Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is fran Ken Irie and he is the
Speaker 1: head of portfolio Construction at Vanguard Group, managing a modest
Speaker 1: five point something trillion dollars. He has an absolutely fascinating
Speaker 1: career and the work he's done at Vanguard on a
Speaker 1: concept called Advisors Alpha is absolutely essential and part of
Speaker 1: the single largest trends UH in investment management today, which
Speaker 1: has to do with the shift from transactional brokerage type
Speaker 1: investments two more UM fee only long term asset allocation
Speaker 1: from advisors. This is one of the single biggest trends
Speaker 1: in investing and has seen literally trillions of dollars shift UH.
Speaker 1: This is a big part of the shift from active
Speaker 1: to passive, from transactional UM to long term. And if
Speaker 1: you are an advisor, if you work in the industry,
Speaker 1: or if you're just simply UM, if you're just simply
Speaker 1: an investor who is interested in learning what's going on
Speaker 1: in the world of investment management, you're going to find
Speaker 1: this conversation to be absolutely fascinating. So, with no further ado,
Speaker 1: my conversation with Vanguards Franken I Re. This is Master's
Speaker 1: in Business with Barry Ridholts on Boomberg Radio. My special
Speaker 1: guest this week is fran Kinnary. He is the global
Speaker 1: head of Portfolio Construction at the Vanguard Group, which manages
Speaker 1: over five trillion. That's trillion with a T five trillion dollars.
Speaker 1: He's a principal in the Investment Strategy Group, where as
Speaker 1: an m BE a slash chartered financial analyst, he helps
Speaker 1: to develop Vanguard's investment philosophy, methodology, and portfolio construction strategies.
Speaker 1: At Vanguard, he helped to create the firm's investment counseling
Speaker 1: and research departments, it's asset management services, and the Vanguard
Speaker 1: Advisory Services. But perhaps he is best known for creating
Speaker 1: the concept of advisor's Alpha. Fran Kinnary, Welcome to Bloomberg.
Speaker 1: Thank you so much, Barry. It's great to be here.
Speaker 1: I've been a big fan of your show and so
Speaker 1: just a pleasure to be here. I um I have
Speaker 1: had as a guest on the show just about all
Speaker 1: of your CEO s since the firm began. I have
Speaker 1: to track down the new guy. He's he's been elusive,
Speaker 1: but I will eventually. He's been busy, I can imagine.
Speaker 1: So so let's start a little bit with with some background.
Speaker 1: I hear that index funds are are a bubbler. Are
Speaker 1: you guys at Vanguard about to crash the economy? Yeah,
Speaker 1: that's an interesting one. The the author I guess of
Speaker 1: the or the creator of the big short came out recently,
Speaker 1: and I know your team covered at Josh covering it
Speaker 1: as well, and I think people, you know, I have
Speaker 1: to really take a step back when I see stories
Speaker 1: like this. There's a lot of confusion even on index
Speaker 1: and active and I think people don't even understand. As
Speaker 1: long as they've been around, they're still very confused. So
Speaker 1: so let's delve into the details, explain the broad difference
Speaker 1: and why it matters. Yeah, first off, I think people
Speaker 1: confused this idea of you know, indexing maybe surpassing active management, right,
Speaker 1: so in the US, and you actually just did that,
Speaker 1: did that exactly, But I think people forget that that's
Speaker 1: forty ACT funds, forty ACT being mutual funds and e
Speaker 1: t f s, and that is a very small part
Speaker 1: of the capital market structure. So what is not included
Speaker 1: under the forty Act, separate accounts, institutional investors, sovereign wealth funds.
Speaker 1: So actually the mutual fund and ETFs are somewhere between
Speaker 1: thirty and thirty five percent. So if you do that math,
Speaker 1: index equities on the U S side is somewhere around
Speaker 1: so still relatively small. Indexing passive investing much more than
Speaker 1: active investing exactly. And I think the other big confusion
Speaker 1: is that people think that indexing moves price. If there's
Speaker 1: only two active managers. Let's say it's you and I Berry,
Speaker 1: and you and I are playing golf and we're not
Speaker 1: at our trading desk, the index doesn't move, so the
Speaker 1: index is taking their direction. They index will replicate active managers.
Speaker 1: So this idea that indexing is driving price or price discovery,
Speaker 1: if there were only two active managers and they decided
Speaker 1: to take the day off, the index wouldn't move. There
Speaker 1: would be no index trading. That's that's interesting. So as
Speaker 1: long as we're we're talking about this bubble. Over the
Speaker 1: past couple of years, i've heard indexing is a threat
Speaker 1: to the economy. Is an American, it's Marxist. It seems
Speaker 1: like a lot of people are flailing and Jack Bogel
Speaker 1: very famously said when Vanguard first rolled out their initial
Speaker 1: index funds, they were accused of being un American. Yeah,
Speaker 1: and I think some of the assaults that you're hearing
Speaker 1: is back to incentives, right, and and um, you know,
Speaker 1: Charlie Munger famously said that his whole life he believed
Speaker 1: that of what people say or do is due to incentives,
Speaker 1: and his whole life he underestimated incentives. Uh So, I
Speaker 1: think there's a large crowd that would love to talk
Speaker 1: about this indexing bubble or all the negatives of indexing.
Speaker 1: You have to look at the incentives there. The bottom
Speaker 1: line is indexing is broadly diversified, low cost exposure, and
Speaker 1: probably one of the greatest things that have happened to
Speaker 1: investors in the last fifty years. So so you suggesting
Speaker 1: that the people who are critics of indexing are the
Speaker 1: ones who are seeing outflows and losing market share? Is
Speaker 1: is that how cynical you are? Yeah? I think when
Speaker 1: you your your survival and uh, you know, depends on it,
Speaker 1: you'll say whatever makes that right. The famous Upton Sinclair quote.
Speaker 1: So you've been at Vanguard since nineteen seventy seven, what
Speaker 1: path took you there. What what was your first role
Speaker 1: at the Vanguard Group. Well, I'm not that old, Barry.
Speaker 1: I joined in nineteen nineties seven, is that? What did
Speaker 1: I say? I said seventy seven you you were going
Speaker 1: into high school? Yes, exactly, exactly, So I joined in
Speaker 1: nineteen ninety seven. By the way, Vanguard's only been around
Speaker 1: with what's in seventy four? So so ninety seven, Yes,
Speaker 1: so nineteen ninety seven I joined Vanguard. UM. The backstory
Speaker 1: is like yourself, I was at a registered investment advisory firm.
Speaker 1: Back at that time. We had a billion dollars, which
Speaker 1: was was quite large. We were a multi family office
Speaker 1: and institutional advisory firm. To be fair, in nineteen ninety seven,
Speaker 1: a billion dollars was a lot of money. Now it's
Speaker 1: walking around money exactly. So it seems with six trillion
Speaker 1: and five trillion and just crazy a UM numbers exactly
Speaker 1: and so UM. I was a big fan and studied
Speaker 1: Vanguard from AFAR, from my prior firm, and I ended
Speaker 1: up at Vanguard because our r I a business, got
Speaker 1: rolled up into a you know, they were going through
Speaker 1: a roll up stage and roll up being other big
Speaker 1: advisory shops bringing other advisors together. I had about a
Speaker 1: year to figure out whether I was gonna stay or
Speaker 1: move somewhere, and I just was. I was a c
Speaker 1: f A and I happened to be at a CFA
Speaker 1: event and Vanguard was entering the advice business. And so
Speaker 1: a lot of people know about Vanguard's advice today and
Speaker 1: they may think it's new, but I was, you know,
Speaker 1: at the very very early beginning of Vanguard's starting advice,
Speaker 1: and my role was to develop the investment methodology we
Speaker 1: used in our advice services. So so let's talk a
Speaker 1: little bit about that. Vanguard has been a giant advocate
Speaker 1: of the sixty forty portfolio. Equity bonds advisors embrace that,
Speaker 1: uh in giant numbers. Uh. Is the sixty forty portfolio
Speaker 1: still a desired sort of miss Yeah. I think some context,
Speaker 1: they're just like we we started with the context on indexing.
Speaker 1: The context is, I think Vanguard believes in broadly diverse
Speaker 1: fight portfolios, low cost, whether it's active or passive, because
Speaker 1: we actually believe in active. You're almost two trillion and active,
Speaker 1: that's right, And so I think the sixty forty gets
Speaker 1: thrown out there, you know, um as a starting point.
Speaker 1: But we we believe that the asset allocation should reflect
Speaker 1: the client's goals and objectives. So we have clients, uh,
Speaker 1: for example, our target retirement funds, it's a glide pass.
Speaker 1: It starts out nine ten and gets all the way
Speaker 1: down to thirty seventy and otherwise, as you get older,
Speaker 1: you assume less risk with equities and more stability with bonds. Absolutely,
Speaker 1: So the sixty forty, while you know, that's one spot
Speaker 1: on that frontier, I think the main part is having
Speaker 1: an asset allocation and investment policy. You know that you're
Speaker 1: navigating back to, so you're rebalancing to that, being broadly
Speaker 1: diversified and either having high talent and low costs. That
Speaker 1: would be our formula for success for an investor. Whether
Speaker 1: it's sixty forty or forty sixty UM doesn't really matter. Um,
Speaker 1: But yeah, the sixty tends to be that starting point
Speaker 1: for many investors, and a lot of the institutional funds, endowments,
Speaker 1: foundations were that for a very long time. Quite fascinating.
Speaker 1: So let's talk a little bit about Advisor's alpha. Um,
Speaker 1: your team effectively created this concept in two thousand and one.
Speaker 1: Let's define it. What is Advisor's alpha? Yeah, so advisor's alpha,
Speaker 1: as you mentioned, we created in two thousand and one,
Speaker 1: and it really changed the value proposition or the framework
Speaker 1: of what it means to you know, why hire an advisor?
Speaker 1: And um my prior role, I was an advisor, and
Speaker 1: I think our value proposition was probably similar to most
Speaker 1: and that was a myopic value proposition. Hire me and
Speaker 1: I'll outperform a policy portfolio whatever. That's the traditional chasing
Speaker 1: alpha wool Street pursue the hot hands will beat the market, right,
Speaker 1: and so whether you do that through security selection, market timing,
Speaker 1: fund selection, the value proposition for a long time and
Speaker 1: the advice community was outperform a policy portfolio, and and
Speaker 1: none of the data supported anybody's ability or at least
Speaker 1: the vast majority of investors and fund manager's ability to
Speaker 1: do that consistently over time. Yeah, and think about what
Speaker 1: a high hurdle that is if if you're charging you know,
Speaker 1: let's say one percent in a fee based uh an arrangement,
Speaker 1: and then you now so not only that, you have
Speaker 1: to outperform by one percent plus any product fee. So
Speaker 1: that's a really tough hurdle. So it's a value proposition
Speaker 1: that you're setting up. You know, you own your value
Speaker 1: proposition as the advisor, and you're telling your client, you know,
Speaker 1: judge me on this, and you're you know, you're really
Speaker 1: handicapping yourself. And that's what led to a lot of churn,
Speaker 1: a lot of churn over and unhappy clients. So we
Speaker 1: kind of broadened the value proposition. So Advisor's alpha, you know,
Speaker 1: is a much more holistic value proposition. It still has
Speaker 1: investment management if you believe that that is a you know,
Speaker 1: skill you want to do. But what about financial planning,
Speaker 1: tax planning, wealth planning, saving planning, retirement income? How do
Speaker 1: I get a paycheck to me? And then behavioral coaching
Speaker 1: also the service model. I work with a lot of
Speaker 1: investors that are very busy, you know, they could be
Speaker 1: a doctor, a lawyer, an entrepreneur, and they don't want
Speaker 1: to you know, come home at the end of the
Speaker 1: day and manage their assets. So a service model, you know,
Speaker 1: I came up with the acronym t W A you know,
Speaker 1: client may not have the time, willingness or ability to
Speaker 1: do it on their own. And for most of those clients,
Speaker 1: it's worth you know, the hundred basis points of advice.
Speaker 1: So you you mentioned, um, something that reminds me of
Speaker 1: the Vanguard concept of total return. I want to explain
Speaker 1: what that is because most people think total return, they
Speaker 1: think capital appreciation plus diven ends. But Vanguard has a
Speaker 1: slightly different definition. Yeah, our our turtle return is um.
Speaker 1: I think a lot of people try to engineer a return.
Speaker 1: And what I mean by that is, let's take this
Speaker 1: low yield environment and they think that they you know,
Speaker 1: they may need five or six percent for their spending,
Speaker 1: so they kind of start with widow is my liability stream?
Speaker 1: And we see this a lot in the institutional space
Speaker 1: with endowments and foundations. Um or they have a five
Speaker 1: percent bogy. If they want to stay completely, they must
Speaker 1: spend five percent otherwise they're risk losing their texas and
Speaker 1: status exactly. And we're a client who's in retirement. Had
Speaker 1: earth client who's in retirement, Let's say they want to
Speaker 1: spend the four percent rule. How do you know that
Speaker 1: works for you know, if you look at a bond chart.
Speaker 1: The sixties, seventies, eighties, and nineties, interest rates were above
Speaker 1: the spend rate, so you could have you canna have
Speaker 1: a fixed income portfolio and it was quite easy. But
Speaker 1: now you have dividend yields it on the equity market
Speaker 1: of let's say one eight, one nine, and the bond
Speaker 1: marketed somewhere like two. So how do you get to
Speaker 1: a spending policy of four or five percent? Uh and
Speaker 1: them together? Well, you see people taking risks. They go
Speaker 1: out on the yield carve, they high yield junk bonds.
Speaker 1: You see a lot of duration doesn't work, doesn't work
Speaker 1: inverted yield care of going out duration art. Yeah, and
Speaker 1: you see a lot of these that's there's nothing. This
Speaker 1: is not an anti alternative investment or private investment conversation,
Speaker 1: but you know, you you see people going in reaching
Speaker 1: for you know, alpha that may or may not be there.
Speaker 1: But well, when you say may or may not be there,
Speaker 1: the data is pretty overwhelming that for the most part,
Speaker 1: it's not there. And and a lot of people who
Speaker 1: dabble alternatives seem to my joke has come for the
Speaker 1: high fees, stay for the under performance. But that has
Speaker 1: not been the solution. That has not been the magic bullet,
Speaker 1: especially for pension funds that have pushed in giant numbers
Speaker 1: into private equity and hedge funds and venture capital. It's
Speaker 1: like everything else, a winner take all. There's a handful
Speaker 1: of You know, if you can't get into renaissances, medallion
Speaker 1: funds or d E shaw, the odds are you're not
Speaker 1: going to do as well as a simple sixty. Yeah,
Speaker 1: and I think that goes even for liquid space, right, So,
Speaker 1: and I still think that this gets back to the
Speaker 1: marketplace being very sophisticated but maybe not understanding the math.
Speaker 1: And then and then math is and most of your
Speaker 1: listeners will probably be familiar with zero sum game, which
Speaker 1: means that if you and I are counterparties, one of
Speaker 1: us is going to win on that trade and one
Speaker 1: is gonna lose. So on average active management, whether they
Speaker 1: be liquid or ill liquid or alternatives or traditional, it's
Speaker 1: going to be impossible at the fiftie percentile and zero
Speaker 1: some game to win that doesn't. But but I think
Speaker 1: what misses that is someone is on the right side
Speaker 1: of that distribution. Someone is winning. And so you know,
Speaker 1: if you can find talent, you mentioned a few vanguards,
Speaker 1: active funds have actually done very well. So if you
Speaker 1: have good talent and you have your costs below your talent,
Speaker 1: which is a key component of total return total return,
Speaker 1: then you know, so we're we're in the total return
Speaker 1: or outcomes. You know, we we believe that what's the
Speaker 1: most important thing is what our client outcomes. And so
Speaker 1: what I mean by that it doesn't have to be
Speaker 1: all index or that alternatives are bad or you know,
Speaker 1: private investments are bad. What you really want to end
Speaker 1: up with is is my talent greater than my friction?
Speaker 1: And if that works, then there's a real strong case
Speaker 1: for active and a strong case for privates and alternatives. Um,
Speaker 1: the question is do you have access to that? Right?
Speaker 1: Not everyone is going to have access to world class
Speaker 1: talent and they just need a couple of billion dollars
Speaker 1: and you're in yeah, or you work with you work
Speaker 1: with a professional fiduciary, so you could work with you know,
Speaker 1: not not to say you could work with someone like
Speaker 1: Vanguard that actually can you know, find great managers, get
Speaker 1: access to great managers and deliver outcomes that are superior
Speaker 1: even though the cost structure is above an index cost structure.
Speaker 1: Let me give you a quote from one of your
Speaker 1: research papers that I found interesting. Left alone investors often
Speaker 1: make choices that impair the returns jeopardize their ability to
Speaker 1: fund their long term objectives. Many are influenced by capital
Speaker 1: market performance and This is often evident in market cash flows,
Speaker 1: mirroring what appears to be emotional responses fear or agreed
Speaker 1: rather than rational ones. Explain the idea of behavioral coaching
Speaker 1: and what that means. Yeah, so behavioral coaching is one
Speaker 1: of the key pillars of Advisor's alpha. And what we
Speaker 1: mean by that is investing is emotional right, and we
Speaker 1: know that, you know, you have to be, you know,
Speaker 1: in a decision state where your emotions are calm, and
Speaker 1: you know it's hard to stay calm. Let's go back
Speaker 1: to the global financial crisis, oh eight oh nine. It's
Speaker 1: hard to stay calm when you've lost you know, forty
Speaker 1: of your value of your equities. And what you're asking
Speaker 1: the investor to do is it, let's just take a
Speaker 1: two million dollar portfolio, a million in stocks, a million
Speaker 1: in bonds. Your million in stocks now is five hundred thousand,
Speaker 1: and you're asking without an advisor, You're you're saying, I'm
Speaker 1: going to sell two and fifty thousand of bonds that
Speaker 1: are actually doing quite well in GFC and add to
Speaker 1: this stock portfolio. So now I have seven fifty seven
Speaker 1: fifty right to rebalance that. And when I've studied cash
Speaker 1: flow at Vanguard for my twenty plus years. And what
Speaker 1: we see is that you know, investors especially in the extreme.
Speaker 1: So you go back to that O eight oh nine environment,
Speaker 1: there was huge outflows of equities in the money market,
Speaker 1: and so investors were not rebalancing on their own. And
Speaker 1: so working with a behavioral coach who's going to help
Speaker 1: you through the emotions to stay committed to your policy,
Speaker 1: we think and had a tremendous amount of out and
Speaker 1: I I personally noticed the outflows going just reaching their
Speaker 1: plateau that February March oh nine the worst possible time
Speaker 1: for it, right at the bottom. You know, we study
Speaker 1: that right and and and equities went pre GFC. So
Speaker 1: if you go back to you know O seven, pre GFC,
Speaker 1: equities were at about sixty eight percent on the household
Speaker 1: balance sheet, and that means that you know, the thirty
Speaker 1: two was in more risk off assets. At the bottom
Speaker 1: you mentioned February of oh nine, equities dropped the thirty
Speaker 1: six percent. So I call this the most hated bull
Speaker 1: market of all time because this bull market was very
Speaker 1: front end loaded, meaning a lot of the returns came
Speaker 1: out of March O nine. In that very first and
Speaker 1: investors only had thirty And so if you look about
Speaker 1: the I R R, the compound that returned that goes
Speaker 1: to an investor, the behavioral gap, you know that. You know,
Speaker 1: we we talk a lot about Advisor's outfit. It's you know,
Speaker 1: one to two percent, it's episodic. But investors, you know,
Speaker 1: tend not to do the right thing at the right
Speaker 1: time for sure. Let's talk a little bit about UM
Speaker 1: Vanguard Group, which does things quite a bit differently than
Speaker 1: the rest of Wall Street. Here's another quote of yours.
Speaker 1: What Vanguard really believes in is high talent and low cost.
Speaker 1: Aren't those two things contradictory? Aren't we taught? Hey, if
Speaker 1: you want the best, you're gonna have to pay up
Speaker 1: for it. How do you combine low costs with high talent? Yeah, well,
Speaker 1: the asset management business is one of the more scalable
Speaker 1: businesses out there, right, and so UM, what we've been
Speaker 1: meaning by scalable meaning it doesn't take a whole lot
Speaker 1: more to manage a billion dollars than it does to
Speaker 1: manage it depends on the strategy. But yes, that's exactly right.
Speaker 1: So you know, if if I'm managing a billion dollars,
Speaker 1: versus a million dollars. My cost should not be my
Speaker 1: marginal contents. My marginal costs should shrink, right if we
Speaker 1: and so what we've been able to do at Vanguard,
Speaker 1: I think the most important thing is to take a
Speaker 1: giant step back is you know, when Jack Bogel started
Speaker 1: the Vanguard Group, it was a mutual mutual fund. And
Speaker 1: what that means is that we are owned by our investors.
Speaker 1: And so there's different ways that you can set up
Speaker 1: an organization. You can be public public equity, where the
Speaker 1: public shareholders you know, get the the p and L.
Speaker 1: You could be a private partnership where the partners get
Speaker 1: the excess P n L. What Vanguard does and sometimes
Speaker 1: people think at Vanguard is a nonprofit, but we are
Speaker 1: actually fiercely for profit. Everything we do is try to
Speaker 1: maximize our profit. It's what we do with the profit.
Speaker 1: We end up giving it back to our sharehold it's
Speaker 1: our owners, So the owners of our funds through lower
Speaker 1: costs in the future, and so we pass along the
Speaker 1: you know, the P and L access back to our investors,
Speaker 1: either in the form of lower costs coming out of
Speaker 1: that or higher service levels. Uh and that so that
Speaker 1: gives us that advantage relatives to some of our competitors.
Speaker 1: I think people confuse unfair advantage, and it is an
Speaker 1: unfair advantage with an illegal advantage. It's a perfectly legal advantage.
Speaker 1: Any other mutual fund could have set up this way,
Speaker 1: they chose not to. That's exactly right, I mean. So,
Speaker 1: and and again everyone has to pick their ownership structure.
Speaker 1: We're not here to say that public is wrong or
Speaker 1: private right. They're just different, right. And so we are
Speaker 1: owned by our investors, and you kind of think about
Speaker 1: one master as opposed to multiple masters, and so that
Speaker 1: allows us, UM, you know, to kind of pass back
Speaker 1: through where you can actually your original question of how
Speaker 1: can you have high towent and low cost, Well A,
Speaker 1: we have our ownership ructure and be we pass along
Speaker 1: scale back to our investors. We also think our brand
Speaker 1: is very attractive. So what I mean by that is
Speaker 1: we're able to attract world class active managers who want
Speaker 1: to work with us because they know just the brand
Speaker 1: to be, you know, working with Vanguard. But they also
Speaker 1: know we're very patient with our active managers. UM. And
Speaker 1: so if you actually want to be a pure asset
Speaker 1: manager and let you know, Vanguard take the client servicing
Speaker 1: and the distribution. It's a it's an arrangement that works
Speaker 1: very well and it's probably one of the reasons why
Speaker 1: we're so successful and active managers. So so let's let's
Speaker 1: focus a little more on the active management you rolled out.
Speaker 1: You Vanguard rolled out a group of quantitative funds not
Speaker 1: too long ago. I don't want to call them smart data,
Speaker 1: but a fundamental factor based set of funds. UM. The
Speaker 1: one thing there's really hasn't been a big push into yet,
Speaker 1: but I've heard rumors of is an E s G
Speaker 1: type of fund. I know, you the foot see in
Speaker 1: the UK the Footsie E s G funds. Where else
Speaker 1: is Vanguard gonna go with some of these active UM funds?
Speaker 1: And and what are the areas that have done very
Speaker 1: well under active at Vanguard? Yeah, so the areas have
Speaker 1: done very well for us is is UM you know,
Speaker 1: the full suite first off, So a lot of people
Speaker 1: don't know, but we are one of the largest managers
Speaker 1: in tax exempt so municipal bond funds, so high net
Speaker 1: worth clients that might be at your practice. UM. You know,
Speaker 1: we're like world class in tax exempt fixed income and
Speaker 1: also taxable fixed income. On the active side. So you
Speaker 1: on the MUNI, So let's talk about that because it's
Speaker 1: so attractive in a low um yield environment because post
Speaker 1: tax makes a big difference, or or um tax equivalent
Speaker 1: yield makes a huge difference. Is this on a national basis?
Speaker 1: Is it a state by state basis? How do you
Speaker 1: put these together? Yeah, So we have a full suite
Speaker 1: of of tax exem bond funds UM. You know, we
Speaker 1: have as you mentioned, we have multi state, so you
Speaker 1: would own the US in a multi state way, but
Speaker 1: we also have single state where there's actually a higher
Speaker 1: state tax like New York it's quite high. So we
Speaker 1: offer both. We offer a lot of things in active
Speaker 1: and passive because we have an e t F on
Speaker 1: the tax exempt as well. But our active funds on
Speaker 1: the fixed income side, both tax exempt and taxable, have
Speaker 1: done quite well. You also talked about some of our
Speaker 1: factor funds. Uh. You know, I've I've been an author
Speaker 1: of a lot of papers on smart beta and so
Speaker 1: we were really just critical of the term. We didn't
Speaker 1: think it was smart or it was beta UM. And
Speaker 1: we were kind of, you know, early in kind of
Speaker 1: being critical of the narrative, you know, because you know,
Speaker 1: but we believe that there's factors, you know, if you
Speaker 1: think about a factor, the value factor, momentum factor, that
Speaker 1: actually have a different risk and return stream, and they
Speaker 1: have some premiums to them, and you can even kind
Speaker 1: of think about why those premiums would exist. Some of
Speaker 1: them could be behavioral, some of them could be um
Speaker 1: just back to misunderstanding the risk. So we do have
Speaker 1: a series of quant factor funds out there, and and
Speaker 1: and a whole list of traditional bottom up funds that
Speaker 1: that you're probably familiar with. The Vanguard has offered for many,
Speaker 1: many years. You mentioned earlier target date funds UM, which
Speaker 1: used to get kind of a bad rap, but they
Speaker 1: have for the most part become the default setting for
Speaker 1: four oh one K plans. If you don't pick something,
Speaker 1: you tend to go right into a target date funds.
Speaker 1: These have done pretty well over the past decade. Tell
Speaker 1: us a little bit about the Vanguard target date funds,
Speaker 1: because I think these are attracting a whole lot more
Speaker 1: money every month. Yeah, I mean, outside of the invention
Speaker 1: of index funds, I think target retirement funds, you know,
Speaker 1: will go down as one of the more helpful innovations
Speaker 1: for the average person trying to save for retirement. And
Speaker 1: if you go back before target retirement funds, the four
Speaker 1: oh one K space, which is where most of these
Speaker 1: are used. Um, let's say I'm starting day one at Vanguard.
Speaker 1: I would get a brochure about all the Vanguard funds,
Speaker 1: and I had to make these decisions for myself. As
Speaker 1: as an employee. You start you feel out, here's my
Speaker 1: healthcare choice, here's my ten or W two tax choice.
Speaker 1: And now I got a deploy money in my form
Speaker 1: on K exactly. And so here's a hundred funds like
Speaker 1: you know that you have to select from. And we
Speaker 1: call that unbundled, meaning that think about going into a
Speaker 1: restaurant and you're at the buffet and you now have
Speaker 1: to pick it. You know, they're everything overwhelmed with choice.
Speaker 1: And we talked earlier about investor behavior. What you probably
Speaker 1: saw most often his investors buying the things that had
Speaker 1: great five and tenure returns. And so investors month or
Speaker 1: quarter was whatever the flavor of the month was. Everybody closing.
Speaker 1: And so that's a hard thing for the average investor
Speaker 1: to be successful. Target retirement funds now are the default option,
Speaker 1: as you mentioned, where you it's a basket of multi
Speaker 1: asset class funds, so stocks, bonds. So in order to
Speaker 1: talk about van Guards target retirement funds, you virtually own
Speaker 1: the world. You own, you know over ten thousand US
Speaker 1: you know non U s stocks, three thousand US stocks.
Speaker 1: You own the global equity and fixed income, and it
Speaker 1: stays rebalanced automatically throughout your life up until your retirement automatically,
Speaker 1: and it glides down in risk. And so you think
Speaker 1: about it's starting out. If if I'll use my son,
Speaker 1: my son just graduated from Bucknell, he joins the workforce,
Speaker 1: he starts out, and he glides gradually down through time,
Speaker 1: and on his last day of work it'll be thirty seventy.
Speaker 1: So here's the question about that that I'm I'm intrigued by.
Speaker 1: People are living much longer. They need to have, I
Speaker 1: suspect additional risk assets in order to carry them through
Speaker 1: their entire lifespan so they don't run out of money.
Speaker 1: Howard target date funds dealing with the rising longevity stats
Speaker 1: amongst forget your son, someone who's sixty eight next week,
Speaker 1: probably he is gonna live twenty five plus years, assuming
Speaker 1: they're healthy at retirement. It used to be that, all right,
Speaker 1: the average lifespan with seventy two seventy four, we need
Speaker 1: just five years. Now you need twenty five years. How
Speaker 1: do target dates adjust to that? Yeah, so we uh
Speaker 1: do a lot of modeling on you know, sufficiency, Will
Speaker 1: this meet sufficiency savings on a life horizon of a
Speaker 1: hundred you know, if not more in years? And so
Speaker 1: at thirty seventy you think about thirty stock seventy percent
Speaker 1: bonds um in most environments is gonna, you know, give
Speaker 1: you a real return over inflation that's going to last you.
Speaker 1: Number one and number two, this is not meant to
Speaker 1: be a percent. Most clients are people that use them
Speaker 1: will have Social Security, at least they have it today,
Speaker 1: and we hope that they'll have it tomorrow. That's a
Speaker 1: different topic for a different day. But I think that's
Speaker 1: career suicide for any petition wants to vote against that,
Speaker 1: because because the retired they vote exactly the young kids today,
Speaker 1: they're voting more than they used to, but they're still
Speaker 1: far below their numbers. So I can't imagine anyone is
Speaker 1: foolish enough to, yeah, let's get rid of Social Security.
Speaker 1: That's just political career suicide. Yes, I totally agree, And
Speaker 1: and so I think the thirty seventy we we will
Speaker 1: continue to challenge that. So to your point, maybe if
Speaker 1: investors start living to a hundred and ten or a
Speaker 1: hundred and twenty, we're not We're not fixed to that
Speaker 1: final allocation. We tested every year, and we tested very thoroughly.
Speaker 1: But if we were hypothetically that's how you wanted to
Speaker 1: take more risk, you know you risk is kind of
Speaker 1: a trade off of longevity risk versus capital, you know, depreciation.
Speaker 1: So if you get O eight oh nine and your
Speaker 1: versus you know, value at risk is gonna be much,
Speaker 1: so you're you're trading one risk for the other. Makes
Speaker 1: perfect sense. Let's talk a little bit about bonds. We
Speaker 1: were discussing target date funds earlier. What does an investor
Speaker 1: who's looking for yield do in the carrent environment? Interest
Speaker 1: rates are relatively low, inflation is relatively low, valuations on
Speaker 1: the equity side are relatively high. What's an investor to do? Yeah,
Speaker 1: I think what an investor should do is, you know,
Speaker 1: really think about and you asked me earlier on total return,
Speaker 1: is don't think about the individual components of your portfolio.
Speaker 1: So don't look at bonds and isolation of stocks or
Speaker 1: stocks and isolation of bonds, because what you see is
Speaker 1: some bonds, if you're reaching for yield, it could have
Speaker 1: equity like beta to it. For example, if you're going
Speaker 1: into high yield bonds or emerging market bonds and the
Speaker 1: equity market we're to have a sell off, they're gonna
Speaker 1: have equity correlation to it. So you know, you really
Speaker 1: want to be careful if you were to do that,
Speaker 1: because you know, for most investors, bonds are the diversifire
Speaker 1: to your equity risk. And we see that time and
Speaker 1: time again, and we saw it a No. Eight oh nine,
Speaker 1: We saw it into the Internet tech bubble, We saw
Speaker 1: it in December of eight team where we had that
Speaker 1: little mini sell off where bonds have very nice our
Speaker 1: relation properties, meaning that they they serve really well when
Speaker 1: equities are doing poorly. And so, but if you have
Speaker 1: ballast during a ballast or in a downturn in most environments,
Speaker 1: I don't want to say all environments, but certainly in
Speaker 1: all environments, if you increase the risk of your bond portfolio,
Speaker 1: it's gonna look more and more like equities. So let's
Speaker 1: talk a little bit about all right, So that's credit risk.
Speaker 1: What about duration, and what about um other bonds like
Speaker 1: tips that are index to inflation. Yeah, duration is kind
Speaker 1: of a It's another one of those tricky areas because
Speaker 1: I think what most people don't feel to understand is
Speaker 1: these risks are trade off risks. So if you wanted
Speaker 1: to increase duration, let's just say increase duration, you're taking
Speaker 1: on interest rate risk, right, So if I went from
Speaker 1: a five duration to attend and interest rates go up,
Speaker 1: I'm gonna lose twice the amount of money because I
Speaker 1: went from a five duration to attend. But if you're
Speaker 1: using duration in hope that if the equities go down
Speaker 1: and bonds are the ballast, you would double your returns
Speaker 1: in equity contagion in that environment. So it's really what
Speaker 1: is the role of a bond portfolio. So, you know,
Speaker 1: there are some institutional investors, some pretty sophisticated investors that
Speaker 1: have length and duration because they really want the bonds
Speaker 1: to have that high you know, negative correlation and positive
Speaker 1: offset to equities. But we are taking on his interest
Speaker 1: rate risks. So it is hard to you know, kind
Speaker 1: of think about these risks and and make sure that
Speaker 1: you're talking about the tradeoffs. So so let's talk about
Speaker 1: another trade off. We we in the United States pretty
Speaker 1: much have the highest yields in the developed world. But
Speaker 1: we look at Japan negative interest rates, we look at
Speaker 1: Germany negative interest rates, we look at a lot of
Speaker 1: Europe negative interest rates. First, is that possibly going to
Speaker 1: come here? On? Second? What can an an investor do
Speaker 1: if they don't want to pay for the privilege of
Speaker 1: owning bonds? Yeah? I mean, you know what you mentioned
Speaker 1: is true, and it's hard to believe that, you know,
Speaker 1: the US market being you know, actually offering some pretty
Speaker 1: good yields relative to some of the other high quality
Speaker 1: developed sovereigns that are out there. Um. So I just
Speaker 1: would caution everyone, you know, regardless of how low rates go,
Speaker 1: even if they go to zero or negative, what is
Speaker 1: the role of bonds and a portfolio? Um, if it
Speaker 1: is the ballast of the portfolio, then trying not to
Speaker 1: stretch for yield, you know, kind of take with the
Speaker 1: market gives you. Anytime we see people trying to engineer
Speaker 1: returns that the market isn't giving you, that's usually when
Speaker 1: they get themselves in trouble. Well, it worked out so
Speaker 1: well in oh eight or nine yields? What what what
Speaker 1: could possibly I remember hearing salespeople pitch me on safest
Speaker 1: treasuries but paying two hundred fifty to three hundred basis
Speaker 1: point more. Well, someone's either gonna win a Nobel prize
Speaker 1: or go to jail. There's nothing in between, right, It's
Speaker 1: you've just changed the fundamental rules of economics. The only
Speaker 1: problem is no one went to jail. So I was
Speaker 1: not fully uh correct about that. So taking what the
Speaker 1: market gives you as opposed to reaching for yields, what
Speaker 1: does that do to that draw down calculus we talked
Speaker 1: about for people in retirement who need to take money
Speaker 1: out of their portfolio to live on. Yeah, And I
Speaker 1: think education, and I think also the role of the advisor.
Speaker 1: The advisor is doing a great job educating their clients.
Speaker 1: The way I've always looked at total return is it's
Speaker 1: a partnership between the capital markets and the investor in themselves.
Speaker 1: And what I mean by that is, for a lot
Speaker 1: of periods, the capital markets did all the heavy lifting.
Speaker 1: The individual didn't need necessarily to save as much. And
Speaker 1: so if you're thinking about this partnership of how much
Speaker 1: the capital markets is going to contribute to your total
Speaker 1: return versus how much you personally are going to contribute.
Speaker 1: If we are in a muted return environment, which I
Speaker 1: think is pretty much consensus. It's certainly Vanguard's outlook to
Speaker 1: have a muted return, then the partnership is going to
Speaker 1: have to come more from saving more, spending less, and
Speaker 1: making sure that you're doing your end of the bargain
Speaker 1: as the saver worked longer, or if not, just expect
Speaker 1: a lower retirement income stream in retirement. So I think
Speaker 1: investors may not have realized how lucky they were in
Speaker 1: the second half of the twentieth century. That was a
Speaker 1: fantastic period of time. If you were fortunate enough to
Speaker 1: be born, pick a decade, the thirties, forties, fifties, the
Speaker 1: next fifty years of your investing returns have been spectacular.
Speaker 1: We're not likely to see that over the next twenty
Speaker 1: plus years or so, are we absolutely not. I mean,
Speaker 1: even from eighty two to the stock market was up
Speaker 1: eighteen compounded annually. In the bomb market was up about
Speaker 1: ten eighteen percent a year, eighteen percent a year. I
Speaker 1: know the Dow went up about a thousand points a
Speaker 1: thousand percent over that time. So you think about a
Speaker 1: balanced investor over that time and use the demograph. Think
Speaker 1: of being born in the thirties. If you were at
Speaker 1: your peak earning or near near retirement, and you were
Speaker 1: able to get fourteen percent from a balanced portfolio, I'll
Speaker 1: take it. I'll take it right now. And but I
Speaker 1: think one another thing is people have to understand is
Speaker 1: if you are saving to eventually spend it or gift it,
Speaker 1: you have to think about real returns, meaning after test,
Speaker 1: after tax, and after inflation. Okay, so in that environment
Speaker 1: with I my my my mom is always saying, oh,
Speaker 1: I want to go back to those days where CDs
Speaker 1: were eighteen percent, And I say, mom, interest, you know
Speaker 1: inflation was fift so you've got three nets. So I
Speaker 1: think you know, in this environment, you also have to
Speaker 1: understand that inflation is quite loss. So it's a little misleading.
Speaker 1: It is. It was better then, but once you're back
Speaker 1: on inflation, it wasn't as it looks much better than
Speaker 1: it was. It was still better, but not as overwhelmingly
Speaker 1: better than today. Is that the implication that's right. Let's
Speaker 1: say that the stock market gets you five to seven
Speaker 1: percent hypothetically, and don't go by the first half of
Speaker 1: this year, we're up twenty. But you look at the
Speaker 1: that's year to day. You look the previous twelve to
Speaker 1: eighteen months, it's essentially flat. Right, So so five to
Speaker 1: seven percent going forward? Is that a reasonable expected return?
Speaker 1: I think if you were think about a ten year horizon,
Speaker 1: and and then if you say you're sixty forty or
Speaker 1: you know, we can pick whatever ratio you want stock
Speaker 1: bonds two to three on bonds um you know, all
Speaker 1: of a sudden to balance portfolio is probably closer to
Speaker 1: four percent, right. Net of inflation, you mean, well it's
Speaker 1: probably nominal. And then if you add any one and
Speaker 1: a half to to inflation, your your real returns two
Speaker 1: to three percent. Two to three percent. That seems light.
Speaker 1: Where the periods we were talking about before, for someone
Speaker 1: born in the thirties and the forties was probably five
Speaker 1: to seven perk. Wow, that's a big difference. So and
Speaker 1: that's gonna really then what is the education coming out
Speaker 1: of that? You can't choose when you were born, right,
Speaker 1: So this idea of taking with the market will give you, Uh,
Speaker 1: the person today who's going to look at the future
Speaker 1: with reality that it is, they're gonna have to save
Speaker 1: a little bit more back to our you know, talk
Speaker 1: about target retirement funds. We do think with auto and roll,
Speaker 1: Auto Save, Auto Escalate and companies matching during a much
Speaker 1: better position to maybe generate those kind of returns on
Speaker 1: their own behavior and and to take the behavior component
Speaker 1: and bring it back to advisors Alpha. We seem to
Speaker 1: be much smarter these days about understanding our own emotions,
Speaker 1: our own biases, and why investors are typically their own
Speaker 1: worst enemies. And this is anecdotal, but my observations are
Speaker 1: people seem to be doing a better job of not
Speaker 1: blowing themselves up the way they did so much in
Speaker 1: the nineties and two thousands. They still messed up in
Speaker 1: O nine and we we saw a lot of people
Speaker 1: dragging their feet in to get back into the markets.
Speaker 1: But on average, is it fair to say people seem
Speaker 1: to be a little smarter about their own behavior and
Speaker 1: how it impacts investing. Yeah, you're exactly right. So we
Speaker 1: I mean the Advisor's Alpha work that my team and
Speaker 1: I work on and created. We created the Vanguard Wrists Pedometer,
Speaker 1: and the Vanguard Wrists pometer looks at cash flow through time,
Speaker 1: and so what we actually have seen is that throughout
Speaker 1: most of history, investors would be known as momentum investors,
Speaker 1: meaning whatever category or sector was doing well, that's where
Speaker 1: all the flows went. The hot hand. You're talking about
Speaker 1: fun flows two different funds to not only the funds,
Speaker 1: but the categories let's say growth, value, US non US,
Speaker 1: emerging stocks, and bonds. And that was a theme that
Speaker 1: was pretty much as you know, you know, the sun
Speaker 1: coming up, you know tomorrow. That was the church of
Speaker 1: what's working now, the church of what's working now. And
Speaker 1: so investors were, you know, whether you want to use
Speaker 1: pro cyclical or momentum based wherever the wherever the hot
Speaker 1: hand was or the asset class, that's where the flows
Speaker 1: have gone. The last five to six years. We've seen behavior,
Speaker 1: believe it or not, contrary into that, which is which
Speaker 1: is hard to think about. So right now you think
Speaker 1: about you know, the top performing category in the US
Speaker 1: is large cap growth. It's actually one of the bottom
Speaker 1: cash flow categories really, so if it's not going into
Speaker 1: large cap growth, it's going into value. In small well,
Speaker 1: it was actually going into fixed thing like so who
Speaker 1: would have ever, I would have never thought in my
Speaker 1: career that would be in one of the largest and
Speaker 1: longest bull markets in equities trail in six months and
Speaker 1: you have negative equity flow year to day, you know,
Speaker 1: in equities year to date August and all the money
Speaker 1: going in the fixed income. That's a big contrarian play.
Speaker 1: And and to me, that's a complement to the education
Speaker 1: to the advisor community. To back to target retirement funds,
Speaker 1: I think what is really changed is it went from
Speaker 1: a fun picker world where people were picking stocks and
Speaker 1: building a portfolio bottom up to a top down way.
Speaker 1: Meaning yeah, you know, so, whether it's whether it's you know,
Speaker 1: target retirement funds, advisors such as your, your firm, UM
Speaker 1: and the firms out there, the amount of money that
Speaker 1: are in the systematic auto rebalance programs et F models
Speaker 1: that by definition, if stocks are they're gonna sell stocks
Speaker 1: and put him in bonds. And isn't isn't there a
Speaker 1: ton of UM research and data And I'm trying to remember,
Speaker 1: was you or your firm or another firm that basically
Speaker 1: had reached the conclusion that stock picking, as much fun
Speaker 1: and interest as it can be, the asset allocation decision
Speaker 1: is far more impactful to the portfolio returns over time. Yeah,
Speaker 1: And so going all the way back to Brinson, you know,
Speaker 1: so Brinson has covered this work. Jankee has covered this work.
Speaker 1: Me and my team actually covered the Brinson Jankee debate,
Speaker 1: which is really about how much of the return is
Speaker 1: coming from policy acid allocation versus security selection and timing
Speaker 1: and and so both both of the arguments are right, right, So,
Speaker 1: and this is where context is important. If you're sixty forty, Barry,
Speaker 1: but you only have two stocks, and I'm sixty forty
Speaker 1: and I have two stocks, but those stocks are different
Speaker 1: than security selection, dry the policy doesn't quite matter. But
Speaker 1: when we're sixty forty, you're sixty broad indexes and but
Speaker 1: just wanted to give a context when when you're talking
Speaker 1: about broadly diversified portfolios, the allocation drives everything. Timing decisions
Speaker 1: in which mutual fund or securities you selected get almost
Speaker 1: to be you know, decimal places relative to the policy portfolio.
Speaker 1: Can you stick around a little bit. I have a
Speaker 1: ton more questions for you. I'd love to I love this.
Speaker 1: We have been speaking with fran Canary. He is the
Speaker 1: head of Global UH portfolio Construction at the Vanguard Group.
Speaker 1: If you enjoy this conversation, well, be sure and come
Speaker 1: back for the podcast extras where we keep the tape
Speaker 1: rolling and continue discussing all things asset allocation. You can
Speaker 1: find that at Apple iTunes, Google podcast, Stitcher, Spotify, wherever
Speaker 1: you're funding, podcasts are sold. We love your comments, feedback
Speaker 1: and suggestions. You can write to us at m IB
Speaker 1: podcast at Bloomberg dot net. Give us a lovely review
Speaker 1: at Apple iTunes. You can check out my weekly column
Speaker 1: at Bloomberg dot com, or are signed up from my
Speaker 1: daily reads at revolts dot com. Follow me on Twitter
Speaker 1: at ridolts. You might guess I'm Barry Results. You're listening
Speaker 1: to Masters in Business on Bloomberg Radio. Welcome to the podcast, Fran.
Speaker 1: Thank you so much for doing this. You and I
Speaker 1: have met on on several occasions previously, and I've been
Speaker 1: a fan of your work, and obviously I am a
Speaker 1: fan of Vanguard for a long time. But I've been
Speaker 1: meaning to sit down with you for forever, and I'm
Speaker 1: glad we finally got you into New York from from Pennsylvania.
Speaker 1: I have a ton of questions I didn't get to
Speaker 1: during the pod during the broadcast portion, um, but the
Speaker 1: first one is a little funny, and I have to
Speaker 1: ask you about this because it's such a ridiculous statistic
Speaker 1: I either heard or read somewhere it's one of these
Speaker 1: like urban legends. Vanguard has nine percent of the certified
Speaker 1: financial planners in the state of Pennsylvania. Is that remote
Speaker 1: lead possible? Is that true? It's it's probably. I can't
Speaker 1: confirm the exact number, but I would imagine we have
Speaker 1: a high percentage, So, you know, I think that's probably true. Again,
Speaker 1: I think context is in order. We're probably one of
Speaker 1: the largest employers in that area and and financial services,
Speaker 1: so we're likely to have maybecent of the c f
Speaker 1: as in the community, and maybe even of the phone
Speaker 1: representatives and financial services. So I think it's our size, UM.
Speaker 1: And it's also our dedication to advice and why we
Speaker 1: think advice really matters, and our commitment to it, you know,
Speaker 1: having professional advice. UM. Let's talk a little bit about
Speaker 1: that advice, because there's some really interesting um debates back
Speaker 1: and forth with that. Who needs a financial advisor? So
Speaker 1: I get this question all the time, and my answer is, well,
Speaker 1: if you could do it yourself, do it yourself. But
Speaker 1: you have to be disciplined, you have to know yourself,
Speaker 1: you have to manage your own behavior, and you have
Speaker 1: to put a little time and elbow grease in. But
Speaker 1: it's not hard stuable. Um. But not everybody seems to
Speaker 1: be able to manage yourselves. So the question is who
Speaker 1: should have an advisor? Um? Out of out of people
Speaker 1: who have been self directed and are not happy with
Speaker 1: with what it's taking, how do you decide who should
Speaker 1: really be working with an advisor and who should be
Speaker 1: doing this themselves? Yeah, I mean, and not to be
Speaker 1: too curt with it, but I do think if you're human,
Speaker 1: because of emotion, you probably most the vast majority of
Speaker 1: clients would be well served working with an advisor. Really,
Speaker 1: that's a bit when you say vast majority, that's a
Speaker 1: bigger number than I was expecting from you. And I
Speaker 1: don't mean to tee up softballs, but you're you're answering
Speaker 1: this in a way that was different than than I expected. Yeah,
Speaker 1: I mean, I'll give you a great, great little story
Speaker 1: of my brother and hopefully he doesn't listen to the show,
Speaker 1: but I'll throw one of the smartest individuals I know.
Speaker 1: He's head of medicine at PEN so you know Columbia
Speaker 1: Med School, Pen Med School, just very very smart. Yeah,
Speaker 1: ten years ago he calls me up and you know,
Speaker 1: ten years ago, like the middle, and he calls me,
Speaker 1: he says, he like, I'm I'm like literally the worst
Speaker 1: investor ever. I study this. I put so much time
Speaker 1: into it. Vanguard has the you know, his four oh
Speaker 1: one K. So he's in the right place, he's in
Speaker 1: the right funds, right place. But he himself, who studies it,
Speaker 1: is shooting himself in the foot because he studies this
Speaker 1: analytically like he would study anything else you would study
Speaker 1: in school. And what we know, um I wrote a
Speaker 1: paper several years ago about decision making right, and so
Speaker 1: decision making there's a lot of credibility on persistence, meaning
Speaker 1: that what you know, if you top doctors, top hotels,
Speaker 1: top restaurants tend to stay top the investment market, you know,
Speaker 1: asset classes, strategies, there is not that same persistence, right.
Speaker 1: You see almost some some reversion and no patterns to it.
Speaker 1: And so most investors, whether you know it, is a
Speaker 1: rare person that who in two thousand and eight, two
Speaker 1: thousand and nine, you know, back to my analogy earlier,
Speaker 1: a million in stocks, a million in bonds. Investor, you
Speaker 1: just lost five hundred thousand dollars in stocks, and you're
Speaker 1: gonna sell bonds that are actually doing well and by
Speaker 1: two or fifty thousand dollars in February about now that
Speaker 1: there there are obviously some investors who can do that,
Speaker 1: or maybe some investors will use a single fund solution.
Speaker 1: We talked about target retirement funds or balanced funds to
Speaker 1: do it for you. But if a lot of investors
Speaker 1: would be, you know, benefit from working with an advisor
Speaker 1: to not only help them with emotions, but you know
Speaker 1: retirement income, uh, tax planning, you know, generational planning. So
Speaker 1: I think it's more than most people would think. So
Speaker 1: your brother doctor, you're saying, doctor, and he's with an advisor.
Speaker 1: So so my experience with doctors, and I'm gonna say
Speaker 1: this very specifically so you can send your angry emails
Speaker 1: to me, I have found that doctors are exceedingly bright.
Speaker 1: They've been very studious their whole life, and they are
Speaker 1: genuinely surprised when all that intelligence and all that studying
Speaker 1: does not readily translate to investing, and they find it
Speaker 1: to be very frustrating. Um. And I've actually said to doctors, listen,
Speaker 1: I have to cut the conversation showed. I'm going to
Speaker 1: Wikipedia to learn how to take out a gall bladder
Speaker 1: and I have surgery this afternoon, and ha ha, it's funny,
Speaker 1: But the reality is, Okay, this is in brain surgery,
Speaker 1: but it's not the sort of thing that you could
Speaker 1: do casually and very often. Because doctors are so successful
Speaker 1: and they're so smart, and they've done so well educationally,
Speaker 1: there is a lack of Hey, maybe this is harder
Speaker 1: than I think. Am I overstating this? Absolutely? And I
Speaker 1: and I follow all the behavioral literature and all the
Speaker 1: behavioral finance stuff, and sometimes I think it's quite critical
Speaker 1: on investors. But I actually reframed that. I actually think,
Speaker 1: how would you How would any other intellectual person decide
Speaker 1: to put their money in the worst performing asset class?
Speaker 1: And that's what rebalancing is. Mathematicians maybe, but every who
Speaker 1: understand mean reversion, but everybody else are horrified. Yeah, And
Speaker 1: so I think, you know, outside of your own personal health, verry,
Speaker 1: think about what's the most important you have health, you know,
Speaker 1: your family, and then your wealth, right, and so you know,
Speaker 1: wealth destruction or wealth in the moment, it's not just
Speaker 1: on the downside. Look at all the mistakes people made
Speaker 1: in in the internet technic. You know, we you know
Speaker 1: we we talked about how changing cash flow. Never in
Speaker 1: the history of the markets that we have five years
Speaker 1: in a row with twenty percent returns. It was it
Speaker 1: was just and we had negative bond flows. All the
Speaker 1: money was going into stocks. So you know, I think
Speaker 1: which by the way, you were about halfway through a
Speaker 1: multi decade bond bull market that for big periods of
Speaker 1: time significantly outperformed equities. Yeah. So, and so I do
Speaker 1: believe that the vast majority of clients would benefit from advice.
Speaker 1: The good news is, you know, the the access to advice. Um,
Speaker 1: you know, ten years ago, fifteen years ago, access to
Speaker 1: high quality advice was pretty limited, right, You needed maybe
Speaker 1: a million or two to get access to world class
Speaker 1: advisors such as yourself. But you know, as technology has
Speaker 1: come around, I know, your firm is you know, offering
Speaker 1: different solutions. It doesn't have to be high touch, it
Speaker 1: could be more tech automated advice. So advice is now
Speaker 1: becoming much more tech enabled. And so the ability to
Speaker 1: get advice for a fifty thou dollar or ten thousand
Speaker 1: dollar investor is here, and the cost have calmed down
Speaker 1: on that. So I think, you know, given that change,
Speaker 1: you know, a huge opportunity for self directed investors to
Speaker 1: use advice. So one of the things that you mentioned earlier,
Speaker 1: I wanna just address when we talk about things like
Speaker 1: generational wealth transfer, or state planning or more complicated tax planning,
Speaker 1: or or even a sale of a business, you're paying
Speaker 1: for that when you're paying an advisor. I'll use the
Speaker 1: one percent fee because that's pretty standard these days. But
Speaker 1: if you're a hundred thousand or even half a million
Speaker 1: dollar UM portfolio and you don't need all those extra services,
Speaker 1: why pay the one percent or more? You're better off
Speaker 1: in if you can work with the CFP will help
Speaker 1: you do the planning, but automade as much of that
Speaker 1: technology and the fee is half or less. Why wouldn't
Speaker 1: you do that? Why should you pay for you know,
Speaker 1: advice on setting up a philanthropic trust if you're not
Speaker 1: going to do that. People sort of forget that that
Speaker 1: this can be a little ala carte and you don't
Speaker 1: need to pay for everything if you're not going to
Speaker 1: use it. Totally agree, and that's why I think, you know,
Speaker 1: this is really the golden opportunity for investors because you know,
Speaker 1: we talked about access in the past. It was really
Speaker 1: a reserved space for clients of the ultra high net
Speaker 1: worth and the institutional marketplace, and they had a very
Speaker 1: high touch and the and they probably advisors added a
Speaker 1: lot of value from some of the things you mentioned
Speaker 1: of succession planning, making sure your will and your state
Speaker 1: is in good order, all of those things. But now
Speaker 1: for the average individual that doesn't have all those needs,
Speaker 1: you know, advices here for the masses, and I think
Speaker 1: it's a very good value for those who want to,
Speaker 1: you know, employee an advisor, whether it be tech enabled
Speaker 1: or a hybrid. So one of the questions, speaking of technology,
Speaker 1: I didn't ask you about UM. One of the new
Speaker 1: technologies that have been rising is direct indexing, where instead
Speaker 1: of owning an et F for a mutual funds UM,
Speaker 1: you own the entire index, but in individual stocks. And
Speaker 1: this seems to come up when someone has a concentrated
Speaker 1: risk in a given space or a given uh. So, hypothetically,
Speaker 1: you're an employee of Apple and of your net worth
Speaker 1: is an Apple stock, do you really need more Apple
Speaker 1: in in your index? With a direct index, you could
Speaker 1: tune down Apple or any of the other tech names
Speaker 1: similar to that. Have you has Vanguard looked at this
Speaker 1: and what are the thoughts about this? Yeah, I mean
Speaker 1: we've looked at it a lot. There's other reasons too.
Speaker 1: You mentioned the single stock risk like Apple, there's been
Speaker 1: some people believe that it's more tax efficient other people
Speaker 1: that may. Um, you want to think about excluding certain
Speaker 1: sectors of the the s G side, the socially responsible side.
Speaker 1: You can be a little more granular, and you can
Speaker 1: with broad indexes. Right, Um, you know a couple of
Speaker 1: things I would say, One is what is the costs
Speaker 1: you know, if you know, if if you can get
Speaker 1: an index a broadly base. So let's take the Apple
Speaker 1: example of you know, I'm employee of Apple, Apple my portfolio.
Speaker 1: Do I really want more Apple? Well, if I were
Speaker 1: to just buy the total Vanguard US stock market my
Speaker 1: position and Apple is only adding another two and a
Speaker 1: half three or three and alp percent, And do I
Speaker 1: want more of it? No? But that's like a pretty
Speaker 1: small amount. And I guess it would really be what
Speaker 1: is the cost differential to do self directed indexing? And
Speaker 1: then how do I keep that rebalanced through time? Right?
Speaker 1: Because the grain news about an in an open index
Speaker 1: fund is we can use other investors cash flow in
Speaker 1: and out to keep that portfolio rebalanced. The minute you're
Speaker 1: now creating a separately managed direct index, the markets moving
Speaker 1: all over, you may have cash coming and going. It's
Speaker 1: it becomes much more complicated, and that's where you lose
Speaker 1: all some of the tax. This idea that's more tax efficient,
Speaker 1: you know, we've done some work on that, actually is
Speaker 1: it would actually be a little less tax efficient because
Speaker 1: you get locked up in your basis and the market
Speaker 1: moves away from you. So indexing has been extremely tax efficient.
Speaker 1: Tfs have been extremely tax efficient. So a lot of
Speaker 1: the direct indexing, you know, things we hear out there
Speaker 1: are very niche or actually they're actually not correct. Uh.
Speaker 1: And since you're talking about tax efficiency, I have to
Speaker 1: talk about one of my favorite stories of this year
Speaker 1: because it's just so um wild and unexpected, and that's
Speaker 1: the Vanguard patent on making mutual funds almost as tax
Speaker 1: efficient as e t f s. And a little background
Speaker 1: for people who may not follow this sort of art
Speaker 1: caning tax stuff. The huge advantage of ETFs is that
Speaker 1: there incredibly tax efficient. If other people buy or sell
Speaker 1: holdings within e t F, it doesn't matter. It's only
Speaker 1: when the investor sells that e t F that there's
Speaker 1: a potential tax event. But you can own a forty
Speaker 1: Act fund, you can own a mutual funds and if
Speaker 1: within that fund there are takeovers or cells or whatever
Speaker 1: else happens where there's a capital gain that passes straight
Speaker 1: through to the investor. Vanguard I want to say this
Speaker 1: was early two thousand's we just heard about it recently
Speaker 1: or mid two thousands came up with an idea that
Speaker 1: allowed e t fs to effectively be a different class
Speaker 1: share clash of mutual funds and are able to share
Speaker 1: that tax efficiency between e t f s and mutual
Speaker 1: fund Am I am I doing that justice? Or if
Speaker 1: I mangled that compared? I mean, you know a couple
Speaker 1: of things on that is um So why indexing in
Speaker 1: general is very tax efficient doesn't really necessarily have to
Speaker 1: do with its structure or our patent because others you know,
Speaker 1: any e TF so I think what the you know
Speaker 1: what happens with an index fund is that you know
Speaker 1: adds and first off, it's broad indexing, right because there's
Speaker 1: not a lot of ads in deletes, and when you
Speaker 1: are getting deleted, you're almost getting delisted unless there's a
Speaker 1: merger or and that's usually what you see some capital
Speaker 1: and that's where you see some capital gains. But so
Speaker 1: those are more of the rare instances. You know, where
Speaker 1: you see more inefficiencies would be you know, the the
Speaker 1: niche sector E t F s or t know, so
Speaker 1: there you have graduations and that's why active sometimes meaning
Speaker 1: they go from small kept to MidCap on midcapt to
Speaker 1: lunch growth of value and stuff like that. And that's
Speaker 1: where even active has some tax inefficiencies relative index because
Speaker 1: if I no longer like stock A, I don't necessarily
Speaker 1: care what my cap gain is because I've also have
Speaker 1: tax exempt I've tax exempt clients. I'm really just trying
Speaker 1: to add excess returns, not necessarily thinking about a taxable
Speaker 1: entity that they don't. Most active funds are not really
Speaker 1: focused on tax efficient exactly. And so why indexing is
Speaker 1: so tax efficient in general is because they own a
Speaker 1: market and the ads and deletes are quite small only
Speaker 1: do to this merger. So that's where indexing an e
Speaker 1: t fs, whether they're in mutual fund form or in
Speaker 1: e t F have been very tax efficient over the
Speaker 1: last patents specifically, so no matter what company you buy
Speaker 1: an ETF funds, you're an e t F from You're
Speaker 1: not going to generate an unintentional UH tax consequence merely
Speaker 1: by owning it. It's only when you sell it. But
Speaker 1: mutual funds have that. Your unique patent allows mutual fund
Speaker 1: holders in taxable accounts to effectively reduce their tax basis dramatically. Right,
Speaker 1: it's a share class of the funds, so they you know,
Speaker 1: they would end up sharing in you know in that
Speaker 1: because it's a the e t F is a share
Speaker 1: class off of the mutual fund. So so because of that,
Speaker 1: somehow the tax savings from within the e t F
Speaker 1: managed to work backwards to the mutual fund. Is that fair?
Speaker 1: And vice and vice versa. Right, So the mutual fund.
Speaker 1: When an e t F starts with no assets, the
Speaker 1: mutual fund, you know, so it's it's it's so you
Speaker 1: immediately get a track record, you immediately get some real assets.
Speaker 1: So you're not launching any t F, which seems to
Speaker 1: be a problem with the t F. You're not launching
Speaker 1: it with no track record and no assets. So right
Speaker 1: away Van guard ETFs. And this is a fairly unique structure,
Speaker 1: making e t f s not a standalone but a
Speaker 1: share class of a core portfolio or a model portfolio. Um,
Speaker 1: but it's the tax efficiency that reverts back to the
Speaker 1: mutual fund that's really somewhat unique. Also it is and
Speaker 1: uh that patent expires this year next year soon yeah
Speaker 1: soon yea. So should we expect to see more tax
Speaker 1: efficient sees at other mutual funds or other companies um,
Speaker 1: either looking to do this themselves or license it from you. Yeah.
Speaker 1: I think back to our early conversation. I think the
Speaker 1: reason why indexing and e t s are so tax
Speaker 1: efficient is back to the original structure of owning everything
Speaker 1: without a lot of ads and deletes. What you're talking
Speaker 1: about is is a very very very small advantage. So
Speaker 1: I don't I don't see it changing much. The landscape
Speaker 1: of helping or hurting either complex, you know, the industry.
Speaker 1: And I just thought it was so fascinating such a
Speaker 1: and that came from um, you're now retired c I O, right,
Speaker 1: and and that was really very I thought it was
Speaker 1: a very clever uh idea. UM, what about alternatives to
Speaker 1: assets under management fees a u M fees, things like
Speaker 1: flat fees or hourly fees. How do you guys look
Speaker 1: at that trend within the advisor space. Yeah, I mean
Speaker 1: we always hear a lot of talk about at fee
Speaker 1: or hourly fee. Um, we haven't seen it grow much.
Speaker 1: It's hard to scale. It's it's hard to scale. And
Speaker 1: I also think that advisors earned their you know, money episodically.
Speaker 1: And what I mean, here's what here's here's an example
Speaker 1: of oh nine. Right. That's why I show this in
Speaker 1: the advisor's alpha paper that if you were you know,
Speaker 1: sixty forty and you were unable to keep your investor,
Speaker 1: you know, I called you up. I was a client
Speaker 1: of Redhole, hypothetically, and I'm sixty forty and I call
Speaker 1: you up and I'm like, you know, Barry, I just
Speaker 1: can't take it anymore. I just lost and you weren't
Speaker 1: able to influence and convince me to stay. And I
Speaker 1: went to money market. I went all out, and a
Speaker 1: lot of clients did that. We saw, you know, money
Speaker 1: markets reach about fifty percent on household balance sheets in
Speaker 1: February oh nine, that's across the entire all investors in
Speaker 1: forty act funds. So and then if I just had
Speaker 1: stayed in that position. Now this is a hypothetical situation,
Speaker 1: but if it did happen, you know, the returns differential
Speaker 1: between doing that you keeping me sixty's it's it's a
Speaker 1: it's about a hundred percent. You would have earned a
Speaker 1: hundred years versus your one percent fee in one phone call.
Speaker 1: So I do believe that the fee, you know, or
Speaker 1: is it? Let's say, if you have a million dollars
Speaker 1: with one percent, that's ten thousand dollars a year. Are
Speaker 1: you earning ten thousand dollars every single year? You know? Maybe?
Speaker 1: Maybe not. Depends on what you do. It's episodic and
Speaker 1: it comes in huge waves. You know. It's funny. I
Speaker 1: was getting emails in eleven by started to trickle down,
Speaker 1: but it was I've been reading you forever. I followed
Speaker 1: you out on the market and oh eight, But when
Speaker 1: you jump back into O nine, I thought you were crazy.
Speaker 1: And now I'm paralyzed. I don't know what to do
Speaker 1: and I've missed fifty six gains. What do I do?
Speaker 1: And you can't. Even though the math is just put
Speaker 1: the whole thing in as a lump sum, people can't
Speaker 1: do that emotionally. Hey, break it up into four quarters,
Speaker 1: scale your wing in over a year, and then just
Speaker 1: continue contributions after that. It's the only advice I found
Speaker 1: that works for people, because there's still suffering from PTSD
Speaker 1: post financial crisis. What did you guys see after the
Speaker 1: crisis from people? Yeah, I mean the good news is
Speaker 1: at Vanguard. You know a lot of investors read our
Speaker 1: education and back to the role of an educator or
Speaker 1: the role of advice. So our behavior at at at
Speaker 1: Vanguard was certainly not We weren't We weren't seeing huge
Speaker 1: flows into equities and out of balands, but it was
Speaker 1: much more balanced, much more muted relative that we saw
Speaker 1: in the industry. Let let me interrupt you right here
Speaker 1: because I have to share a story from your former
Speaker 1: CEO and chairman, Bill McNab who word got back to
Speaker 1: him that employees were nervous about getting fired and that
Speaker 1: nervousness was being communicated to clients and send out a
Speaker 1: missive nobody's getting fired. Everybody's job is safe. Your job
Speaker 1: is now is when you earn your money. Your job
Speaker 1: is to keep clients informed and have be and let
Speaker 1: them know this tool will pass. And that turned out
Speaker 1: to be a key turning point in Vanguard attracting a
Speaker 1: ton of assets. Yeah, I think we've always kind of
Speaker 1: had that, you know, you know, stewardship, you know, is
Speaker 1: the word of you know, we've been through many cycles
Speaker 1: at Vanguard, you know UM, and so I think you know,
Speaker 1: every cycle is different. But again, if if you like
Speaker 1: stocks and O seven, it was hard not to like
Speaker 1: stocks and O nine and so you know, the theme
Speaker 1: of staying the course and rebalance I think was a
Speaker 1: very very good advice for investors who followed that. And
Speaker 1: and before we get to my speed round questions, Uh,
Speaker 1: the last question I have to ask you. You mentioned
Speaker 1: UM technology sort of implying about robo advisors. What is
Speaker 1: it that human advisors can do that computers can't. Yeah,
Speaker 1: I still think this debate on robo versus hybrid versus
Speaker 1: high end service UM gets again. Maybe i'll context. I'm
Speaker 1: a believer of you know, what does the client want? Right?
Speaker 1: And I used my son and my brother already in
Speaker 1: in this story. My son has a cell phone, but
Speaker 1: he never talks on it. He's he's all into the apps,
Speaker 1: and he might, you know, be more comfortable in a
Speaker 1: robo automated digital advice than actually coming in and sitting
Speaker 1: down with you or Josh, right, my brother, who's you know,
Speaker 1: our age. You know, he's used to probably wanting to
Speaker 1: sit face to face and have a coach help him
Speaker 1: through things on a couch or in a conference room
Speaker 1: and talk through that. So, you know, I think it
Speaker 1: really gets back to what is the investor's experience? What
Speaker 1: do they want? Do they want a digital offer meaning
Speaker 1: all robo. Do they want to work with a CFP
Speaker 1: or a c f A or do they want to
Speaker 1: have a very high touch engagement? And so I think
Speaker 1: the great news is is now investors have choice and
Speaker 1: there's not that one is better or or it's really
Speaker 1: what does the client want and how do they want
Speaker 1: to engage in your services? As the key point, do
Speaker 1: you think it's segmented? You're implying it's segmented almost generationally,
Speaker 1: if you're over sixty, you want one experience, If you're
Speaker 1: forty to sixty, it's something else. And then there's a
Speaker 1: very different group of investors under forty. Is that a
Speaker 1: fair way to break that up? And do they really
Speaker 1: want very different things? Ultimately it's probably a stereotype, but
Speaker 1: it probably does you know, you know, holds to some extent.
Speaker 1: If you didn't grow up with technology, or you didn't
Speaker 1: grow up with you know, taking advice from you know,
Speaker 1: an app, then maybe you're less inclined that if you
Speaker 1: actually grew up in that environment. So I think it's
Speaker 1: a it's it's an over generalization. So will there be
Speaker 1: a demographic that is in retirement in their seventies and
Speaker 1: eighties that are very comfortable using digital Absolutely? And are
Speaker 1: there millennials, um who would real more than want to
Speaker 1: sit down face to face and work with a human. Absolutely.
Speaker 1: But on average, I think it's kind of what you're
Speaker 1: used to and what you grew up with that will
Speaker 1: probably have a big pull. Who will select what quite
Speaker 1: quite fascinating. I know I don't have you forever, So
Speaker 1: let me get to some of my favorite questions that
Speaker 1: I asked all of my guests. Tell us the first
Speaker 1: car you ever owned? Year making model my first car,
Speaker 1: and it wasn't a classic yet it was? It was.
Speaker 1: It was a nineteen sixty seven Mustang Um. But you
Speaker 1: know at the time that was you know, I bought
Speaker 1: it for under a thousand dollars with my landscaping money,
Speaker 1: and yeah, it was you know, had I known what
Speaker 1: would eventually come to be. It wasn't a GT. Three
Speaker 1: fifty or a five hundred. It was just a standard,
Speaker 1: just a straight fastback fast back. Those are still handsome cars,
Speaker 1: and you can now get them with seven hundred horsepower
Speaker 1: if you want, um and a live rear axle as
Speaker 1: opposed to those old truck Your car had effectively a
Speaker 1: solid truck axle on the back. Yes it did, so
Speaker 1: that was a but it was a very handsome car.
Speaker 1: I know you've seen the movie Bullet right solutely repeatedly
Speaker 1: that was That was effectively your car. Um. What's the
Speaker 1: most important thing that people at Vanguard don't know about you?
Speaker 1: I think the most important thing that people may not
Speaker 1: know is being a Vanguard and and and really working
Speaker 1: very I mean, I think I'm the luckiest person a
Speaker 1: Vanguard is. I got to work really closely with all
Speaker 1: four CEOs, so I got started with both. I started
Speaker 1: with Bogel and we had a friendship up until his
Speaker 1: passing away. We would have lunch. Jack Brennan and I
Speaker 1: worked with father very very closely. You know a lot
Speaker 1: of people don't really understand that. You know, Jack bog
Speaker 1: will start a Vanguard, but Jack Brennan a lot of
Speaker 1: the things that are driving Vanguard to an outcomes for
Speaker 1: clients today. Jack Brennan started target retirement funds, ETFs advice.
Speaker 1: Uh So Jack Brennan, you know and I were you know,
Speaker 1: extremely close. Uh you know, you know, a mentor in
Speaker 1: some respects Bill and Tim. I worked very closely with
Speaker 1: Tim long before he was CEO. Uh So I've worked
Speaker 1: you know, so I feel I'm one of the luckiest things.
Speaker 1: And being close with Vanguard. I think a lot of
Speaker 1: people think that, you know, Fran is an index guy,
Speaker 1: of which I am, but I actually started out inactive
Speaker 1: and I'm a big believer in active. We already talked
Speaker 1: about zero sum game. So I think it gets back
Speaker 1: to talent and costs. And so I started out as
Speaker 1: a you know, a bottom up stock picker at a
Speaker 1: deep value firm. And so that's kind of my roots
Speaker 1: in my training is you know, how do you tear
Speaker 1: a company apart and find out what it's intrinsic value is?
Speaker 1: So coming from Vanguard, who's known for indexing, I think
Speaker 1: most people don't know that my training, my formal training
Speaker 1: was an active management. And I don't want to digress
Speaker 1: too much to Tim Buckley, but he's got a fascinating
Speaker 1: career path at Vanguard started as uh Jack Bogel's intern.
Speaker 1: Is that a fair way to Jack Bogel's assistant, right,
Speaker 1: and then worked his way through both technology and CEE I.
Speaker 1: Oh that's a really interesting career path to CEO. Well yeah, so, um,
Speaker 1: you know, so Tim and I worked together very closely,
Speaker 1: so Jack Bogel's assistant. Then he was in the I
Speaker 1: T and then became the chief and CEE I O
Speaker 1: Chief Investment officer. Uh. Then actually ran our whole retail
Speaker 1: and as it really has a big hand in our advice.
Speaker 1: You know, you know, you know, Tim's hand and our
Speaker 1: advice offer. His hands are all over that and his
Speaker 1: vision to see advice. Then became the c i O. Um,
Speaker 1: and now he's the CEO. One of the smartest you
Speaker 1: know him, Jack Brennan and Tim are probably to the
Speaker 1: smartest people I've ever been blessed to be around. You
Speaker 1: mentioned Brennan, you mentioned Buckley, any other men mentors you
Speaker 1: want to bring up? So my my career, Uh, well, first,
Speaker 1: my parents, you know, my parents say, I think, you know,
Speaker 1: really gave my brother and I an unbelievable head start
Speaker 1: and and that we came from pretty modest means, but
Speaker 1: they really stressed education. Um, and so I would be
Speaker 1: remissed without talking about them, Um, my kids. I've learned
Speaker 1: as much from my five kids is probably pretty much anybody,
Speaker 1: just the good nature and humility of them. And then
Speaker 1: maybe my first boss. My first boss coming out of
Speaker 1: business school was Terry Gabrielle. He's the individual who ran
Speaker 1: the billion dollar Are I a firm? Uh? There was?
Speaker 1: Executive Investment Advisors was the name of our firm? What
Speaker 1: about investors who influenced your approach to analyzing companies and
Speaker 1: thinking about portfolio construction. Yes, on the valuation side, Um,
Speaker 1: certainly Graham, DoD You've read all the work on Graham
Speaker 1: and Dodd, Mario Gabelly, you know it, you know so
Speaker 1: again being a you know deep value uh, Monger, Buffett.
Speaker 1: So I think of them really on the valuation side
Speaker 1: of the house. But then on the behavioral side, you know,
Speaker 1: Conoman Diversky fail or uh, just huge you know readers
Speaker 1: and consumers of all the work that they've done. Quite
Speaker 1: quite interesting. Let's talk about books. What are some of
Speaker 1: the books you enjoy reading? Finance, nonfinance, fiction, nonfiction? What
Speaker 1: what do you like to read? Yeah, I would say
Speaker 1: Fooled by Randomness by talib probably for sure, probably my
Speaker 1: most favorite Uh. But then back to you know Tversky,
Speaker 1: so you know, Judgment under Uncertainty. They're one of the
Speaker 1: very early least books twos when they wrote that book. Uh,
Speaker 1: Annie Duke, Um, thinking and thinking in bets um, you know,
Speaker 1: just an incredible way to think about resulting. You know,
Speaker 1: I'm a big believer, you know before she actually framed
Speaker 1: it in that way of thinking about what is your
Speaker 1: process and does your process seems sound? And then you know,
Speaker 1: not necessarily resulting or always thinking about you know, was
Speaker 1: your decision right and changing your process. If your process
Speaker 1: is right, you're gonna get your results that you know.
Speaker 1: It's not a probabis probabilistic approach, and that means sometimes
Speaker 1: you're gonna do the right thing and lose exactly. So
Speaker 1: those would be you know, what I've read, you know consistently.
Speaker 1: You know, I'm a consumer of reading books over and
Speaker 1: over again. So those are books I probably have read,
Speaker 1: you know, multiple multiple times. Quite interesting, tell us about
Speaker 1: the time you've failed and what you learned from the experience. Yeah. So, Um,
Speaker 1: I'm a huge music buff um. I love going to
Speaker 1: live events and as a teenager, I I so wanted
Speaker 1: to have a career in music. So I took guitar lessons.
Speaker 1: You know, I was the one who didn't fail, you know, easily.
Speaker 1: I failed a lot, but not easily, And so I
Speaker 1: kept trying and kept trying for years. I just did
Speaker 1: not have the music gene. I think I have the
Speaker 1: music ear so I I I can identify maybe talent early.
Speaker 1: But I just as hard as I tried. So the
Speaker 1: idea of grit and persistence. Uh you know, I I
Speaker 1: really tried my hardest, but I just missed the musical gene.
Speaker 1: The um you mentioned you and I have something in common.
Speaker 1: You go to a lot of shows. What have you
Speaker 1: seen recently? I go to a ton of live music events.
Speaker 1: I have a very eclectic so most you may not
Speaker 1: even know of. Uh so camp okay, hop along? So
Speaker 1: now you're way out there. Yeah. So I mean I'm
Speaker 1: next country or no, it's a progressive. So I'm a
Speaker 1: mix of indie rock progressive. But I I see, you know,
Speaker 1: I've been to fifty cent eminem to seeing Adele's opening act,
Speaker 1: so I saw. I was lucky enough to see Adele
Speaker 1: before anyone knew who she was and a small arena
Speaker 1: two thousand people. Um, so I probably go to twenty
Speaker 1: live concert events. And I'm also a big live sporting
Speaker 1: event person. Uh, you know, mostly Philadelphia fan, but so
Speaker 1: I love live events. The I just the Sunday before
Speaker 1: we recorded this, I just saw The Who as part
Speaker 1: of their their farewell tour. But it's nice being in
Speaker 1: or near a big city because everybody eventually passes through Philadelphia,
Speaker 1: everybody eventually passes through New York. You could go to
Speaker 1: a different show every single night and not see the
Speaker 1: same band twice. Absolutely, and then more close to New
Speaker 1: York too. I'm only an hour train ride, so I
Speaker 1: get into New York quite often as well. What do
Speaker 1: you what do you do for fun? You mentioned you
Speaker 1: go to live shows? What else do you do? Ye?
Speaker 1: So live shows and then five kids? My my, my
Speaker 1: five kids are you know? And and to me it
Speaker 1: is a hobby, you know, going to all their sporting
Speaker 1: events and their extracurricular events. I'm also a big workout person,
Speaker 1: so you know, I've always been into you know, weight
Speaker 1: training and running and anything outdoors. Uh, you know, to me,
Speaker 1: that's my hobbies. What do you most optimistic and pessimistic
Speaker 1: about within our industry? I'm very optimistic about the continued
Speaker 1: democratization uh for investors. And what I mean by that is,
Speaker 1: you know, ten twenty years ago we talked a lot
Speaker 1: about access. You really needed to be a large institution
Speaker 1: or a very high net worth to get world class
Speaker 1: investments and world class advice, and so I'm very optimistic
Speaker 1: for end investors to get world class outcomes. And so
Speaker 1: you know, whether it's you've seen, you know, pricing go
Speaker 1: from bitass spreads of halves and quarters to decimals, Commissions
Speaker 1: go down, product go down, advice minimums go down, so
Speaker 1: you know, to me, it's all about the end investor.
Speaker 1: I always wanted to do investments, and I also wanted
Speaker 1: to be helping my clients, and so I am very
Speaker 1: optimistic about the continued democratization of giving investors a fairer
Speaker 1: and fairer shake to get world class outcomes. So if
Speaker 1: a recent college graduate came to you and said they
Speaker 1: were interested in a career in asset management, what sort
Speaker 1: of advice would you give them? Yeah, I would say,
Speaker 1: you know, it's hard not to see what technology and
Speaker 1: machine learning and AI are doing to asset management, and
Speaker 1: so maybe getting a little bit out or less in
Speaker 1: the stem or I Q and more into the EQ
Speaker 1: side because I think that, you know, what is going
Speaker 1: to be left standing is behavioral coaching and relating to
Speaker 1: clients and working with clients, which is a different skill
Speaker 1: set than sitting at a terminal and trying to figure
Speaker 1: out that I buy stock X or Y or z.
Speaker 1: So I think there's gonna be, you know, somewhat of
Speaker 1: a shift from I Q to EQ UH in the
Speaker 1: space so viral millennial or talking to my son who's
Speaker 1: trying to enter the space, I was talking about making
Speaker 1: sure these world class and relationship management on the EQ
Speaker 1: persuasion and influence side as much as he is on
Speaker 1: the math and analytical and technology side. Quite quite interesting.
Speaker 1: UM and our final question, what do you know about
Speaker 1: the world of investing today that you wish you knew
Speaker 1: thirty years ago when you were first getting started. Yeah,
Speaker 1: I would say that the market does not know or
Speaker 1: care what my valuation. If a fair value is um,
Speaker 1: you know, I remember my first job, would say the
Speaker 1: fair value of this company. It's selling below book value,
Speaker 1: it's selling below cash value. And it's kind of Kansas
Speaker 1: quote that you know, the the market can stay irrational
Speaker 1: or longer than you can stay solvent and there's never
Speaker 1: a truer quote than that, right, So, you know, the
Speaker 1: market doesn't know care what my valuation or my assumption is.
Speaker 1: The market is gonna do what it's gonna do. And
Speaker 1: I think, you know, having that sense of humility, um,
Speaker 1: I think it would. You know, I probably wasn't as
Speaker 1: humble and human. You have it as much humility in
Speaker 1: my earlier days and I have today. You know, it's
Speaker 1: funny you say that I used to hear early in
Speaker 1: my career a variation on that, which is the mark.
Speaker 1: It doesn't care what you paid for that stock really,
Speaker 1: so valuation or even what you paid, it's not relevant.
Speaker 1: It's gonna do what it's gonna do. Your little purchase
Speaker 1: is not reliant. Yeah, the market doesn't know your right exactly. Hey,
Speaker 1: fran this has been absolutely fascinating. Thank you for being
Speaker 1: so generous with your time. We have been speaking with
Speaker 1: fran Can I re H, head of Global Portfolio Construction
Speaker 1: for Vanguard Group in Malvern, Pennsylvania, which manages a small
Speaker 1: five trillion dollars. If you enjoyed this conversation, well, look
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Speaker 1: fifty eight or so previous conversations we've had. We love
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Speaker 1: not thank the crack staff that helps put these conversations
Speaker 1: together each week. Michael bat Nick is my head of research.
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Speaker 1: my producer. I'm Barry Retolts. You've been listening to Masters
Speaker 1: in Business from Bloomberg Radio