WEBVTT - Vanguard’s Reyes on Enduring Investment Merit 0:00:14.440 --> 0:00:17.560 Welcome to Inside Active, a podcast about active managers that 0:00:17.600 --> 0:00:20.639 goes beyond sound bites and headlines and looks deeper into 0:00:20.680 --> 0:00:25.920 the processes, challenges, and philosophies and security selection. I'm David Cohne, 0:00:26.000 --> 0:00:28.920 I lead Mutual fund and active Research at Bloomberg Intelligence. 0:00:29.280 --> 0:00:33.519 Today my cost is Eric Baltoonis, Senior ETF analyst at 0:00:33.600 --> 0:00:36.640 Bloomberg Intelligence. Eric, thanks so much for joining me today. 0:00:36.880 --> 0:00:38.800 Great to be here, David, Thank you so. 0:00:39.040 --> 0:00:40.920 Eric, as most of you know, is author of the 0:00:40.960 --> 0:00:43.599 Bogel Effect, so it's safe to say you not know 0:00:43.640 --> 0:00:47.760 a lot about Vanguard. Most Bogel's thoughts on active funds. 0:00:49.400 --> 0:00:52.159 He was an anti active. A lot of people think 0:00:52.200 --> 0:00:56.360 that he definitely was pro index, but if when you 0:00:56.440 --> 0:00:59.800 read his books, he's got over ten books, he highlights 0:00:59.800 --> 0:01:03.920 act to funds in all of them, especially the Wellington Fund. 0:01:04.160 --> 0:01:08.240 He looked at that as his firstborn child, and he 0:01:08.400 --> 0:01:11.440 saved that fund from near extinction. I won't go into 0:01:11.440 --> 0:01:14.520 the details, but he loved that fund, and he loves 0:01:14.520 --> 0:01:17.000 some of the other active funds they started. I will 0:01:17.000 --> 0:01:20.640 say when you read about how his pride in those 0:01:20.680 --> 0:01:23.160 funds and why he thinks they were able to beat 0:01:23.200 --> 0:01:26.720 their benchmarks and have better returns. He does kind of 0:01:27.400 --> 0:01:30.040 move it back to Vanguard's mutual ownership structure and they 0:01:30.080 --> 0:01:33.120 would bring the fees down, and so I call it 0:01:33.120 --> 0:01:38.839 Bobo metrics, you know, like sabermetrics. He didn't necessarily think 0:01:38.920 --> 0:01:42.720 that any human had such superior skills to predict the future. 0:01:43.240 --> 0:01:45.399 But he thought, if you can get the fees really low, 0:01:46.080 --> 0:01:49.920 you can decrease the turnover and diversify some of the active, 0:01:50.640 --> 0:01:54.240 you stand the best possible chance to outperform. And so 0:01:54.840 --> 0:01:58.920 he was more anti high cost and high turnover, not 0:01:59.000 --> 0:02:01.880 necessarily anti acting in his books and his writings show that, 0:02:02.480 --> 0:02:05.960 but that kind of got drowned out by how much 0:02:05.960 --> 0:02:07.360 he talked about passive for sure. 0:02:08.680 --> 0:02:11.160 Well, we're definitely going to get into more about active 0:02:11.200 --> 0:02:15.520 at Vanguard. So i'd like to welcome Daniel Reyes, Global 0:02:15.560 --> 0:02:19.040 head of Product at Vanguard. Dan, thanks for joining the podcast. 0:02:19.639 --> 0:02:20.880 David, thank you for having me here. 0:02:20.960 --> 0:02:23.360 So I'd like to ask our guests, you know, how 0:02:23.360 --> 0:02:25.120 they got their start in business. So I'd love to 0:02:25.120 --> 0:02:27.880 hear how you chose a career in investing in what 0:02:27.960 --> 0:02:28.959 led you to Vanguard. 0:02:29.840 --> 0:02:33.840 Yeah, so, David, I'm at Vanguard. I I've had a 0:02:33.840 --> 0:02:37.120 pretty non linear career here. I actually started in our 0:02:37.200 --> 0:02:41.600 human resources team as a compensation analyst at Vanguard, but 0:02:41.600 --> 0:02:45.079 I studied finance as an undergrad and so Vanguard was 0:02:45.080 --> 0:02:47.760 always a name that I had heard of, But I 0:02:47.800 --> 0:02:53.040 didn't fully appreciate the Vanguard's story, the ownership structure, all 0:02:53.120 --> 0:02:55.960 that's embedded in kind of what's popular and known about 0:02:56.040 --> 0:02:59.799 Vanguard now until I actually got here. So I got 0:02:59.840 --> 0:03:05.040 to Vanguard in the HR team, went back to business school, 0:03:05.360 --> 0:03:09.880 studied finance and investments again, and then came back in 0:03:09.919 --> 0:03:11.640 an investment centric career. 0:03:12.080 --> 0:03:12.600 So I came. 0:03:13.120 --> 0:03:16.560 I came through a team that did advisory services for 0:03:16.639 --> 0:03:21.480 small endowments, foundations, pension funds. I worked on our fixed 0:03:21.520 --> 0:03:24.799 income trading floor, on our rates desk. For a little bit. 0:03:25.560 --> 0:03:29.200 I worked in our personal investor business. I've been fortunate 0:03:29.200 --> 0:03:31.680 to lead our education savings business of the five twenty 0:03:31.760 --> 0:03:35.480 nine business, but for the last several years really focused 0:03:35.600 --> 0:03:40.640 on investments per se, first in our investment strategy team 0:03:40.720 --> 0:03:44.360 here in the US, and then between twenty seventeen and 0:03:44.360 --> 0:03:47.640 twenty twenty one, I actually was really lucky and got 0:03:47.640 --> 0:03:51.000 the opportunity to go lead our Asia Pacific Investments team, 0:03:51.120 --> 0:03:54.040 so moved out to Melbourne, Australia where we've got a 0:03:54.080 --> 0:03:58.240 sizable crew population out there Cruz what we call employees 0:03:58.280 --> 0:04:01.000 here at Vanguard, and then at the end of twenty 0:04:01.040 --> 0:04:03.720 twenty one move back to the States to lead our 0:04:03.800 --> 0:04:08.160 product team. So very non linear in the sense of 0:04:08.280 --> 0:04:11.320 how my career has progressed here at Vanguard. I'm sure 0:04:11.360 --> 0:04:14.920 as you've talked to Vanguard employees over time, you've heard 0:04:14.920 --> 0:04:18.839 this theme where you know, Vanguard's really really great about 0:04:18.880 --> 0:04:21.640 giving people the opportunity to rotate throughout the organization and 0:04:21.720 --> 0:04:23.039 learn different parts of the business. 0:04:23.040 --> 0:04:25.320 So I'm no different that in that way. 0:04:26.080 --> 0:04:29.039 That's great. So you know, I've actually been covering Vanguard 0:04:29.120 --> 0:04:32.279 my whole career, so I'm quite familiar with their active funds. 0:04:32.800 --> 0:04:36.799 Can you explain how active management fits in at Vanguard 0:04:36.880 --> 0:04:39.240 and you know, how active and passive can work together. 0:04:40.440 --> 0:04:45.520 I think from a philosophical perspective, you know, are many 0:04:45.520 --> 0:04:48.560 of our roots right when Vanguard was first started. Our 0:04:48.640 --> 0:04:52.400 roots were with Active Product as well to Wellington Fund 0:04:52.839 --> 0:04:56.200 amongst others, being one of the things that originally started 0:04:56.240 --> 0:05:00.280 with Vanguard. And so from Vanguard's inception, we've always had 0:05:00.320 --> 0:05:05.400 this idea that Vanguard Active, if delivered in a low 0:05:05.480 --> 0:05:08.760 cost way, can play a really really meaningful role in 0:05:08.800 --> 0:05:11.599 a client's portfolio for investors who have the tolerance to 0:05:11.640 --> 0:05:16.560 take that on. I think that oftentimes people talk about 0:05:16.600 --> 0:05:19.480 the notion that active and passive, and it's often framed 0:05:19.520 --> 0:05:23.920 as passive versus active, But in many instances, David, the 0:05:23.960 --> 0:05:26.480 way that we think about active at Vanguard is that 0:05:26.760 --> 0:05:30.880 it's an and decision right for investors who have the 0:05:31.120 --> 0:05:35.039 tolerance to take on the inevitable ups and downs of 0:05:35.080 --> 0:05:40.280 outperformance that active will bring, and they've got that risk tolerance, 0:05:40.640 --> 0:05:43.960 that the two can be really blended together, provided that 0:05:44.000 --> 0:05:47.520 they're grounded in this common principle of low cost. 0:05:48.040 --> 0:05:48.240 Right. 0:05:48.320 --> 0:05:51.560 Low cost is one of the things that's inherent to indexing, 0:05:52.880 --> 0:05:56.200 and in many ways, when you give low cost active 0:05:56.240 --> 0:06:01.200 strategies access to low cost active strategies, you're lowering the 0:06:01.240 --> 0:06:06.760 investment manager's hurdle for outperformance to deliver alpha after. 0:06:06.440 --> 0:06:07.800 Fees, you know. 0:06:07.920 --> 0:06:11.680 Moving on, I do want to touch upon product development. 0:06:12.760 --> 0:06:15.320 How do you decide when to launch new active products? 0:06:16.680 --> 0:06:21.200 I think the the product development process David, for active 0:06:21.240 --> 0:06:26.840 product is the same as the process for any product 0:06:27.040 --> 0:06:30.719 here at Vanguard, and when we think about product, we're 0:06:30.720 --> 0:06:35.200 always grounding it in Vanguard's investment philosophy, right, which really 0:06:35.240 --> 0:06:39.560 centers around this concept of keeping your costs low, focusing 0:06:39.600 --> 0:06:43.719 on balance, being really clear about your goals and whatever 0:06:43.760 --> 0:06:48.120 your strategy is, right, being disciplined about executing it against that. 0:06:48.120 --> 0:06:51.440 That's the backdrop for all product that we think about 0:06:51.839 --> 0:06:54.720 at Vanguard, and then when we come to the actual 0:06:54.800 --> 0:06:57.960 product decision. You know, Vanguard is a big fan of 0:06:57.960 --> 0:07:00.800 these frameworks that we've got to. We've got a framework 0:07:00.839 --> 0:07:04.080 that we call our Product design Principles where we effectively 0:07:04.600 --> 0:07:08.159 ask ourselves for questions, and this is applicable for active 0:07:08.600 --> 0:07:12.160 in general. The first thing that we ask David is 0:07:12.880 --> 0:07:16.800 does any product that we're thinking about have an enduring 0:07:17.120 --> 0:07:18.160 investment merit? 0:07:18.440 --> 0:07:18.560 Right? 0:07:19.400 --> 0:07:21.960 What we mean by enduring is can we envision that 0:07:22.040 --> 0:07:25.040 this strategy would be on the shelf and available for 0:07:25.120 --> 0:07:27.280 investors for decades to come. 0:07:28.000 --> 0:07:28.160 Right. 0:07:28.760 --> 0:07:32.720 Within that that investment principle, we think about whether or 0:07:32.760 --> 0:07:36.920 not a strategy has a plausible economic rationale to deliver 0:07:37.160 --> 0:07:40.920 positive real returns. Right, That's another question that we ask ourselves. 0:07:40.920 --> 0:07:45.320 Within that, the second question that we ask ourselves is 0:07:45.880 --> 0:07:50.320 does it fulfill the long term needs of the targeted clients? 0:07:50.640 --> 0:07:50.800 Right? 0:07:50.880 --> 0:07:54.320 Who are we designing this product for? And does it 0:07:54.360 --> 0:08:00.480 have a plausible role in a well grounded portfolio instruction 0:08:00.640 --> 0:08:03.640 framework doesn't necessarily have to be the way that Vanguard 0:08:03.680 --> 0:08:06.960 builds portfolios, but it could be. Is it a reasonable 0:08:06.960 --> 0:08:10.880 portfolio construction framework? Then we'll think about offering an active, 0:08:11.080 --> 0:08:15.480 active strategy. There After we clear those two hurdles, David, 0:08:16.040 --> 0:08:19.240 then we think, hey, is there a reason that we 0:08:19.280 --> 0:08:23.840 can deliver a compelling advantage over competitors? Do we feel 0:08:23.840 --> 0:08:27.480 like Vanguard bringing a product in this space can be 0:08:27.520 --> 0:08:31.400 a best in class product? And then finally we'll ask 0:08:31.400 --> 0:08:34.240 ourselves is it feasible to launch the product? What are 0:08:34.320 --> 0:08:39.840 sort of the barriers? Operational hurdles, regulatory hurdles. Those are 0:08:39.880 --> 0:08:43.959 the four basic questions that we ask ourselves, and it's 0:08:44.000 --> 0:08:48.880 important to point out that we ask them in sequential order. Right, 0:08:48.920 --> 0:08:53.040 So we ask ourselves the investment question first, and if 0:08:53.040 --> 0:08:56.600 we can't clear the investment question, there's no point in 0:08:56.679 --> 0:09:00.320 talking about the client the client question or or the 0:09:00.640 --> 0:09:02.560 you know, the business question about whether or not we 0:09:02.600 --> 0:09:05.440 can offer a compelling, compelling product in this space. Because 0:09:05.480 --> 0:09:07.960 it has to be grounded in our thoughts on investment 0:09:08.080 --> 0:09:09.280 principles and philosophy. 0:09:09.960 --> 0:09:11.560 I'd like to jump in here real quick, Dan if 0:09:11.600 --> 0:09:16.120 I could, so everything said makes sense. There is a 0:09:16.240 --> 0:09:20.600 market for active, especially low cost active. However, I don't 0:09:20.640 --> 0:09:23.320 know if you've noticed, but it seems like people won 0:09:23.400 --> 0:09:26.520 in the ETF format more and more versus the mutual 0:09:26.520 --> 0:09:32.560 fund format, especially on the equity side. How how are 0:09:32.600 --> 0:09:36.400 you guys dealing with and planning on adapting to that? 0:09:38.120 --> 0:09:41.840 Yeah, Eric, you're you're certainly right in the trend towards 0:09:42.480 --> 0:09:48.040 active strategies in an ETF rapper, and we've historically had 0:09:48.600 --> 0:09:51.320 a couple of active strategies in our ETF rapper if 0:09:51.360 --> 0:09:54.800 you think about our five factor products, and then we 0:09:54.840 --> 0:09:57.680 had an ultra short product that we launched several years 0:09:57.679 --> 0:10:02.240 ago in an ATF rapper, And more recently you've seen 0:10:02.280 --> 0:10:06.840 more active ETFs from us on the fixed income side, 0:10:07.000 --> 0:10:10.400 right we had Core and a Core Plus launch at 0:10:10.440 --> 0:10:13.800 the end of twenty twenty three. We're doing the new 0:10:13.960 --> 0:10:16.520 we just announced the new community products as well too, 0:10:17.720 --> 0:10:20.679 and we're naturally turning our attention to what does this 0:10:20.760 --> 0:10:25.280 mean for active equity strategies and so it's a body 0:10:25.280 --> 0:10:28.000 of ongoing work that we have right now. I think 0:10:28.000 --> 0:10:31.480 the clients. What we're hearing from clients is they're certainly 0:10:31.520 --> 0:10:35.560 preferring the ETF rapper. If you just look at flows 0:10:35.640 --> 0:10:37.920 and where flows have gone, you know, first part of 0:10:37.920 --> 0:10:41.360 the year, and overmwhelming proportion have gone into the active 0:10:41.360 --> 0:10:45.720 ETF rapper, and active equity ETFs are certainly a part 0:10:45.720 --> 0:10:48.760 of that trend. Now, I can tell you Eric that 0:10:48.920 --> 0:10:54.679 as we think about active equity ETFs, you know, our 0:10:54.720 --> 0:10:58.000 early thinking is that we don't necessarily think that every 0:10:58.040 --> 0:11:02.880 single strategy that is active equity would lend itself well 0:11:02.960 --> 0:11:07.120 to the ETF wrapper. And I'll give you an example 0:11:07.160 --> 0:11:09.080 of kind of some of the things that we think 0:11:09.120 --> 0:11:13.679 about when we consider any active strategy. Right first is, 0:11:14.280 --> 0:11:17.040 you know, we have to think about liquidity in the 0:11:17.160 --> 0:11:21.320 ETF wrapper. You know, unlike a mutual fund where vanguardt 0:11:21.320 --> 0:11:24.920 has historically deployed closing a mutual fund. If we think that, 0:11:25.080 --> 0:11:26.720 you know, there are some flows that are coming in 0:11:26.760 --> 0:11:28.800 that are going to make it more challenging for an 0:11:28.840 --> 0:11:31.680 active manager to deliver the alpha. You don't have that 0:11:31.760 --> 0:11:37.280 lever to pull in an ETF wrapper, right Naturally, are 0:11:37.520 --> 0:11:40.840 active managers in an ETF where you're you're talking about 0:11:40.960 --> 0:11:45.720 daily disclosure. They're concerned about IP leakage. What am I 0:11:45.800 --> 0:11:49.160 revealing about the fund's strategy? What am I revealing about 0:11:49.160 --> 0:11:52.559 the strategy in the ETF rapper that I wouldn't necessarily 0:11:52.600 --> 0:11:57.760 be revealing in the in the mutual fund wrapper. And 0:11:57.840 --> 0:12:02.680 so we think about things like that, liquidity, ip leakage, 0:12:03.120 --> 0:12:08.679 the tax efficiency of different strategies in in an ETF wrapper, 0:12:08.960 --> 0:12:12.040 virtus versus a mutual fund are all things that are 0:12:12.120 --> 0:12:13.120 that are on our mind. 0:12:13.679 --> 0:12:13.839 Eric. 0:12:13.840 --> 0:12:17.160 I think it's particularly in in the ETF, in the 0:12:17.200 --> 0:12:21.080 active equity ETF world, our initial thinking is that it 0:12:21.520 --> 0:12:23.439 not everything's going to be you know, I use the 0:12:23.520 --> 0:12:27.320 term quote unquote etfable, right, They're going to be things 0:12:27.360 --> 0:12:31.400 that lend themselves well to the ETF rapper and other 0:12:31.440 --> 0:12:34.520 things that we would be more cautious about approaching them, 0:12:34.760 --> 0:12:36.120 you know, if we were to offer a product in 0:12:36.120 --> 0:12:36.640 that space. 0:12:37.320 --> 0:12:41.199 Yeah, I mean, just those are very good reasons. 0:12:41.240 --> 0:12:41.800 I get that. 0:12:42.559 --> 0:12:47.480 It just seems to me that advisors, especially when it 0:12:47.480 --> 0:12:50.560 comes to large cap US equities and even mid and 0:12:50.640 --> 0:12:56.360 small to a degree and a developed market, I get, 0:12:56.400 --> 0:13:00.640 like you know microcaps and maybe emerging markets where capacity 0:13:00.640 --> 0:13:03.559 can be an issue. But it does seem like advisors 0:13:03.559 --> 0:13:06.520 don't really like they get all that, but they now 0:13:06.520 --> 0:13:09.120 expect managers to show what they hold. Every day on 0:13:09.160 --> 0:13:11.720 the ETS space has been interesting. The non transparent active 0:13:11.720 --> 0:13:15.360 ETFs try to protect their ip but like nobody bought them, 0:13:15.960 --> 0:13:21.040 and so Capital Group and others were got on board 0:13:21.080 --> 0:13:24.440 with transparency and you can see their ETFs start to sell. 0:13:26.200 --> 0:13:29.920 So I think they have the same issues. But the 0:13:29.960 --> 0:13:34.240 marketplace demand is a big variable, and the tax efficiency 0:13:34.480 --> 0:13:40.679 is also really powerful, and I think I don't empathize 0:13:40.720 --> 0:13:45.320 with your dilemma here. It's clearly you got two polarizing forces. 0:13:46.320 --> 0:13:48.640 My guess is you're going to have active equity ETFs 0:13:48.679 --> 0:13:52.000 come out soon. You probably can't break that news here, 0:13:52.480 --> 0:13:55.080 but I think you're gonna do it. 0:13:55.120 --> 0:13:59.120 I'm on record. It's good to know. It's good to 0:13:59.160 --> 0:14:01.760 know that's where you think we're eric. I appreciate that. 0:14:01.800 --> 0:14:06.480 I mean, to your point, advisors are expressing their preference right, 0:14:06.520 --> 0:14:09.160 and individual investors are expressing that preference. 0:14:09.679 --> 0:14:11.640 I think for us, when we think. 0:14:11.520 --> 0:14:14.120 About like an active equity ETF, we're going to be 0:14:14.120 --> 0:14:17.440 thinking about on an after tax basis, even with all 0:14:17.480 --> 0:14:21.240 those things that I talked about, does it offer comparable 0:14:21.280 --> 0:14:25.120 returns to the mutual fund wrapper and if and if 0:14:25.240 --> 0:14:27.960 the answer to that is yes, which is going to 0:14:27.960 --> 0:14:31.680 be different strategy by strategy, I think that's something that 0:14:31.760 --> 0:14:33.840 we would we would strongly consider moving forward. 0:14:35.640 --> 0:14:38.040 Actually want to kind of you know, still on the 0:14:38.080 --> 0:14:42.240 topic of active ETFs, but kind of a different question. 0:14:42.640 --> 0:14:46.520 You know, you have the newer core bond ETFs, and 0:14:46.880 --> 0:14:50.120 I know those are managed in house. Is active active 0:14:50.160 --> 0:14:53.720 fixed income and area where you see Vanguard, you know, 0:14:53.800 --> 0:14:57.240 continuing to launch products that are managed in the house 0:14:57.280 --> 0:14:58.960 as opposed to external managers. 0:15:00.240 --> 0:15:01.640 David, We've got a long history. 0:15:01.680 --> 0:15:05.400 I mean, we work with some talented external fixed income 0:15:05.480 --> 0:15:08.320 managers on a couple of strategies. You know, I think 0:15:08.360 --> 0:15:12.040 of our long term investment grade strategy, our Jimmy may fund, 0:15:12.640 --> 0:15:16.000 our high yield fund where we've got Wellington there. But 0:15:16.080 --> 0:15:19.760 we've also been simultaneously really investing in our in house 0:15:20.160 --> 0:15:23.800 fixed income capabilities on the active side as well as 0:15:23.840 --> 0:15:26.760 on the on the indexing side. Now, Vanguard's had some 0:15:26.840 --> 0:15:31.760 real success in being able to attract talent because the 0:15:31.840 --> 0:15:34.560 Vanguard story is a compelling story in the sense that 0:15:34.600 --> 0:15:38.720 if you're in fixed income and you're given the opportunity 0:15:38.800 --> 0:15:42.479 to build an active fixed income business, but with Vanguard 0:15:42.600 --> 0:15:47.160 fees as a lower headwind, right, really gives investors the 0:15:47.280 --> 0:15:51.840 chance to outperform regardless of market environments, you know, when 0:15:51.840 --> 0:15:54.920 they've got that smaller headwind with lower fees. It gives 0:15:55.000 --> 0:15:58.880 them the opportunity to be really judicious about when they 0:15:58.880 --> 0:16:01.480 deploy their drive power and not have to take on 0:16:02.160 --> 0:16:05.680 risks in order to stretch, you know, and outperform the fee. 0:16:05.800 --> 0:16:09.320 So I think that you know, the the product development 0:16:09.320 --> 0:16:11.320 that you've seen with us, even just with those four 0:16:11.360 --> 0:16:14.840 products that I mentioned earlier, is gonna is gonna that 0:16:14.960 --> 0:16:19.520 trend will continue moving into twenty twenty five and beyond. 0:16:20.360 --> 0:16:23.440 You know, And you did mention the external managers. Yeah, 0:16:23.640 --> 0:16:26.120 I guess you know. What I'm most curious about is 0:16:26.280 --> 0:16:29.400 what is the process of selecting those managers. Is it, 0:16:29.840 --> 0:16:32.040 you know, kind of typical of a manager search that 0:16:32.080 --> 0:16:34.600 an asset allocator would do, or is this something more 0:16:34.640 --> 0:16:36.800 of you have your own process. 0:16:37.560 --> 0:16:41.760 It's it's similar, but it's definitely distinct in that way. 0:16:41.840 --> 0:16:43.800 David. We we we. 0:16:43.840 --> 0:16:46.520 Like to often say that we don't typically date managers. 0:16:46.520 --> 0:16:49.280 We like to marry them, right. We we tend to 0:16:49.560 --> 0:16:52.800 have a long dating period and coording period as well too. 0:16:53.800 --> 0:16:54.600 That process. 0:16:54.680 --> 0:16:58.440 Right, when we're thinking about partnering with external managers, we 0:16:58.560 --> 0:17:02.720 will think deeply about what does their firm look like, 0:17:02.840 --> 0:17:05.960 what are the incentives of the investors at the firm, 0:17:06.320 --> 0:17:09.359 what does their culture look like, what does their leadership 0:17:09.400 --> 0:17:11.800 team look like, and what does the bench of talent 0:17:11.880 --> 0:17:15.080 look like? And we'll think about that even before we 0:17:15.119 --> 0:17:18.439 get into the specifics of like what's their process and 0:17:18.480 --> 0:17:22.440 their philosophy. Right, if you think about those things at 0:17:22.440 --> 0:17:27.520 the highest level, performance and the opportunity to outperform should 0:17:27.600 --> 0:17:30.639 be an output of all those things that I just mentioned, 0:17:30.720 --> 0:17:35.680 like firm culture, people, process, philosophy. We actually spend the 0:17:35.760 --> 0:17:40.840 vast majority of our time on those elements, David, before 0:17:40.880 --> 0:17:43.560 we even get to thinking about, okay, what are the 0:17:43.600 --> 0:17:46.119 returns look like? You know, for the last three to 0:17:46.240 --> 0:17:50.280 five years, and you know, we will sit with managers, 0:17:50.320 --> 0:17:53.439 conduct hundreds of search meetings throughout the year because we're 0:17:53.440 --> 0:17:57.160 always trying to make sure that we've got managers at 0:17:57.200 --> 0:17:59.640 the ready for any sort of opportunity that we might 0:17:59.680 --> 0:18:02.800 be thinking, say we're thinking about a product in you know, 0:18:02.840 --> 0:18:05.320 a certain space will go on and we'll we'll keep 0:18:05.359 --> 0:18:07.680 kind of a quote unquote lying in the water when 0:18:07.720 --> 0:18:10.400 it comes to working with managers and searching for managers 0:18:10.400 --> 0:18:12.879 on a continual basis. 0:18:13.520 --> 0:18:17.080 Okay, And I guess you know a continuation of that question. 0:18:18.040 --> 0:18:20.600 You know, some of the funds have you know, a 0:18:20.640 --> 0:18:24.520 bunch of different external managers managing different slices of the 0:18:24.600 --> 0:18:28.440 portfolio if they come up, you know, on the equity side, 0:18:28.440 --> 0:18:32.560 if all the managers happen on like one stock, how 0:18:32.600 --> 0:18:36.159 do you prevent it from you know, going beyond diversity 0:18:36.640 --> 0:18:41.240 requirements and you know, just making sure that you know, 0:18:41.280 --> 0:18:45.040 the portfolio stays diversified if there's a lot of you know, 0:18:45.160 --> 0:18:47.199 stocks that each of the managers all like. 0:18:48.359 --> 0:18:51.560 I think we try to get get at that process first, David, 0:18:51.600 --> 0:18:55.760 by having rigorous monitoring at the portfolio level to look 0:18:55.800 --> 0:18:58.560 at the you know, the exposures of the portfolio at 0:18:58.560 --> 0:19:01.880 the overweight and underweight level. But then when it comes 0:19:01.920 --> 0:19:05.200 to actually selecting managers, say, for instance, if we're talking 0:19:05.280 --> 0:19:09.080 about a growth fund, right, what we wouldn't do is 0:19:09.160 --> 0:19:12.800 go out and choose managers that we think have duplicative 0:19:13.000 --> 0:19:17.960 growth styles. Right, one manager might like high high growth 0:19:18.000 --> 0:19:20.320 companies and look for those companies that are going to 0:19:20.320 --> 0:19:24.800 be kind of your true outliers. Another company might approach 0:19:24.920 --> 0:19:28.160 or another subadvisor might approach growth, you know, with a 0:19:28.200 --> 0:19:31.080 growth at a reasonable price, more of a Garbie type, 0:19:31.440 --> 0:19:34.080 you know, growth philosophy. So what we're trying to do 0:19:34.359 --> 0:19:40.040 is pull together managers that have complimentary and not necessarily 0:19:40.280 --> 0:19:44.000 duplicative styles. So part of that goes into us thinking 0:19:44.000 --> 0:19:46.720 about what type of active fund do we want this 0:19:46.840 --> 0:19:50.600 strategy to be from the outset, and then thinking about 0:19:50.640 --> 0:19:53.600 the managers that might complement each other when we're pulling 0:19:53.600 --> 0:19:56.680 that together, and then we back that up with rigorous 0:19:56.720 --> 0:19:59.560 monitoring at the tail end of the portfolio. 0:20:00.760 --> 0:20:04.240 So is there, would you say, an oversight to some 0:20:04.359 --> 0:20:05.480 of the trades they make. 0:20:07.040 --> 0:20:11.480 In terms of actually, you know, like the the output, 0:20:11.520 --> 0:20:14.159 like when they're making the trades, that's not something that 0:20:14.200 --> 0:20:18.720 they run by Vanguard at the process beforehand. We'll know 0:20:18.840 --> 0:20:22.159 that they made trades, right, We'll know that that they 0:20:22.200 --> 0:20:24.639 made trades, and will part of our oversight duty and 0:20:24.720 --> 0:20:28.160 responsibility is to ask them why, what were what's their 0:20:28.200 --> 0:20:31.119 thesis on a particular company, How does it align with 0:20:31.160 --> 0:20:34.439 our philosophy and their process? Right, so we do it 0:20:34.480 --> 0:20:36.760 on the back end, but they're not. I wouldn't say 0:20:36.800 --> 0:20:40.080 that they're running trades by us before they execute. 0:20:39.680 --> 0:20:42.879 Them doing Okay. 0:20:42.960 --> 0:20:45.720 You know, if we, you know, continue talking about Vanguard's 0:20:45.760 --> 0:20:48.879 active lineup, how would you say it's evolved over time? 0:20:50.520 --> 0:20:54.640 I think I think you know, first and foremost you've 0:20:54.640 --> 0:20:57.240 seen you know, Vanguard. You think about some of our 0:20:57.320 --> 0:21:00.280 historical funds. We always think about funds that are been 0:21:00.720 --> 0:21:06.640 broadly benchmarked relative these big indices, and you know, lately, 0:21:06.920 --> 0:21:10.040 if you think about some of our active lineup, you know, 0:21:10.080 --> 0:21:13.000 I think that on the equity side, you've seen us 0:21:13.080 --> 0:21:16.640 launch things, for instance, like the Bailey Gifford Global Positive 0:21:16.640 --> 0:21:19.600 Impact Fund back in twenty twenty two, which had a 0:21:19.720 --> 0:21:24.000 very specific kind of need, It had very specific exposure 0:21:24.000 --> 0:21:26.320 there was going to or for instance, you know, another 0:21:26.359 --> 0:21:30.119 example on the equity side is the Global Environmental Opportunity 0:21:30.160 --> 0:21:32.760 Stock Fund in November of twenty twenty two. I mean, 0:21:32.760 --> 0:21:37.320 those were definitely catering towards investors who had a preference 0:21:37.359 --> 0:21:40.960 for ESG and also had a preference for active management. 0:21:41.640 --> 0:21:44.639 On our fixed income side, what you'll see more of 0:21:44.920 --> 0:21:48.960 now is, for instance, the core type strategies core bond, 0:21:49.359 --> 0:21:53.840 core plus that give the portfolio management teams the latitude 0:21:53.880 --> 0:21:57.600 to make that decision across different subsectors of the fixed 0:21:57.600 --> 0:22:00.719 income space. Right, they can make it decision to think 0:22:00.760 --> 0:22:03.320 about what their credit beta would look like. They can 0:22:03.440 --> 0:22:06.320 lean more into security selection if they feel like that's 0:22:06.359 --> 0:22:09.919 where they're they have the opportunities, or they can you know, 0:22:10.080 --> 0:22:14.119 think about moving the dial slightly on rates as well too. Right, So, 0:22:14.600 --> 0:22:17.640 on the fixed income side, the evolution has been giving 0:22:17.680 --> 0:22:20.760 the given the portfolio managers and the talented investors a 0:22:20.800 --> 0:22:24.600 little more latitude. And then on the equity side, given 0:22:24.640 --> 0:22:28.480 the breadth of the existing product strategy product lineup already 0:22:28.960 --> 0:22:33.080 giving some exposures, some targeted exposures for investors who have 0:22:33.200 --> 0:22:34.800 the particular preferences. 0:22:35.880 --> 0:22:38.720 So what would the future have in store? You know, 0:22:39.359 --> 0:22:41.760 you know, we know about what's happening with the ETFs. 0:22:42.080 --> 0:22:45.240 Do you see more mutual funds being launched as well 0:22:45.280 --> 0:22:47.359 on the equity On the active side. 0:22:47.440 --> 0:22:49.760 I think we'd think about both, right, I think we 0:22:49.840 --> 0:22:55.720 think about a strategy that we find compelling, and then 0:22:55.800 --> 0:23:00.320 if we think about the structure for instance, that would 0:23:00.320 --> 0:23:04.959 be a secondary consideration. So I'll give you an example 0:23:05.000 --> 0:23:06.720 of a you know, we you know, last year we 0:23:06.800 --> 0:23:10.360 launched an international dividend growth strategy in a mutual fund 0:23:10.440 --> 0:23:13.800 format because we were we've got a successful US focused 0:23:13.960 --> 0:23:18.080 dividend growth strategy and there was an international counter counterpart. 0:23:18.400 --> 0:23:21.280 We'll continue to do that type of work, and then 0:23:21.320 --> 0:23:24.720 if we think about the structure as a secondary consideration, 0:23:24.920 --> 0:23:26.720 that's what we would That's what we would see. Is 0:23:26.800 --> 0:23:28.800 kind of like the the evolution of our of our 0:23:28.840 --> 0:23:29.520 active offering. 0:23:31.960 --> 0:23:36.560 Okay, you know, I know, you know Eric mentioned you know, 0:23:36.840 --> 0:23:42.119 possible equity ETFs. Is that something you're thinking about, you know, 0:23:42.160 --> 0:23:45.760 in addition for you know, to the factor ETFs. Is 0:23:45.760 --> 0:23:48.679 that something you're always thinking about when you're thinking about, 0:23:48.760 --> 0:23:49.960 you know, what to launch next. 0:23:50.200 --> 0:23:52.520 Yeah, just like any other Just like any other trend 0:23:52.600 --> 0:23:54.679 that we see, you know, at vand GUARD. 0:23:55.080 --> 0:23:56.640