WEBVTT - Greg Davis on Vanguard Portfolio Management 0:00:02.040 --> 0:00:06.000 This is Master's in Business with Barry rid Holds on 0:00:06.240 --> 0:00:08.200 Bloomberg Radio. 0:00:08.880 --> 0:00:12.319 This week on the podcast, I have an extra special guest, 0:00:12.880 --> 0:00:16.400 Greg Davis, chief investment officer at a little shop called 0:00:16.400 --> 0:00:20.880 the Vanguard Group, which manages eight trillion dollars. He's only 0:00:20.920 --> 0:00:24.560 responsible for seven point three trillion of it, so kind 0:00:24.600 --> 0:00:28.960 of a slacker. I found this conversation to be absolutely 0:00:29.200 --> 0:00:33.639 a masterclass in how to think about investing risk, how 0:00:33.680 --> 0:00:37.440 to think about where your returns come from, what sort 0:00:37.479 --> 0:00:42.960 of behavioral problems lead to bad outcomes, and all of 0:00:43.000 --> 0:00:45.720 the usual things that we've learned over the years from 0:00:45.800 --> 0:00:50.959 the success of Vanguard. Few people are in a position 0:00:51.080 --> 0:00:54.000 to see what's going on in the world of investing, 0:00:54.800 --> 0:00:59.480 whether it's institutional or retail, better than Vanguard's CIO, and 0:00:59.560 --> 0:01:03.440 Greg Day just does an amazing job. I thought this 0:01:03.640 --> 0:01:07.440 was a really fascinating conversation. I think you will also 0:01:07.800 --> 0:01:13.399 with no further ado, my interview with Vanguard CIO Greg Davis. 0:01:14.200 --> 0:01:16.600 Greg Davis, Welcome to Bloomberg. 0:01:16.880 --> 0:01:18.280 Thanks very great to be here with you. 0:01:18.360 --> 0:01:20.720 Great to have you. So let's talk a little bit 0:01:20.720 --> 0:01:25.480 about your background, which is kind of interesting. Undergraduate you 0:01:25.560 --> 0:01:28.640 get a BSN insurance from Penn State. What led to 0:01:28.680 --> 0:01:30.520 an interest in insurance. 0:01:31.240 --> 0:01:33.480 It's a long story, but originally I went to school 0:01:33.520 --> 0:01:37.120 for engineering. Got to school, realized that I wasn't very 0:01:37.160 --> 0:01:38.920 good at mechanical drawing, which is a big part of 0:01:38.959 --> 0:01:42.280 aerospace engineering curriculum. So I started to look at other 0:01:42.319 --> 0:01:47.360 opportunities and primarily in a business space, so start examining 0:01:47.440 --> 0:01:51.000 opportunities in finance, real estate, and insurance. Penn State was 0:01:51.000 --> 0:01:53.600 one of the few schools that actually had an insurance major, 0:01:54.280 --> 0:01:57.000 and you know, with the goal of actually getting becoming 0:01:57.040 --> 0:01:59.720 gainfully employed. When I graduated college, I thought, hey, having 0:01:59.720 --> 0:02:03.040 a a somewhat unique background would be helpful and it 0:02:03.160 --> 0:02:05.440 worked out. And had multiple job offers coming out of 0:02:05.440 --> 0:02:08.360 school from a number of different insurance companies and had 0:02:08.360 --> 0:02:10.400 an opportunity to be an underwriter for a few years 0:02:10.400 --> 0:02:12.840 before I decided to go back to school to get 0:02:12.880 --> 0:02:13.320 the NBA. 0:02:14.000 --> 0:02:17.040 How'd you end up at Merrill Lynch in the nineteen nineties, 0:02:17.240 --> 0:02:20.760 So I ended up going through the Wharton program. 0:02:20.760 --> 0:02:22.880 I did an internship in the summer at City Bank 0:02:22.960 --> 0:02:27.560 Securities and fixing come sales and trading, got a couple 0:02:27.600 --> 0:02:30.040 different job offers across the Street. But the reason I 0:02:30.040 --> 0:02:31.799 went to Meryl was because they had this unique global 0:02:31.800 --> 0:02:35.200 debt rotation program that allowed you to rotate through a 0:02:35.240 --> 0:02:38.639 couple of different business units in fixingcome sales, and trading, 0:02:38.680 --> 0:02:39.919 and I knew I wanted to do trading. 0:02:40.639 --> 0:02:43.840 Were you at the Downtown the World Final Financial by 0:02:43.880 --> 0:02:47.040 the way, that could be the most amazing trading desk. 0:02:47.120 --> 0:02:50.360 I've been there a couple of times, and in the 0:02:50.440 --> 0:02:53.840 nineteen nineties, when you walked onto the equity floor, you 0:02:53.919 --> 0:02:56.680 were just hit with a wall of sound and energy. 0:02:57.400 --> 0:03:00.000 I've never seen or experienced anything like that anywhere else. 0:03:00.080 --> 0:03:02.560 And the fixed income floor was equally sized, just on 0:03:02.560 --> 0:03:04.920 a different floor, but also a similar type environment. But 0:03:04.960 --> 0:03:07.440 it was a very interesting place to start a career 0:03:07.480 --> 0:03:12.519 after grad school. But that experience got cut short because 0:03:12.680 --> 0:03:16.080 right around that time when my class started, it was 0:03:16.160 --> 0:03:18.280 the tail end of the Asian financial crisis, the. 0:03:18.360 --> 0:03:19.880 Russian roue seven or ninety eight. 0:03:19.919 --> 0:03:22.600 I started in the beginning of I started in September 0:03:22.639 --> 0:03:26.200 of ninety eight, and that happened in ninety seven, but 0:03:26.280 --> 0:03:31.080 you had the Asian financial crisis, the Russian ruble devaluation, 0:03:31.600 --> 0:03:34.520 and then you had long term capital management blowing up. 0:03:34.680 --> 0:03:37.360 So there was a lot of changes that was happening 0:03:37.360 --> 0:03:40.680 across the street in terms of you know, layoffs happening, 0:03:40.680 --> 0:03:44.120 and our program got cut short, ended up getting placed 0:03:44.120 --> 0:03:46.920 in a non trading role, and you know, decided to 0:03:46.920 --> 0:03:49.480 look at other opportunities outside and came across this great 0:03:49.480 --> 0:03:52.720 opportunity to pursue trading at Vanguard, you know, twenty four 0:03:52.760 --> 0:03:53.160 years ago. 0:03:53.240 --> 0:03:58.440 So let's talk about that, and your bio explains how 0:03:58.480 --> 0:04:00.760 you were recruited to Van Guard. I thought that was 0:04:00.800 --> 0:04:03.520 a really interesting story. Tell us a little bit about 0:04:03.520 --> 0:04:04.880 what brought you to Vanguard. 0:04:05.200 --> 0:04:08.160 So it was interesting because I was pretty pretty keen 0:04:08.200 --> 0:04:09.920 on staying in New York. I had a number of 0:04:09.960 --> 0:04:12.160 relationships that I built up and had another job lined 0:04:12.200 --> 0:04:14.400 up in New York City. But one of my best 0:04:14.400 --> 0:04:16.120 friends that I grew up with actually worked in the 0:04:16.279 --> 0:04:18.159 HR department at Vanguard, and she was like, you should 0:04:18.160 --> 0:04:20.640 come down and talk to some people at Vanguard, And 0:04:20.720 --> 0:04:22.839 at first I kind of blew it off, but she 0:04:22.920 --> 0:04:25.520 was pretty persistent. So I came down, met with our 0:04:25.560 --> 0:04:29.840 head of the portfolio review department, which oversees our external managers, 0:04:30.120 --> 0:04:32.520 met with our head of brokerage, and then met with 0:04:32.560 --> 0:04:34.600 the head of Bond Indexing, who was Ken Volpert at 0:04:34.600 --> 0:04:36.919 the time, and me and him had an instant connection, 0:04:37.560 --> 0:04:40.599 and so Ken was the main reason I came to Vanguard. 0:04:40.720 --> 0:04:43.040 Vanguard had a great reputation already we were much smaller 0:04:43.120 --> 0:04:45.320 at the time, but Ken had a track record of 0:04:45.320 --> 0:04:48.240 bringing new people onto his team, developing them and seeing 0:04:48.279 --> 0:04:51.119 them move into bigger jobs over time. And as somebody 0:04:51.120 --> 0:04:53.839 who was relatively new to the industry, that's the kind 0:04:53.880 --> 0:04:57.320 of mentor and boss I was looking for. So, you know, 0:04:57.440 --> 0:04:59.960 Ken ended up being, you know, one of the best 0:05:00.120 --> 0:05:01.440 bosses I've ever had in my career. 0:05:01.520 --> 0:05:04.840 We'll talk a little bit about leadership and crew development 0:05:04.880 --> 0:05:08.520 a little later. It's really a fascinating subject. But you 0:05:08.560 --> 0:05:14.080 eventually serve as director of Vanguard Australia and Asia Pacific 0:05:14.320 --> 0:05:16.880 and CIO of the region. Tell us a little bit 0:05:16.920 --> 0:05:20.440 about that experience in the two thousands, I mean, the 0:05:20.520 --> 0:05:23.800 nineties was its own unique animal, but the two thousands 0:05:24.080 --> 0:05:25.520 certainly weren't boring. 0:05:25.760 --> 0:05:28.680 Now, So my family and I we moved to Melbourne, 0:05:28.680 --> 0:05:32.159 Australia where offices. It was a just a fabulous experience, 0:05:32.200 --> 0:05:35.200 both professionally and personally. Just having an opportunity to work, 0:05:35.920 --> 0:05:38.799 you know, in a different country, embracing the Australian culture, 0:05:39.400 --> 0:05:41.240 but being part of the Asia pac region because at 0:05:41.240 --> 0:05:43.160 the time we had an office in Hong Kong as well, 0:05:43.160 --> 0:05:45.920 where we were starting up our ETF business. But it 0:05:46.000 --> 0:05:49.159 was a tremendous experience because I had started off in 0:05:49.240 --> 0:05:52.200 bond trading, worked my way into portfolio management and running 0:05:52.240 --> 0:05:54.960 the bond the nexting team for a number of years, 0:05:55.000 --> 0:05:56.960 and then it got asked to take this responsibility which 0:05:57.000 --> 0:05:59.279 was much broader. So I was a mile deep on 0:05:59.360 --> 0:06:02.040 a subject matter of bond indexing, but now I had 0:06:02.080 --> 0:06:05.080 the opportunity to lead an equity indexing group, the entire 0:06:05.120 --> 0:06:08.720 fixed income team, our investment strategy team that does research 0:06:08.800 --> 0:06:11.839 for our clients around portfolio construction, those types of things. 0:06:12.279 --> 0:06:14.640 But the other big part of it was having an 0:06:14.680 --> 0:06:16.760 opportunity to be on the Australian executive team that actually 0:06:16.800 --> 0:06:19.120 ran the business. So from a broadening standpoint, I'm an 0:06:19.160 --> 0:06:21.560 investment guy, but that was an opportunity to actually learn 0:06:21.600 --> 0:06:25.320 about the business, how Vanguard Australia operates in the ecosystem, 0:06:25.760 --> 0:06:28.600 how we're trying to market our products and services, how 0:06:28.600 --> 0:06:31.280 we're engaging with regulators, the media, the whole nine yards, 0:06:31.400 --> 0:06:33.760 and then also being part of the board of directors 0:06:33.800 --> 0:06:37.920 down there. So from a broadening standpoint, that experience was unbelievable, 0:06:39.000 --> 0:06:41.479 so valued every minute that I was down there. And 0:06:41.560 --> 0:06:44.280 unfortunately or fortunately depending on how you look at it, 0:06:45.120 --> 0:06:46.839 you know, the three to four year assignment ended up 0:06:46.839 --> 0:06:49.839 being thirteen months, but I got a great opportunity to 0:06:49.839 --> 0:06:51.640 come back to run the fixed income group as you 0:06:51.720 --> 0:06:54.360 had As you had mentioned, but the time in Australia 0:06:54.440 --> 0:06:56.720 was fabulous for both myself, my wife and the kids. 0:06:56.880 --> 0:06:59.640 Yeah. You know, what's really interesting is everybody tends to 0:06:59.680 --> 0:07:03.359 think of Wall Street and investing in finance in terms 0:07:03.440 --> 0:07:09.080 of the investing side, but the business side is really intriguing. 0:07:09.480 --> 0:07:13.920 There are a lot endless variety of business models and 0:07:14.000 --> 0:07:18.480 seeing how people operate that it's really an education one 0:07:18.520 --> 0:07:20.680 that I think a lot of people coming out of 0:07:20.680 --> 0:07:24.440 school don't think about goes. You think about the sexy things. Hey, 0:07:24.440 --> 0:07:26.040 I want to do venture capital, I want to do this, 0:07:26.080 --> 0:07:28.240 I want to do that. The business side is really 0:07:28.280 --> 0:07:30.200 quite fascinating and somewhat overlooked. 0:07:30.400 --> 0:07:32.480 That's very, very true, but it's also one of those 0:07:32.480 --> 0:07:34.360 things that you don't necessarily appreciate it until you've been 0:07:34.360 --> 0:07:35.800 doing a certain job for a while. So if you 0:07:35.800 --> 0:07:37.640 would have said to me, you know, when I first 0:07:37.640 --> 0:07:39.240 came out of grad school and you said to me, hey, 0:07:39.280 --> 0:07:41.280 I want you to go to the business side, you 0:07:41.280 --> 0:07:42.680 know I would have said, no, thank you, I really 0:07:42.680 --> 0:07:45.200 want to do trading and portfolio management. But you get 0:07:45.240 --> 0:07:47.920 to a point in your career where you feel like, hey, 0:07:47.960 --> 0:07:50.640 you've you've learned a lot, You've developed a team, and 0:07:50.680 --> 0:07:53.000 you're looking for new challenges and a chance to stretch 0:07:53.000 --> 0:07:54.200 yourself and grow and learn. 0:07:54.480 --> 0:07:56.520 And that's exactly what that opportunity provided. 0:07:56.960 --> 0:07:59.840 So now you eventually get you go to fixed in 0:08:00.200 --> 0:08:03.760 and then you're elevated to chief investment officer of all 0:08:03.800 --> 0:08:06.560 a vangroup. Take us through a day in the life 0:08:06.640 --> 0:08:09.160 or or a week in the life of Vanguard CIO. 0:08:09.520 --> 0:08:10.240 Well, it's a lot. 0:08:10.280 --> 0:08:12.280 I mean, there's a there's a tremendous amount of meetings 0:08:12.280 --> 0:08:14.360 and the way I would the way I would describe it, Barry, 0:08:14.760 --> 0:08:17.600 it's a mix. It's you know, client related, it's media 0:08:17.640 --> 0:08:20.080 like we're doing today. It's also being part of the 0:08:20.120 --> 0:08:22.680 senior team that runs Vanguard, the business of Vanguard right 0:08:22.920 --> 0:08:26.880 from a client strategy marketing standpoint, and then you know, overseeing, 0:08:26.960 --> 0:08:30.240 overseeing the the the investment team, So a variety of 0:08:30.320 --> 0:08:33.720 risk meetings, a variety of economic meetings. So it's a 0:08:33.720 --> 0:08:35.839 any given day could be slightly different, but it typically 0:08:35.880 --> 0:08:40.680 will capture those categories over time. And so you know, 0:08:40.720 --> 0:08:42.679 it's uh, there's there's always plenty of stuff going on 0:08:42.720 --> 0:08:44.800 in the marketplace and then the business that that that 0:08:44.880 --> 0:08:45.720 keeps us very busy. 0:08:46.280 --> 0:08:49.959 And you've now been with Vanguard for almost twenty five years. 0:08:49.960 --> 0:08:51.959 You have to be twenty four in November. 0:08:51.480 --> 0:08:56.480 So you're you're year away from a big milestone. That 0:08:56.640 --> 0:09:04.319 period very much encompasses Vanguard going from and admittedly successful 0:09:04.520 --> 0:09:09.079 but not enormous entity till you know, I think the 0:09:09.480 --> 0:09:13.680 two thousands, especially the financial crisis, changed how people thought 0:09:13.720 --> 0:09:22.000 about managed assets, indexing advisory versus transactional and Vanguard along 0:09:22.040 --> 0:09:24.559 with black Rock, have been two of the biggest beneficiaries 0:09:24.559 --> 0:09:27.360 of this. Tell us a little bit about what you've 0:09:27.720 --> 0:09:31.640 experienced over the arc of those twenty four years that 0:09:31.960 --> 0:09:35.400 you were really there as the company ramped up and 0:09:35.440 --> 0:09:38.360 then went they found a whole other gear and just exploded. 0:09:38.760 --> 0:09:41.520 Yeah, it's absolutely right, Barry I mean, it's been a 0:09:41.559 --> 0:09:44.199 lot in terms of, you know, just the changing perception 0:09:44.280 --> 0:09:47.559 in the marketplace of how investors invest right. And you're right, 0:09:47.600 --> 0:09:49.520 So you think back thirty years, you know, there are 0:09:49.559 --> 0:09:52.000 so many people who are focused on individual security selection, 0:09:52.080 --> 0:09:55.640 picking individual stocks and the reality is that you know, 0:09:55.800 --> 0:09:58.240 we know that's very difficult to do and outperforming a 0:09:58.320 --> 0:10:01.160 broader market. So does a big push for folks to 0:10:01.160 --> 0:10:04.560 get the appropriate level of asset allocation in a highly diversified, 0:10:04.559 --> 0:10:09.120 low cost way. And you know, the ETF the ETF rapper, 0:10:09.559 --> 0:10:12.800 you know, allowed people to get that exposure inexpensively holding 0:10:12.880 --> 0:10:15.560 it in a brokerage account. So it really provided a 0:10:15.640 --> 0:10:19.400 nice tailwind to folks in the indexing space who provided 0:10:19.440 --> 0:10:21.640 those products. In Vanguard, is you know, one of the 0:10:21.880 --> 0:10:24.920 big beneficiaries of that that migration away from individual stock 0:10:24.920 --> 0:10:28.080 selection to to broad based index exposure to. 0:10:28.400 --> 0:10:31.920 Say the very least. So let's discuss leadership and what 0:10:32.000 --> 0:10:36.160 you do to develop crew members and to identify and 0:10:36.280 --> 0:10:39.480 foster other people's leadership skills. 0:10:39.880 --> 0:10:42.000 Yeah, so it's a great question. 0:10:42.480 --> 0:10:43.599 You know, one of the things that we try to 0:10:43.640 --> 0:10:47.120 focus on is you know, as part of our interview process, 0:10:47.200 --> 0:10:50.600 you know, always trying to assess and gauge the the 0:10:50.679 --> 0:10:53.400 willingness and the interest for folks to develop the leadership 0:10:53.400 --> 0:10:56.920 competencies in addition to the technical competencies. So you know, 0:10:56.920 --> 0:10:59.120 when we think about our investment professionals, clearly they have 0:10:59.200 --> 0:11:01.319 to be technically sharp, they have to learn those skills 0:11:01.320 --> 0:11:03.920 to do their jobs day to day. But if they 0:11:03.960 --> 0:11:05.679 also want to be the head of a trading desk 0:11:05.760 --> 0:11:08.320 and lead a major function within our group or within 0:11:08.360 --> 0:11:10.839 broader vanguard, they also have to be really good at 0:11:10.880 --> 0:11:15.560 identifying talent, developing talent, maintaining really strong relationships, you know, 0:11:15.640 --> 0:11:18.520 being strategic thinkers and things of that nature. And so, 0:11:19.040 --> 0:11:20.720 you know, these are the types of things that we 0:11:20.760 --> 0:11:23.000 have a number of programs that we run to help 0:11:23.080 --> 0:11:26.240 us assess how people are progressing through that leadership journey. 0:11:26.480 --> 0:11:29.080 We help develop people on that leadership journey along the way. 0:11:29.400 --> 0:11:31.920 But the assessment process also allows us to figure out, 0:11:32.800 --> 0:11:35.400 you know, where people might have gaps and need an 0:11:35.400 --> 0:11:38.600 opportunity to go back and do a bit of a refresher. 0:11:38.679 --> 0:11:41.360 So you know, we've been very actively involved in that 0:11:41.400 --> 0:11:44.240 whole process for our investment professionals, and you know, it's 0:11:44.240 --> 0:11:47.080 paid off. It's paid spades in terms of you know, 0:11:47.280 --> 0:11:49.240 it helps us make sure that we're recruiting the right people. 0:11:49.280 --> 0:11:52.000 It helps us in terms of retaining folks because when 0:11:52.000 --> 0:11:54.680 you work for a great boss, you're motivated to stay 0:11:54.679 --> 0:11:57.280 at that firm because we know, you know, it's difficult 0:11:57.320 --> 0:11:59.959 to make a strong connection with the boss at times. 0:12:00.080 --> 0:12:02.440 And to the extent that Vanguard has great leaders in 0:12:02.480 --> 0:12:04.400 the seats and we feel like, hey, we have some 0:12:04.400 --> 0:12:06.880 of the coolest jobs that are available to people. You 0:12:07.040 --> 0:12:09.000 couple that with great leadership. I mean, it's a win 0:12:09.080 --> 0:12:11.640 win formula for long term success for our organization. 0:12:12.240 --> 0:12:15.680 That's really interesting. A lot of people in finance have 0:12:15.800 --> 0:12:19.800 been saying it's difficult to find people in this environment. 0:12:20.440 --> 0:12:24.360 What is Vanguard doing to keep the seats filled and 0:12:24.480 --> 0:12:27.920 make sure you have an ongoing source of talent coming 0:12:27.960 --> 0:12:29.040 to Pennsylvania. 0:12:29.120 --> 0:12:32.079 Yeah, so we are very heavily involved. We have you 0:12:32.280 --> 0:12:32.760 in our group. 0:12:32.800 --> 0:12:35.920 Specifically, we have the Investment Management Development Program where every 0:12:36.000 --> 0:12:38.199 year we have a cadre of summer interns as well 0:12:38.240 --> 0:12:41.280 as full time folks who just finished their undergraduate studies 0:12:41.320 --> 0:12:43.760 who come to us in a rotational program that gives 0:12:43.800 --> 0:12:46.920 them exposure to equities various points in fixed income and 0:12:47.120 --> 0:12:50.800 risk and our portfolio reviewed department as a nice entry 0:12:50.840 --> 0:12:52.800 point for people to explore and see what they really 0:12:52.840 --> 0:12:55.040 want to do. And so we just had a cadre 0:12:55.120 --> 0:12:57.880 that launched to their final placement earlier this week, and 0:12:57.920 --> 0:13:01.280 so there were seven individuals that span the range from 0:13:01.400 --> 0:13:05.120 risk to high yield trading to investment grade research. And 0:13:05.640 --> 0:13:08.080 you know, it's a nice talent pipeline. And the great 0:13:08.080 --> 0:13:10.640 thing is the talent that we're seeing today is so 0:13:10.760 --> 0:13:12.559 much greater than the talent that we were able to 0:13:12.640 --> 0:13:15.400 attract twenty years ago. And so, you know, just the 0:13:16.360 --> 0:13:19.679 level of awareness, understanding of markets, the technical skills from 0:13:19.720 --> 0:13:22.360 an IT and data science standpoint that these folks are 0:13:22.360 --> 0:13:25.280 bringing to the table today is pretty amazing. And so 0:13:25.440 --> 0:13:27.800 that's really the pipeline for us. And then you know, 0:13:27.840 --> 0:13:30.800 we will supplement that with experienced senior hires, you know, 0:13:30.920 --> 0:13:33.160 as we you know, if there's turnover and we don't 0:13:33.200 --> 0:13:34.880 have somebody on a bench ready to go to move 0:13:34.920 --> 0:13:36.480 into a bigger seat as well, or if we're trying 0:13:36.520 --> 0:13:38.400 to build that new capabilities like we've done in the. 0:13:38.360 --> 0:13:42.200 Past, huh, really impressive. Let's talk a little bit about 0:13:42.559 --> 0:13:47.679 the Vanguard total market index that's become the largest fund 0:13:47.760 --> 0:13:52.600 in the world. What goes into managing a fund of 0:13:52.679 --> 0:13:55.760 that size and that importance to Vanguard. 0:13:55.600 --> 0:13:57.640 I mean, it really starts, It really starts with the people, 0:13:58.240 --> 0:14:00.240 you know, just making sure that we have humble, really 0:14:00.280 --> 0:14:03.720 talented professionals who you know are truly dedicated to managing 0:14:03.800 --> 0:14:06.760 these uh these index funds on a day to day basis. 0:14:06.800 --> 0:14:08.680 And you know, the way the way we think about 0:14:08.720 --> 0:14:11.360 it are our pms also service traders, and so they're 0:14:11.400 --> 0:14:15.800 working very closely day by day making sure that Total 0:14:15.800 --> 0:14:18.320 Stock Market Index fund and all of our other equity 0:14:18.320 --> 0:14:21.760 index funds are you know, minimizing the tracking here, also 0:14:21.800 --> 0:14:24.200 trying to make sure that we're minimizing transaction costs as 0:14:24.240 --> 0:14:27.280 we're transacting in the marketplace, also being cognizant of the 0:14:27.320 --> 0:14:31.280 tax implications of trading activity, and then also looking to 0:14:31.320 --> 0:14:34.640 add value at the margin through opportunistic ideas and you know, 0:14:34.680 --> 0:14:37.680 through rebalancing corporate actions, new issues and things that nature 0:14:37.720 --> 0:14:41.080 to try to eat into the expense ratio at the margin, 0:14:41.160 --> 0:14:44.240 but again in a highly highly riskcontrolled way. And the 0:14:44.280 --> 0:14:46.360 great thing is we have, you know a team of 0:14:46.360 --> 0:14:49.040 folks who have been doing this for decades, and you know, 0:14:49.080 --> 0:14:52.119 they're unmatched in the industry because they're dedicated to doing indexing. 0:14:52.480 --> 0:14:54.160 A lot of firms you find folks who start with 0:14:54.200 --> 0:14:56.920 indexing and move on to something else. At Vanguard, this 0:14:56.960 --> 0:14:58.720 is a career destination for a lot of these folks 0:14:58.720 --> 0:15:00.200 and they love every minute of what they do. 0:15:00.760 --> 0:15:05.280 So a lot of indexers will track somebody else's index. 0:15:05.920 --> 0:15:09.920 The Vanguard Total Market Index is something that Vanguard itself creates. 0:15:10.280 --> 0:15:13.040 There's a separate index group and there's a whole bunch 0:15:13.080 --> 0:15:19.320 of technical ways that's set up. What goes into making 0:15:19.440 --> 0:15:22.640 changes in stock memberships tell us a little bit about 0:15:22.880 --> 0:15:24.120 what that process is like. 0:15:24.440 --> 0:15:27.640 So so for total stock market, the Total Stock Market 0:15:28.160 --> 0:15:31.160 Index fund that is a CRIPS fund that is you know, 0:15:31.920 --> 0:15:34.560 run by the University Chicago. They create the benchmark. We 0:15:34.680 --> 0:15:37.720 help them in terms of identifying and creating the parameters 0:15:37.760 --> 0:15:38.400 around how. 0:15:38.240 --> 0:15:40.280 That that that index should be constructed. 0:15:40.840 --> 0:15:44.280 The biggest things are you know, primarily when there's corporate actions, 0:15:44.280 --> 0:15:47.120 there's there's I pos. Those are the things that typically 0:15:47.200 --> 0:15:50.000 drive changes because again this represents the total market. So 0:15:50.000 --> 0:15:53.120 you have small cap, small cap, MidCap, large cap, you 0:15:53.240 --> 0:15:56.480 have growth value and blend in there. So the turnover 0:15:56.560 --> 0:15:59.720 is primarily driven by corporate actions and I pos and 0:15:59.760 --> 0:16:01.280 then you know, the team spends a lot of time 0:16:01.360 --> 0:16:03.680 just making sure they handle those you know, really really 0:16:03.720 --> 0:16:07.400 well to minimize costs, make sure that tracking are remains 0:16:07.440 --> 0:16:10.240 relatively tight, and the other thing the team does. And 0:16:10.280 --> 0:16:13.200 we have a securities lending team that that also spends 0:16:13.200 --> 0:16:15.200 a lot of time making sure that we're getting value 0:16:15.240 --> 0:16:17.400 for the securities that are in demand, and that that 0:16:17.600 --> 0:16:20.560 those earnings from the securities lending revenue, net of the 0:16:20.600 --> 0:16:22.480 cost to run that group, goes right back to the fund. 0:16:22.520 --> 0:16:25.160 So our shareholders benefit whenever there's a lot of demand 0:16:26.080 --> 0:16:28.080 for certain securities that we own. So that's a that's 0:16:28.120 --> 0:16:30.840 another contributing factor to performance in those funds as well. 0:16:30.920 --> 0:16:34.720 That's a performance enhancer that ultimately leads to the ability 0:16:35.040 --> 0:16:37.120 to lower costs to that fund. 0:16:37.160 --> 0:16:39.480 Well, it lowers the ultimate drag that you would have 0:16:39.480 --> 0:16:40.840 from transaction costs exactly. 0:16:41.080 --> 0:16:41.280 Yeah. 0:16:41.360 --> 0:16:44.840 So so how often does Vanguard create a new index? 0:16:44.880 --> 0:16:46.040 So what's that process? 0:16:46.120 --> 0:16:47.840 Like, we tend not to create the index. You know, 0:16:47.880 --> 0:16:49.120 that's an outsourced process. 0:16:49.240 --> 0:16:51.280 So you know it's really function of you know, do 0:16:51.320 --> 0:16:53.840 we have gaps in our lineup, and so you know, 0:16:54.040 --> 0:16:56.200 we get we get input from, you know, the various 0:16:56.200 --> 0:16:58.560 business divisions, whether or not it's our retail group or 0:16:58.600 --> 0:17:01.920 institutional group, our financial advisor services group. You know, are 0:17:01.960 --> 0:17:04.120 there gaps where we feel like, hey, we don't have 0:17:04.600 --> 0:17:07.600 a relevant offering that's that's needed by our clients. And 0:17:07.640 --> 0:17:10.160 then we find out we do research. The portfolio review 0:17:10.200 --> 0:17:12.720 department does the research to figure out who would be 0:17:12.760 --> 0:17:16.160 the best and most well equipped you know, index provider 0:17:16.200 --> 0:17:18.280 for that type of mandate, and then our team works 0:17:18.359 --> 0:17:20.880 very closely with them in terms of the due diligence 0:17:20.920 --> 0:17:25.040 process and making sure that that index is constructed in 0:17:25.080 --> 0:17:27.800 a way that we're comfortable and the right levels of 0:17:27.840 --> 0:17:30.040 controls are in place. And then you know, once that's 0:17:30.040 --> 0:17:32.080 set up, the team is ready to go to start 0:17:32.080 --> 0:17:34.320 managing against that newly defined index. 0:17:34.560 --> 0:17:37.960 And when you say there are gaps in your lineup, 0:17:38.000 --> 0:17:41.160 you're not talking about trendy things like hey we don't 0:17:41.160 --> 0:17:44.119 have a metaverse index. Oh look, we don't have an 0:17:44.160 --> 0:17:50.320 AI index. It's always much broader and more permanent if 0:17:50.400 --> 0:17:52.200 that's the right word, or long lasting on. 0:17:52.200 --> 0:17:55.119 That yeah, yeah, you know, again, these need to have enduring, 0:17:55.160 --> 0:17:57.600 long term investment merit. That's one of the key defining 0:17:57.640 --> 0:18:00.280 principles before we launch a fund, is it is there 0:18:00.280 --> 0:18:03.280 real value long term for this type of investment strategy. 0:18:03.480 --> 0:18:05.679 And you're absolutely right, Vanguard is not the type of 0:18:05.720 --> 0:18:09.000 firm that, you know, we'll launch thematic products that you 0:18:09.040 --> 0:18:12.560 know are focused on when not it's AI water whatever, 0:18:12.760 --> 0:18:15.760 That's just not what Vanguard does. We're looking for long term, enduring, 0:18:16.600 --> 0:18:19.879 you know, investment solutions and products that will be you know, 0:18:20.000 --> 0:18:23.040 we'll provide our investors with you know, long term opportunity 0:18:23.080 --> 0:18:24.480 that will serve them really well. 0:18:24.800 --> 0:18:27.800 So a couple of years ago I wrote a column 0:18:28.960 --> 0:18:31.840 about this shocking little aspect of Vanguard that I think 0:18:31.880 --> 0:18:36.720 nobody understood, which is the patents that Vanguard had on 0:18:36.880 --> 0:18:40.800 the way you manage taxes for mutual funds, which made 0:18:40.800 --> 0:18:43.920 your mutual funds behave more like atfs and that there 0:18:44.040 --> 0:18:48.440 was no tax pass through typically. It kind of made 0:18:48.440 --> 0:18:53.080 me think of a question. When you're the size of Vanguard, 0:18:53.200 --> 0:18:57.119 how do you balance discipline on the one hand with 0:18:57.880 --> 0:19:01.520 the need for creativity and occasionally thinking out of the box. 0:19:01.880 --> 0:19:05.600 You would think they might be at odds. What's that like? 0:19:05.720 --> 0:19:08.119 Yeah, the main thing very it's a great question. The 0:19:08.119 --> 0:19:10.360 main thing goes back to, like what's the enduring philosophy. 0:19:10.440 --> 0:19:12.359 What are we trying to accomplish for our clients. And 0:19:12.480 --> 0:19:13.560 you know, at the end of the day, they come 0:19:13.600 --> 0:19:15.919 to us to try to get long term exposure to 0:19:16.080 --> 0:19:17.760 a segment of the market, and we want to do 0:19:17.840 --> 0:19:20.720 that in the best possible way, making sure they're getting 0:19:20.760 --> 0:19:23.880 the market return, you know, minus the expense ratio, which 0:19:23.880 --> 0:19:27.040 again we will try to you know offset with security 0:19:27.119 --> 0:19:31.479 lending revenue and you know thoughtful rebalancing strategies. But at 0:19:31.520 --> 0:19:33.399 the end of the day, it's really boils down to 0:19:33.720 --> 0:19:37.760 you know, broad based exposure in a low cost, diversified 0:19:37.760 --> 0:19:39.520 way for our clients, which we think will ultimately serve 0:19:39.560 --> 0:19:42.040 them really well as they're constructing their portfolios. 0:19:42.720 --> 0:19:47.000 Most people think of Vanguard as passive. First, tell us 0:19:47.000 --> 0:19:50.000 a little bit about what the chief investment officer does 0:19:50.520 --> 0:19:53.240 for the passive side of an investment business. 0:19:53.280 --> 0:19:54.800 A big part of it is really around when there's 0:19:54.840 --> 0:19:57.119