1:13:32.920 --> 1:13:37.559 we're producing negative real returns. UM. We've never lived through that. 1:13:37.640 --> 1:13:41.760 And typically, um, when you study history, the longer something 1:13:41.880 --> 1:13:45.160 is distorted, the less predictable and the and the harsher 1:13:45.200 --> 1:13:49.240 the outcome is. So that's my big, long winded caveat UM. 1:13:49.479 --> 1:13:51.920 Not much of a caveat that. We we we look 1:13:52.000 --> 1:13:54.680 at So we look at um. You know, if you 1:13:54.720 --> 1:13:57.040 look at let's say ten years, if you look at 1:13:57.120 --> 1:13:59.759 yield to maturity on a bond, it's your best predictor 1:13:59.760 --> 1:14:02.519 of your returns um. You know, plus or minus fifty 1:14:02.560 --> 1:14:06.280 basis points. Typically, so yield to maturity on corporate bonds 1:14:06.360 --> 1:14:08.760 is less than three right now or right around let's 1:14:08.760 --> 1:14:11.360 say three, just around the numbers. So that's our best 1:14:11.360 --> 1:14:13.280 guess is to what bonds are going to return over 1:14:13.320 --> 1:14:16.679 the next decade. I can dream up a scenario where 1:14:16.680 --> 1:14:18.639 it's worse. I can dream up a scenario where it's better. 1:14:18.680 --> 1:14:21.760 Not many that it's better. Um, But if you do 1:14:21.800 --> 1:14:24.360 sort of we do a we sort of a distribution 1:14:24.400 --> 1:14:28.759 and returns the in the square, you know, the bulk 1:14:28.800 --> 1:14:31.559 of the distribution, if you will, is in around that 1:14:31.560 --> 1:14:34.920 three percent number for a corporate bond. If you look 1:14:34.960 --> 1:14:38.240 at equities, you know, we're at a pretty high valuation 1:14:38.280 --> 1:14:43.120 place UM, probably top decile historically. And again when we 1:14:43.240 --> 1:14:45.519 run we so we run a capital markets model which 1:14:45.600 --> 1:14:50.120 you know basically runs and Monte Carlos simulation UM. And 1:14:50.640 --> 1:14:54.320 when historically, when markets have been valued this way, the 1:14:54.439 --> 1:14:57.000 central tendency would be to be a couple hundred basis 1:14:57.000 --> 1:15:01.200 points below long term average, and so that would typically 1:15:01.880 --> 1:15:05.840 you know, and again it's a much flattered distribution with 1:15:06.040 --> 1:15:09.559 much longer tails, but the central tendency is in the 1:15:09.640 --> 1:15:12.559 six to eight range. And so we've actually been It's 1:15:12.560 --> 1:15:15.439 not horrible, No, it's not um and considering what we've 1:15:15.479 --> 1:15:19.200 lived through all things, if that's the future returns, there's 1:15:19.200 --> 1:15:22.599 certainly worse scenarios. So yeah, you and I could both 1:15:22.680 --> 1:15:24.519 dream up a lot of worse ones, and we can 1:15:24.560 --> 1:15:26.760 certainly what could lead to them, and you can you 1:15:26.760 --> 1:15:28.519 can dream up a few better. Um. You know, you 1:15:28.600 --> 1:15:32.439 mentioned some things that could accelerate earnings and whatnot. But 1:15:32.520 --> 1:15:34.439 if you look at if you look at that, what 1:15:34.560 --> 1:15:37.960 it says is a sixty portfolio is probably going to 1:15:38.040 --> 1:15:42.639 be in the five so three fifty reel let's say, 1:15:42.720 --> 1:15:46.439 just for um estimates, that's on the low end of 1:15:46.439 --> 1:15:50.360 you you know, but it's not crazy. And so what 1:15:50.760 --> 1:15:53.519 we've been doing is we've been pretty vocal about this 1:15:54.400 --> 1:15:57.719 because again, to me, it's an asymmetric risk for an investor. 1:15:58.680 --> 1:16:02.160 If we're wrong, if we're wrong on the if we're 1:16:02.280 --> 1:16:05.960 too high, then it's going to be a really rough ride. 1:16:06.479 --> 1:16:10.040 If we're too low, then great, you know, everybody will 1:16:10.080 --> 1:16:12.360 be happy at the end, although there'll be some inflation. 1:16:12.439 --> 1:16:17.120 There'll be some inflation. What um. The real messages, especially 1:16:17.160 --> 1:16:20.280 for people who are in the bulk of their their 1:16:20.280 --> 1:16:24.200 earning years and in their savings years, is don't expect 1:16:24.240 --> 1:16:26.400 the markets to bail you out over the next decade. 1:16:26.840 --> 1:16:28.760 You need to be saving at a higher rate than 1:16:28.800 --> 1:16:31.519 you are. And you know, well that's always one of 1:16:31.560 --> 1:16:35.960 the inputs whenever we whenever our cfps run a scenario 1:16:36.000 --> 1:16:39.679 with people, it's you have to either plan on spending 1:16:39.760 --> 1:16:43.920 less when you retire, or working longer or saving more. 1:16:44.000 --> 1:16:46.599 Those are the three which which is your first choice 1:16:46.600 --> 1:16:49.160 and there and there're no there're no other levers and 1:16:49.240 --> 1:16:51.240 so what you've got to do what you have to do. 1:16:51.720 --> 1:16:54.280 You know, I think it's a very much incumbent on 1:16:54.400 --> 1:16:59.080 us as professionals to make that case to people. UM. 1:16:59.120 --> 1:17:02.080 And it's hard, it's not sexy, it's not necessarily a 1:17:02.120 --> 1:17:05.519 fun message. But the flip side is, um, it's the 1:17:05.560 --> 1:17:09.719 responsible thing to do. And Charlie Ellis's most recent book, 1:17:09.920 --> 1:17:13.200 right UM, which is on my it's literally sitting on 1:17:13.280 --> 1:17:19.600 my night table. That's the next book I'm reviewing, basically describes, Hey, 1:17:19.720 --> 1:17:23.800 here's the situation and we have a potential problem down 1:17:23.800 --> 1:17:26.120 the road if we don't take steps immediately to fix it. 1:17:26.400 --> 1:17:29.719 You just summarize the book perfectly in your three times 1:17:29.760 --> 1:17:32.559 only I'm only three chapters and you got the levers. 1:17:32.600 --> 1:17:34.599 That's I mean, that's the book I had that. You know, 1:17:34.720 --> 1:17:36.800 Charlie was kind enough to send me the book early 1:17:36.920 --> 1:17:39.400 and I had a chance to review it, and it's 1:17:39.439 --> 1:17:42.920 exactly his message. And look it's there, it is what 1:17:43.040 --> 1:17:45.040 it is. And you know it's up to us, I think, 1:17:45.080 --> 1:17:47.840 to really make that case. You know, look, um, I'll 1:17:47.880 --> 1:17:50.280 say something, it'll sound sacrilegious and it's not meant to. 1:17:50.360 --> 1:17:54.280 But you know, if I go back to UM and 1:17:54.360 --> 1:17:57.160 do I have any regrets, And one of them is, um, 1:17:57.280 --> 1:17:59.719 you know, we didn't have the sophistication around our capital 1:17:59.760 --> 1:18:02.479 market model. We you know, we weren't doing all these 1:18:02.520 --> 1:18:05.880 Monte Carlo simulations and predicting future returns and so forth. 1:18:06.560 --> 1:18:09.360 But you knew in nine that the next decade couldn't 1:18:09.400 --> 1:18:11.439 be great. I mean you just knew. I mean when 1:18:11.680 --> 1:18:14.280 stock when p s were where they were earning. You know, 1:18:14.320 --> 1:18:18.439 however you want to measure valuation. And I wish we 1:18:18.560 --> 1:18:22.400 as an industry had done a better job telling people that. 1:18:22.600 --> 1:18:24.240 And you know, there were people out there who were 1:18:24.280 --> 1:18:29.480 saying it, but it wasn't the strong voice. And um, 1:18:29.520 --> 1:18:32.479 you know, to me, I certainly don't want to go 1:18:32.520 --> 1:18:34.639 through that again. I don't think we're in that territory, 1:18:34.680 --> 1:18:38.240 by the way. But on the other hand, um, we 1:18:38.240 --> 1:18:41.320 we're farther along. Let me also point out then, and 1:18:41.560 --> 1:18:45.160 so I began as a trader in the nineties, and 1:18:45.280 --> 1:18:48.720 there was no frame of reference for anybody who was 1:18:49.400 --> 1:18:54.599 buying stocks, actively trading playing the dot com game. Think 1:18:54.640 --> 1:18:59.800 about it, you you had even you know, people kind 1:18:59.800 --> 1:19:02.439 of have blanched. I'm guilty of it. Also, when Ronald 1:19:02.479 --> 1:19:05.200 Reagan came out and said, hey, this is just a correction. 1:19:05.960 --> 1:19:09.000 People snickered. He turned out to be right. It was 1:19:09.120 --> 1:19:11.960 just everyone forgets eighty seven finished the year up one 1:19:13.000 --> 1:19:15.880 so that I don't want to call it a flash crash, 1:19:16.160 --> 1:19:22.120 that major structural plumbing snaffoo. There was no frame of 1:19:22.160 --> 1:19:25.599 reference for what would happen in two thousand, maybe seventy three, 1:19:25.680 --> 1:19:29.719 seventy four. But ham I know that because I'm be calm, 1:19:29.800 --> 1:19:33.400 I've made myself a student of market history after all 1:19:33.439 --> 1:19:36.720 these years. But back then I had no idea what night. 1:19:37.680 --> 1:19:40.440 So you're absolutely right in seventy seventy four is the closest. 1:19:40.520 --> 1:19:43.680 And you know you asked it an earlier question. You 1:19:43.720 --> 1:19:46.800 know who were some of my people who influenced me, Well, 1:19:46.880 --> 1:19:48.760 they all lived through that, so I got to hear 1:19:48.800 --> 1:19:51.640 their stories. And so even though I was a teenager 1:19:51.720 --> 1:19:54.160 and somebody I remember sitting in gas lines for my 1:19:54.240 --> 1:19:58.360 dad too, I got to I got to use the 1:19:58.439 --> 1:20:01.160 car if I sat in the line, even or not. 1:20:01.400 --> 1:20:05.439 You know, it was today even but um so I 1:20:05.479 --> 1:20:07.960 was vaguely aware how bad it was out there. But 1:20:08.720 --> 1:20:11.320 you know, we didn't live through it as professionals, and so, 1:20:11.800 --> 1:20:14.880 but some of my early mentors did, and so you 1:20:14.880 --> 1:20:17.680 you look at that and you say, Okay, what can 1:20:17.720 --> 1:20:21.000 I learn from them? And yeah, So now I think 1:20:21.000 --> 1:20:23.439 going forward, I'm hoping we're going to do a much 1:20:23.479 --> 1:20:26.120 better job with this. So so let me ask a 1:20:26.200 --> 1:20:31.439 somewhat related question, um, because I've asked similar questions to 1:20:31.560 --> 1:20:35.559 people who did live through the early part of the 1:20:35.640 --> 1:20:39.000 eighties and as as professionals. So here we are with 1:20:39.160 --> 1:20:43.000 six years into this bullmarket. We're up two hundred plus percent, 1:20:44.120 --> 1:20:47.519 and there's still an awful lot of skepticism the fact 1:20:47.560 --> 1:20:52.080 that we're talking about, hey, let's lower expectation for future returns. 1:20:52.600 --> 1:20:54.599 You know, I tell some of the younger guys who 1:20:54.640 --> 1:21:01.479 weren't on trading or or managing money in housing, you 1:21:01.520 --> 1:21:05.240 think this is euphoric. There's no euphori now compared to then. 1:21:05.720 --> 1:21:08.840 It's for every bull, there's a bear and sometimes too. 1:21:09.200 --> 1:21:12.479 So the question is, six years into this bull market 1:21:13.640 --> 1:21:17.040 plus two, which is a heck of return, why know 1:21:17.200 --> 1:21:22.599 you for you yet? Is it still post financial crisis? Uh? Trauma? 1:21:23.240 --> 1:21:25.280 I think you know, if you think about the last 1:21:25.320 --> 1:21:29.200 fifteen years, we've had two really bad markets, right, you 1:21:29.200 --> 1:21:32.120 have the dot com crash and then you have the GFC, 1:21:32.680 --> 1:21:34.559 and then on top of that you have the housing 1:21:34.600 --> 1:21:36.559 collapse right in the middle, right in the middle. So 1:21:37.000 --> 1:21:39.720 you know, to me, I I think the I do 1:21:39.800 --> 1:21:43.680 think the GFC it certainly didn't have the impact that 1:21:43.720 --> 1:21:46.840 the depression had on my parents. My parents were born 1:21:46.920 --> 1:21:49.080 right in the middle of the depression, and you know, 1:21:49.400 --> 1:21:52.479 have great stories to tell about growing up then. But 1:21:53.640 --> 1:21:56.360 this is pretty close, you know, in terms of I 1:21:56.400 --> 1:21:59.880 think a psychic impact on people. It was you know, 1:22:00.040 --> 1:22:02.640 for people who had been saving their whole life, it 1:22:02.680 --> 1:22:06.640 was a pretty scary moment and you've certainly seen, you know, 1:22:06.760 --> 1:22:10.040 some change in behavior as a result. So, um, I 1:22:10.320 --> 1:22:14.920 think that partly explains the lack of euphoria. UM. But look, 1:22:15.280 --> 1:22:17.479 you know, I think despite the fact that I don't 1:22:17.479 --> 1:22:19.280 think the next ten years the markets are going to 1:22:19.360 --> 1:22:22.280 be as robust is certainly they've been the last five, 1:22:22.640 --> 1:22:26.360 by almost definition, they can't be. It's still really important 1:22:26.400 --> 1:22:28.960 to keep investing. It's still really important to have that 1:22:29.000 --> 1:22:32.120 diversified portfolio. And so I think, actually that's gonna be 1:22:32.120 --> 1:22:35.040 one of our challenges is to keep people. You know, 1:22:35.120 --> 1:22:37.439 you're you're putting out this message that's not all that 1:22:38.320 --> 1:22:41.400 you know, Um, optimistic, but at the same time, don't 1:22:41.400 --> 1:22:44.040 try to time it, don't try to avoid it, try 1:22:44.080 --> 1:22:46.599 to keep investing on a regular basis. If anything, try 1:22:46.640 --> 1:22:49.479 to save a little bit more. The interesting thing is 1:22:49.560 --> 1:22:52.960 some of the folks we've had through here, like Jeff's 1:22:53.000 --> 1:22:58.080 out of Raymond James and Laslow Berrini and um Ralph Akumpora, 1:22:58.160 --> 1:23:02.120 who were all act of money managers or strategists in 1:23:02.120 --> 1:23:05.000 the early eighties, have made the case that the first 1:23:05.040 --> 1:23:08.400 five years of this bull market, we're not unlike eighty 1:23:08.439 --> 1:23:11.040 two to eighty seven, when there was a tremendous amount 1:23:11.040 --> 1:23:14.839 of skepticism. You had the eighty seven crash and everybody 1:23:14.880 --> 1:23:17.759 came out and said told you so, and the markets 1:23:17.800 --> 1:23:21.160 sort of gathered themselves up in the next decade wasn't 1:23:21.200 --> 1:23:25.559 too shabby. So so we theoretically, I wonder if we're 1:23:26.200 --> 1:23:31.679 potentially in that sort of secular market, if that's what's 1:23:31.720 --> 1:23:35.200 developing here. So you know, look, we'd all love it 1:23:35.240 --> 1:23:38.880 if that were the case. Um, I guess I don't 1:23:39.000 --> 1:23:43.160 quite yet see the um what's going to accelerate earnings 1:23:43.680 --> 1:23:45.679 to the level that you would need to see earnings 1:23:45.680 --> 1:23:48.240 accelerate to sort of make the valuations make sense, which 1:23:48.240 --> 1:23:51.160 you saw me in the beginning of that period, you 1:23:51.200 --> 1:23:55.000 certainly saw earnings growing at tremendous rates, and then obviously 1:23:55.040 --> 1:23:58.080 evaluations got you know, kind of crazy towards the end. 1:23:58.160 --> 1:24:00.080 But if even if you back out the last a 1:24:00.120 --> 1:24:04.439 couple of years, companies, you know, companies have done an 1:24:04.439 --> 1:24:07.639 awful lot to improve margins over the last decade. They 1:24:07.760 --> 1:24:10.840 you know, they've they've been very conservative and in fact, 1:24:10.920 --> 1:24:12.720 one could argue in some cases they may have even 1:24:12.800 --> 1:24:16.519 under invested in in in the future. But what we 1:24:16.680 --> 1:24:20.320 don't UM, top line growth is getting tougher to come by, 1:24:20.439 --> 1:24:25.240 and ultimately you need top line growth. And so I'm 1:24:25.280 --> 1:24:28.120 again I'm not optimistic or pessimistic. I just don't know 1:24:28.240 --> 1:24:32.160 on that score whether we'll see sort of a revitalization 1:24:32.439 --> 1:24:35.200 of top line growth that leads to, you know, really 1:24:35.240 --> 1:24:38.439 sustained earnings growth over the next five six years, which 1:24:38.479 --> 1:24:42.360 would make the case that you described come true. So 1:24:42.479 --> 1:24:46.760 let's talk a little bit about UM investors today. What 1:24:46.800 --> 1:24:50.920 are they doing right? What are they doing wrong? So, look, 1:24:50.960 --> 1:24:55.360 I think UM at the highest level, we're seeing better 1:24:55.479 --> 1:24:59.000 behavior UM in in two things. One, they're paying a 1:24:59.000 --> 1:25:00.720 lot more attention to cost and again I know that 1:25:00.720 --> 1:25:03.519 sounds self serving, but you know the results of actually 1:25:04.000 --> 1:25:08.879 boring it out um from a return standpoint, So UM, 1:25:08.920 --> 1:25:12.759 there's certainly been much more attention to that too. Again, 1:25:12.840 --> 1:25:16.479 during the crisis, we didn't see, um, you know, a 1:25:16.520 --> 1:25:18.960 big uptick in transaction vol In fact, we actually saw 1:25:19.120 --> 1:25:23.120 a decline in transaction volume and people actually stayed the course, 1:25:23.960 --> 1:25:27.519 which is amazing because most shops did not experience that. 1:25:27.800 --> 1:25:30.040 So you know, we were we were pleased to see that, 1:25:30.160 --> 1:25:33.680 and again I think as a result, people benefited from that. 1:25:34.400 --> 1:25:37.639 You know, you're the the advent of target date funds, 1:25:37.640 --> 1:25:40.519 which we talked about a little bit earlier. Um, it's 1:25:40.520 --> 1:25:42.640 amazing how much money is going into those in the 1:25:42.680 --> 1:25:45.639 four oh one case system. Really now, is that because 1:25:45.680 --> 1:25:49.040 they've become a default if somebody doesn't select a different portfolio. 1:25:49.600 --> 1:25:52.080 The default certainly explains some of it, but we've seen 1:25:52.160 --> 1:25:57.160 people make wholesale changes to really encourage their their folks 1:25:57.160 --> 1:26:00.360 to go into it. Um as much as fifty percent 1:26:00.439 --> 1:26:03.599 of a cash flow going into our four oh one 1:26:03.680 --> 1:26:05.680 case system, and we have four million people on our 1:26:05.680 --> 1:26:07.839 record keeping system, so we get to watch this closely. 1:26:08.160 --> 1:26:12.080 Is going into target a funds and so yeah, and 1:26:12.280 --> 1:26:15.120 we feel great about that because it's highly diversified, you know, 1:26:15.280 --> 1:26:19.719 very global, very balanced, and you know, you can argue 1:26:19.720 --> 1:26:22.679 on the margins, but it's a really good UM solution 1:26:22.760 --> 1:26:26.320 for most people. So I think actually investors are more 1:26:26.439 --> 1:26:30.680 well diversified, probably even more than they know in some cases. UM. 1:26:30.720 --> 1:26:32.639 And that's going to really stand them in good stead 1:26:32.720 --> 1:26:37.679 over the next decade. So what aren't they doing is well, UM, 1:26:37.720 --> 1:26:40.760 I think the savings rates I've already mentioned. You know, 1:26:40.840 --> 1:26:42.639 if you look at the average in the four oh 1:26:42.640 --> 1:26:45.280 one case system is a proxy. Um, they're not where 1:26:45.280 --> 1:26:47.439 they need to be. UM. I think the average large 1:26:47.439 --> 1:26:50.600 plan it's about the number needs to be more like 1:26:50.640 --> 1:26:54.840 twelve or fifteen. So that's one. Two. I do think 1:26:54.840 --> 1:26:58.479 people still on the margin pay too much attention to 1:26:58.560 --> 1:27:02.640 macroeconomic factor. Well, it makes for fascinating conversation and it is, 1:27:02.680 --> 1:27:04.120 and you know, it's one of the things that we 1:27:04.200 --> 1:27:07.400 found as a provider is we need to put more 1:27:07.479 --> 1:27:11.240 macro economic information out on our website and arm our 1:27:11.320 --> 1:27:13.840 reps with that and so forth. But at the same 1:27:13.880 --> 1:27:17.200 time we're telling people, despite all this really interesting stuff, 1:27:17.240 --> 1:27:19.840 don't act on it. Well, we we call those folks 1:27:19.920 --> 1:27:23.600 macro tourists, the hedge funds that suddenly all right, Now 1:27:23.680 --> 1:27:26.519 I'm an expert expert on the Ukraine, and I'm sure 1:27:26.520 --> 1:27:29.840 at X y Z and those funds have all gotten 1:27:29.880 --> 1:27:32.519 show laughed over the past couple of years. Very difficult 1:27:32.560 --> 1:27:34.920 to do, as you know. And and again I'm not 1:27:34.960 --> 1:27:37.240 gonna there are firms out there who have made a 1:27:37.880 --> 1:27:40.479 you know, they this is all they do. But for 1:27:40.520 --> 1:27:42.880 the average investor it's really tough. But I'll give you 1:27:42.880 --> 1:27:47.120 an interesting um just this is an anecdote. About a 1:27:47.160 --> 1:27:48.759 year and a half ago. I did a day on 1:27:48.800 --> 1:27:51.840 Facebook and Twitter for Vangard, you know, the Vanguard accounts, 1:27:52.520 --> 1:27:56.360 and I got more macro questions than anything else. And 1:27:56.600 --> 1:27:58.960 that was very different than what I used to experience, 1:27:59.120 --> 1:28:03.400 answering phones and so forth. You wait, you answer phones that, Yeah, 1:28:03.439 --> 1:28:06.600 we we all do a day. Yeah, where you want it. 1:28:06.640 --> 1:28:08.600 So you want to hear what investors are saying and 1:28:08.640 --> 1:28:11.240 what they're thinking, and um see what our people are 1:28:11.240 --> 1:28:13.800 going through as well. Have you ever done to read it? 1:28:13.920 --> 1:28:19.880 Asked me anything? Um well, basically on the Twitter and 1:28:20.320 --> 1:28:22.559 Facebook it was and I got to ask all kinds 1:28:22.600 --> 1:28:25.439 of stuff, you know, from you should you should tag 1:28:25.520 --> 1:28:29.200 read it because that's a unique community. It's a little 1:28:29.680 --> 1:28:33.479 it's a little different than Twitter or Facebook because there 1:28:33.479 --> 1:28:37.760 are these sub communities and they're investing. Group is absolutely 1:28:38.600 --> 1:28:41.719 robust and articulate and informed, and they'll give you questions 1:28:41.760 --> 1:28:45.080 that I'm lobbying you softball SMPAD what they're going to 1:28:45.120 --> 1:28:46.840 throw now, that'd be that would be great. Actually we 1:28:46.960 --> 1:28:49.280 like doing that. But you know what was interesting is 1:28:49.280 --> 1:28:52.280 we got so many macro questions that you know, we 1:28:52.320 --> 1:28:54.400 went back and said, gee, we're not putting enough information 1:28:54.439 --> 1:28:56.920 out there. Yeah, but people are hearing a lot of it. 1:28:57.080 --> 1:29:00.320 And look, let's be honest. The newspapers and magazine ends, 1:29:00.360 --> 1:29:03.400 the television stations, they've got a lot of commentes and 1:29:03.479 --> 1:29:07.160 a lot of time to fill. I have this argument 1:29:07.200 --> 1:29:10.160 all the time with people, Hey, how did the sequester 1:29:10.240 --> 1:29:14.919 affect your your portfolio? No impact? What's the GDP of Ukraine? 1:29:15.080 --> 1:29:17.880 It's about a year's GDP of Ukraine is about two 1:29:17.960 --> 1:29:20.559 days a day and a half of US GDP. And 1:29:20.640 --> 1:29:22.960 every time, oh what's going on with the Israelis and 1:29:23.040 --> 1:29:25.599 the Syrian every time one of these things come up, 1:29:25.680 --> 1:29:29.040 not to be Look, there's real human tragedy involved in 1:29:29.080 --> 1:29:32.120 all these stories. And I'm not I'm not downgrading or 1:29:32.160 --> 1:29:36.639 annoying that, but from a portfolio manager's perspective, the question 1:29:36.760 --> 1:29:40.400 is always what is this gonna do to global economic activity? 1:29:40.439 --> 1:29:43.400 How is this going to impact revenues? Right? So I so, 1:29:43.439 --> 1:29:45.000 first of all, I couldn't agree with you more and 1:29:45.000 --> 1:29:47.280 and I actually think that's the education that has to 1:29:47.320 --> 1:29:49.880 take place. So when I said we were getting more 1:29:49.920 --> 1:29:53.080 inquiries around it, um, what we've tried to do with 1:29:53.200 --> 1:29:56.440 it is put out the information with a and here's 1:29:56.479 --> 1:29:59.040 what it means, and here's what it doesn't mean. And 1:29:59.120 --> 1:30:02.800 generally it's don't let it change your portfolio allocation at all, 1:30:03.320 --> 1:30:06.720 which is, you know, sort of your basic message. You know. 1:30:06.920 --> 1:30:09.640 Art cash And tells this delightful story. He's been on 1:30:09.680 --> 1:30:11.920 the floor of the New York Exchange for fifty years, 1:30:12.320 --> 1:30:15.920 and he tells the story about back then, supposedly the 1:30:15.960 --> 1:30:19.759 specialists all got the inside dope, they got the real story, 1:30:19.840 --> 1:30:23.800 and and a rumor circulated that the Russians had hit 1:30:23.840 --> 1:30:26.880 the button the Soviets and that the nukes were on 1:30:26.920 --> 1:30:29.120 the way and we all had eight minutes to live. 1:30:29.479 --> 1:30:31.880 So Art runs around and tries to get a short 1:30:31.920 --> 1:30:35.920 off to sail into the nuclear armageddon, and he go 1:30:36.160 --> 1:30:38.280 couldn't get it execute. And he comes to his boss 1:30:38.280 --> 1:30:41.080 and says, I tried to short the market, and in 1:30:41.280 --> 1:30:43.240 light of the rumor, I couldn't get it done. And 1:30:43.280 --> 1:30:45.960 the boys says, art, when we find out the nukes 1:30:45.960 --> 1:30:48.320 are coming, you want to take the other side of 1:30:48.320 --> 1:30:50.320 that trade. You want to get long. Why do I 1:30:50.360 --> 1:30:53.320 want to get long? Because if the new kids, who cares? 1:30:53.360 --> 1:30:55.320 But if the rumor turns out not to be true, 1:30:55.880 --> 1:30:58.880 we're long and the market comes snapping back. And that's 1:30:59.080 --> 1:31:02.840 just goes to show how ridiculous those macro trades are. 1:31:04.760 --> 1:31:07.240 You know, how is anybody going to trade on any 1:31:07.320 --> 1:31:11.120 of this stuff? You know, it's been a somebody puts 1:31:11.120 --> 1:31:13.519 this out. I can't remember who it is. I'll dig 1:31:13.560 --> 1:31:15.559 it up and send it to you where they have 1:31:15.680 --> 1:31:19.400 this chart of the past fifty years and every year 1:31:19.439 --> 1:31:23.360 there's a balloon as to what the macro disaster of 1:31:23.439 --> 1:31:25.519 that year is going to be. And every year the 1:31:25.560 --> 1:31:27.800 market kind of shrugs it off and keeps going. It's 1:31:27.840 --> 1:31:33.360 almost like just an annoying distraction with no impact on portfolios. Yeah, 1:31:33.400 --> 1:31:35.680 we've actually there's a great research paper out on our 1:31:35.720 --> 1:31:41.360 website that looks at macro economic data and essentially GDP 1:31:41.520 --> 1:31:44.240 growth and market returns, as you know are there's almost 1:31:44.280 --> 1:31:46.960 no correlation in the short run, certainly not in real time. 1:31:47.240 --> 1:31:50.960 You're not gonna see it over the long haul. Growing 1:31:51.200 --> 1:31:53.680 markets should be growing if a GDP stops growing, like 1:31:53.720 --> 1:31:55.160 we've seen in some kind. But you know, one of 1:31:55.160 --> 1:31:57.000 the one of the great, one of the one of 1:31:57.000 --> 1:31:59.040 the great statistics that it's out there. If you if 1:31:59.040 --> 1:32:03.599 you went back to UM late eighteen hundreds, so eight nineties, 1:32:03.640 --> 1:32:06.040 so what was the number one economy? Was the UK 1:32:06.200 --> 1:32:10.639 and US close on its heels, And then subsequent hundred years, 1:32:10.640 --> 1:32:13.479 obviously the US economy grew at I think twice the 1:32:13.560 --> 1:32:16.240 rate of the UK economy. And so the trick question 1:32:16.360 --> 1:32:18.920 is what were the returns in the equity markets. I 1:32:18.920 --> 1:32:21.400 think they're almost identical. They're very similar within a tent 1:32:21.680 --> 1:32:23.880 within a tenth of a percentage point. So much for 1:32:23.920 --> 1:32:26.840 g d P. Well, and you sort of you sort 1:32:26.880 --> 1:32:29.240 of peel the onion one level and it's like, well, 1:32:29.560 --> 1:32:33.360 really smart UK companies made their money in the US 1:32:33.479 --> 1:32:36.439 of course, became global and that makes a lot of sense. 1:32:36.840 --> 1:32:39.760 So let's talk a little bit about active management, because 1:32:39.800 --> 1:32:44.800 that's an active management question. So everybody knows Vanguard for indexing, 1:32:44.880 --> 1:32:48.560 but we mentioned a third of your funds are active, 1:32:49.360 --> 1:32:53.280 and the key question is not only active, but very 1:32:53.360 --> 1:32:59.720 successful track records. So a why has Vanguard active funds 1:32:59.720 --> 1:33:01.599 been so successful? And I think I know what your 1:33:01.640 --> 1:33:04.200 ranch is gonna be. But so what makes what makes 1:33:04.240 --> 1:33:07.280 you're active better than the average active? So I think 1:33:07.320 --> 1:33:11.479 there are um two big factors. One is we run 1:33:11.479 --> 1:33:13.639 our active funds at a lower cost than everybody. That's 1:33:13.680 --> 1:33:19.759 a huge, huge advantage. You're eliminating that drag from from active. Second, um, 1:33:19.920 --> 1:33:22.439 we didn't think we could attract all the best active 1:33:22.439 --> 1:33:26.160 talent to Malvern, Pennsylvania, as bucolic and beautiful as it is, 1:33:26.520 --> 1:33:29.760 And so for all of our active equity funds, we 1:33:29.840 --> 1:33:32.880 actually travel the world and look for the best subadvisor, 1:33:33.120 --> 1:33:35.800 so much like a foundation or an endowment would do. 1:33:35.880 --> 1:33:38.320 If you're looking for a large cap growth manager, who's 1:33:38.320 --> 1:33:40.200 the best large cap growth manager you can find? So 1:33:40.240 --> 1:33:42.160 we go and we we have a team that does 1:33:42.200 --> 1:33:45.120 nothing than but that. So, so how do you set 1:33:45.160 --> 1:33:47.920 these guys up? It's it's there in London or they're 1:33:47.960 --> 1:33:51.840 in Hong Kong, or they're in Los Angeles or San Francisco. 1:33:51.880 --> 1:33:55.280 When you basically say you're gonna run your fund out 1:33:55.280 --> 1:33:58.040 of the Vanguard San Francisco office, No, so you're gonna 1:33:58.120 --> 1:34:00.720 run your fund, We're gonna we're gonna do all the 1:34:00.760 --> 1:34:03.960 back office, all the administration. You're gonna just manage money 1:34:04.720 --> 1:34:08.320 and um, you know, they'll transmit um data to the 1:34:08.320 --> 1:34:10.639 custodian and so forth, you know, or you know, they'll 1:34:10.640 --> 1:34:14.080 do their own trading and so forth, but it'll be 1:34:14.120 --> 1:34:17.880 a Vanguard fund and will be the distributor. And basically 1:34:17.880 --> 1:34:20.559 our premise is if you do a really good job 1:34:20.600 --> 1:34:23.080 over the long run, our clients are really smart, they'll 1:34:23.080 --> 1:34:25.960 probably invest more with you. And so, you know, the 1:34:26.000 --> 1:34:28.479 outside managers love it because they don't have to do 1:34:28.520 --> 1:34:31.400 any service. They don't have to do any marketing, any sales. 1:34:31.720 --> 1:34:34.800 All they do is run money or like they most 1:34:34.840 --> 1:34:38.439 of them tell us we're their best institutional account. That's 1:34:38.479 --> 1:34:42.200 really fascinating. And so what's the team like that goes 1:34:42.240 --> 1:34:45.439 out looking for these people? So it's it's an experience group. 1:34:45.720 --> 1:34:50.000 UM typically, um all you know, mostly all c f 1:34:50.000 --> 1:34:53.120 A s at this point, UM A number of them 1:34:53.120 --> 1:34:55.800 have actually worked before they came to Vanger. They might 1:34:55.800 --> 1:34:58.360 have been working for a consultant, so you know an 1:34:58.439 --> 1:35:00.760 NSCNUP for example, or some any like that who is 1:35:00.800 --> 1:35:03.280 you know, really good at manager selection. A lot of 1:35:03.280 --> 1:35:06.320 them have been homegrown though, but UM really highly trained 1:35:06.880 --> 1:35:09.360 and UM we just put a lot of time and energy. 1:35:09.400 --> 1:35:13.640 And again this may surprise you, but so we have 1:35:13.840 --> 1:35:18.040 thirty one firms. They run about seventy five mandates for 1:35:18.120 --> 1:35:23.280 us UM and there's a small group of UM our 1:35:23.400 --> 1:35:26.960 executive team, a subset of my executive team, but this 1:35:27.040 --> 1:35:30.720 includes me along with the senior members of this portfolio 1:35:30.840 --> 1:35:34.519 review department that I just described. We'll do a hundred 1:35:34.520 --> 1:35:38.960 manager meetings on campus a year at a minimum. So 1:35:39.320 --> 1:35:43.680 these firms will come and spend an hour with me 1:35:43.840 --> 1:35:47.280 and my team and then half a day with the 1:35:47.320 --> 1:35:51.240 broader portfolio review group, and we'll put them through their paces, 1:35:51.479 --> 1:35:53.479 and of course we'll do things in their office as well, 1:35:53.520 --> 1:35:56.599 but we bring them in formally every year, and then 1:35:56.600 --> 1:35:58.719 of course they're in front of our board on a 1:35:58.840 --> 1:36:02.240 rotating basis as well. So there's a ton of rigor 1:36:02.320 --> 1:36:05.680 that goes on and it's very senior management. A lot 1:36:05.680 --> 1:36:08.360 of senior management time. And I've I've even had a 1:36:08.360 --> 1:36:10.160 couple of my directors say to me, gosh, you guys 1:36:10.160 --> 1:36:11.640 spend an awful lot of time, and I said, this 1:36:11.720 --> 1:36:14.080 is what we do. I mean, this is the most 1:36:14.120 --> 1:36:16.959 important thing we do on the active side is select managers. 1:36:17.040 --> 1:36:21.360 And so we're not selecting emerging managers so to speak. 1:36:21.680 --> 1:36:24.679 These are fairly seasoned people. Yeah, although you know, we've 1:36:24.720 --> 1:36:29.160 we've we have found a few firms um in early 1:36:29.200 --> 1:36:33.200 in their in their existence, but they generally were seasoned 1:36:33.200 --> 1:36:36.680 people who spun out of bigger firms, and you know, 1:36:36.720 --> 1:36:40.560 some of our most well known managers actually started that way. 1:36:40.760 --> 1:36:44.639 Do you find active is better in less efficient markets? 1:36:44.640 --> 1:36:48.600 And what I mean by less efficient emerging markets distressed 1:36:48.720 --> 1:36:51.680 small cap where there there's not a lot of coverage 1:36:51.680 --> 1:36:55.479 and there's opportunity there or is there something else going 1:36:55.520 --> 1:36:59.880 on and you're active? So Um, the short answers, we 1:37:00.080 --> 1:37:03.040 don't see, you know, we don't see in those quote 1:37:03.080 --> 1:37:06.320 unquoteless efficient markets. Um. And I think the reason for 1:37:06.400 --> 1:37:08.479 that is the costs are so much higher there that 1:37:08.880 --> 1:37:12.200 you know, even trading costs, it's such a drag, you know, 1:37:12.240 --> 1:37:14.840 when you look at index results versus UM small cap 1:37:14.880 --> 1:37:18.839 active for example, it's it's it's not quite the same 1:37:18.880 --> 1:37:22.600 extreme as in the large cap, but it's close. UM. 1:37:22.640 --> 1:37:28.040 But we UM. The things that we see are they're 1:37:28.120 --> 1:37:32.120 they're more soft. There's there's one quantitative thing that we see, 1:37:32.200 --> 1:37:35.240 which is for the most part, they're they're much lower 1:37:35.320 --> 1:37:39.200 turnover than their counterparts. They they tend to be, you know, 1:37:39.320 --> 1:37:42.200 very focused on that. But then the UM the other 1:37:42.800 --> 1:37:47.800 things are they have great, great talent retention, they have 1:37:48.120 --> 1:37:52.679 great process for UM, they're very consistent in what they do, 1:37:53.360 --> 1:37:57.439 and they're really good at developing the next generation UM. 1:37:57.560 --> 1:38:00.080 You know, in our business, so many firms have employed it, 1:38:00.280 --> 1:38:03.639 going from first to second to third generation. And so 1:38:04.560 --> 1:38:07.479 what we've seen over time is that people side is 1:38:07.560 --> 1:38:10.479 really important and that that is a qualitative thing. But 1:38:10.840 --> 1:38:12.320 when you you know, we've got a group of people 1:38:12.320 --> 1:38:13.800 have been doing this for a long time. You know, 1:38:13.840 --> 1:38:18.000 I've been part of this um UH process for almost 1:38:18.200 --> 1:38:20.680 twenty five years now, so I've seen a lot. It 1:38:20.680 --> 1:38:22.720 doesn't I'm going to make my share mistakes, but I've 1:38:22.720 --> 1:38:25.599 seen a lot, and many of my peers have been 1:38:25.640 --> 1:38:29.439 involved for you know, fifteen twenty years. So hopefully that 1:38:29.600 --> 1:38:32.000 experience allows you to assess the people side a little 1:38:32.040 --> 1:38:36.200 bit better. So so you're looking at low turnover, good 1:38:36.360 --> 1:38:39.680 employee retention because that tells you a lot, and as 1:38:40.160 --> 1:38:44.280 a succession planning that seems to be well thought out. 1:38:44.760 --> 1:38:48.439 None of those things really speak directly too, so the 1:38:48.479 --> 1:38:51.559 investing So so on the investing side, what we're really 1:38:51.600 --> 1:38:56.400 looking for is an explainable process that's very consistent. And 1:38:56.439 --> 1:38:58.960 again I'll give you I'll oversimplify, but if if someone 1:38:59.080 --> 1:39:02.680 says I'm a bottom up stock picker, and you know, 1:39:02.840 --> 1:39:06.639 we don't think about sector allocation, we don't think about um, 1:39:07.320 --> 1:39:11.640 the benchmarket all etcetera, etcetera. When you do a portfolio 1:39:11.680 --> 1:39:16.000 attribution analysis and let's say they've outperformed the outperformed abroad 1:39:16.040 --> 1:39:18.720 market by two basis points, and you see when you 1:39:18.760 --> 1:39:23.960 do the attribution analysis, there's no nothing from stock selection, 1:39:24.000 --> 1:39:26.720 and it's all from sector selection. It's all because of 1:39:26.760 --> 1:39:29.720 what sectors they were in. Well, you may you may 1:39:29.720 --> 1:39:32.000 be happy that you have two d basis points about performance, 1:39:32.040 --> 1:39:33.559 but you have it for the wrong reason. So you're 1:39:34.280 --> 1:39:36.320 that's something that actually would raise a flag with us. 1:39:36.400 --> 1:39:39.000 Is that's not what you say you do on the 1:39:39.040 --> 1:39:42.360 other hand, if you have a manager who, um, you know, 1:39:42.360 --> 1:39:46.040 maybe their performance is only average because they've had some 1:39:46.120 --> 1:39:48.680 factor headwinds or whatever. But if they say bottom up 1:39:48.720 --> 1:39:51.080 stock selection is really what's driving it, and you look 1:39:51.120 --> 1:39:53.559 at the portfolio attribution and you see stock selections actually 1:39:53.560 --> 1:39:56.120 added value, well then you know that begins to reinforce 1:39:56.160 --> 1:39:58.720 what they're saying is what they're doing. And then you know, 1:39:58.760 --> 1:40:00.840 we really do roll up our sleeves and you know, 1:40:00.880 --> 1:40:03.479 we meet with the analyst teams and we get into 1:40:03.800 --> 1:40:06.360 you know, how does a good idea get into the portfolio? 1:40:06.400 --> 1:40:08.439 How does an idea get out of the portfolio? What? 1:40:08.520 --> 1:40:11.120 You know, what, what are you looking at next? Etcetera, etcetera. 1:40:11.160 --> 1:40:13.839 So we actually get into a lot of the weeds 1:40:13.880 --> 1:40:16.600 around the portfolio. But we what at the end of 1:40:16.600 --> 1:40:18.080 the day, what we really want to see is a 1:40:18.200 --> 1:40:22.240 consistency between what they say and what actually happens. So 1:40:22.280 --> 1:40:24.960 it makes sense, It makes a whole lot of sense. Um, 1:40:25.040 --> 1:40:28.160 So who are the buyers of the active side. If 1:40:28.200 --> 1:40:33.160 everybody knows you as the index are in chief, who 1:40:33.400 --> 1:40:38.680 are the ideal investor buying a vanguard active funds? So 1:40:38.720 --> 1:40:41.080 we see a lot of um, We see a lot 1:40:41.160 --> 1:40:44.360 of investors on our retail direct side, UM, you know, 1:40:44.400 --> 1:40:47.400 the do it yourself investors who do a combination of 1:40:47.479 --> 1:40:51.600 they'll build a core portfolio around an index strategy, and 1:40:51.600 --> 1:40:53.680 then they may add one or two or three of 1:40:53.680 --> 1:40:58.240 our active funds, almost like a course satellite kind of approach. UM. 1:40:58.280 --> 1:41:01.559 That's become pretty prevalent, and that's most prevalent in the 1:41:01.640 --> 1:41:06.320 retail side. Before one case side, UM used to follow 1:41:06.439 --> 1:41:09.519 that trend as well, but certainly the last five years, 1:41:09.560 --> 1:41:12.280 the advent of target date funds has changed some of that, 1:41:12.320 --> 1:41:15.160 so we see a little less interest there. You know, 1:41:15.280 --> 1:41:18.200 on the advisor side, you know, our financial advisors with 1:41:18.240 --> 1:41:22.880 whom we work UM, many of them employ that kind 1:41:22.880 --> 1:41:27.080 of strategy where they mix indexing and active, but historically 1:41:27.120 --> 1:41:29.360 I think they've looked to us more for our indexing 1:41:29.400 --> 1:41:32.519 prowess than our active prowess. Well, it makes sense because 1:41:32.600 --> 1:41:35.080 if you're looking for low costs and that's what you wanna, 1:41:35.760 --> 1:41:37.760 that's what you want to focus on, that that's where 1:41:37.760 --> 1:41:40.200 you're gonna go. So let's talk a little bit about 1:41:40.800 --> 1:41:42.559 I know I only have you for so many times, 1:41:42.560 --> 1:41:44.760 so many minutes left, and I want to get to 1:41:44.760 --> 1:41:49.360 a few of my favorite questions, So since you've joined Vanguard, 1:41:49.640 --> 1:41:54.400 what has changed at Vanguard? And since you've become CEO 1:41:54.560 --> 1:41:58.680 what changes have you implemented? So you know, UM, I 1:41:58.800 --> 1:42:02.120 joined in eighty six and UM, you know, obviously the 1:42:02.120 --> 1:42:05.640 biggest changes have been UM. You know that just the 1:42:05.680 --> 1:42:08.760 growth and scope of the scale that's has to be 1:42:08.800 --> 1:42:11.200 immense To have had a front row I mean, that's 1:42:11.200 --> 1:42:14.040 hard to imagine having a front row seat. So when 1:42:14.120 --> 1:42:17.559 you joined, how big was Vigor was under a thousand 1:42:17.680 --> 1:42:22.160 crew members people and um less just about twenty billion 1:42:22.200 --> 1:42:25.000 under management. So you've been there from twenty billion to 1:42:25.120 --> 1:42:31.599 three point one billion trillion. That's that's unfathomable of a growth. 1:42:32.520 --> 1:42:34.840 So the breath and scale of what we do is 1:42:35.120 --> 1:42:39.040 certainly huge. UM. The change in technology has been breathtaking, 1:42:39.080 --> 1:42:41.840 I mean breath taking. You know, it's the biggest technological 1:42:41.840 --> 1:42:45.040 innovation when I joined was the eight hundred toll free number. 1:42:45.680 --> 1:42:50.439 And you know, now all transactions are conducted on the web. UM, 1:42:50.520 --> 1:42:52.840 and then and and and you see people doing all 1:42:52.840 --> 1:42:56.840 this stuff with smartphones and tablets and it's just incredible 1:42:56.880 --> 1:42:59.760 to see. So that's that's been a huge change. You know, 1:42:59.760 --> 1:43:04.479 the change has been actually the adoption of indexing. So 1:43:04.720 --> 1:43:06.719 you say, wait a minute, you invented the first index 1:43:06.760 --> 1:43:09.920 one in seventy six, but we only had one index 1:43:09.960 --> 1:43:11.880 fund when I joined. We were in the process of 1:43:11.960 --> 1:43:14.439 rolling out our second one, and no one had really 1:43:14.439 --> 1:43:16.360 come to the party at that point. Um. You know, 1:43:16.400 --> 1:43:19.920 we were still primarily an active shop. And to see 1:43:20.040 --> 1:43:23.720 the adoption of indexing is a major force in the 1:43:23.800 --> 1:43:28.000 mutual fund space. Um. You know, we always believe it 1:43:28.000 --> 1:43:30.320 would take hold, but I'm not sure even we saw 1:43:30.360 --> 1:43:33.240 it taking hold to the level that it's that it's gone, 1:43:33.280 --> 1:43:37.200 so that that's had a pretty profound change. And then um, 1:43:37.920 --> 1:43:41.479 probably the last thing, um, and then we'll get the 1:43:41.520 --> 1:43:44.559 second part of the question is, um, the globalization. And 1:43:44.600 --> 1:43:49.000 you know we've globalized our investment thinking. Um, so we 1:43:49.080 --> 1:43:53.000 you know, we we were very heartily recommending people, you know, 1:43:53.400 --> 1:43:57.240 check their home bias at the door and really diversify globally. 1:43:57.880 --> 1:43:59.519 And if we if we look at Europe and we 1:43:59.520 --> 1:44:03.880 look at them markets somewhat less expensive than US markets, yeah, 1:44:03.520 --> 1:44:07.320 I mean yeah, much even after the most recent run ups, 1:44:07.320 --> 1:44:10.559 still cheaper than it's Again, it's a great case for 1:44:11.120 --> 1:44:14.080 why you want to be globally diverse UM in your portfolio, 1:44:14.920 --> 1:44:18.320 and UM our client base is increasingly becoming global. UM. 1:44:18.360 --> 1:44:21.599 You know, we've got pretty significant footprint in Australia, Hong Kong, 1:44:22.040 --> 1:44:25.800 the UK, Canada. UM. You know, we serve Europe from 1:44:26.160 --> 1:44:30.479 the UK. So we're seeing, you know, our ability to 1:44:30.520 --> 1:44:34.280 take our story to many disparate markets. UM, and that's 1:44:34.280 --> 1:44:36.120 been pretty exciting to watch, and that's really happened in 1:44:36.160 --> 1:44:40.560 the last five years. So you mentioned UM, almost of 1:44:40.640 --> 1:44:44.479 your transactions are digital. What are you guys doing with 1:44:44.520 --> 1:44:48.400 all that data? I would imagine that the ability to 1:44:48.640 --> 1:44:52.720 take the reams of quantitative metrics that are developed in 1:44:52.840 --> 1:44:56.360 house just from your own client transactions, and look at 1:44:56.360 --> 1:44:59.160 it geographically in the US, look at the globally, look 1:44:59.200 --> 1:45:04.920 at how people are using that UM interacting with Vanguard. 1:45:05.200 --> 1:45:08.479 Have you guys come up with some interesting ways to 1:45:08.520 --> 1:45:12.080 slicensese that well. So I would tell you we're probably 1:45:13.360 --> 1:45:15.679 not as far along in that as you would think, 1:45:15.720 --> 1:45:19.200 and hope in some ways. UM. You know, one, you've 1:45:19.200 --> 1:45:20.680 got all the privacy issues, so you want to make 1:45:20.680 --> 1:45:24.559 sure you have your structures to protect privacy. But I 1:45:24.600 --> 1:45:26.760 think the big data concept that a lot of people 1:45:26.760 --> 1:45:29.920 are talking about is probably the next going to be 1:45:29.960 --> 1:45:33.000 a really important thing going forward. You know, we we 1:45:33.000 --> 1:45:36.479 we certainly look at all the transactional activity and and 1:45:36.760 --> 1:45:39.439 um we it gives us a very good sense of 1:45:39.439 --> 1:45:41.759 what investors are thinking and doing. And we can watch 1:45:41.760 --> 1:45:43.439 what people do on the web, so we know where 1:45:43.479 --> 1:45:46.280 they're spending time and where they're not and that actually 1:45:46.320 --> 1:45:48.799 gives us some insights as to how investors are thinking. 1:45:49.400 --> 1:45:53.919 But um, we probably are in you know, the second 1:45:53.920 --> 1:45:57.240 inning of that game, if you really Yeah, so I 1:45:57.280 --> 1:45:59.800 think there's just an immense amount more that can be done. 1:46:00.160 --> 1:46:02.840 So aside from big data, what do you want to 1:46:02.880 --> 1:46:06.160 accomplish as CEO of Vanguard for the next five years? 1:46:06.200 --> 1:46:08.760 And I understand if there are a company secrets you 1:46:08.760 --> 1:46:10.800 you don't want to share, but you have to have 1:46:10.840 --> 1:46:14.320 a fairly public set of goals. Yeah, so let me 1:46:14.400 --> 1:46:17.559 let me just step back to you know, coming out 1:46:17.600 --> 1:46:21.080 of the crisis, just the context. So you know, we 1:46:21.080 --> 1:46:22.519 we did a lot of work coming out of the 1:46:22.560 --> 1:46:25.479 crisis about things that we thought were going to really matter. 1:46:25.680 --> 1:46:27.840 So you know, one of them was, you know, we 1:46:27.880 --> 1:46:30.479 thought et f s were gonna be a bigger part 1:46:30.520 --> 1:46:32.519 of our future, so we put a lot of emphasis there. 1:46:32.560 --> 1:46:34.200 We thought target date funds in the four oh one 1:46:34.240 --> 1:46:36.040 K market would be a bigger part of our future. 1:46:36.439 --> 1:46:38.400 We put a lot of emphasis there. We thought global 1:46:38.439 --> 1:46:40.599 would be a really much bigger part of what we're 1:46:40.600 --> 1:46:42.840 going to do um and so we put a lot 1:46:42.880 --> 1:46:45.280 of emphasis there. There were a lot of internal things 1:46:45.280 --> 1:46:47.280 that we worked on in terms of developing the next 1:46:47.280 --> 1:46:50.479 generational leaders and so forth. And what you've seen in 1:46:50.680 --> 1:46:52.640 you know, the last half dozen years is you know, 1:46:52.680 --> 1:46:54.960 obviously the E t F side has you know, it's 1:46:54.960 --> 1:46:58.320 played out pretty much the way we saw it. We 1:46:58.320 --> 1:47:00.960 weren't in the we we didn't serve people like you 1:47:01.160 --> 1:47:04.639 financial advisors a decade ago. It's a trillion dollar business 1:47:04.720 --> 1:47:12.040 today for trillion dollars one trillion dollars um. From a startup. 1:47:12.439 --> 1:47:15.439 You know, we were late in the target date fund. 1:47:15.439 --> 1:47:17.519 We're now the largest provider. We we actually are the 1:47:17.600 --> 1:47:19.920 largest four oh one K manager today, you know, three 1:47:19.960 --> 1:47:22.920 quarters of a trillion dollars in in four oh one 1:47:23.000 --> 1:47:26.759 K assets. So and then our global business has gone 1:47:26.840 --> 1:47:29.200 from you know, I don't know, seventy or eighty billion 1:47:29.320 --> 1:47:33.639 to two fifty billion in that time frames. So all 1:47:33.640 --> 1:47:39.439 those sort of strategic pushes UM have paid off to 1:47:39.600 --> 1:47:42.400 date UM, and then we did a lot of internal things. 1:47:42.400 --> 1:47:46.280 As I said, so going forward, UM, I think the 1:47:46.320 --> 1:47:48.880 E t F phenomenon is not done. So I think 1:47:48.920 --> 1:47:52.519 ETFs UM are not only gonna be front and center 1:47:52.560 --> 1:47:53.880 in the US. I think they're going to be more 1:47:53.920 --> 1:47:58.280 prevalent around the world. We're seeing are they not especially 1:47:58.320 --> 1:48:00.920 prevalent overseas like there and you look at as you 1:48:00.960 --> 1:48:05.200 look at Europe, are people not in pockets of Europe? 1:48:05.240 --> 1:48:07.920 They are, but they haven't really taken hold of the 1:48:07.920 --> 1:48:10.600 way they have here. So we think that's coming. And 1:48:10.640 --> 1:48:14.000 we think the indexing story broadly is coming around the 1:48:14.000 --> 1:48:16.759 world because it's still a it's less than five percent 1:48:16.840 --> 1:48:19.840 of all assets under management outside the US, so I 1:48:19.840 --> 1:48:24.320 think that's a huge opportunity UM, so the whole global 1:48:24.520 --> 1:48:28.679 so E t F s global. UM. I think this 1:48:28.960 --> 1:48:33.160 UM intersection of robo and personal advice that we're calling 1:48:33.160 --> 1:48:35.280 our personal advisor service is going to be a really 1:48:35.320 --> 1:48:39.240 big thing for US UM the next five years. And 1:48:39.280 --> 1:48:43.760 then I think, UM, maybe it may not sound as big. 1:48:43.800 --> 1:48:46.479 There's a lot to be done on the technology front 1:48:46.479 --> 1:48:49.760 to make US even easier to deal with, and so 1:48:49.880 --> 1:48:52.760 some of that will be more evolutionary than revolutionary. But 1:48:53.320 --> 1:48:55.960 so much of what we did over the last decade 1:48:56.120 --> 1:48:59.080 was focused on making the PC experience better on our websites, 1:48:59.120 --> 1:49:02.120 really robust. As you know, we gotta we have to 1:49:02.200 --> 1:49:06.600 have smartphone and tablet technology that's equally robust. We're I 1:49:06.600 --> 1:49:10.040 think we're sort of leading in that, but I don't 1:49:10.040 --> 1:49:13.120 think it's anywhere near where it needs to get, so, um, 1:49:13.280 --> 1:49:16.439 you should expect a lot there. And then the last 1:49:16.439 --> 1:49:18.479 thing I would say is, um, we're not done on 1:49:18.479 --> 1:49:21.360 the cost side. So you think you can extract more 1:49:21.439 --> 1:49:25.919 costs make things cheaper, I do so more vanguard effect. 1:49:26.040 --> 1:49:28.080 You're going to raise the bar and make everybody else 1:49:28.320 --> 1:49:31.160 we come to you. We we we we we think 1:49:31.200 --> 1:49:34.880 we need to keep raising the bar on that because again, um, 1:49:34.920 --> 1:49:40.519 it's certainly a institutional in your d N, a part 1:49:40.560 --> 1:49:43.000 of part of the corporate culture. But you guys have 1:49:43.040 --> 1:49:47.040 an enormous advantage. You're so far ahead of just about 1:49:47.080 --> 1:49:51.880 everybody in that space. Why not press that further? Well? 1:49:51.920 --> 1:49:55.320 And you know the other as I mentioned any Grove 1:49:55.360 --> 1:49:58.240 earlier in this, you know, um, the idea about the 1:49:58.240 --> 1:50:01.839 parent only the paranoid surrive. You can't get complacent. Um. 1:50:01.880 --> 1:50:03.960 You know, there's a lot of tough competitors out there. 1:50:04.000 --> 1:50:05.400 They're not going to just roll over and say, oh, 1:50:05.479 --> 1:50:08.519 Vanguard's won the game, it's over. I wish they would. Um, 1:50:08.320 --> 1:50:11.200 I'd be happy if if market. That's not the way 1:50:11.240 --> 1:50:12.880 markets work. And that's what I love about you know. 1:50:13.000 --> 1:50:15.559 I mean, so you have to suit up every day. 1:50:15.680 --> 1:50:18.600 You you don't sound like a guy. Hey we have 1:50:18.640 --> 1:50:22.400 three trillion dollars. I'm just gonna kick back and uh, 1:50:22.439 --> 1:50:24.760 you know we our team goes to bed every night 1:50:24.840 --> 1:50:27.519 nervous about what tomorrow is gonna bring. And I think 1:50:27.520 --> 1:50:30.439 it's a really healthy, um, healthy thing for us. So 1:50:30.800 --> 1:50:33.479 you know you can't um. Jack Brennan, who I know 1:50:33.560 --> 1:50:36.679 you you you spent some time on this very doing 1:50:36.720 --> 1:50:40.160 the same thing. Jack had his favorite saying, I think 1:50:40.479 --> 1:50:46.240 um was complacencies the seven deadly sins all rolled into one, 1:50:46.360 --> 1:50:48.760 which I think is a justice brand. Ice I think 1:50:48.880 --> 1:50:51.439 was the originator of it. And Jack used to preach 1:50:51.479 --> 1:50:53.639 that to us, and you know, I think it's part 1:50:53.640 --> 1:50:55.800 of our d n A at this point. So in 1:50:55.840 --> 1:50:59.120 the last few minutes we have before because I know, um, 1:51:00.040 --> 1:51:02.360 your associate is gonna be jumping up and down a second. 1:51:02.439 --> 1:51:05.080 Let me let me give you my final three or 1:51:05.120 --> 1:51:09.760 four questions that I ask everybody. And I know this 1:51:09.800 --> 1:51:13.720 is gonna be, um, really interesting. First, what sort of 1:51:13.760 --> 1:51:17.080 advice would you give to a millennial or someone just 1:51:17.160 --> 1:51:20.759 starting out their career, whether it's in the investment business 1:51:20.960 --> 1:51:25.120 or just more broadly, so more broadly, um, you know, 1:51:25.160 --> 1:51:30.360 it's to me, it's all about save early. You know. Actually, 1:51:30.400 --> 1:51:33.400 let me back it up. Live below your means, you know, 1:51:33.600 --> 1:51:35.920 whatever you think you can afford, just notch it down 1:51:35.960 --> 1:51:39.080 a little bit, save more than you you think you're 1:51:39.080 --> 1:51:43.280 gonna need to be very aggressive early and then get 1:51:43.439 --> 1:51:47.320 exposure um to you know, a highly diversified portfolio. If 1:51:47.320 --> 1:51:49.280 you're young, if you're a young millennial, you should be 1:51:49.320 --> 1:51:52.960 mostly equities, um volatilities your friend, it's not your enemy 1:51:53.000 --> 1:51:56.320 at this point. Be very global and and and then 1:51:56.400 --> 1:51:57.840 you know, obviously we're gonna say, pay a lot of 1:51:57.840 --> 1:52:00.639 attention to cost, but I would I would really start 1:52:00.640 --> 1:52:03.479 early and try to save as much as you can early. 1:52:03.640 --> 1:52:05.640 It makes a huge difference, you know. We just have 1:52:05.800 --> 1:52:09.640 this conversation the other day. I think back about my 1:52:10.000 --> 1:52:13.200 cars that I had when I was I'm a car guy. 1:52:13.320 --> 1:52:17.599 Early in my career and in hindsight, who really cares 1:52:17.640 --> 1:52:20.919 what you're driving when you're just starting out. You're supposed 1:52:20.960 --> 1:52:23.200 to be broke and and and it's just you know, 1:52:23.640 --> 1:52:26.599 if you do it on the front end, the compounding 1:52:26.640 --> 1:52:30.080 effect is just amazing. You know, for somebody coming into 1:52:30.160 --> 1:52:35.759 our business. UM, I would say, really important to develop 1:52:35.760 --> 1:52:39.280 a global perspective. UM, I still see it. It's it's 1:52:39.479 --> 1:52:42.640 getting better and home country biases everywhere. It's it's not 1:52:42.760 --> 1:52:45.200 just here. And in the US it's not as bad 1:52:45.240 --> 1:52:48.120 because the US is about half of the global markets, 1:52:48.160 --> 1:52:50.720 so it doesn't grow as much. But if you're in 1:52:50.720 --> 1:52:53.120 the UK, where you're six or seven percent of the 1:52:53.160 --> 1:52:58.280 global markets and of your equity exposure is local, that's 1:52:58.280 --> 1:52:59.800 a problem. So if you're going to be if you're 1:52:59.800 --> 1:53:02.040 going to be in our business, you've got to develop 1:53:02.040 --> 1:53:05.720 a global mindset to UM, you've gotta work really hard. 1:53:06.000 --> 1:53:07.719 UM I think it's you know, I think it's gonna 1:53:07.720 --> 1:53:09.840 get even harder. And you know, whether you're on the 1:53:09.880 --> 1:53:13.160 business side or the investment side, hard work really really 1:53:13.200 --> 1:53:17.840 separates people. UM. And then three, UM, you know, line 1:53:17.880 --> 1:53:24.280 yourself up with organizations that really put integrity above all else. 1:53:25.040 --> 1:53:28.000 Our business. Um, you know a lot of really good people, 1:53:28.000 --> 1:53:29.559 a lot of really good firms, but you know there 1:53:29.560 --> 1:53:32.120 are some stuff on the margin that you just is 1:53:32.160 --> 1:53:35.120 not good. And I think if you're young, pay a 1:53:35.160 --> 1:53:39.160 lot of attention to that early on. UM, and you know, 1:53:39.280 --> 1:53:42.040 try to find the firm who's got a value system 1:53:42.080 --> 1:53:44.720 that really matches up with your own. So my my 1:53:44.920 --> 1:53:47.479 second to last question, I kind of asked you already, 1:53:47.520 --> 1:53:49.760 so I'm gonna change it up. I was gonna say 1:53:49.800 --> 1:53:52.080 what has changed for better or worse since you've joined 1:53:52.120 --> 1:53:55.040 the industry. But we've really talked about that a lot, 1:53:55.439 --> 1:53:58.040 So let me mix it up a little bit and 1:53:58.120 --> 1:54:01.040 say what changes would you lie to see take place 1:54:01.120 --> 1:54:05.640 going forward in the industry. So look, I think the industry, 1:54:05.960 --> 1:54:10.840 uh again, it's not gonna shock you the cost side, um. 1:54:10.920 --> 1:54:13.040 And and it's it's not just about price, by the way, 1:54:13.080 --> 1:54:16.400 it's about value. The industry really needs to think about 1:54:16.439 --> 1:54:20.240 what value are we providing? And um, there's there's an 1:54:20.240 --> 1:54:24.520 immediate reaction when you say low costs to you know, um, 1:54:24.800 --> 1:54:28.439 people people flinch. I think the value you know, you 1:54:28.479 --> 1:54:31.080 have to understand your value proposition, and I don't think 1:54:31.080 --> 1:54:34.200 everybody does that. As well as they should. Um. You know, 1:54:34.040 --> 1:54:35.840 you don't have to be the low price guy all 1:54:35.840 --> 1:54:39.600 the time if you're really adding something, um that's valuable 1:54:39.600 --> 1:54:41.720 to a client at the end of the day. So 1:54:41.720 --> 1:54:44.600 I think people need to really understand the value of 1:54:44.640 --> 1:54:47.760 the side of their equations better. I'd also like to 1:54:47.800 --> 1:54:52.560 see um uh, the industry a little bit more focused 1:54:53.000 --> 1:54:55.879 on the long term. Um. You know, a lot of firms, 1:54:56.720 --> 1:54:59.080 despite the fact that they talk long term from an 1:54:59.120 --> 1:55:02.600 investment perspective, they run themselves very short term with a 1:55:02.680 --> 1:55:05.400 very short term orientation. You know. One of the things 1:55:05.440 --> 1:55:08.040 we really pride ourselves on is trying to run ourselves 1:55:08.040 --> 1:55:10.200 the same way we tell people to invest, which was 1:55:10.720 --> 1:55:13.320 you know, don't think in terms of quarters or even years, 1:55:13.320 --> 1:55:17.280 think in terms of you know, five, ten, twenty year blocks. 1:55:17.320 --> 1:55:21.240 And I think the industry is still too short term oriented, 1:55:21.280 --> 1:55:23.520 and you see that in some of the discussions around 1:55:23.520 --> 1:55:26.240 regulation and things like that. You know, I think the 1:55:26.320 --> 1:55:29.560 third thing, um, you know, for the industry um to 1:55:29.720 --> 1:55:33.200 really to really focus on is the people's side. Um. 1:55:33.280 --> 1:55:37.320 And this is going to sound a little bit um 1:55:36.800 --> 1:55:41.040 uh paternalistic perhaps, but you know, when I talked to 1:55:41.080 --> 1:55:44.360 a lot of young professionals in the business, and it's 1:55:44.400 --> 1:55:48.160 a wide distribution of experiences in terms of whether they 1:55:48.200 --> 1:55:51.840 really feel satisfied or not. And I think it's really 1:55:51.880 --> 1:55:55.400 important that, um, for you know, you know, you know, 1:55:55.480 --> 1:55:59.080 in your own work, having a purpose that matters really 1:55:59.120 --> 1:56:01.880 makes coming to work every day better. I think more 1:56:01.960 --> 1:56:04.920 firms need to think about what's our real purpose? Why 1:56:05.040 --> 1:56:07.920 why do we exist? And why does somebody want to 1:56:07.920 --> 1:56:09.880 work here? Not just for the paycheck. As the paycheck 1:56:09.960 --> 1:56:12.360 is important, but it's not it's not actually what you're 1:56:12.360 --> 1:56:15.840 going to remember, you know after thirty five years. Um, 1:56:15.880 --> 1:56:18.000 you know, what I'll remember in Vanguard are the people 1:56:18.440 --> 1:56:21.680 and the clients and the culture and you know, the 1:56:21.680 --> 1:56:25.080 compensation and all that will be nice, but that that's 1:56:25.080 --> 1:56:27.560 what I'm going to remember. One of the things we've 1:56:27.600 --> 1:56:31.240 talked about, and when we sit around and have a 1:56:31.320 --> 1:56:34.760 couple of glasses of wine or beer, is how things 1:56:34.800 --> 1:56:37.520 have changed. And and so I'm the oldest guy in 1:56:37.560 --> 1:56:40.440 my office. I'm a couple of years younger than you, 1:56:40.600 --> 1:56:45.120 but mostly young younger folks. And the conversation is, when 1:56:45.160 --> 1:56:49.440 I was coming up, it was very much a mentorship 1:56:49.960 --> 1:56:55.720 philosophy that was very widespread and maybe this is someone anecdotal, 1:56:55.760 --> 1:56:59.440 but I don't see as much of that around today 1:56:59.480 --> 1:57:02.960 as I used to. And it was a very very 1:57:03.040 --> 1:57:07.160 big thing to have someone taking onto the kid Camille. 1:57:07.200 --> 1:57:09.240 Let me let me you're doing it wrong. Let me 1:57:09.360 --> 1:57:12.080 let me show you the ropes. And I know there's 1:57:12.080 --> 1:57:15.520 still some of them around. But I'm not sure if 1:57:15.600 --> 1:57:19.440 the people who are twenty five or so, we're thirty 1:57:19.920 --> 1:57:22.760 arguing able to answer the same question in twenty five 1:57:22.840 --> 1:57:26.640 years who your influences, who your mentors, who really affected 1:57:27.040 --> 1:57:29.960 the way you think? And I think that's a great 1:57:30.000 --> 1:57:32.360 loss these days. Yeah, you know, and and and some 1:57:32.440 --> 1:57:35.360 of that you know, you you earlier you talked a 1:57:35.400 --> 1:57:37.960 little bit about the change in the industry composition. I mean, 1:57:37.960 --> 1:57:40.640 you know, there's a lot of more money with you know, 1:57:41.240 --> 1:57:44.520 a handful of bigger firms. And what you hope is 1:57:44.560 --> 1:57:47.160 the big firms don't lose that. I think some of 1:57:47.200 --> 1:57:50.160 them do. And you know, investment management for some firms, 1:57:50.160 --> 1:57:52.440 it's just a little piece of a bigger set of 1:57:52.480 --> 1:57:56.640 financial services they're providing. And we've definitely seen that. Um 1:57:56.760 --> 1:58:01.120 when we hire people from some of those firms, you 1:58:01.160 --> 1:58:03.080 know they're they're after they've been with us for a 1:58:03.160 --> 1:58:06.080 year to tack aground. This is really different and I 1:58:06.080 --> 1:58:09.280 think maybe it's getting to what you're describing, and I 1:58:09.320 --> 1:58:14.120 think again it's the human element side of this business 1:58:14.200 --> 1:58:17.080 is really important if you're going to really add value. 1:58:17.160 --> 1:58:18.680 You know, one of the ways you add values through 1:58:18.680 --> 1:58:22.040 your people, and you need to put a lot of 1:58:22.040 --> 1:58:24.360 time and energy into that. And you can't treat people 1:58:24.440 --> 1:58:27.120 just as another asset on the books. Um, who you 1:58:27.120 --> 1:58:29.160 know that happens to walk out at night. You gotta 1:58:29.200 --> 1:58:32.360 really treat it specially. And finally we get to our 1:58:32.440 --> 1:58:35.320 last question. I asked this of all of my guests, 1:58:36.160 --> 1:58:39.000 what do you know today about investing that you wish 1:58:39.000 --> 1:58:42.040 you knew thirty years ago when you started your career? 1:58:43.800 --> 1:58:47.560 Global is good. That's the big change from thirty years ago. 1:58:47.760 --> 1:58:50.680 So are you saying thirty years you were domestic focused 1:58:50.680 --> 1:58:53.480 and you weren't thinking globally. Yeah. I would not have 1:58:53.960 --> 1:58:56.160 thirty years ago. It just would not have occurred to 1:58:56.200 --> 1:58:58.880 me to be thinking nearly as globally. And that's the 1:58:58.880 --> 1:59:02.000 big change for me. It's been. Um, you know, uh, 1:59:02.800 --> 1:59:04.720 I'd like to think thirty years ago, you know, I 1:59:04.720 --> 1:59:07.040 believed in low costs because I joined Vanguard. I believed 1:59:07.040 --> 1:59:11.120 in indexing because we are a pioneer, um, you know, 1:59:11.480 --> 1:59:14.000 getting acid allocation right with something we preach right from 1:59:14.000 --> 1:59:16.480 the get go. But I was not nearly as global 1:59:16.520 --> 1:59:18.600 in my thinking as I needed to be. And and 1:59:18.760 --> 1:59:21.240 that's really a fascinating change. Hey, Listen, when we look 1:59:21.280 --> 1:59:24.640 around the world, the US is more than a developed economy, 1:59:24.640 --> 1:59:27.720 it's a mature economy. The same thing with Japan and Europe. 1:59:27.760 --> 1:59:31.720 When you look globally, the developing markets and the emerging 1:59:31.760 --> 1:59:34.560 markets are where all the global growth is likely to 1:59:34.600 --> 1:59:38.360 come from. So, uh, you're you're I'm drinking from the 1:59:38.400 --> 1:59:41.320 same cup that you are. There's little doubt that that's 1:59:41.320 --> 1:59:43.720 what the future has been. Bill I. I can't thank 1:59:43.760 --> 1:59:46.360 you enough for being so generous with your time. This 1:59:46.440 --> 1:59:51.080 has really been absolutely fascinating. UM. I just want to review. 1:59:51.720 --> 1:59:54.560 People want to find your your research and your work. 1:59:54.760 --> 1:59:58.960 It's at Vanguard Vanguard dot com. UM. I meant to 1:59:59.000 --> 2:00:01.120 ask you about the no whole theme? Is it true? 2:00:01.160 --> 2:00:04.640 Everything is everything? So the galley we have a galley, 2:00:05.040 --> 2:00:06.880 or we don't have a gym. We have ship shape. 2:00:07.760 --> 2:00:10.920 We don't have employees, we have crew members. You hinted 2:00:10.920 --> 2:00:13.880 at that in the last answer. That's what checking it off. 2:00:13.920 --> 2:00:16.480 It's it's it's very nautical, but it builds a strong 2:00:16.520 --> 2:00:19.800 culture to say the very least. Well, this has been 2:00:19.880 --> 2:00:23.560 absolutely delightful. Thank you so much for spending so much 2:00:23.600 --> 2:00:27.000 time with us. You've been listening to my interview with 2:00:27.080 --> 2:00:31.720 Bill McNabb. He's the chairman and CEO of Vanguard Group. 2:00:32.080 --> 2:00:34.720 If you'd like more information, you know what, you can 2:00:34.800 --> 2:00:36.960 check it out. Be sure and listen to all our 2:00:37.000 --> 2:00:40.480 other podcasts and by this point, if you're still with us, 2:00:40.520 --> 2:00:43.000 just look an inch or two above or below on 2:00:43.080 --> 2:00:46.839 iTunes and you can see all the rest. I'm Barry Ridhults. 2:00:46.880 --> 2:00:50.160 You've been listening to Masters in Business on Bloomberg Radio.