Speaker 1: Well trillions. I'm Joel Webber and I'm Americultures Eric. We've
Speaker 1: had some heavy hitters on the podcast lately and this
Speaker 1: week is no exception. Yeah, you could introduce this person
Speaker 1: as the portfolio manager of the largest fund in the
Speaker 1: world and the first trillion dollar fund in the world.
Speaker 1: This is the first trillion dollar portfolio manager. Almost definitely,
Speaker 1: We're not quite there, but it's it's it's almost an inevitability.
Speaker 1: Almost definitely. Is a is a great hedge. He's somewhere
Speaker 1: in the nine d billion range right now. And we're
Speaker 1: talking about Jerry O. Reiley at Vanguard and what do
Speaker 1: you do at Vanguard? Eric is the guy who makes
Speaker 1: sure that you're Vanguard stock index fund tracks the index
Speaker 1: right the index lives into vacuum, and he has to
Speaker 1: get as close as ken to it and deal with
Speaker 1: the realities of tracking stocks that come in and out
Speaker 1: corporate actions. It's a lot more complicated than it looks.
Speaker 1: But his one fund is the Total Market Fund, which
Speaker 1: is the largest fund in the world. As you said,
Speaker 1: I think it's nine close to nifty billion right now,
Speaker 1: and that's sort of the biggest fund he runs, but
Speaker 1: he runs many, many and some are mutual funds like
Speaker 1: that one, and others are actually e t s. Yeah,
Speaker 1: in Vanguard's case, e t F is like a share
Speaker 1: class of the index fund. So that includes v T I,
Speaker 1: which a lot of people probably know our own as
Speaker 1: part of the whole package, and that is unique. So
Speaker 1: in a way, the Vanguard fund assets per fund are
Speaker 1: a little higher than others because their e t F
Speaker 1: is counted in that number. And uh, yeah, it's possible
Speaker 1: if we keep having this nice market that it can
Speaker 1: hit a trillion in a couple of months. Another thing
Speaker 1: about Jerry is that this is not a guy that
Speaker 1: we hear from often. No. I mean, the media is
Speaker 1: in int stayed in like Alpha. You know who's hitting
Speaker 1: the home run this year, the Jim Simons of the world,
Speaker 1: the hedge fund managers. He's trying to tie for him,
Speaker 1: tying his winning. But what I find fascinating about him
Speaker 1: and others who do what he does is I think
Speaker 1: they're underappreciated as a whole, and they're they're rebating money
Speaker 1: left and right. So if you take the total market
Speaker 1: fund that he manages, fifty billion in assets, it charges
Speaker 1: a roughly four basis points depending on the share class,
Speaker 1: and yet it only misses the index by one point
Speaker 1: five basis points, and an e t F for index
Speaker 1: funds should trail the index by the same amount of
Speaker 1: as the expense ratio. So if you can get closer
Speaker 1: to the index and the expense ratio, that's free money
Speaker 1: back to the investor. And so in Jerry's case, he's
Speaker 1: basically returning about two d and thirty million back to
Speaker 1: investors through what we'll go into, which is securities, lending,
Speaker 1: trading acumen, and there's a lot of other tricks and
Speaker 1: opportunities that he can do to return that money. Also
Speaker 1: joining us on this episode is Annie Massa, a reporter
Speaker 1: with brit News, this time on trillions the unsung art
Speaker 1: of passive with Vanguard Almost trillion dollar man. Jerry, welcome
Speaker 1: to Trilliance. Thank you. I want to ask about what
Speaker 1: you do every day. You know, I think of passive
Speaker 1: investment and it seems like it might be relatively hands off.
Speaker 1: So what are you doing all day? I mean there's
Speaker 1: a lot that goes into I mean, our job, if
Speaker 1: you boil it down, it really is to deliver the
Speaker 1: performance of the benchmark to our shareholders. And now how
Speaker 1: you do that? Is a little more complicated, so we'll
Speaker 1: come in in the morning. Before we even get in,
Speaker 1: our data team has come in and they've already received
Speaker 1: all the indexes from the different index providers, and they've
Speaker 1: made sure that it's all the the corporate actions, the splits,
Speaker 1: the reverse splits, whatever else needs to take place is
Speaker 1: going to take place, so that we know that the
Speaker 1: index that we're tracking to two is the exact same
Speaker 1: index as S and P, as CRISP, as Russell, as
Speaker 1: fox See, and all these different index survivors are giving
Speaker 1: to us. So once you have that, that's kind of
Speaker 1: the foundational piece, and then it's okay, my fund and
Speaker 1: the index making sure that everything that takes place throughout
Speaker 1: the day, So those things would be like all of
Speaker 1: the cash flows coming in, making sure that you have
Speaker 1: a really good understanding of what those cash flows are.
Speaker 1: Any index changes that are happening over the course of
Speaker 1: the day, any syndicate offerings that may have priced to
Speaker 1: night before, and if the index is making the change
Speaker 1: that day, there's both the upweight and also we need
Speaker 1: to be able to fund the the buys that are
Speaker 1: taking place, any type of corporate actions that are taking place,
Speaker 1: throughout the day. And then keep in mind that you know,
Speaker 1: we receive cash flows all the way up until four o'clock,
Speaker 1: so I could in total stock, for example, I may
Speaker 1: think that I have a you know, at three thirty,
Speaker 1: I could think I have a million dollar list that
Speaker 1: I'm buying today, and at three forty five find out that, hey,
Speaker 1: two million is being redeemed from the and so all
Speaker 1: of a sudden, it's like, okay, I need to stop
Speaker 1: and need to change directions, need to to reduce my list.
Speaker 1: Um So, there are all sorts of things that are
Speaker 1: going to happen throughout the day that are going to
Speaker 1: force you to kind of change the way you trade.
Speaker 1: And then of course there's the actual trading itself. Um So,
Speaker 1: we are at desk of about twenty four traders and
Speaker 1: roughly split fifty fifty between international and US, and our
Speaker 1: job basically is to navigate, you know, the market in
Speaker 1: terms of you know, it's it's a fairly fragmented market,
Speaker 1: as you know, so you have thirteen different exchanges and
Speaker 1: fifty different pools of liquidity. So when you have a
Speaker 1: trade list, what are the objectives? What is the urgency
Speaker 1: to get this list done? And what is the appropriate strategy.
Speaker 1: So understanding all of that kind of goes into your
Speaker 1: every day in terms of tracking that benchmark, and you know,
Speaker 1: we we want to be as tight as possible. We're
Speaker 1: talking fractions of a basis point, and we will receive
Speaker 1: a scorecard every morning letting us know how we did
Speaker 1: the previous day. So at no point do we think,
Speaker 1: I hope we're tracking. We know exactly by ten o'clock
Speaker 1: the next morning, how fund did versus the benchmark the
Speaker 1: day before. So you said you had twenty four so
Speaker 1: traders working for you. How many funds do you manage? Well,
Speaker 1: in total, we manage a little over three trillion dollars
Speaker 1: across about two hundred and fifty different funds. And not
Speaker 1: every single fund is going to get cash flow every day.
Speaker 1: There are some funds that really only received cash flows
Speaker 1: maybe mid month and end of the month, but the
Speaker 1: good portion of those two hundred and fifty would be
Speaker 1: receiving cash flows on a daily basis, which what will
Speaker 1: require us to trade. So you know, fortunately we have
Speaker 1: great technology, so we can you know, one one one
Speaker 1: portfolio manager can handle you know a number of different
Speaker 1: portfolios and and we work really have a kind of
Speaker 1: a team concept here. So even though I might be
Speaker 1: running total stock market, I know that if I'm out
Speaker 1: that you know, Michelle Louis or Bill Coleman can take
Speaker 1: over the reins and and run the fund every bit
Speaker 1: as good as I can. So everyone get kind of
Speaker 1: gets cross trained. You have kind of a team of
Speaker 1: people that are assigned to your fund. Uh and um,
Speaker 1: you know in Read for example, I manage the Read
Speaker 1: fund as well. I know that Walt Mayman will be
Speaker 1: taken over if if if I'm on vacation or if
Speaker 1: I'm out. So here's a question, how do you play defense?
Speaker 1: You have hedge funds out there who know when the
Speaker 1: indexes are rebalancing and what might be added or subtracted
Speaker 1: from the index. How do you handle that? How do
Speaker 1: we handle it? Yeah, so we have so when we
Speaker 1: have rebalances, which you know most of the indexes do
Speaker 1: rebounces on a quarterly basis. So we um, you know,
Speaker 1: have a team, a specific team on the desk that
Speaker 1: is our rebalanced team, and they will they have history
Speaker 1: of our rebalance is going back years and years about
Speaker 1: how we performed versus the benchmark. We will look at names. Um,
Speaker 1: you know, that the index provider is going to notify
Speaker 1: us ahead of time. UM, give us what they call
Speaker 1: a proform at index, which is basically the index that's
Speaker 1: going to be in effect on the date of the
Speaker 1: index changes, and then we'll figure out what we need
Speaker 1: to trade in order to be totally in line with
Speaker 1: the index on that date. So, I mean we're going
Speaker 1: to look at things like, you know, has the volume
Speaker 1: increased in names, has the price what kind of price
Speaker 1: action has happened since the announcement. Get a sense for
Speaker 1: if in fact people have started the front run names
Speaker 1: and anticipation of the index buying on the day. And um,
Speaker 1: you know, the one great thing we have on the
Speaker 1: desk is that we have probably average ten uere here
Speaker 1: of about fifteen years, so we have some traders who've
Speaker 1: been here thirty odd years, but great tenure in terms
Speaker 1: of understanding how these reboundces work. So we will be
Speaker 1: well aware of names where perhaps people have tried to
Speaker 1: get into an anticipation of of of you know, selling
Speaker 1: it to the indexes on the date, and some of
Speaker 1: those names we may decide we're not going to buy
Speaker 1: anything ahead of the index date and just buy it
Speaker 1: on the day and we also work closely with our
Speaker 1: teams in risk and in our transaction cost analysis team
Speaker 1: to make sure we're taking the appropriate level of risk
Speaker 1: to minimum to kind of understand where that tradeoff is
Speaker 1: between tracking our versus having too much impact on a name.
Speaker 1: So I think, you know, you have a team that's
Speaker 1: been doing this for quite a while. It's not like
Speaker 1: there's a temp it that I can tell you, hey,
Speaker 1: this is the this is what you need to do
Speaker 1: every time there's a rebounds coming up. But just a
Speaker 1: lot of experience and understanding of how these things work. Sure,
Speaker 1: and and this is a more specific example even, but
Speaker 1: all eyes are kind of on Tesla right now and
Speaker 1: the prospect of it being added to the s n
Speaker 1: P five hundred and my colleague has even quoted you
Speaker 1: in a story saying that would be an all hands
Speaker 1: on deck kind of trading situation. How would you think
Speaker 1: about that approach? You know, smp uh the way they
Speaker 1: handle that. There is an index committee and they will
Speaker 1: determine when you know, Tesla is at it. If it
Speaker 1: is at it, I assume that at some point it
Speaker 1: will be at it. You know, if you look at
Speaker 1: the US equities right now, you would say that Tesla
Speaker 1: is probably an outlier in terms of if you're looking
Speaker 1: at the five SMP five hundred UM, I think the
Speaker 1: minimum market cap to get in there is a little
Speaker 1: over eight billion dollars, and currently Tesla is a three
Speaker 1: hundred and forty five billion dollar company, you know, a
Speaker 1: stock that's up three year to date. And so the
Speaker 1: only reason it wasn't included was one of the criteria
Speaker 1: that SNP has is that it has to have uh,
Speaker 1: you know, positive earnings for four quarters, and it's just
Speaker 1: crossed that threshold, right, it just crossed that hurdle. Yeah, yeah,
Speaker 1: a little while ago. So now it's available, So it
Speaker 1: is potentially a candidate for inclusion, and as I mentioned,
Speaker 1: we just don't know when that is. But in terms of,
Speaker 1: you know, the potential for an ad like like Tesla,
Speaker 1: I mean it would be one of the biggest ads
Speaker 1: ever in terms of notional I think it would be
Speaker 1: the biggest In terms of weight in the index. I
Speaker 1: think maybe Berkshire when it acquired Burlington Northern might have
Speaker 1: had a bigger weight in the index. But it would
Speaker 1: require indexes would roughly need to buy thirty five to
Speaker 1: forty billion dollars worth of Tesla or roughly twenty five
Speaker 1: million shares, so that would immediately put Tesla as a
Speaker 1: top sort of fifteen name in the index. And UM
Speaker 1: when large names have been added in the past, SMP
Speaker 1: has looked for potentially corporate actions that may have had
Speaker 1: a big cash component. So, uh, if if I'm a
Speaker 1: five manager and I know, for example, that there's a
Speaker 1: corporate action coming up. So for example, when Twitter was added, UM,
Speaker 1: it was back in June and Bear was acquiring Monsanto,
Speaker 1: and there was a huge component of that corporate action
Speaker 1: involved cash, so they you know, Monsanto left the benchmark
Speaker 1: and then you know, if you're managing money, you could
Speaker 1: take the proceeds you got from this corporate action and
Speaker 1: use that to buy Twitter. So it helped to minimize
Speaker 1: kind of the turnover in the index. If we look
Speaker 1: out towards the end of this year, there really are
Speaker 1: no corporate actions that you would say there's a huge
Speaker 1: cash component to it, so we could maybe that might
Speaker 1: be the date that SMP decides to add it. They
Speaker 1: also have the ability to maybe add it um you
Speaker 1: know at the September quarterly rebounds. UM. So those are
Speaker 1: options available, you know, in terms of the trade itself,
Speaker 1: we obviously will be very much involved. Um you know
Speaker 1: previously large names that got added to the SMP five hundred.
Speaker 1: Sometimes the issuers will decide that they themselves are going
Speaker 1: to do a secondary offering to offset some of the
Speaker 1: indexing demand. So if we look back, you know, over
Speaker 1: the years, I think Facebook and Google did something like that.
Speaker 1: So if if Tesla was in a situation where they felt, hey,
Speaker 1: we we could uh you know, we could do with
Speaker 1: the proceeds and for whatever they wanted to use them for,
Speaker 1: they may decide to do something like that. Now I
Speaker 1: have not heard that that's the case, but that's that's
Speaker 1: the potential. This just comes to in a bigger topic,
Speaker 1: which is how companies get in and out of the index.
Speaker 1: You run this massive fund, and there's this feeling and
Speaker 1: argument that comes up once in a while that once
Speaker 1: the stock gets into your fund, which is the SMP
Speaker 1: five hundred or the total market, it's like it can relax, Right,
Speaker 1: it's now got all this constant bid coming, gets all
Speaker 1: the flows. But there's many cases of companies getting kicked
Speaker 1: out of the SMP. Right, So Macy's went after it
Speaker 1: at it went down, it's now out. Do you sort
Speaker 1: of feel like you're downstream from the choices that active
Speaker 1: managers make? Um Or is there some truth to the
Speaker 1: fact that once you get into the SMP there is
Speaker 1: a a sense that you've got a more comfortable life
Speaker 1: as a company. Yeah, I'm not sure i'd buy that,
Speaker 1: Eric Um. You know, if if we look right now,
Speaker 1: for example, at the S and P year to date,
Speaker 1: I mean, you're going to have companies that are up.
Speaker 1: You know, if I look at Navidio up up year
Speaker 1: to date, you know, PayPal up. You know, in the
Speaker 1: eighties you've got Amazon up. And then the other end
Speaker 1: of it, you've got some of the cruise lines that
Speaker 1: are down seventy. So these names, I think you'd be
Speaker 1: hard pressed to make the argument that those, you know,
Speaker 1: either the ones that are doing well or the ones
Speaker 1: that are underperforming the market, that they were quite content
Speaker 1: just to get in there and and sit back. So
Speaker 1: I'm not sure I buy that. I would say that.
Speaker 1: You know, if you think about all passive investors in total,
Speaker 1: we maybe represent the shares outstanding in terms of the ownership.
Speaker 1: So keep in mind that's SEV roughly as non passive investors.
Speaker 1: So I think things like price discovery very healthy. Um,
Speaker 1: you know, yes, we are priced takers. I'm not sure
Speaker 1: that's always a bad thing. We represent roughly five percent
Speaker 1: of the daily trading for indexing. You know that that's
Speaker 1: a relatively small number, So I think there's certainly a
Speaker 1: lot of positives I think by being included in the index.
Speaker 1: If you think about it from our perspective, we're the
Speaker 1: ultimate holder. We're going to hold this these stocks, you know, forever,
Speaker 1: potentially as long as they remain in the index, and
Speaker 1: so our investment stewardship group, uh, you know, it's in
Speaker 1: their best interest and in our shareholders best interest. These
Speaker 1: guys basically are going to reach out to these issuers
Speaker 1: to make sure that things like board composition, you know,
Speaker 1: corporate governance, executive compensation, you know, how they think about strategy,
Speaker 1: these types of things that are going to ensure that
Speaker 1: these companies are going to be around for a long time.
Speaker 1: So these are some of the things that I think
Speaker 1: are really benefits from being in an index. We just
Speaker 1: talked about defense. These are things you have to do
Speaker 1: just to make sure you don't slip. But when you
Speaker 1: think about a passive fund, it should miss the index
Speaker 1: by the exact amount of the expense ratio if you
Speaker 1: do your job well. We study this a lot. We
Speaker 1: called the game of basis points and the unsung art
Speaker 1: of actually doing better than the expense ratio. So tracking
Speaker 1: difference would be the amount you miss and in many
Speaker 1: funds that amount is less than the expense ratio, which
Speaker 1: you could say is a rebate. So for example, your
Speaker 1: your total market UM, that's the biggest fund in the
Speaker 1: world vt I. Right, you miss the index by about
Speaker 1: one point five basis points, but the fee is four
Speaker 1: bibs got two point five basis points that you made
Speaker 1: up on offense. Can you break down how that happens? Sure? So, um,
Speaker 1: if we look at that two and a half basis points,
Speaker 1: there's there's a number of different things that go into
Speaker 1: that number. I would say security lending is a piece
Speaker 1: of it. So you know, brokers who are looking to
Speaker 1: borrow stock from Vanguard, they'll call us and deal with
Speaker 1: our sect loan area. It is kind of an area
Speaker 1: that's separate from the desk, but we work very closely
Speaker 1: with those guys in terms of you know, names that
Speaker 1: they're loaning out and things like that. There's also the
Speaker 1: day to day trading cash flows, and there's the rebalances
Speaker 1: that we have on a quarterly basis, which we've been
Speaker 1: doing for for quite some time. I'm a very experienced
Speaker 1: team working on those. Those are opportunities to add value
Speaker 1: syndicate process. You know, obviously companies, you know, every day
Speaker 1: after four o'clock the phones will start ringing with brokers
Speaker 1: telling us that they have a syndicate offering. And because
Speaker 1: we show up as kind of a page one holder
Speaker 1: on Bloomberg, they're gonna want to know are we do
Speaker 1: we want to participate in the syndicate offering. And you know,
Speaker 1: most times the index provider is going to make the
Speaker 1: change the following day, so we'll do in analysis. Does
Speaker 1: this make sense that we need to, you know, maintain
Speaker 1: our weight and is it sufficiently large where the index
Speaker 1: is going to make the change, And we'll go in
Speaker 1: on those the ones that we think are appropriate to
Speaker 1: go in on. And as long as the price that
Speaker 1: we buy it at, you know, is below the closing price.
Speaker 1: When the index is added, it's incremental value. It might
Speaker 1: be fractions of a basis point, but that will add
Speaker 1: up over time. Erica. So I would say the combination
Speaker 1: of of of sect landing, syndicate process, working index changes
Speaker 1: weren't working complex corporate actions. You know, there's plenty of
Speaker 1: corporate actions that they're they're not easy in terms of
Speaker 1: you know, some of them are mandatory, which are pretty straightforward,
Speaker 1: but there's a lot where you get to elect and
Speaker 1: you know, what's the what percentage should we go for
Speaker 1: stock on this deal versus cash? And you're getting feedback
Speaker 1: from our brokers to say, hey, this is what we
Speaker 1: think most people are going to do, and then we
Speaker 1: decide this is what we think is appropriate for us,
Speaker 1: and then figuring out what we elect and then what
Speaker 1: the probation will be and how index providers are going
Speaker 1: to handle that. There is the potential to add fractions
Speaker 1: of a basis point over the course of a year
Speaker 1: when you do that, and obviously, you know, having an
Speaker 1: experienced team doesn't hurt. And I know these numbers get
Speaker 1: so small when you talk basis points, but we convert
Speaker 1: the we multiply that savings by the assets and you're
Speaker 1: looking at for your one and it might be in
Speaker 1: the ballpark of twenty million dollars returned or rebated back
Speaker 1: if you look at all the SMP five hundred ETFs
Speaker 1: and index funds they returned about twenty three So if
Speaker 1: you add it all up, passive managers maybe getting the
Speaker 1: neighborhood of a hundred million put back into the fund.
Speaker 1: Which is interesting also because the sec lending is typically
Speaker 1: lending stocks to hedge funds, so you're taking money from
Speaker 1: them and then you're playing defense against them. So in
Speaker 1: a weird way, it's sort of transferring money from hedge
Speaker 1: funds to the to the little guy, which is rare
Speaker 1: and perhaps refreshing that that that happens. And I guess
Speaker 1: I just ask you, do you find the people notice
Speaker 1: this like doesn't get much press attention. Um, that's what
Speaker 1: we call it unsung. Yeah, internally we we you know,
Speaker 1: I mentioned that we get a report every every morning
Speaker 1: around ten o'clock to let us know how the fund
Speaker 1: was doing. Uh And and obviously the first column that
Speaker 1: I go to is is the value add in terms
Speaker 1: of you know, how is my fundne you know, week
Speaker 1: to date, month to day, year to date versus the inchmark.
Speaker 1: And so we would know right up until and that's
Speaker 1: what everyone focuses on. And and um, you know, so
Speaker 1: among the desk, it's a badge of honor if we
Speaker 1: can kind of incrementally add value for our shareholders. So
Speaker 1: it's something that we focus on a lot, you know,
Speaker 1: And I think it's not just the expense ratio. While
Speaker 1: the expense ratio is incredibly important and probably a great
Speaker 1: first filter, you know, obviously the lower expense ratio. Vanguard
Speaker 1: has been beating that drum for for forty odd years.
Speaker 1: I think other things that come into play are things
Speaker 1: like that tracking difference and uh you know, obviously benchmark
Speaker 1: uh can can differ a little bit as well. So
Speaker 1: some of those other things will will come into but
Speaker 1: but tracking error is something that we are very much,
Speaker 1: you know, on top of you. So, Jerry, you brought
Speaker 1: up the scorecard a couple of times, and I gotta
Speaker 1: ask you, what's it look like so far this year? UM,
Speaker 1: I would say the numbers that are mentioned earlier, I
Speaker 1: would say, uh, is it looks like it's going to
Speaker 1: be on on course for that again. So another another
Speaker 1: good year, UM in terms of performance. So despite everything
Speaker 1: that happened, uh, you know, back I would say in March, UM,
Speaker 1: there were some of the rebounces were canceled due to
Speaker 1: the fact that you know, people were just starting to
Speaker 1: go home for the first time working from home. There
Speaker 1: was some questions around, hey, you know, is this the
Speaker 1: right thing to do, But I absolutely think it was
Speaker 1: the right thing to do at that time based on
Speaker 1: the environment. But you also saw that trading costs, the
Speaker 1: spreads on stocks, the amount of of liquidity that was
Speaker 1: available kind of disappeared back in March. UM, So it
Speaker 1: was a very um you know in terms of you know,
Speaker 1: I've been trading for twenty five odd years, um, that
Speaker 1: was that was pretty bad time to be to be trading,
Speaker 1: because I would say most people, if you had kind
Speaker 1: of plugged in, you know, what are my cost estimates
Speaker 1: for trading this list, the reality was maybe two to
Speaker 1: three times what the what the expected costs would be
Speaker 1: based on the fact that just all of the whole
Speaker 1: market micro structure had changed so much during during that period. Thankfully,
Speaker 1: we're at a period now where things have calmed down
Speaker 1: and it feels like things have gotten back to normal.
Speaker 1: But even despite that, we were still I would say,
Speaker 1: this is still going to be a very good year
Speaker 1: for us in terms of performance as the benchmark across
Speaker 1: the board. It struck me March especially that must have
Speaker 1: just been a crazy time to be doing what what
Speaker 1: you do. And I'm curious, you know, when you think back,
Speaker 1: You've mentioned, you know, you've been doing this twenty five years,
Speaker 1: and you know you've seen the financial crisis ten plus
Speaker 1: years ago. Now, like, how did that moment in March
Speaker 1: compare with everything else that you've seen? Yeah, I would
Speaker 1: say it was greater than the global financial crisis in
Speaker 1: terms of just the trading it was. I mean there
Speaker 1: were um, you you'd be coming in in the morning
Speaker 1: and wondering if futures were going to go down limit,
Speaker 1: wondering you know, what happened? What what did investors do
Speaker 1: last night? And you know, thankfully, maybe it's the it's
Speaker 1: the type of shareholders we had, but we actually had
Speaker 1: very few of our investors that transacted that got out
Speaker 1: of the market back then, and and um, a very
Speaker 1: very small percentage. So you know, thank God for that,
Speaker 1: because here we are, you know, up from our lows
Speaker 1: on March three. And obviously if you stuck with it,
Speaker 1: you were rewarded for taking on that risk. And probably
Speaker 1: every every fiber in your in your body wanted to say,
Speaker 1: we need to get out because this is going to
Speaker 1: get worse. Um, But that's I think where if you've
Speaker 1: if you've gone through a few of these before periods
Speaker 1: where you've had extreme volatility in the market, probably getting
Speaker 1: out of the market is not the right thing to
Speaker 1: do at that time. Well, you mentioned, um, how sticky
Speaker 1: Vanguard customers are, and you know that's a testament to
Speaker 1: Mr Bogol and you know obviously they're they're probably making
Speaker 1: him very proud right now. Um. But but Jerry, I
Speaker 1: think you might also be making him pretty pretty proud
Speaker 1: because you know you're managing you know, you mentioned the
Speaker 1: three trillion dollar number earlier, but you also oversee the
Speaker 1: world's biggest mutual fund and one of the biggest e
Speaker 1: t f s and and by our account, I think
Speaker 1: you know you're somewhere in the nine hundred billion dollars
Speaker 1: assets under management. Do you ever think about what it's
Speaker 1: gonna be like to hit a trillion which could happen,
Speaker 1: like you know, if the market takes off between now
Speaker 1: and the end of the year, and maybe there's a
Speaker 1: vaccine or something like we we could see you hit
Speaker 1: a trillion dollars this year. Do you do you have
Speaker 1: like an alert set up for that moment? Well, I
Speaker 1: hope We're not tempting fate here because back in February
Speaker 1: that the fund was at around nine thirty and I
Speaker 1: need to tell you what happened over the next month.
Speaker 1: It assets got down below six billion. But yeah, we're
Speaker 1: right around nine fifty billion right now, and um, you know,
Speaker 1: so obviously trillion dollars is not that far away. It's
Speaker 1: it's never been Vanguard's goal to see, hey, we need
Speaker 1: to see if we can get you know, the first
Speaker 1: fund to a trillion dollars. But I think what it
Speaker 1: does show us is that investors have bought into the
Speaker 1: idea of of low cost diversify funds. And obviously, the
Speaker 1: equity portion of a lot of our target date funds
Speaker 1: is total stock markets. So when people you know, sign
Speaker 1: up for their four oh one K or the target
Speaker 1: retirement funds and they say, hey, I want to retire
Speaker 1: in the equity portion of that is total stock So
Speaker 1: I'm the beneficiary of a lot of that cash flow
Speaker 1: that is coming from our target date funds. So that's
Speaker 1: kind of has been a good source of the cash
Speaker 1: flows that are coming into the fund. So you know, when, when,
Speaker 1: when will it happen? I think there's a chance that
Speaker 1: happens later this year, but I I wouldn't want to
Speaker 1: tempt fate and and and to answer your question, yes,
Speaker 1: I think the van the systems folks are well aware that,
Speaker 1: you know, things are going to need to change when
Speaker 1: we hit a trillion, and they're on top of that
Speaker 1: and have been on top of that for some time. Jerry,
Speaker 1: one of the things that makes fan Guard different from
Speaker 1: other e t F issuers is that your e t
Speaker 1: s have this patented structure where they're a share class
Speaker 1: and the mutual funds. How does that make your job
Speaker 1: different than it might be at different kind of e
Speaker 1: t F provider. Yeah, okay, good question. Yeah, so um,
Speaker 1: there's a couple of things I would say on that.
Speaker 1: So um, you know, we sometimes will get calls from
Speaker 1: institutions who maybe they fired another manager and they would
Speaker 1: look to bring money to Vanguard, and they will tell
Speaker 1: you what front, Hey, it's we're looking to find a
Speaker 1: new manager. We just want equity exposure the mutual fund.
Speaker 1: We would not be huge fans of taking that money
Speaker 1: if we knew it was gonna leave a month from
Speaker 1: now or three weeks from now. But obviously, if you
Speaker 1: have an e t F, they're going to pay their
Speaker 1: own freight on the way in. They're paying their own
Speaker 1: transaction costs, you know, bidass spread whatever it might be,
Speaker 1: and maybe even a tiny fee from the the the
Speaker 1: from the the issuer if it's an e t F.
Speaker 1: So for people who are short term, I think the
Speaker 1: e t F is is perfect um and it isolates
Speaker 1: the fund itself, you know, in terms of you know,
Speaker 1: we work closely with with with the folks in our
Speaker 1: Capital markets group who kind of run the e t F.
Speaker 1: You know, I think there's great benefits in terms of
Speaker 1: index changes. We talked about some of the changes that
Speaker 1: potentially can happen when you have cash flows coming into
Speaker 1: the fund. It means sometimes that you don't need to
Speaker 1: sell because you can take advantage of that cash flow
Speaker 1: to buy the ads that are coming into the index.
Speaker 1: So we think that that structure works well. You know,
Speaker 1: I remember when we started vt I, you know, um
Speaker 1: and looking at the volume and celebrate when it when
Speaker 1: over ten thousand shares traded in one day. And now
Speaker 1: it's an incredibly liquid vehicle. You know, there are times
Speaker 1: when for example, I need cash coming into my fund.
Speaker 1: For example, if I have ex dividends going out and
Speaker 1: I can elect rather than receiving stocks into the fund,
Speaker 1: perhaps it might be more beneficial for me to receive
Speaker 1: cash and then use that cash to to to fund
Speaker 1: the dividends. So there are lots of benefits to it,
Speaker 1: and and it works really well for us. And how
Speaker 1: much of your job now is automated? And are there
Speaker 1: aspects of it that you see becoming automated over time? Yeah?
Speaker 1: I mean if I look back on you know, started
Speaker 1: when I started advaning gard, actually one of the people
Speaker 1: on the desk brought in a floppy disk this morning
Speaker 1: as a as a coaster, you know, as for as
Speaker 1: the holder coffee on, just as a joke. And we
Speaker 1: have people on the desk we actually had never seen
Speaker 1: it before. And if I think back to the early days,
Speaker 1: we had one dot machine on the desk that we
Speaker 1: would use to send trades down to the floor. Very
Speaker 1: very different today obviously, um, in terms of the technology
Speaker 1: available to us. Wait, you mean Vanguard's not running on
Speaker 1: floppy disks right now, We're not. We're not running back
Speaker 1: in the in the early nineties, uh disks where how
Speaker 1: you you know, you saved your program and sent it down.
Speaker 1: But uh, now obviously you know, incredible amount of attention
Speaker 1: is paid to technology in terms of let's see what
Speaker 1: are the manual chores that we used to do that
Speaker 1: they are now just fully automated in terms of you know,
Speaker 1: we used to back in the day you would have
Speaker 1: compare reports which would compare what we knew in the
Speaker 1: portfolio versus what what what the bank the custodian knew.
Speaker 1: Now you know, we have reports that come in and
Speaker 1: it'll it'll just automatically tell you in there here's a
Speaker 1: break between you and the custodian and is it as
Speaker 1: a as a result of maybe a corporate action or
Speaker 1: what's the reason for it, and you can immediately focus
Speaker 1: on it. Whereas before you were looking at these green
Speaker 1: bar reports. Today, I mean we have obviously so we
Speaker 1: have trading desks here in Malvern, also in the UK
Speaker 1: and in Australia, so we have, you know, trading systems
Speaker 1: where we have consistency of data. We can pass the
Speaker 1: trade around in terms of if we have global portfolios,
Speaker 1: we can start it in in in Asia, then move
Speaker 1: it to Europe and then come back to North America.
Speaker 1: For the guys who are working kind of on the
Speaker 1: international side, and so they just have consistency of data
Speaker 1: and great insights into terms of things like tracking er
Speaker 1: like I know, for example, when I go home at
Speaker 1: five o'clock, Um, I'm going to sign off as the
Speaker 1: portfolio manager. We also have risk folks who are going
Speaker 1: to sign off, and we have a death supervisor who
Speaker 1: will sign off and they can see exactly that based
Speaker 1: on all the information available at five o'clock, here's where
Speaker 1: you're expected X anti tracking error is we never had
Speaker 1: that kind of insight, I would say ten or fifteen
Speaker 1: years ago, but now we do. And um, you know. So,
Speaker 1: so the type of insights like I can look at
Speaker 1: total stock, which is, you know, stocks in the portfolio,
Speaker 1: and I can see which stock do I have my
Speaker 1: biggest misswait first demention mark and what how is that
Speaker 1: going to impact, if at all, my tracking error and
Speaker 1: so really good insights that will help us to kind
Speaker 1: of track even tighter than we have in the past.
Speaker 1: Speaking of that, UM, I just have a quick anecdote.
Speaker 1: I went to interviewed Jack Bogel back maybe five years ago,
Speaker 1: and I asked him about some of this game of
Speaker 1: basis points stuff. And if you look at the Vanguard
Speaker 1: five hundred fund in nine, the tracking difference was sixty
Speaker 1: five basis points and the fee was forty six, so
Speaker 1: it actually was worse than the fee, So bad job. Um.
Speaker 1: And he was telling me that back then they had
Speaker 1: a woman doing They sent it to a woman who
Speaker 1: had a part time job somewhere else, like I believe,
Speaker 1: like I want to say it a mattress company or something.
Speaker 1: But anyway, over the years that it's amazing to see
Speaker 1: that chart, the fee fell and the tracking improved to
Speaker 1: the point where it's now, you know, one point five
Speaker 1: basis points. But anyway, just a um anecdote there, and
Speaker 1: then I just want to pivot to a question Morgan
Speaker 1: Barne on my team had, which is a good one
Speaker 1: to ask a lot of people, which is what keeps
Speaker 1: you up at night as we look forward, uh, you
Speaker 1: know into the next couple of years, what keeps me
Speaker 1: up at night. So I would say that we have
Speaker 1: we're fortunate in that we have a really, really good
Speaker 1: team on the desk. Uh. You know, I mentioned earlier
Speaker 1: that we've probably the average tenure is about fourteen years.
Speaker 1: And you know, when I sign off in the evening,
Speaker 1: after we've done all the trading at four o'clock. We've
Speaker 1: processed everything. I get a chance to go through my
Speaker 1: portfolio and make sure that it's right where I think
Speaker 1: it should be. I'm going to sign off on that.
Speaker 1: And we also have a risk team that's going to
Speaker 1: sign off on that, and we also have a death
Speaker 1: supervisor who will sign up. So there's almost three sets
Speaker 1: of eyes looking at every single portfolio. You know that
Speaker 1: you're tracking error, your ex anti tracking error is within
Speaker 1: acceptable whatever the limit might be. UM, and you can
Speaker 1: feel when you leave that everything is in pretty good shape.
Speaker 1: Now that's not saying there are days we come in
Speaker 1: that the following morning and find out, hey, by the way,
Speaker 1: you know, a portfolio brought in fifty million dollars. We
Speaker 1: were not aware of it. That's a that's a different
Speaker 1: ball game. But we have systems in place. We have
Speaker 1: lots of eyes looking at portfolios at the end of
Speaker 1: the day. So by the time I get home and
Speaker 1: take the dog for a walk, I think I can
Speaker 1: I can I can rest knowing that things are in
Speaker 1: pretty good shape. UM. So there's not a whole lot
Speaker 1: I will say. When we have rebalances and we're trading
Speaker 1: fifty six billion dollars over the course of a week.
Speaker 1: I think it's uh, there's plenty of days when I'm
Speaker 1: thinking about this is what we need to do the
Speaker 1: next morning, or did we remember to do this? And
Speaker 1: but but fortunately, as I mentioned earlier, we have twenty
Speaker 1: four people who are probably thinking the same thing, and
Speaker 1: we've we've lots of checks and lots of eyeballs that
Speaker 1: are looking at the same reports. And so I think
Speaker 1: over time we can feel relatively comfortable that even though
Speaker 1: it's it's a lot of money that we manage, we
Speaker 1: have we have really good systems in play and lots
Speaker 1: of people who have been through this before. So that
Speaker 1: makes me kind of feel that we can we can
Speaker 1: relax when we get home. So, Jerry, Um, you sort
Speaker 1: of just described the penultimate team sport. I also understand
Speaker 1: that at one point in your past, um, you were
Speaker 1: less of maybe a team sport athlete and more of
Speaker 1: a long distance runner middle distance runner. I think, yeah, yeah,
Speaker 1: so yeah, back in my uh in my college days.
Speaker 1: You know, I grew up in Ireland, but um, I
Speaker 1: I went to Villanova and attract scholarship and uh, you know,
Speaker 1: great great memories of running for Villanova and then even
Speaker 1: after school tried the professional running for a few years
Speaker 1: and competed at the eighty eight Olympics for Ireland. In
Speaker 1: I would say there's a lot lots of lessons that
Speaker 1: you would learn. And it's not just me, and there
Speaker 1: are other guys on the desk cour uh fairly competitive
Speaker 1: in their in their particular sports. Um, but I think
Speaker 1: there are things like you know that you lessons you
Speaker 1: learn from from from me. It was tracked, which were
Speaker 1: you know, hard work, being able to operate in an
Speaker 1: environment where things can change in an instant. You know,
Speaker 1: you start in a race, you think, hey, we're gonna
Speaker 1: go through. We think we're going to go out in
Speaker 1: about fifty eight seconds maybe for the first quarter, and
Speaker 1: all of a sudden someone decides to go out in
Speaker 1: fifty six seconds. Well, all of a sudden, your plan
Speaker 1: has to change. That happens to on the desk where
Speaker 1: you think trading a list and uh, you know, I
Speaker 1: run my five million dollar list, and all of a sudden,
Speaker 1: you know, you get an institution called in and say
Speaker 1: we're bringing in an additional four hundred million today, and
Speaker 1: so you have to change plans. There are things that
Speaker 1: happened late and late late in the day, like three
Speaker 1: fifty five, and you have to be able to change
Speaker 1: and react in an environment where it can be fairly intense.
Speaker 1: And I'm really thankful of what tracted for me in
Speaker 1: terms of being able to operate in that type of
Speaker 1: an environment in my rate. Did you run the mile
Speaker 1: under four minutes one time? Yes? Yeah, that's impressive. Eric.
Speaker 1: But then, um, if I tell you that the world
Speaker 1: record was broken for the five thousand earlier this week
Speaker 1: in Monaco and the uh, the gentleman who did it,
Speaker 1: I forget his name, but he ran three miles, you know,
Speaker 1: three point one miles for five kilometers in twelve thirty five,
Speaker 1: which is almost like three four or one miles back
Speaker 1: to back. So it just puts things in perspective. So
Speaker 1: it's a long way of saying I'm glad I found
Speaker 1: a job away from track because I don't think I
Speaker 1: would have been able to support myself today based on
Speaker 1: the type of times they're running. Yeah, so I have
Speaker 1: to ask how close to a four a minute mile
Speaker 1: can you run? Today? Um? Not even close? Yeah, you know,
Speaker 1: I'm more of a biker these days. Yeah, so I
Speaker 1: get out on the bike. I have a couple of
Speaker 1: friends in the neighborhood. We'll go out and do liket
Speaker 1: mis on on on a Saturday, on a Sunday and
Speaker 1: it's a lot more forgiving on the knees and hips
Speaker 1: and uh yeah, so, uh, the bike has kind of
Speaker 1: taken over from the running. I think all those years
Speaker 1: of running, Uh, the knees took a little bit of
Speaker 1: a pounding and it's the bike is way more forgiving
Speaker 1: right now. Um So, Jerry, my last question for you
Speaker 1: here is you know what you've described. It's it's like
Speaker 1: the one of the most interesting jobs sort of in finance,
Speaker 1: I think where you know the S and P five
Speaker 1: hundred especially, is this penultimate thing that and you guys
Speaker 1: are sort of in the trenches making sure that you
Speaker 1: know the Vanguard Vanguard's name does this thing as as
Speaker 1: as well as anybody in the business. And I'm just curious,
Speaker 1: um on sort of a personal level for you, like
Speaker 1: if you weren't doing this, have you ever given thoughts
Speaker 1: of like what else would you be doing? Well? You know,
Speaker 1: I I do. I'll tell you when I think about
Speaker 1: that is when I when I go back to Ireland
Speaker 1: and I see guys I went to school with and
Speaker 1: they're doing. Believe me, they're they're doing very different things
Speaker 1: than I'm doing today. And I think how different it
Speaker 1: could have been if I never came to the US
Speaker 1: and never never ended up at Villanova. Maybe, you know,
Speaker 1: I don't know what I'd be doing back home, but
Speaker 1: I knew, within i'd say, a month of being on
Speaker 1: the trading desk here at Vanguard, that this is what
Speaker 1: I wanted to do. I mean, I just couldn't wait
Speaker 1: on a Sunday night. I couldn't wait to get into
Speaker 1: work on the Monday morning. And when Friday would hit,
Speaker 1: you know, it was great because we you know, it
Speaker 1: was a couple of days to relax. But Sunday evening,
Speaker 1: I was like, yeah, I can't wait to get back in.
Speaker 1: Here's where we got going on this week. And I
Speaker 1: think most of the people on the desk feel that
Speaker 1: they just have this passion about about trading, that that's
Speaker 1: what they love to do. That's what gets through juices
Speaker 1: going in terms of you know, we look ahead. We
Speaker 1: have a group that kind of picks out corporate actions
Speaker 1: that are happening over the next two weeks. And when
Speaker 1: I assign those trades, different people on the desk, you know,
Speaker 1: you can immediately see people doing the research figuring out
Speaker 1: what's the strategy we want to use to to to
Speaker 1: for this complex corporate action that's coming up. I think
Speaker 1: everyone that we've had very little turnover on the desk,
Speaker 1: So I think when we hire people, we look for
Speaker 1: that passion. And certainly when it comes to funds like
Speaker 1: you know, the five hundred or total stock Market some
Speaker 1: of our kind of flagship uh you know funds um
Speaker 1: there is incredible pride and making sure that those funds
Speaker 1: are performing and delivering the performance that our investors expect.
Speaker 1: And that's what gets us, That's really what satisfies us.
Speaker 1: When we get to talk to some of our shareholders
Speaker 1: at events like when we used to have the Bogo
Speaker 1: Heads meeting, you get to talk to people and they
Speaker 1: tell you, hey, your fund helped put my kids through college,
Speaker 1: you know, helped us acquire a nice home, help me
Speaker 1: retire early. Those are fantastic stories. And really that that's
Speaker 1: what we care about, is is is making sure that
Speaker 1: we're delivering the performance of the funds. And and and
Speaker 1: I think that's I speak for the rest of the
Speaker 1: desk when I say that, all right, I thought of
Speaker 1: one more question. Jerry, and this is this is actually
Speaker 1: truly the last one. And it's when that we often
Speaker 1: ask people, Um, what is your favorite E T F ticker? Oh,
Speaker 1: it has to be v t I. Yeah, I'm a
Speaker 1: bit of a homer when it comes to that. I
Speaker 1: knew you were going to say that, and it can't
Speaker 1: be v t I. It has to be something else. Uh, well,
Speaker 1: you know it's first cousin is VOO. I guess, uh
Speaker 1: you know which is but uh, you know if if
Speaker 1: you know. Obviously people find out sometimes what I do
Speaker 1: and they were like, hey, what should I do? You
Speaker 1: know what I always say, Well, take a look. I'm
Speaker 1: not telling you what to do, but take a look
Speaker 1: at vt I, take a look at VOOR or the funds,
Speaker 1: whatever you decide is best for you. It's a tough
Speaker 1: question for him because Vanguard, I think, only has one
Speaker 1: cool ticker, which is VCR, which is the consumer discretionary.
Speaker 1: And that's accidental. I didn't even mean it. Um, I
Speaker 1: guarantee it. Although Woo you could argue is interesting because
Speaker 1: it's Roman number five, Oh, which is five? Okay, did
Speaker 1: you know that, Jerry? I'm not until you just told me. Okay,
Speaker 1: I think that's why they did it, or again it
Speaker 1: was an accidental situation. But yeah, you guys don't really
Speaker 1: um do much on the ticker front. That's just not
Speaker 1: your game. It's not our game. Yeah, I mean we'd
Speaker 1: like to think. I think when we when we do
Speaker 1: come out with with funds and and ets, you know, Eric,
Speaker 1: that that we're looking for things that are not not
Speaker 1: just a fad, right, it's it's that we think to
Speaker 1: have an investment merit. And yeah, maybe we don't have
Speaker 1: the most creative when it comes to assigning tickers, but
Speaker 1: you know, it's a long game. It's a long game exactly,
Speaker 1: all right, Jerry or Riley, thank you so much for
Speaker 1: spending time with us on Trillians. You're very welcome, guys,
Speaker 1: Thank you very much. Have a great day. Thanks for
Speaker 1: listening to Trillions until next time. You can find us
Speaker 1: on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,
Speaker 1: and wherever else you like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter, I'm at Joel Weber Show,
Speaker 1: He's at Eric Baltunas, and you can find any at
Speaker 1: Antonia b Massa. This episode of Trillions was produced by
Speaker 1: Magnus Hendricks. Francesca Levy is the head of Bloomberg podcast
Speaker 1: Bye