Speaker 1: Brought to you by Bank of America. Merrill Lynch seeing
Speaker 1: what others have seen, but uncovering what others may not.
Speaker 1: Global Research that helps you harness disruption. Voted top global
Speaker 1: research firm five years running. Merrill Lynch, Pierre, Spinner and
Speaker 1: Smith Incorporated. This is Masters in Business with Barry Ridholes
Speaker 1: on Bloomberg Radio. This week on the podcast, I have
Speaker 1: a spectacular guest. I have a very special guest. His
Speaker 1: name is Bill McNabb. He is chairman and CEO of
Speaker 1: the Vanguard Group, a small little shop in Pennsylvania that
Speaker 1: runs about four trillion dollars um. This is one of
Speaker 1: the few guests we've had back for a second time.
Speaker 1: We had him on eighteen months ago, and there's almost
Speaker 1: no overlap between the two interviews. If you are either
Speaker 1: an individual investor, an institutional investor, a registered investment advisor,
Speaker 1: or a broker, this is a conversation you're going to
Speaker 1: want to hear. This might be one of the most
Speaker 1: influential people in all of finance. Certainly, Vanguard has become
Speaker 1: one of the most influential shops there are. It's called
Speaker 1: the Vanguard effect. Any space they step into sees costs
Speaker 1: to investors Plummet. A Bloomberg article not too long ago
Speaker 1: estimated that Vanguard has helped pull forty billion dollars in
Speaker 1: fees out of wall streets pockets and and put it
Speaker 1: in the hands of investors by not only them charging
Speaker 1: a very low price, but by the competition being forced
Speaker 1: to compete with Vanguard and lower their fees. I'm gonna
Speaker 1: make two recommendations for those of you who are listening
Speaker 1: to this. First, listen to the podcast. Enjoy it. He's
Speaker 1: incredibly knowledgeable and eloquent, and I loved having a conversation
Speaker 1: with him. But second, go back onto iTunes or SoundCloud
Speaker 1: or the Big Picture at Reholts dot com and and
Speaker 1: pull out that previous conversation. I'll link to it on
Speaker 1: the blog when when I when I write about this,
Speaker 1: you should really listen to both of these. They are
Speaker 1: master class in the business of running an investment business.
Speaker 1: There's there's none better than Bill McNabb. With no further ado,
Speaker 1: my conversation with Vanguard Groups CEO and chairman, Bill McNabb.
Speaker 1: This is master's in business with Barry Ridholts on Bloomberg Radio.
Speaker 1: I'm Barry Ridholts. You're listening to Masters in Business on
Speaker 1: Bloomberg Radio. My special guest this week is a returning guest.
Speaker 1: His name is William McNabb. He is Chairman and see
Speaker 1: EO of the Vanguard Group, which currently manages just about
Speaker 1: four trillion dollars. That's trillion with the t uh. Bill
Speaker 1: has been with the Vanguard Group since so his thirtieth
Speaker 1: anniversary was not too long ago. He became CEO in
Speaker 1: two thousand and eight and chairman in oh nine. And
Speaker 1: he is the third CEO and Vanguard's history, following Jack
Speaker 1: Brennan before him, and prior to that, uh, a gentleman
Speaker 1: named John Bogel, the founder of Vanguard. Bill McNabb, welcome
Speaker 1: to Bloomberg. Great to be here, Barry, Thanks, and I
Speaker 1: should say welcome back to Bloomberg. Uh. The last time
Speaker 1: we had a conversation, it was really quite fascinating. So
Speaker 1: I want to jump right into some of the really
Speaker 1: interesting going zones these days and and get the Vanguard
Speaker 1: perspective of things. Uh, let's jump right to your competitors.
Speaker 1: How do you see the lay of the lands when
Speaker 1: it comes to managing other people's money? So I think
Speaker 1: what we're seeing right now, say, um, you know, there's
Speaker 1: a secular change that's gone on and will continue to
Speaker 1: go on in terms of costs being a much more
Speaker 1: important component of investing. Obviously that's played out most purely
Speaker 1: with indexing firms doing better. But I think it's gonna
Speaker 1: lead to further consolidation in the industry. UM. So you know,
Speaker 1: we saw a week ago Janis and Henderson UM big
Speaker 1: big merger that was clearly uh, let's get more economies
Speaker 1: of scale kind of play. I think more of that
Speaker 1: may happen. UM. I also think that you will see
Speaker 1: UM on the other side of it, maybe some boutiques
Speaker 1: emerge who are more specialized, and so you you may
Speaker 1: end up with a more barbeled industry where you've got
Speaker 1: a lot of really you know, nimble small players and
Speaker 1: you know some some larger players who can really exploit
Speaker 1: economies of scale. So is it all about the economies
Speaker 1: of scale or when we look at let's look at
Speaker 1: some of your competitors who are Giant, black Rock, Pimco,
Speaker 1: State Street, these are all trillion all the firms there
Speaker 1: are probably close to a dozen trillion dollar asset managers
Speaker 1: around the world. Is that the cost of admission these
Speaker 1: days in order to to get to where you can
Speaker 1: start driving costs now for investors, you know, I think, um,
Speaker 1: I think you could do it at lower levels than that,
Speaker 1: but certainly when you're at that kind of level, UM,
Speaker 1: you know, you're spreading your fixed costs across a very
Speaker 1: large asset base, and you know that helps. And you know,
Speaker 1: I think Vanguard is like the purest form of transparency
Speaker 1: if you will, into economies of scale, if you look
Speaker 1: at how our costs have come down over time, you
Speaker 1: can see the power of technology, you know, um, spreading
Speaker 1: fixed costs over a broader asset base and so forth.
Speaker 1: It's been called the Vanguard effect, the impact of you
Speaker 1: moving in a particular space. Last time we talked about
Speaker 1: your desire to drive prices lower, but really, how much
Speaker 1: more fat is out there? How much cheaper can invest
Speaker 1: and get It's you know, we're getting down to you know,
Speaker 1: it's an assem taught to kind of relationship at this point.
Speaker 1: And uh, you know, there's room to go, but it's
Speaker 1: not going to be the kind of uh declines we've
Speaker 1: seen in the last decade. Most of the fat has
Speaker 1: been wrong out of I think that's right, But you know,
Speaker 1: again there's still our economies of scale to be gained. Barry.
Speaker 1: You know, I'm such a huge believer in the power
Speaker 1: of technology, and in a sense, I don't know what
Speaker 1: I don't know. And the more you see, UM in
Speaker 1: the technology arena, you know, some of the new things
Speaker 1: that are emerging, you know, the use of big data,
Speaker 1: that the emergence of the cloud. Um, I'm not sure
Speaker 1: we even know what we can do going forward. And
Speaker 1: you know we're spending a lot of time and effort
Speaker 1: in that arena as well. So we're gonna talk more
Speaker 1: about technology, UM shortly. When what about the people who
Speaker 1: are running some of your competitors. Do you ever get
Speaker 1: to chat with the Larry Fins and the Bill Grosses
Speaker 1: of the world. So I was until just a couple
Speaker 1: of weeks ago chairman of the Investment Company Institute, which
Speaker 1: is the Mutual Fund trade Association, and as such I
Speaker 1: met with many of the leaders in our industry on
Speaker 1: a very regular basis, and you know, I get a
Speaker 1: chance to you know, talk about industry issues, talk about
Speaker 1: regulatory changes with them. Uh. You know, I think Larry
Speaker 1: and I have actually shared the stage on a couple
Speaker 1: of occasions. UM, talking about governance for example, talking about
Speaker 1: long term versus short term and so yeah, you know,
Speaker 1: you get a chance every now and then to compare notes.
Speaker 1: So we'll talk more about governance UM in a few minutes.
Speaker 1: Let's talk about the Index Fund. It just had a birthday,
Speaker 1: It just celebrated its forty anniversary. Tell us what what
Speaker 1: that means. You know, it's an amazing thing. So UM
Speaker 1: and this is really the power of Jack Bogel's imagination,
Speaker 1: if you will, in the ninety six so Jack, you know,
Speaker 1: had this concept UM that he had written about extensively
Speaker 1: that you know, this idea of a broad market in
Speaker 1: might make sense, as you know from the history um
Speaker 1: Wells Fargo in particular, I think did some work on
Speaker 1: the pension area, and you know the first separate account.
Speaker 1: And what Jack did was he said, if it's good
Speaker 1: enough for a sophisticated institution, why not for everybody? And
Speaker 1: that was really the concept. And you know when it
Speaker 1: was first introduced in seventy six, people laughed at it.
Speaker 1: They said, it's you know, mediocrity, it's never gonna work
Speaker 1: on American w Jack actually has hanging outside his office
Speaker 1: a print of an ed taken tell us about that.
Speaker 1: So Yeah, it was UM. You know this this because
Speaker 1: it was viewed as almost communistic, UM people called it
Speaker 1: on American And you know, for Jack, it was always
Speaker 1: a game of math. You know, at the end of
Speaker 1: the day, UM investing was going to become a zero
Speaker 1: sum game. And eventually, when you looked at active versus
Speaker 1: index on average, the index guys were gonna win UM
Speaker 1: just because both were gonna add up to the market
Speaker 1: and one had a much higher cost structure than the other.
Speaker 1: I'm Barry Ri Hults. You're listening to Masters in Business
Speaker 1: on Bloomberg Radio. My special guests this week is Bill McNab.
Speaker 1: He is chairman and CEO of the Vanguard Group, which
Speaker 1: manages about four trillion dollars. And let's talk about the
Speaker 1: size of van going and what that means. You guys
Speaker 1: essentially own about five percent of just about every publicly
Speaker 1: traded company in America and some proportion of non US equities.
Speaker 1: What does that due to your thinking about corporate governance issues?
Speaker 1: You guys really are the eight hundred pound gerrilla when
Speaker 1: it comes to that. You know, I think for us,
Speaker 1: Barry it it really underscores the unbelievable responsibility we have
Speaker 1: you know, it's we're here representing, you know, the hopes
Speaker 1: and dreams of millions of investors who have entrusted they're
Speaker 1: hard earned assets into our funds. And so we've got
Speaker 1: to make sure that the port the constituent portfolio companies
Speaker 1: are being governed in in a sense with long term
Speaker 1: value creation for the end investor as a very big goal.
Speaker 1: And we've had to up our game. We've had to
Speaker 1: increase our staff who engage in this. You know, the
Speaker 1: difference between us and say a traditional active manager, and
Speaker 1: we do have as you know, traditional active third at
Speaker 1: that's that's still a trillion and changed a lot of money, um.
Speaker 1: But on the index side, we're a permanent holder of
Speaker 1: these of these companies and so you have to You
Speaker 1: can't sell the stock if you're not happy with the
Speaker 1: way the company is performing, but you can agitate if
Speaker 1: there's something we could talk about gap accounting or stock
Speaker 1: options or CEO pay if you if Vanguard says we're
Speaker 1: not happy about this, you're not a entity without resources.
Speaker 1: So and that's a really good segue into what I
Speaker 1: think has been one of the really interesting evolutions in
Speaker 1: the last couple of years, and it's been this whole
Speaker 1: concept of shareholder engagement and one of the things we
Speaker 1: really did agitate for. And you know, we we get
Speaker 1: a couple of us gave talks on this maybe to
Speaker 1: three years ago, and we've really seen a change in
Speaker 1: the way boards are working as a result, we said,
Speaker 1: you need to engage with your big owners, not just Vanguard,
Speaker 1: but anybody who owns a significant UM steak, and you
Speaker 1: need to be thinking about how are you creating long
Speaker 1: term value not short term. No one's interested in the
Speaker 1: short term here. And so we have a set of
Speaker 1: principles that we ask people to follow in terms of governance.
Speaker 1: And that's the first sort of screen for us is
Speaker 1: what what sort of principles? So you know, we we
Speaker 1: want UM transparent, transparency. We want the board you know,
Speaker 1: composition to be right. We want the UM defined by
Speaker 1: what do you mean by right, you know, a complementary
Speaker 1: set of skills, UM independent not not just golf buddies
Speaker 1: of the CEO totally and and real independence. And we
Speaker 1: want there to be linkages between executive pay and long
Speaker 1: term value creation and not short term so another word,
Speaker 1: not pay people on the basis of how well the
Speaker 1: SMP has done recently, because that seems by just granting
Speaker 1: stock options, you basically compensating executives for what the stock
Speaker 1: market does, not how their company does relative to everybody else, Right,
Speaker 1: And you know you've actually written a fair amount of
Speaker 1: this in your blog, and you know, I'm, as you know,
Speaker 1: I'm in big agreement with a lot of your points
Speaker 1: there that in the eighties and nineties, in particular, especially
Speaker 1: in the nineties after the compensation rules changed, um, there
Speaker 1: were a lot of just blanket granting of options and
Speaker 1: it really was a rising tide and closed to performance
Speaker 1: really driving it. Talk about unanticipated effects of a legislative
Speaker 1: change for those those folks who may not be aware
Speaker 1: of this. We changed the rules on exact compensation in
Speaker 1: the United States. We capped dollar compensation and pretty much
Speaker 1: allowed unlimited stock option compensation, and so people were paid
Speaker 1: not based on how well the company did, but how
Speaker 1: well the stock market did. So, so what can Vanguard
Speaker 1: do and what what can a board do to to
Speaker 1: change that? So I think what boards have been doing,
Speaker 1: and you know, there's actually been a couple of academic
Speaker 1: studies recently that have pointed out that there's been real
Speaker 1: progress here is they have been doing a better job
Speaker 1: defining longer term objectives for the company and linking executive
Speaker 1: pay to those objectives, and you're seeing less use of options,
Speaker 1: more use of restricted stock grants, and the grants are
Speaker 1: made only if certain objectives are achieved, and then the
Speaker 1: vesting on those grants may actually take place over pretty
Speaker 1: long periods of time. We think that's actually helping drive
Speaker 1: executive teams to think longer term. It's still not you know,
Speaker 1: we we it's not universal, and it's not where it
Speaker 1: should be. It's not where it should be. M there's
Speaker 1: still too much short termism in the market. Is it?
Speaker 1: Is it safe to say you were in agreement with
Speaker 1: the Larry Fink letter of black Rock basically went out
Speaker 1: to the SMP five hundred and some big European companies saying, hey,
Speaker 1: you're too focused on the quarter and you're none of
Speaker 1: the thing in R and D and you're not thinking
Speaker 1: long term. Yeah. I I give Larry and Blackrock a
Speaker 1: lot of credit for that letter. It was very complimentary
Speaker 1: actually to the letter. The last couple of letters we'd
Speaker 1: sent out, you know, we had um really emphasized with
Speaker 1: our portfolio companies that think long term and you know,
Speaker 1: we we really stressed the need for better engagement. You know,
Speaker 1: he hit particularly hard on the long term issues, and
Speaker 1: you know, I think together it's actually a pretty good message.
Speaker 1: So let's talk a little bit about UM other issues
Speaker 1: in in corporate governance. What do you think about E
Speaker 1: s G investing, Environmental, sustainable and governance seems to be
Speaker 1: a rising UH theme these days. I think it's a
Speaker 1: very complex topic, you know, So UM, I can tell
Speaker 1: you my my mailbox is filled UM every week with
Speaker 1: different UM constituencies having particular social issues UM that they
Speaker 1: want to expressed in the way we run money. Actually,
Speaker 1: I think if I added it all up, we would
Speaker 1: exclude almost every company in the S and P five hundred.
Speaker 1: So one of the things we've done is we created
Speaker 1: UM a socially responsible index fund, the foot see and
Speaker 1: foot See, and you know it hits some of your
Speaker 1: big screens, and I think it's been successful at meeting
Speaker 1: a lot of investor needs we see UM. You know,
Speaker 1: it's a it's a fairly significant fund at this point.
Speaker 1: Is that only European or is that US or global?
Speaker 1: It's actually UM, it is a global phenomenon, and I
Speaker 1: could see US doing more in that product space over time,
Speaker 1: you know, perhaps adding a couple of more complementary kinds
Speaker 1: of offerings. I will say that the other evolution in
Speaker 1: E s G for us is looking at sort of
Speaker 1: broad E s G principles and how do they affect
Speaker 1: long term value creation? And so you know, the easy
Speaker 1: example would be if you have a company who's got
Speaker 1: a bad track record in terms of environmental issues. What
Speaker 1: you know is that's going to hurt the stock price
Speaker 1: over the long run. It's a cost that will eventually
Speaker 1: come back to it is and you see it time
Speaker 1: after time. So one of the things you can agitate
Speaker 1: for as a large owner is, hey, let's make sure
Speaker 1: we've got a long term environmentally sound set of principles
Speaker 1: that were operating under so the shareholder doesn't bear the
Speaker 1: brunt of that cost down the road. UM. That's you
Speaker 1: know that there's judgment involved there obviously in terms of
Speaker 1: how you actually have those conversations. But we're finding companies
Speaker 1: are actually doing a better job beginning to disclose that.
Speaker 1: You're seeing it more and more in UM some of
Speaker 1: the management write ups and so forth, in the proxy
Speaker 1: statements and in the annual reports. Might we see a
Speaker 1: US version of the Footsie E s G portfolio anytime.
Speaker 1: So yeah, I mean we we clearly will have I
Speaker 1: think a range of opportunities for people. I'm Barry rid Hults.
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
Speaker 1: special guest today is William McNabb. He is CEO and
Speaker 1: chairman of the Vanguard Group. They manage about four trillion
Speaker 1: dollars and he is the third CEO, following Jack Brennan
Speaker 1: and Vanguard founder Jack Bogel. Um. So, Bill, let's let's
Speaker 1: talk a little bit about technology. You referenced it earlier,
Speaker 1: the impact of it, what's the potential upside for technology
Speaker 1: as well as the downside uh that technology presents. So
Speaker 1: we've historically approached technology as needing to do one of
Speaker 1: three things. You know, First, um, create automation where automation
Speaker 1: is possible, so you can generate economies of scale for
Speaker 1: your investors. That's kind of classic automate things that are, um,
Speaker 1: you know, very manual in nature, you know. Second, can
Speaker 1: you use technology to make your people better, so better
Speaker 1: systems so that when you're talking to clients over the
Speaker 1: phone or you're doing you know, increasingly video conferencing and
Speaker 1: so forth with them. You're you're it's a better experience.
Speaker 1: And then the third is how do you make it
Speaker 1: more convenient for your investors. So we been, you know,
Speaker 1: historically trying to I'll say, you know, Bucket are investing
Speaker 1: that way, and it's been it's been pretty productive for us. UM.
Speaker 1: You know, one of the figures I always love to
Speaker 1: describe to people is UM in two thousand, the Internet
Speaker 1: was just starting to take hold. We had about five
Speaker 1: billion dollars under management, twelve thousand people. You know, today
Speaker 1: we're a little less than fifteen thousand people and we have,
Speaker 1: as you referenced, nearly four trillion. So technology has actually
Speaker 1: made that possible. So it's an eight fold increase in
Speaker 1: assets and you're barely a increase in in personnel. Yeah,
Speaker 1: and and and as you know, during that period, the
Speaker 1: market hasn't been you know, tremendous lift. There a lot
Speaker 1: of that has just been true organic growth, so we're
Speaker 1: able to do more for people. So, you know, technology
Speaker 1: has just been a phenomenal um tail wind for us,
Speaker 1: if you will, UM the you know, one of the
Speaker 1: challenges I think we see in one particular area, and
Speaker 1: you allude to in your question, is you know, the
Speaker 1: rise of social media and instantaneous information on everything, or
Speaker 1: misinformation or misinformation and as you know, one of the
Speaker 1: new sort of fads out there. Maybe it's more than
Speaker 1: a fad. Maybe it's the way it's going to be.
Speaker 1: Is get the headline out there, or get the item
Speaker 1: out there, and then we'll check for veracity later. And
Speaker 1: we're seeing, you know, when when that kind of information proliferates,
Speaker 1: it really does make investors struggle because you know, they're like,
Speaker 1: what should I do? And of course we're trying to
Speaker 1: console them. Hey, there's noise in in the system here.
Speaker 1: You need to avoid, you know, reacting to that noise.
Speaker 1: But the more there is, the hard artist to make
Speaker 1: that point. Last time we spoke, um two things. First,
Speaker 1: you mentioned the web call you did in the midst
Speaker 1: of the crisis. I would tell listeners go find that.
Speaker 1: It's on iTunes and SoundCloud and Bloomberg dot com and
Speaker 1: listen to that. But you were also just launching your
Speaker 1: robo advisor, your automated investment platform. They've all come to
Speaker 1: me known as a robo advisor. So that was with
Speaker 1: a few billion dollars. How has that been working out
Speaker 1: what what's it managing these days? So we launched at
Speaker 1: last May. So it's about eighteen months now. And as
Speaker 1: you as you allude, we had um sort of a
Speaker 1: legacy business of about ten billion at the time. It's
Speaker 1: now approaching fifty UM in eighteen months. And so I
Speaker 1: lose the bed. I said it was going to be
Speaker 1: a hundred in a year. Well, but um, I think
Speaker 1: you're going to be right directionally though. There's there's tremendous
Speaker 1: appetite for this in the marketplace, and you know, our
Speaker 1: our whole thing was to be able to give really sound,
Speaker 1: personalized advice for very small accounts. You know, we wanted
Speaker 1: somebody with fifty thou dollars to be able to get
Speaker 1: the same kind of service that people with a million
Speaker 1: dollars we're getting just five years ago. So you're you're
Speaker 1: anticipating my next question, which is what sort of pushback
Speaker 1: has there been? Van God is very popular amongst advisors
Speaker 1: who are are based. I know some people complained about it.
Speaker 1: They're obviously not interested in the fifty dollar account, But
Speaker 1: what sort of pushback has there been and what does
Speaker 1: Vanguard say in response to that? So, you know, we'd
Speaker 1: be naive to think there's been no pushback UM, although
Speaker 1: I can you know, the mentions are in the dozens,
Speaker 1: if you will, from advisors. We serve something like fifty
Speaker 1: thou advisors today and I think maybe I've heard from
Speaker 1: a hundred over the course of eighteen months, but you know,
Speaker 1: you take it very seriously. I think that my pushback
Speaker 1: is this technology is upon us, and this this is
Speaker 1: going to happen. You can't just ignore it and hope
Speaker 1: it can't ignore it and hope it goes away. And
Speaker 1: you know, if it's not us, it's gonna be somebody else.
Speaker 1: And the real message here is, let us help you
Speaker 1: work on your value proposition. I think it's more important
Speaker 1: than ever for advisors to be able to explain clearly
Speaker 1: what value am I providing to you as a client.
Speaker 1: The second point I think is really important is for
Speaker 1: UM advisors to look at this technology and say, what
Speaker 1: can I use, you know, technologically to make my business
Speaker 1: more efficient UM. I don't think any of the so
Speaker 1: called robo UM firms are gonna put the advisor community
Speaker 1: out of business, but I think people who ignore their
Speaker 1: technology are going to put themselves at risk. To say
Speaker 1: the least. I'm Barry Ridhults. You're listening to Masters in
Speaker 1: Business on Bloomberg Radio. My special guest today is William McNabb.
Speaker 1: He is the chairman and CEO of the Vanguard Group,
Speaker 1: which runs a couple of dollars for investors around the
Speaker 1: world close to four trillion. We briefly talked about the
Speaker 1: forty birthday of indexing and the index funds. Uh, let's
Speaker 1: let's get into a little more detail with that. There
Speaker 1: was a whole special in the Wall Street Journal about
Speaker 1: indexing and active versus passive investing. My favorite headline was
Speaker 1: the dying business of picking stocks. I thought there was
Speaker 1: a little hyperbole. There is stockpicking really a dying business?
Speaker 1: So I don't think so. I you know, look, I
Speaker 1: think there's a secular element to this shift to indexing,
Speaker 1: and it's really less about indexing and it's about cost.
Speaker 1: So I think low cost investing is the secular change here. Um.
Speaker 1: I think there will be opportunities for active managers, but
Speaker 1: I think if you're a high price active manager, you're
Speaker 1: you're going to really struggle. So based on that, how
Speaker 1: can we explain the success of high priced hedge funds,
Speaker 1: high price venture capital, high price private equity, of which
Speaker 1: there is always one shootout the light spectacular funds, and
Speaker 1: then a whole bunch of gee, we wish we were
Speaker 1: performing like that. Well, you know, I think it does.
Speaker 1: It does underscore that human behavior is always looking for
Speaker 1: you know, the home run, right people, people love that
Speaker 1: idea of you know, outsize returns. Look, you know, if
Speaker 1: you if you take each of those three categories in turn,
Speaker 1: you know, venture you should make you should get paid
Speaker 1: for the risk you're taking a lot of capitalists and
Speaker 1: you know, as an asset class over the last fifteen years,
Speaker 1: it's done okay. And you know, even even more broadly
Speaker 1: than just the very very best funds, and you're getting
Speaker 1: a risk premium for liquidity and for you know, the
Speaker 1: kinds of companies that you're investing in. I think it's
Speaker 1: a very vibrant thing not accessible to the average investor.
Speaker 1: You know, private equity is an asset class over time. Um,
Speaker 1: you know, at least the last fifteen years not been
Speaker 1: a great place. And I think your point on the
Speaker 1: fee side there is probably detracted from those returns. And
Speaker 1: again by you know, the way I look at private
Speaker 1: equity is again you should get a significant premium over
Speaker 1: the public markets for the liquidity that you're giving up.
Speaker 1: We don't see that over the last fifteen to twenty years.
Speaker 1: You know, the hedge funds um You've written about that
Speaker 1: better than I'll ever be able to articulate. It makes
Speaker 1: no sense to me. It makes no sense to me.
Speaker 1: The my my perspective has evolved in a minor nuanced way.
Speaker 1: If you're in one of those hedge funds that has
Speaker 1: a long term track record of outperforming and they're continuing
Speaker 1: to outperform, well why not stay with it? But finding
Speaker 1: those guys in advance, and it's almost always guys, but
Speaker 1: finding the emerging managers who are gonna be the superstars,
Speaker 1: it's all but impossible. It's very difficult. You know, a
Speaker 1: few of the big endowments have done a decent job
Speaker 1: identifying people early in their careers, you know, the Yales
Speaker 1: of the world and the notre Dames of the world,
Speaker 1: and uh, very few others have been able to do that.
Speaker 1: And everybody who's imitator, it has has come to rue
Speaker 1: that that chase and by the way, I agree with you,
Speaker 1: there are a handful of people who um their returns
Speaker 1: in retrospect have been pretty persistent as well. So you know,
Speaker 1: you look at the Seth Clarmon's and the Steve Mandel's
Speaker 1: of the world, and you know, I have tremendous respect
Speaker 1: for what they've accomplished. And all you need is a
Speaker 1: time machine to go back twenty years and give them
Speaker 1: money when they were taking its right. So, UM, let's
Speaker 1: let's stay with with the concept of UM indexing. One
Speaker 1: of the criticisms I hear all the time is we're
Speaker 1: at peak indexing. This so much money has flown into
Speaker 1: indexing it can possibly continue to work. So you know,
Speaker 1: I think, UM, one of the things I love about
Speaker 1: your columns. You like data, and so you know, today
Speaker 1: indexing represents about thirty five percent of the mutual fund world,
Speaker 1: and I think that's where people focus a lot. It's
Speaker 1: only of the US equity market. It's less than five
Speaker 1: percent of global markets, so there's a long way to
Speaker 1: go here. Um. Second, when you look at UM, I
Speaker 1: think even more importantly, trading volume. You know in the US,
Speaker 1: indexing is like five trading volume. Well, isn't that because
Speaker 1: by definition there's not a lot of trading going on.
Speaker 1: That's that's exactly right. But the point is there's there.
Speaker 1: We're we're a long way from you know where this
Speaker 1: this could end up. And I think it's a global phenomenon,
Speaker 1: and you're going to see indexing take a bigger share
Speaker 1: of global equity assets over the next decade. I think
Speaker 1: it's almost inexorable. Um, it'll be inexorable progress. At what
Speaker 1: point is it too big? Or is there just no
Speaker 1: point at that? Do we ever see this at fifty
Speaker 1: or seventy five percent? Think theoretically, then then you you
Speaker 1: wonder where price discoveries, you're creating opportunities for stock price exactly.
Speaker 1: I don't think there's a in the in the let's
Speaker 1: say the next ten years. UM. I think it's going
Speaker 1: to continue to grow. Whether it becomes I don't think
Speaker 1: it becomes fifty percent of the US market, um, even
Speaker 1: in that period, could be in the mutual fund market. Really,
Speaker 1: that of which right now it's thirty the mutual fund market,
Speaker 1: it's of US assets five percent of global assets. That
Speaker 1: really that that's that's astounding. Let let me shift it
Speaker 1: up on you a little bit and talk about valuation.
Speaker 1: I keep hearing that stocks in the US are over priced,
Speaker 1: But I've been hearing that now out for four or
Speaker 1: five years, and the market doesn't seem to care. It
Speaker 1: keeps going higher. Where are we in the world of
Speaker 1: stock prices? So I would still say historically there on
Speaker 1: the high end um and you know a lot of
Speaker 1: stins get covered with essentially zero percent short rates. And
Speaker 1: you know, our view is hasn't changed the last couple
Speaker 1: of years. I've been pretty public about UM. If we
Speaker 1: look out over ten years, we think the central tendency
Speaker 1: is for equity returns to be a couple hundred basis
Speaker 1: points below long term averages. That that's Bob Shiller's perspective.
Speaker 1: You don't use CAPE as a timing tool. Just look
Speaker 1: out ten years. It'll tell you if you have average
Speaker 1: above or below. And that's kind of our philosophy as well, burying.
Speaker 1: You know, we run a lot of sophisticated models to
Speaker 1: get there, but that's where it ends up. And you know,
Speaker 1: I think UM from a planning perspective, it's a it's
Speaker 1: a it's it's a reasonable place the other sort of thing.
Speaker 1: And UM, I can't remember if I've read this with
Speaker 1: Schiller or not, but if you look at you know,
Speaker 1: long term treasuries, you know, take the tenure and compare it. UH,
Speaker 1: you know, a kind of typical equity risk premium, you
Speaker 1: get to the same kind of a couple of percentage
Speaker 1: points below long term averages. So I think there's a
Speaker 1: lot of kind of convergence around that. The difference. I
Speaker 1: just read this, and I don't know who I'm stealing
Speaker 1: this from. UH. With bonds, rates could go negative, but
Speaker 1: with yield on stocks you can't get to a negative
Speaker 1: number because you're paying for the equity. That's fair. Let
Speaker 1: let me mix it up with you again and talk
Speaker 1: about politics. We're recording this not too long before the election,
Speaker 1: the day before the last debate. What should the role
Speaker 1: of politics be in the average investors portfolio? So, despite
Speaker 1: all of the headlines, despite all of the noise, despite
Speaker 1: all of the speculation, it really should play no role,
Speaker 1: no role, what's role whatsoever. We've looked at this going
Speaker 1: back to the eighteen fifties. There's no difference. But that's
Speaker 1: measurable between having a Democrat president versus a Republican president.
Speaker 1: There's no difference, you know, on how the House and
Speaker 1: Senate work out, and so everything that goes on, it's
Speaker 1: kind of speculation and what you typically see is some
Speaker 1: dislocations right before and right after, and usually within about
Speaker 1: a hundred days of a new administration being in you
Speaker 1: get back to kind of what what we could call normal.
Speaker 1: So it's it's noisy, you have some short term ebbs
Speaker 1: and flows, and then if it does, I think there
Speaker 1: is a bigger question out here. UM. And you know,
Speaker 1: it always the risk of leading with my chin. UM.
Speaker 1: You know, I would say, Um, there's some really good
Speaker 1: work that's been done. You know, Harvard just issued their
Speaker 1: US competitiveness study. UM. I think just two weeks ago,
Speaker 1: Mike Porter and the Gang and we studied it pretty carefully,
Speaker 1: and you know, it's key takeaway from me was the
Speaker 1: political dysfunction that we're seeing is causing you know, a
Speaker 1: real rise and uncertainty. And I think that uncertainty holds
Speaker 1: back growth. And I think that's a more macro issue,
Speaker 1: if you will, UM, probably somewhat divorced from what's going
Speaker 1: to happen in the stock and bond markets in the
Speaker 1: intermediate term. I can't say I disagree with with a
Speaker 1: single a single word of that. UM. Let's talk a
Speaker 1: little bit about buy backs. So we've seen a huge
Speaker 1: run of buy backs the past five or six years.
Speaker 1: Some people blame or credit those zero rture referencing UM,
Speaker 1: but they're starting to tail off this year, they've dropped
Speaker 1: a bit. What do you think the proper role of
Speaker 1: buy back should be? Would you rather see dividends or
Speaker 1: investment or what? What do you think about the general
Speaker 1: buy back phenomena? So I think the buyback phenomena has
Speaker 1: definitely UM gotten a lot of UM tail ones, if
Speaker 1: you will, from the low rates I mean, and I
Speaker 1: don't think levering up to increased buybacks is a good
Speaker 1: thing in general. Now, some some companies have done that
Speaker 1: because their cashes overseas and they don't wanna pay the
Speaker 1: taxes on which is a whole broader issue UM. You know. Second,
Speaker 1: I think the uncertainty that I talked about UM actually
Speaker 1: has caused a lot of companies to be more conservative
Speaker 1: with their cash. So they're either keeping it on the
Speaker 1: balance sheet or doing what they can to keep their
Speaker 1: stock price up. Because they they're so unsure about what
Speaker 1: the future is, they don't want to invest in the business.
Speaker 1: I would love to see us get away from that.
Speaker 1: So let's talk a little bit about that. Overseas cash
Speaker 1: the rumor, and we've heard it from both political parties,
Speaker 1: they'll be a some sort of a deal for a
Speaker 1: cash repatriation overseas capital repatriation, UH, in exchange for some
Speaker 1: infrastructure spending and some reform of the corporate task code.
Speaker 1: What what is that feasible, possible, desirable. I think it's feasible,
Speaker 1: and I think directionally desirable. You know. Look, I think
Speaker 1: we're our corporate tax code is I think a hindrance
Speaker 1: to business here, you know. Um, And again I'm somebody
Speaker 1: who wants to see the markets do really well, especially
Speaker 1: here and in my home country. Is um, we we
Speaker 1: should be doing. We should have economic policies in place
Speaker 1: that actually our pro economic growth. And I think a
Speaker 1: more simplified and um you know, probably a net net
Speaker 1: lower corporate tax code would be UM beneficial in that regard.
Speaker 1: I also think getting clarity around international you know, we're
Speaker 1: we're an outlier, as you know, in the developed world
Speaker 1: in terms of the way we treat um international earnings.
Speaker 1: And I think we shouldn't be going forward. I think
Speaker 1: it again, it's those kind of policies are actually restricting
Speaker 1: good economic growth and long term thinking, and we should
Speaker 1: be doing everything from a policy perspective. To clear that up.
Speaker 1: The last point I'd make is, um, I I am
Speaker 1: a believer that infrastructure probably needs improvement here, I don't
Speaker 1: in fact's not probably it does you know? I travel
Speaker 1: the world and nice in Europe and Asia, isn't it?
Speaker 1: You know? You you see things? Um, you know, sometimes
Speaker 1: I'd like to lift all of our lawmakers up and
Speaker 1: take them on a global tour. I think in order
Speaker 1: to promote you know, good economic growth, you need to
Speaker 1: have some basic infrastructure in place. Um. You know. No
Speaker 1: one wants to see um, higher government debt levels and
Speaker 1: so forth. But I think there's got to be some
Speaker 1: some balance here. Sure bandwidth in Asia, sell coverage in Europe,
Speaker 1: and just the roads in Austria, Germany, Brussels and it's amazing.
Speaker 1: And how about those airports around the world, spectacular, absolutely spectacular.
Speaker 1: We've been speaking with Bill McNabb. He is CEO and
Speaker 1: chairman of the Vanguard Group. If you would like to
Speaker 1: learn more about bills the shop, you can go to
Speaker 1: Vanguard dot com. There are regular bulletin's updates. The video
Speaker 1: from the two thousand and nine crisis is up there
Speaker 1: as well. And be sure and check out our prior conversation.
Speaker 1: Be sure and stick around and listen to the podcast extras.
Speaker 1: Will we keep the tape rolling and continue chatting about
Speaker 1: all things investing. Check out my daily column on Bloomberg
Speaker 1: View dot com or follow me on Twitter at rit Halts.
Speaker 1: I'm Barry Hults. You've been listening to Masters in Business
Speaker 1: on Bloomberg Radio, brought to you by Bank of America
Speaker 1: Merrill Lynch committed to bringing higher finance to lower carbon
Speaker 1: Named the most innovative investment bank for climate change and
Speaker 1: sustainability by the banker. That's the power of Global Connections.
Speaker 1: Bank of America North America member f D I C.
Speaker 1: Welcome to the podcast portion Bill, Thank you so much
Speaker 1: for doing this. I'm really excited about this. You you
Speaker 1: said something earlier off air that I have to ask
Speaker 1: you about. Um, we were talking about Lehman Brothers and
Speaker 1: A I G. And your first day as CEO was
Speaker 1: September fift oh nine. Is that right? First two weeks? Really? Yeah?
Speaker 1: I became CEO August thirty one, and um, I was
Speaker 1: actually standing on stage. Um where was this event? This
Speaker 1: was in Washington, d C. And we had our largest
Speaker 1: pension clients. There and I was giving my first talk
Speaker 1: as CEO, and the whole emphasis was on long term
Speaker 1: perspective and the need to tune out the noise and
Speaker 1: as as the world is falling apart, I have a
Speaker 1: separate soundtrack going through my head saying the world is
Speaker 1: ending as I know at how my how, my reconciling.
Speaker 1: I gotta looked past this. The really funny story Barry
Speaker 1: was um our CEO. Gus Souder was due on stage
Speaker 1: a couple of hours later, and um, we basically drafted
Speaker 1: his UM replacement and said, you're gonna go give Gus
Speaker 1: his talk, and we sent Gus to Valley Forge, you know,
Speaker 1: back to the office is to um, you know, oversee
Speaker 1: the trading desk and make sure everything was working the
Speaker 1: way it should. And uh, there were like no rental cars.
Speaker 1: So he ended up I think, cruising into Vanguard's campus
Speaker 1: in a Mustang convertible. And if you knew Gusts, that
Speaker 1: was not his style. Um, he was like a Pontiac
Speaker 1: bonavel guy. So coming in, especially with the world melting down,
Speaker 1: the the only story I know of that's similar to that. Uh.
Speaker 1: Dave Rosenberg used to be chief economist at Meryl. He
Speaker 1: was a government economist, like sleepy backwoods in in Canada,
Speaker 1: and he goes to the private sector and his first
Speaker 1: day at work is Black Monday crash, and he didn't
Speaker 1: understand that anything was unusual. He's like, wow, it's so
Speaker 1: exciting here. What are you talking about? The markets down? Oh,
Speaker 1: this is not the normal. No, this is not how
Speaker 1: it usually uh not how it usually goes well, you know,
Speaker 1: actually mentioning my former colleague Gus Sauer, that was his
Speaker 1: second week on the job, really and he was running
Speaker 1: our then only index fund index and it had about
Speaker 1: a billion six I think at the beginning of the
Speaker 1: day and then you know, a billion two at the
Speaker 1: end of the day. And he went home and his
Speaker 1: wife said, do you still have a job? You just
Speaker 1: lost a quarter of the fund and uh he said,
Speaker 1: you know, I don't know. I have to go back
Speaker 1: and see if my batch still works the next day.
Speaker 1: And so you still you told the story that in
Speaker 1: the midst of the crisis, you wanted to reassure your staff,
Speaker 1: all the employee, the twelve thousand plus employees at Vanguard. Hey,
Speaker 1: you can't be nervous. You can't sound like you're afraid
Speaker 1: for your job, especially the people who are client facing.
Speaker 1: What did you do to try and resolve that sort
Speaker 1: of tension? So we we told people, don't worry about
Speaker 1: your job. UM, we're not going to have any enforced
Speaker 1: reductions where we want people to be there for the client.
Speaker 1: And you know, we found um and and what we
Speaker 1: told people we anticipated there'll be some areas where the
Speaker 1: volume of work might decrease because the world was melting down,
Speaker 1: and if that happened, we would pick people up and
Speaker 1: we put them into areas that needed more help. And
Speaker 1: we ended up moving several hundred people around. But you know,
Speaker 1: it turned out to be a great thing for us
Speaker 1: because the whole focus from that point on was what's
Speaker 1: the client need? And I think all of us who
Speaker 1: lived through that, um, you know, you're you certainly have
Speaker 1: the battle scars, but you also have a lot of
Speaker 1: pride in what we were able to achieve on behalf
Speaker 1: of our clients, and I think that message went a
Speaker 1: long way. So I was at the Vanguard campus in
Speaker 1: Valley Forge when I met Jack Bogel, and it's a
Speaker 1: really large place. It reminds me a little bit of
Speaker 1: the Microsoft campus, which is just building after building after
Speaker 1: building that. What first of all, what was the thinking like, um,
Speaker 1: because you were there, even though you weren't CEO at
Speaker 1: the time, to create this far away from Wall Street
Speaker 1: space in the hills of Pennsylvania. Well again, I give
Speaker 1: I give Jack Bogil a ton of credit for just
Speaker 1: he he wanted there to be UM, you know, for
Speaker 1: us not to be Wall Street. You know, it was
Speaker 1: a very clear message from him. Actually, our predecessor, firm Wellington,
Speaker 1: was headquartered in Philly. Jack moved them out to the suburbs,
Speaker 1: you know he. I think part of it was tax reasons,
Speaker 1: you know Jack, you know, Jack like to save a
Speaker 1: buck for the investor. But I also think it was
Speaker 1: you know, a place too in a sense, create separation
Speaker 1: so that people weren't unduly influenced by short term h forces.
Speaker 1: I think Jack Brennan, who succeeded him UM, built on
Speaker 1: that UM. I remember interviewing with him, uh and I said, so,
Speaker 1: you know, what's your view of the future here, you know,
Speaker 1: what do you want this company to look like? And
Speaker 1: he said, I'd like to I'd like us to have
Speaker 1: Wall Street Smarts with Midwestern values. That's a good comment,
Speaker 1: and you know it really it really resonated with me,
Speaker 1: Barry and UM, I think the headquarters and the whole
Speaker 1: campus atmosphere really reinforces that. Does does that create a
Speaker 1: challenge at all in finding employees flanks that so you're
Speaker 1: in you're in Philadelphia. Outside of Philadelphia and Pennsylvania, it's
Speaker 1: from New York on a two hour drive. Maybe, UM,
Speaker 1: does it make it difficult to find people? I would
Speaker 1: imagine that part of the world, it's a different salary
Speaker 1: scale than New York or San Francisco. So UM it
Speaker 1: poses challenges occasionally, and and in the biggest places, if
Speaker 1: we're trying to bring somebody in at a more senior
Speaker 1: level from the outside. Sometimes the dual career thing. UM.
Speaker 1: You know, in New York there's just so many more
Speaker 1: opportunities and that that actually occasionally imposes a challenge. But
Speaker 1: it's interesting once we get people to the area and
Speaker 1: they see the quality of living, UM, it ends up
Speaker 1: turning into a selling point. UM. I've just added two
Speaker 1: new members to our executive team in the last UM
Speaker 1: six months, and first time we've gone outside in a
Speaker 1: long time, more than a decade. And that was their reaction.
Speaker 1: Both their reactions when they came there like, Wow, it's
Speaker 1: very kicked back, it's very chill. It doesn't feel like
Speaker 1: a frenetic Wall Street firm. A campus is really a
Speaker 1: good time. It feels like you run a college campus
Speaker 1: and you know one of the UM I would say,
Speaker 1: better to be lucky than smart aspects of where we are,
Speaker 1: and lucky you should always acknowledge your luck. There are
Speaker 1: a hundred and eight universities within two hours of our campus.
Speaker 1: UM we produce in that region more masters and graduate
Speaker 1: degrees per capita than any area in the country. I
Speaker 1: think on undergraduate degrees, we were it's between us in Boston,
Speaker 1: and so we got a lot of young people who
Speaker 1: want to come and you know, they want to stay
Speaker 1: close to home, and we're really the biggest UM you know,
Speaker 1: financial services firm, you know, miles around. I read a
Speaker 1: crazy statistic. I don't know if it's true, something like
Speaker 1: of the c f as in the state of Pennsylvania
Speaker 1: worked for Vanguard and Value. Is there any truth to that?
Speaker 1: Is that? A? I think directionally, it's it's close. It's close.
Speaker 1: I I know certified Financial Planners, which is a broader thing.
Speaker 1: I think we have FI now of well, the whole
Speaker 1: state in valley for that's pretty Uh, that's pretty fascinating. Um,
Speaker 1: let's let me take a look at some of the
Speaker 1: questions we might have skipped through before. So those are
Speaker 1: my favorite questions. We really covered a decent amount of stuff.
Speaker 1: We covered technology, we covered indexing, we covered E S
Speaker 1: g um, we we actually discussed buy backs and all right,
Speaker 1: let's keep going. There's there's so much stuff to do.
Speaker 1: And and at this point, I'm going to remind people
Speaker 1: if you haven't heard the first conversation Bill and I
Speaker 1: add which was eighteen months ago, it's one of the
Speaker 1: favorite masses in business we've had. We got tremendous feedback
Speaker 1: about it. Really, there's almost no overlap between this and
Speaker 1: that we've really covered very very You've done a good
Speaker 1: job breaking that apart. I've tried, and you will also
Speaker 1: make it easy. I know how to anticipate with you
Speaker 1: know it. There are some people where I ask questions
Speaker 1: and I have no idea what it's gonna be. I
Speaker 1: have a general sense of what the vanguard philosophy is.
Speaker 1: So when I asked Bill McNab about indexing, you're not
Speaker 1: gonna come out and say, well, you know, I pretty
Speaker 1: much know where you're gonna go with that. Um So,
Speaker 1: let's let's talk a little bit about um the evidence
Speaker 1: based conference that's coming up, because we were discussing that
Speaker 1: off air, and and I think it's interesting. Um So,
Speaker 1: coming up in November, we have an evidence based investing conference.
Speaker 1: You're one of the speakers, and you said you thought
Speaker 1: it was an interesting concept. Let's let's chat about that. Well,
Speaker 1: I think one of the things that's really fascinating to
Speaker 1: me is, um you spend a lot of time on data,
Speaker 1: and we think data rule. You know, it's a there's
Speaker 1: not just your gun instinct. You don't want to go
Speaker 1: with how it feels at the moment. Look, you know
Speaker 1: there's a place for judgment and instinct, there's no question
Speaker 1: about that. But um, you know being well informed and
Speaker 1: you know, to me as an analyst in particular, it's
Speaker 1: you know, the second and third layers, if you will,
Speaker 1: when you're peeling that proverbial onion where sometimes you really
Speaker 1: get the insights you know we have. Um just as
Speaker 1: an example, our chief economists has done some really cool
Speaker 1: work on you know, what's going on from a growth perspective,
Speaker 1: and he doesn't accept the we're in secular stagnation, and
Speaker 1: he he talks a lot about the evolution of tasks
Speaker 1: within occupations, and you know, we take some um comfort,
Speaker 1: if you will, that actually there's been a lot of
Speaker 1: change and it's been absorbed and there's a lot more coming.
Speaker 1: And the question is how well prepared are we for that?
Speaker 1: And you know, it goes back to one of our
Speaker 1: earlier conversations around are there things sort of from a
Speaker 1: policy standpoint that could be going on to help that.
Speaker 1: You know, we think infrastructure, we think education, probably the
Speaker 1: two big categories. But you know, he his his um
Speaker 1: work is so data driven that it makes you think
Speaker 1: a little bit differently about the problem. And that's what
Speaker 1: I loved about your concept and I can't wait to
Speaker 1: see it. The the idea behind it is, there are
Speaker 1: all these things that over the past twenty years worth
Speaker 1: of academic research we've learned to be true, and it
Speaker 1: turns out that a lot of things that most of
Speaker 1: Wall Street used to believe turns out to be false.
Speaker 1: It looks good, it feels good, but in the real
Speaker 1: world it doesn't work. So the idea was, hey, let's
Speaker 1: create a way to have a group of people come
Speaker 1: and discuss investing in markets strictly from what do we
Speaker 1: know to be factually true? What do we know to
Speaker 1: be have evidence behind it that demonstrates the veracity of
Speaker 1: a certain investment philosophy. When I sum up Vanguard for people,
Speaker 1: it's nothing matters more than costs. If you keep costs low,
Speaker 1: everything else all other good things will follow. But that's
Speaker 1: not the only truth that we've learned to be true
Speaker 1: over the past couple of decades. And yet it's amazing.
Speaker 1: How so this comes back to the four trillion advantguard
Speaker 1: and the rise of indexing. And maybe this is a
Speaker 1: question better asked of Dick Faylor or or Bob Schiller,
Speaker 1: But why have these truths taken so long to infiltrate
Speaker 1: the mind of the average investor or the institutional investor?
Speaker 1: You know, I think it's because there is an irrational
Speaker 1: expectation that we, you know, many people have that I know,
Speaker 1: if I pay a little more attention, I can outperform,
Speaker 1: you know, in the simplest way. You know, one of
Speaker 1: the best lessons I learned, and you know, it was
Speaker 1: kind of a blinding flash of the obvious. But I
Speaker 1: often say that's all I'm good for these days, is
Speaker 1: um average is not average. You know people used to
Speaker 1: say indexing while you're just accepting average returns. Actually that's
Speaker 1: not true. As you know, if you take the average
Speaker 1: index funds return and compare it against the whole universe,
Speaker 1: you're gonna you're gonna be in the top quartile from
Speaker 1: a performance standpoint over any long period of time. So
Speaker 1: you're not accept you're not actually accepting being average. You're
Speaker 1: you're saying, I'm going to be in the top quartile guaranteed.
Speaker 1: And you know it's things like that that aren't intuitive
Speaker 1: to people, and you know you need to sort of
Speaker 1: lay it out, you know. Um, it's it's interesting you
Speaker 1: mentioned Taylor. Um, we are huge fans of their work. Um,
Speaker 1: you know Thaylor and BERNARDSI on the four oh one
Speaker 1: case space did some of the best work where they
Speaker 1: took the behavioral principles and said, Okay, instead of using
Speaker 1: it just to explain what's happening, let's use them actually
Speaker 1: to help influence what should happen. And this is where
Speaker 1: the idea of automatic enrollment, automatic escort everything he told them,
Speaker 1: you know, changing the default so that it's a positive outcome.
Speaker 1: One of the examples in his book that I found
Speaker 1: fascinating is if you're default organ donor check is set
Speaker 1: for um, yes, donate my organs. Nine plus percent of
Speaker 1: people in certain European countries that have that default donate organs.
Speaker 1: If you don't have that as a default, it's ten
Speaker 1: or fifteen percent, and there's a giant waiting list. If
Speaker 1: you change that default, suddenly they're on people dying past
Speaker 1: there isn't a kidney available, or it's such a powerful thing. Um.
Speaker 1: You know, we funded some work that UM they are
Speaker 1: and BERNARDSI did in the late nineties, well it was
Speaker 1: probably early two thousand's and it really led us to
Speaker 1: get much more rest of about you know, the target
Speaker 1: date phenomenon and these auto four O one K plans,
Speaker 1: and we've seen better results, I mean, and again to
Speaker 1: your evidence based principles, it's absolutely clear when you look
Speaker 1: at the investment results of people who have followed you
Speaker 1: know sort of UM where we've used behavioral finance to
Speaker 1: shape the plan design and shape behavior versus leaving people
Speaker 1: to their own And you can see it and it
Speaker 1: boils down to dollars and cents. You have more money
Speaker 1: if you if you follow these principles. So, so let's
Speaker 1: talk about four oh one K and best practices UM,
Speaker 1: and I want to make sure I don't keep you
Speaker 1: here too long. We were pretty good on time UM
Speaker 1: best practices. So default should be automatic, regular contributions? And
Speaker 1: should it be a target date fund? Should it be? Uh?
Speaker 1: What should the default be for the typical small companies
Speaker 1: setting up before oh one K? So I think the
Speaker 1: target date is the easiest one. I think any you know,
Speaker 1: UM well diversified balanced option will suffice. But the beauty
Speaker 1: about the target date fund is you can give you know,
Speaker 1: you're a lot younger than I am, so you can
Speaker 1: get that. You can you can get the equity exposure
Speaker 1: you you need versus what I might need UM automatically,
Speaker 1: you don't have to think about it. So that's why
Speaker 1: I like the target date And you know, I've I've
Speaker 1: made the point to you know, thousands of investors at
Speaker 1: this point. I don't care what your income level is
Speaker 1: in a four oh one K plan, whether you're making
Speaker 1: dollars year or two d fifty dollars year. A target
Speaker 1: date fund is a great solution for you if you
Speaker 1: want to put more time and energy into it, and
Speaker 1: you you. You know you you love this stuff. Great,
Speaker 1: you can construct a portfolio and I don't think he'll
Speaker 1: do any better. But you know, maybe it's something that
Speaker 1: you get a lot of satisfaction out out of. But
Speaker 1: I think this default thing is really powerful. And you know,
Speaker 1: we're seeing almost every new investor who comes into the
Speaker 1: system just stay with the default and just leave it
Speaker 1: like that. So let's talk a little institutional. UM. I've
Speaker 1: seen white papers from Vanguard about hey, a sixty forty
Speaker 1: portfolio has beaten nearly all of the alternatives we've we
Speaker 1: mentioned earlier, the hedge funds, the private equity, and the
Speaker 1: venture capital. How does Vanguard present itself to the institutional community.
Speaker 1: I've spoken at various state pension funds, and I'm astonished
Speaker 1: at the level of let's just say, influence outside UM
Speaker 1: consultants have. How do you get past that? How how
Speaker 1: does that work when you're dealing with either a CalPERS
Speaker 1: or and I you obviously don't want to speak to
Speaker 1: any specific UM client, but a state pension fund or
Speaker 1: a large retirement or endowment. So UM, there's no question
Speaker 1: that there's lots of outside influences, whether it's the consultant community,
Speaker 1: or other. You know, people circling around and complexity usually
Speaker 1: is the friend. Um. You know, the more complex relationship is,
Speaker 1: the more complex they want the solution to be. And
Speaker 1: again we found simple works better in most cases. Um.
Speaker 1: So you know, we just go out and we try
Speaker 1: to tell the story and sometimes it doesn't work right away,
Speaker 1: and you just keep sort of knocking at the door
Speaker 1: and you just keep telling the story. In the four
Speaker 1: oh one case base, it's worked really well. In the
Speaker 1: endowments and foundations, we're finding in the sort of up
Speaker 1: to mid you know, several hundred million dollars were Actually
Speaker 1: the story is really resonating there the big some of
Speaker 1: the big pension funds, especially in you know, the States
Speaker 1: and so forth, we're having you know, we don't have
Speaker 1: as much access there. Interesting though, you are starting to
Speaker 1: see some of the messages that we've been promoting actually adopted.
Speaker 1: I don't know if they got it from us or
Speaker 1: they're coming up with it independently, but you're starting to
Speaker 1: hear some of the same things. O, Hey, maybe we're
Speaker 1: paying too much for investment management overall, and we need
Speaker 1: to think about a different approach. What do you think
Speaker 1: happens in that space over the next decade, because clearly
Speaker 1: everything's in flux. New Jersey turned out to have a
Speaker 1: horrific state run pension funds. Lots of money went to
Speaker 1: hedge funds who coincidentally were donors to various political campaigns.
Speaker 1: There's a ton of conflicts of interest. New York City
Speaker 1: announced last year that they were re looking at their
Speaker 1: alternative investments and what they're getting for their bucks. We've
Speaker 1: seen that in California, We've seen that all over the country.
Speaker 1: So so what does this dynamic mean going forward? Is
Speaker 1: there going to be a big shift um? Is that
Speaker 1: already underway? What what's happening in the institutional space? So
Speaker 1: I think the shift is already underway, and some of
Speaker 1: the leading UM plans are actually moving pretty quickly in
Speaker 1: this regard. And you know, I think what you'll end
Speaker 1: up seeing is a little bit more um bifurcation in
Speaker 1: what they do. So they will keep some non traditional
Speaker 1: but it will be more in the liquid space, where
Speaker 1: again in theory it's less about the manager, although as
Speaker 1: you and I know, maybe it's more about the manager
Speaker 1: than anybody wants to admit. But you should get paid
Speaker 1: more in some of those spaces, and then for the
Speaker 1: liquid portion, you're going to see a real emphasis on cost,
Speaker 1: I think, and you know, so you'll see more passive
Speaker 1: investing overall. UM, My guess is that continues. UM. I
Speaker 1: think the big wild card, and it is the most
Speaker 1: interesting part of the equation is everybody is looking at
Speaker 1: the expected returns and the equity and bond market and
Speaker 1: they're looking at their own assumptions for their plans, and
Speaker 1: there's a disconnect. You know, you'll you'll see some very prominent,
Speaker 1: you know, um public plants that have you know, seven
Speaker 1: and a half eight percent expected returns. I don't know
Speaker 1: where that's going to come from. I I can answer
Speaker 1: that question for you. They have an expected return of
Speaker 1: five percent on the equity, two on the bonds. You
Speaker 1: add five and two you end up with seven, although
Speaker 1: any account will tell you the math doesn't really work
Speaker 1: out that way. I've had that exact same conversation with people,
Speaker 1: and the thing that I'm still wrestling with is, so
Speaker 1: those are fair numbers. Two percent on fixed income, five
Speaker 1: percent on equity, and yet on the hedge funds they
Speaker 1: have expected returns of eight nine And I don't know
Speaker 1: where these numbers came from other than someone wants explained
Speaker 1: to me. Well, we're state entity, and if we have
Speaker 1: a short form our pension in the pensions expected returns,
Speaker 1: we have to actually add taxpayer dollar, so we'll crank
Speaker 1: up the hedge fund portion of it. They can't crank
Speaker 1: up the fixed income of a bond portion because everyone
Speaker 1: would scream about that. But somehow alternatives are generating a
Speaker 1: greater return at no greater risk than the asset asses
Speaker 1: of trading. It doesn't make sense, but it allows them
Speaker 1: and out to not It allows them to continually underfund
Speaker 1: their obligations. And I think you're seeing um at least
Speaker 1: I don't know if it's a new breed, but you
Speaker 1: know you're starting to see some serious leaders in that
Speaker 1: space say wait a minute, we've got to we've got
Speaker 1: to re examine what's been going on. So I'll be
Speaker 1: the optimists and say that people are going to start
Speaker 1: to get their hands around it, but it's gonna it
Speaker 1: will highlight that there's gonna be some there's some real
Speaker 1: gaps here in in terms of what's been promised and
Speaker 1: what's actually funded and how that plays out politically. UM,
Speaker 1: I'll leave it to you speculate on. I will before
Speaker 1: I get to my my favorite questions. I wanted to
Speaker 1: ask you. Is there anything I didn't ask you or
Speaker 1: any topics you think are worth mentioning that we we
Speaker 1: haven't discussed on air. We've covered almost everything we really have. Um, yeah,
Speaker 1: I think we've hit it. So so let's jump to
Speaker 1: our our favorite questions. Um, so you joined Vanguard thirty
Speaker 1: years ago. What were you doing before Vanguard? So? I
Speaker 1: had had two jobs before Vanguard. My first job out
Speaker 1: of college was teaching first year of Latin school. Of course,
Speaker 1: that leads right to asset management totally in coaching three sports. Um,
Speaker 1: I was it was nine. It was pretty deep procession.
Speaker 1: Unemployment was high. I was happy to have a job
Speaker 1: and and my parents were happy to have me off
Speaker 1: the doll and it worked out, um and I loved it.
Speaker 1: It was a great couple of years. And then I
Speaker 1: went back to business school. My first job out of
Speaker 1: business school was at what's now JP Morgan Chase. It
Speaker 1: was the Chase part, and I did a lot of
Speaker 1: different things. But the last thing I did was really
Speaker 1: work on a lot of highly leveraged transactions, actually undoing
Speaker 1: some in in for the most part, but you was
Speaker 1: with us. So that was eight three day eighty six
Speaker 1: and I got hired by Vanguard be a guaranteed investment
Speaker 1: contract product manager. What does that mean? I had no
Speaker 1: idea when they were interviewing me. Um. Guaranteed investment contracts
Speaker 1: were a fixed income instrument issued by insurance companies as
Speaker 1: an investment option in four oh one K plans. And
Speaker 1: we were just getting in the four oh one K
Speaker 1: business and UM, you know, we we wanted to take
Speaker 1: a little bit more sophisticated approach. I think we had
Speaker 1: a couple hundred million dollars in the program at the time.
Speaker 1: I'm pretty sure I got hired because Jack Brennan was
Speaker 1: intrigued by the credit background I had, and it wasn't
Speaker 1: convinced that we had analyzed the insurance industry properly for
Speaker 1: the g I C s we were buying, and so
Speaker 1: I think that had something to do with it. Um.
Speaker 1: I'm not sure why else, because nothing in my background
Speaker 1: really pointed toward that, but turned out Again, you'll hear
Speaker 1: me use the phrase over and over better to be
Speaker 1: lucky and smart Sometimes I totally agree. So you mentioned
Speaker 1: Jack Brennan, who were some of your ment so UM.
Speaker 1: You know Jack, certainly before I worked directly for him,
Speaker 1: with somebody I would go to for um, just advice
Speaker 1: around career, family, UM, how to think about business problems.
Speaker 1: Jack was one of the great UM strategic thinkers I
Speaker 1: think of the entire industry during his his time. And
Speaker 1: you know, he was just a really good sounding board
Speaker 1: for a lot of things. So he clearly was a mentor.
Speaker 1: We also, UM, I became pretty friendly with Charlie Ellis
Speaker 1: UM before he came on our board. Um, Charlie was
Speaker 1: running Greenwich Research. You know, I really count Charlie as
Speaker 1: somebody that I learned a ton from. You know, his
Speaker 1: book is arguably one of the two or three great
Speaker 1: his first book, you know, Winning the Losers Game, one
Speaker 1: of the two or three greatest things I ever written
Speaker 1: about investing. And um, Charlie gave me really really good
Speaker 1: advice UM when I took over running the four oh
Speaker 1: one K business, and he kept focusing in and don't
Speaker 1: worry abou growth. Worry about the quality of what you're
Speaker 1: doing for your existing clientele, and growth will take care
Speaker 1: of itself. And you know, of course Greenwich did sort
Speaker 1: of an assessment of who was the highest quality provider,
Speaker 1: and I don't forget coming when he came in one
Speaker 1: day and he said, hey, congratulations, you've won UM first time.
Speaker 1: And he goes, now you're the hunted, so what are
Speaker 1: you gonna do? And you know it just it's a
Speaker 1: great way to describe that, isn't it. Yeah, and you
Speaker 1: know it just so he was a really positive mentor.
Speaker 1: But by the way, for people who may not know
Speaker 1: who Charlie Ellis is. In addition to being on the
Speaker 1: Vanguard Board, he worked with Swenson on the Yale and
Speaker 1: down and arguably the most successful endowmen in history. Harvard's
Speaker 1: is bigger, but their performance has been appreciably worse. And
Speaker 1: Greenwich Associates were really a huge, huge institutional advisor for
Speaker 1: many years. Absolutely um legendary, legendary firm and really changed
Speaker 1: the nature of how people provided services in the institutional space.
Speaker 1: And then you know, I have a couple of unconventional mentors. UM.
Speaker 1: I have a an individual he's eighties six now. He's
Speaker 1: like a second father to me. He was my rowing
Speaker 1: coach um when I go out of college, and while
Speaker 1: I was teaching, he and I were coaches together. But
Speaker 1: he was also my coach because I was continuing to compete,
Speaker 1: and I actually owe him a lot. Um. What's his name?
Speaker 1: His name is Jim Barker, and we still talk a lot.
Speaker 1: And I went to him when I was interviewing at Vanguard,
Speaker 1: and Jim lives in Roxborough, Um, sort of in a
Speaker 1: row house in Philly, and uh we went. We got
Speaker 1: a couple of cheese steaks at what I considered to
Speaker 1: be the best cheese steak place in all Philadelphia, delessandros
Speaker 1: and uh six pack of beer and talking about life.
Speaker 1: And he was the one who really said, you gotta
Speaker 1: go someplace where your values and your passion match up
Speaker 1: with what the organizations trying to do. And he said,
Speaker 1: you know, you've got choice. He said, that's what it
Speaker 1: should come down to. And you know, it was that
Speaker 1: it was sort of the final thing I needed to,
Speaker 1: you know, like I got to do this because you
Speaker 1: know Vanguard there was something special about it thirty years ago. Well,
Speaker 1: you'll have to let us know if it works out.
Speaker 1: I'm I'm still I'm still striving there. Um, still working
Speaker 1: at it, Barry, I'm gonna guess it worked out, okay. Um,
Speaker 1: So let's talk about UM investors that influenced you, be
Speaker 1: CAUSISTL will lead to a few people other than Charlie Alice,
Speaker 1: who clearly is a tremendously influential investor. Who else do
Speaker 1: you think influenced your your approach to thinking about the
Speaker 1: world of investing. So, you know, it's interesting, you know,
Speaker 1: obviously I have to say Jack Bogol just you know,
Speaker 1: his his just the his analytic approach and the way
Speaker 1: he tried to simplify everything was really powerful. We had
Speaker 1: a really great um sort of um duo in we
Speaker 1: had Jack as UM chairman and CEO, and you know,
Speaker 1: Keith Thinker on all this. We also had Bert Malkiel,
Speaker 1: great Princeton economists on our board, and I got some
Speaker 1: pretty early exposure to the board. And you know Bert's
Speaker 1: again random Walked down Wall Street one of the greatest
Speaker 1: treatise ever written. One point eight million I'm sorry, is it?
Speaker 1: It's in the eleventh printing. It's a million and a
Speaker 1: half copies in prints. So you know, so I certainly
Speaker 1: have to give Bert, you know, a lot of credit.
Speaker 1: And then, um, this may surprise you, um, given how
Speaker 1: important I think indexing is. But there have been a
Speaker 1: couple of active managers who I had exposure to fairly
Speaker 1: early on, and I just liked the way they think,
Speaker 1: and I actually think it's very compatible with the way
Speaker 1: I described the power of indexing and the great John
Speaker 1: neff Um, who ran Windsor Fund for thirty years and
Speaker 1: one of the best track records ever for an active manager.
Speaker 1: The thing about John that was so powerful and you know,
Speaker 1: you're evidence it's based investing makes me think about this.
Speaker 1: John knew the companies better than the companies knew themselves.
Speaker 1: And I can remember sitting in sessions where he would
Speaker 1: be going through the details of what was happening at
Speaker 1: a large, you know, a Fortune fifty company and sitting
Speaker 1: across from the management teams and they had no idea
Speaker 1: what he was talking about, and he was so much
Speaker 1: more in depth. And then Um, there was another fellow
Speaker 1: at Wellington who sort of flew the public radar. But
Speaker 1: when you look at his track record at Owens, who
Speaker 1: ran our healthcare fund and he since handed it over
Speaker 1: to his successor, who has done a phenomenal job, Gene Hines.
Speaker 1: But Ed and his team, you know that healthcare fund
Speaker 1: for thirty years. When Ed retired, no fund in the
Speaker 1: industry had a better track record. Really it was at
Speaker 1: the time four basis points ahead of the next best
Speaker 1: fund in the industry. And the thing when did retire,
Speaker 1: so about three years ago now. And the thing that
Speaker 1: was so impressed about Ed and John was their knowledge
Speaker 1: of their companies was deep. But even as active managers,
Speaker 1: they were very much into long term value creation. So
Speaker 1: you look at their portfolio turnover and it was really
Speaker 1: low compared to other active funds, and they actually took
Speaker 1: pretty concentrated bets. And you know, I've come to believe
Speaker 1: that if an active manager is going to add value,
Speaker 1: it's probably going to be by being very different. So
Speaker 1: each of them would have of their portfolio in their
Speaker 1: top ten names, and you know, coupled with an index
Speaker 1: as a base, that was actually a pretty good way
Speaker 1: to invest. So that that raises a question not from
Speaker 1: our our favorite lists, but we talked earlier about recruiting.
Speaker 1: You you get rock stars like that who can jump
Speaker 1: ship to another place and and maybe pick up a
Speaker 1: bunch of stock options and make more money. How does
Speaker 1: Vanguard retain their top talent like that? Well, so, you know,
Speaker 1: interesting on the active management side, some of those folks
Speaker 1: I UM reference, they don't actually work for us. They
Speaker 1: outside manager outside managers and so you know, they work
Speaker 1: for Wellington or for prime Cap or you know any
Speaker 1: of the other firms around the world. Bailey Gifford in Scotland. Um.
Speaker 1: And it's a pretty unique arrangement, isn't it. For a
Speaker 1: big mutual funds. We're the only ones who employ this
Speaker 1: strategy as extensively as we do. And really all of
Speaker 1: our active equity, with a couple of very minor exceptions,
Speaker 1: is run by external firms and we scour the world
Speaker 1: for the best firms. And today I think we have
Speaker 1: about seventy five different mandates run by thirty firms and
Speaker 1: it's been a really um it's been a really good
Speaker 1: way to approach active and we find people who are
Speaker 1: aligned with us in terms of low cost and long
Speaker 1: term view and so forth. Um, you know, in terms
Speaker 1: of the broader question though, how do we retain talent? Um? Yeah,
Speaker 1: I'd say there are a couple of things. One, you know,
Speaker 1: we we do compensate people well, I mean in our
Speaker 1: own firm, our fixed income teams are our index teams
Speaker 1: are client service people. You know, we pay struct attention
Speaker 1: to what's going on in the industry, but you you're
Speaker 1: reputed at the CEO level down. Look, if Jamie Diamond
Speaker 1: would leave and you would say, hey, knock knocked, sure,
Speaker 1: I'll run JP Morgan for you. I imagine JP Morgan
Speaker 1: with its stock options is a multiple of what you're not.
Speaker 1: Not that you're underpaid advantguard. I'm sure it's a reasonable
Speaker 1: check each week, but when you go to any of
Speaker 1: the publicly traded Goldman, Sachs, Morgan, Stanley, those are crazy numbers.
Speaker 1: So it gets to the question how much is enough? Right?
Speaker 1: So you know, at the end of the day, um,
Speaker 1: I think the kind of people we've been able to track. Look,
Speaker 1: we want people to make a good living, We want
Speaker 1: people to be able to take care of their families
Speaker 1: and you know, support whatever. It doesn't have to be
Speaker 1: a hundred million dollars. It doesn't. And you know, we
Speaker 1: want people who are mission based and the thing. And
Speaker 1: you know you've been to the campus, you felt it.
Speaker 1: I mean, everybody there is there because they really believe
Speaker 1: in the mission of the firm. You don't feel that
Speaker 1: there dripping with excess. And I've been to other places
Speaker 1: that you're like, what do you think that costs? On? Yeah,
Speaker 1: I had. There's a funny story. Um somebody, um, a
Speaker 1: reporter came to my office a couple of weeks after
Speaker 1: I had become CEO, and she sort of looked around
Speaker 1: and she said, this isn't really what I expected. And
Speaker 1: she had been somewhere else where I think they had
Speaker 1: spent a million dollars on art or whatever, and she said, well,
Speaker 1: how much did that print costs? And then and I said, well,
Speaker 1: it's a print. It was fifteen bucks. And then we
Speaker 1: got it reframed and you know, and a lot of
Speaker 1: the art was actually went all the way back to
Speaker 1: Jack Bogel and Jack Brennaday's. You know, it was just
Speaker 1: stuff we had. Look we we we we remind ourselves.
Speaker 1: And I know it sounds really Polly Anishberry, but it's
Speaker 1: not our money. You know. The question always I don't
Speaker 1: think that there's a there's a there's a question. I
Speaker 1: get asked a lot out there. People say, what's it
Speaker 1: like to you know, be have three and a half
Speaker 1: trillion or four trillion. I always like, I have no idea.
Speaker 1: It's not my money, it's you know, we we we
Speaker 1: go to bed every night. Actually, I think about the
Speaker 1: responsibility that's been entrusted with us, and I think that's
Speaker 1: why the people are there. You know, you look at
Speaker 1: our senior team and people. The tenure of our organization
Speaker 1: is incredible. Um. You know, we have half the company
Speaker 1: has been in Vanguard more than ten years. And I
Speaker 1: think I don't have this stat right off the top
Speaker 1: of my head, but I'm going to guess it's at
Speaker 1: least the company has been more than twenty And that
Speaker 1: belief in what we do is really palpable. And you
Speaker 1: know it's and then you know, you make it get
Speaker 1: pay well, you make it a really good environment, and
Speaker 1: you know, we try to treat people really well. There's
Speaker 1: no one this was Jack Bogel is um you know, um,
Speaker 1: no problem, you know, in a sense differentiating by how
Speaker 1: you know people's contributions are to the firm. But from
Speaker 1: a behavior standpoint, you know, Jack never cared what level
Speaker 1: you were. You treated everybody with respect. And I remember hearing,
Speaker 1: you know, learning that like my first three days, they're
Speaker 1: just watching what was going on, and that really again,
Speaker 1: for a lot of us, that's what gets us up
Speaker 1: in the morning. There's a firm culture. It's still there
Speaker 1: and it hasn't attenuated yet. Uh, you know, we work
Speaker 1: really hard at that. All right, back to our favorite questions,
Speaker 1: Let's talk about favorite books. You You mentioned Winning The
Speaker 1: Losers Game by Charlie Ellis and Random Walk Down Wall
Speaker 1: Street by Burton Malkiel. By the way, two previous guests
Speaker 1: on the show, what are some of your other favorite books? Fiction,
Speaker 1: non fiction, finance related or not. So I'll give you two.
Speaker 1: Finance one, so I can't not mention bail out nations
Speaker 1: can skip everybody knows, but everybody knows that my so
Speaker 1: it's but it's you know again, you captured a lot.
Speaker 1: There's another book that I think does um it's it's
Speaker 1: less extensive than yours, but gives everybody everything they need
Speaker 1: to know about that here it's The Lost Bank by
Speaker 1: Kirsten Grind The Loss Bank. It's about Washington Mutual and
Speaker 1: it's a fantastic insight into what corporate culture, how corporate
Speaker 1: culture can go awry. L O s t The Lost
Speaker 1: Lost Bank. Um it's it's really a good read. You
Speaker 1: you'd enjoyed, especially given what you've done. You know. On
Speaker 1: the fiction side, So I tend to be accused of
Speaker 1: being very eclectic. Um. I have a huge science fiction collection. Too,
Speaker 1: and what do you like? Well, I'm i'm so. I
Speaker 1: love all the classic guys. So I've read everything. I
Speaker 1: just reread the Lasnie on a plane flight. Um? Which one?
Speaker 1: This Immortal which is favorite classic? Um Dune obviously, Hyperion
Speaker 1: by Dan Simmons one of my favorites. I love all
Speaker 1: the cyberpunk guys. Neil Stevenson Um in particular, and he's
Speaker 1: got a new great book out called Seven Eves. I
Speaker 1: read this summer while I was on vacation and it
Speaker 1: was fantastic. So. Um, that's kind of how I amuse
Speaker 1: myself in in the fiction world. How far into the
Speaker 1: cyberpunk do you go? You William Gibson or so you know?
Speaker 1: I think Gibson? Um, you know Neuromanswers one of my
Speaker 1: top books. Mona Lisa Overdrive one of my favorite books. Um,
Speaker 1: So I I like those guys. Um you know? To me? Um,
Speaker 1: how abstract do you get with with science fiction? You
Speaker 1: can test me, Philip K. Dick, I've read them all. Really,
Speaker 1: you haven't read you Bick. I've got you Buck. I
Speaker 1: haven't read you Bick. So you're right, I read you Bick,
Speaker 1: and I'm the only person I know and I started
Speaker 1: you Buck, and I couldn't figure it out. It's it's
Speaker 1: the spray. It's um. People don't realize. Decades after he
Speaker 1: passed away, his books became these Hollywood Black Blade Runner
Speaker 1: was based on a short story Do Androids Dream of
Speaker 1: Electric Shape? Total Recall was based on We Can Remember
Speaker 1: It for your Wholesale. So if when someone tells me
Speaker 1: they've read Philip K. Dick, I know that they've gone
Speaker 1: through the whole genre. And one of the best, um
Speaker 1: new TV series on Netflix or is an Amazon Pro
Speaker 1: It's Amazon Prime and it's The Man in the High Castle.
Speaker 1: They did it. It's a pretty good treatment. Um, I'm
Speaker 1: in the first I'm halfway through the first season. It's
Speaker 1: it's a it's good. It's a good extrapolation and it
Speaker 1: looks great. Yeah, it makes me think of what I read. So, yeah,
Speaker 1: I love all that stuff. Yeah that that was really
Speaker 1: a fascinating book. A talk show host awakes one morning
Speaker 1: to discover that America has lost World War Two and
Speaker 1: the Japanese and Germans have split up America and he
Speaker 1: can't figure out why. So they haven't quite gone that
Speaker 1: that route. But in the book, it's this Dick loved
Speaker 1: alternative levels of reality. It's a so so I I have.
Speaker 1: I like to say I misspent my youth and my
Speaker 1: adulthood reading a lot of science fiction. But you know,
Speaker 1: for me it's actually very stimulating because things like and
Speaker 1: you know there's cyberspace, um, virtual reality. This has been
Speaker 1: part of my world for twenty years. So what technology
Speaker 1: is always fifty years behind science fiction writer? And so
Speaker 1: like you could, you could look at every major innovation
Speaker 1: and somebody has was writing about it half a century ago. Yeah.
Speaker 1: I'm now about to start a new book on um
Speaker 1: that's about the X Prize and you know, the first
Speaker 1: group to win the X Prize in in you know,
Speaker 1: was the space launch of the driverless car Space Launch,
Speaker 1: And so I'm really interested in what's the name of
Speaker 1: the book? You know, I'm drawn a blank now. It
Speaker 1: just came out and um, it's literally it just showed
Speaker 1: up on my doorstep. And before I so rudely interrupted
Speaker 1: you talking about science fiction, what was the other fiction
Speaker 1: that you were going to reference? Now? I I think
Speaker 1: that's the where I spend most of my fiction, and
Speaker 1: then I do a decent amount of history for nonfiction. Um,
Speaker 1: what have you read recently liked. So my my favorite
Speaker 1: one in the last couple of years is a book
Speaker 1: called Valiant Ambition UM by Natt Philbrick. Valiant Ambition, and
Speaker 1: it's it's basically a follow up to a book he
Speaker 1: did a couple of years ago called Bunker Hill, and
Speaker 1: it's the second year of the Revolutionary War and it's
Speaker 1: really um he he focuses on Washington and Benedictdonald. You
Speaker 1: get a really deeper appreciation for what led to Benedict
Speaker 1: Donald's treason, and it's it's part. It's a story I
Speaker 1: didn't know, so it was really fasting. That's interesting. And
Speaker 1: if memory serves you liked McCullough's Wright Brothers. I love
Speaker 1: Wright Brothers. You loved it, can I tell you it's
Speaker 1: one of those books that have been in my queue
Speaker 1: and I just haven't gotten to it. When when you
Speaker 1: read it, you're so inspired by UM. A lot of
Speaker 1: people love that book. So, you know what what's so
Speaker 1: interesting to me is these guys had a vision and
Speaker 1: they didn't let anything get in their way and they
Speaker 1: just kept pursuing it. And the discipline and the passion, um.
Speaker 1: You know, it's everything I love. You know, it's the
Speaker 1: American Dream writ large. All right, let's um, let's keep
Speaker 1: going because I know I only have you for a
Speaker 1: few more. It's um. So there's a new question I've
Speaker 1: added to my regular list at the request of of listeners.
Speaker 1: What is it that you do to keep mentally and
Speaker 1: or physically fit? What do you do to relax outside
Speaker 1: of the office. So I I have a background in
Speaker 1: endurance sports, and in particular and rowing. Um, you know,
Speaker 1: I took up rowing in college, and I could argue
Speaker 1: that it was taking up rowing that's led to everything.
Speaker 1: You know it really it led me to take the
Speaker 1: teaching job in Philadelphia so I could continue rowing. It
Speaker 1: brought me back to Philadelphia. Um. You know, this coach
Speaker 1: I mentioned as a mentor gave me the best career
Speaker 1: advice I've ever gotten. And um, in a sense, everything
Speaker 1: good that's happened since I can trace back to that
Speaker 1: decision to start rowing. So I'm pretty passionate about the sport.
Speaker 1: Are you still rowing regularly? You know it's hard with
Speaker 1: my schedule, So I'll go out on the weekends. UM,
Speaker 1: I have a show a single and I will occasionally
Speaker 1: jump into a team boat. I'm going to actually race
Speaker 1: this coming weekend in Boston at the head of the
Speaker 1: Charles and a master's event, so the age handicap at
Speaker 1: which in my case is really necessary. And I'm going
Speaker 1: to row with in one I'm rowing in two events
Speaker 1: actually which I may regret later and I think they
Speaker 1: may need oxygen when I'm done. But I'm gonna row
Speaker 1: with three of my teammates and the first time we
Speaker 1: got in a boat together was forty one years ago.
Speaker 1: Oh really, which so it's pretty cool to reunite. And
Speaker 1: then I'm going to row with another group of alumni
Speaker 1: from do they all still still stay active rowing? They do?
Speaker 1: And and what we do is we we all try
Speaker 1: to get together and race this race in Boston periodically.
Speaker 1: And then UM. The other thing I do UM with
Speaker 1: actually a number of my Vanguard colleagues is I bicycle
Speaker 1: and we typically do one or two charity events in
Speaker 1: the summer to raise money for cancer. There's one in
Speaker 1: Massachusetts that's again you love it from um UM. Just
Speaker 1: an economics standpoint, forty million dollars raised in one weekend.
Speaker 1: That's big to benefit Dana Farber and cancer research and
Speaker 1: in particular a lot of emphasis on pediatric cancer and
Speaker 1: UM it's a really cool event. And I think this
Speaker 1: past year we probably had ten or twelve of us
Speaker 1: go up and do it. So how do how does
Speaker 1: the money raising work? Is it a per mile per that?
Speaker 1: However you want to do it, you're you, You you
Speaker 1: tell the organization you will raise a minimum of I
Speaker 1: think the minimum is probably four or five dollars now,
Speaker 1: and you get sponsors, friends. You know, I tend to
Speaker 1: my wife and I tend to you know, it's cancer
Speaker 1: research pretty important to us, so we tend to do
Speaker 1: it ourselves. But everybody has their own approach. And UM,
Speaker 1: it makes you train, you know. You it's two hundred
Speaker 1: miles and two days double centurion. That's pretty impressive. So
Speaker 1: you know, I can't fake it through that anymore. So, UM,
Speaker 1: I've got to do so again. Long rides on the weekend. Then, UM,
Speaker 1: we have a gym on campus. I'll do a spinning
Speaker 1: class a couple of times a week. So there's really
Speaker 1: a lot of you're you're getting ready to do. That's
Speaker 1: a that's a big ride, a hundred miles a day.
Speaker 1: But you know, to your original question, UM, I find that. Um,
Speaker 1: And this was a lesson I learned from Jack Brennan.
Speaker 1: The discipline is staying UM fit has helped me immeasurably
Speaker 1: career wise. UM, you don't get sick as often. You
Speaker 1: understandina is great. You know when you go through crises,
Speaker 1: you you know, long days just sort of bounce off you.
Speaker 1: And so to me, it's become very self reinforcing of
Speaker 1: kind of basic leadership principles. You know something that you
Speaker 1: want to emulate to other people, do it, so you
Speaker 1: have to take care of yourself so you can take
Speaker 1: care of business. That makes sense. Our last two and
Speaker 1: favorite questions what sort of advice would you give to
Speaker 1: a millennial or a recent college graduate who might be
Speaker 1: interested in going into the field of finance or investment management.
Speaker 1: So I think it's a really interesting time UM for that.
Speaker 1: And you know, I first I'd always tell them whatever
Speaker 1: sector they're going into, the accounty, but in particular and
Speaker 1: financial services, find a place where your values match up,
Speaker 1: so you know, really probe a lot around the values
Speaker 1: of a firm, and you've got to go to a
Speaker 1: place that you're comfortable with and where your values really
Speaker 1: match up. I think very related UM is have a
Speaker 1: passion for it too. UM don't do anything just for
Speaker 1: the paycheck, UM. And you know sometimes I mean, you
Speaker 1: know what it's like coming out of school, You're in
Speaker 1: debt and you're you're you're tempted to just do whatever
Speaker 1: to to to h to meet those those obligations. But
Speaker 1: I think passion is really important. You know, when I
Speaker 1: first came out of school, I did have a passion
Speaker 1: around education. So you know, the first couple of years
Speaker 1: for me, you know, I got to fulfill that. You know,
Speaker 1: my first for a into finance, I wasn't is connected
Speaker 1: um from a mission standpoint, and it was finding vanguard
Speaker 1: that really reinforced how important that is. I was just
Speaker 1: so much happier about the work makes sense. And our
Speaker 1: final question, what is it that you know about the
Speaker 1: world of investing and running a company today that you
Speaker 1: wish you knew thirty years ago? Thirty years ago? Um,
Speaker 1: crazy number? Right, Yeah. I I think the speed with
Speaker 1: which technology is evolving UM is much. And you know,
Speaker 1: here for a science fiction guy to admit this, it's
Speaker 1: really hard. But I didn't see it all coming as
Speaker 1: fast as it came. And I think it's because it's
Speaker 1: not linear. I don't think humans are wired to think
Speaker 1: exponentially Um, just the smartphone was such a people don't
Speaker 1: realize there's more power in this than went to them
Speaker 1: took men to the moon, and it's amazing how that's changed,
Speaker 1: you know, not having as good an appreciation about that.
Speaker 1: And then I think it's probably related. But the globalization
Speaker 1: that's occurred, especially the last decade. UM, it's spectacular, but
Speaker 1: also you know, it's it comes with challenges, with a
Speaker 1: lot of challenges, and I think that's really um. You know,
Speaker 1: if I could go back in time and anticipate that
Speaker 1: a little better, I think I would have made smarter
Speaker 1: decisions in terms of helping us as a firm think
Speaker 1: through some of those things. I think we've done okay,
Speaker 1: But you know it's it's. Um. Those two phenomena, the
Speaker 1: acceleration of technology and globalization, again probably very inter related.
Speaker 1: They they really are defining our era in in so
Speaker 1: many ways, and I think they're going to define the
Speaker 1: next ten years too. I don't doubt it for a second. Bill,
Speaker 1: Thank you for being so generous with your time we
Speaker 1: have been speaking. I want to make sure I say
Speaker 1: this right. Is it William McNabb The third because I
Speaker 1: keep calling you Bill, Bill, is what I prefer. Okay,
Speaker 1: it's technically Frederick William the third, and my mother insisted
Speaker 1: that i'd be Bill Um since my father was fred
Speaker 1: All right, that works. If you enjoy this conversation, be
Speaker 1: sure and look up an inch or down an inch
Speaker 1: on Apple iTunes and you can see any of the
Speaker 1: other hundred and eight or so. Uh such conversations we've had. Uh.
Speaker 1: If you want more information on Vanguard, UH, they're a
Speaker 1: small company in Pennsylvania, you could go to Vanguard dot
Speaker 1: com and learn all about them. I would be remiss
Speaker 1: if I failed to thank Taylor Riggs, our booker, Michael
Speaker 1: bat Nick, my head of research, and Charlie Volmer, our
Speaker 1: recording engineer. We love your comments, feedbacks and suggestions, and
Speaker 1: if you've made it this far into the podcast, we'd
Speaker 1: love to hear from you right to us at m
Speaker 1: IB podcast at Bloomberg dot net. I'm Barry rid Holtz.
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio,
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