Latest / Masters in Business / Interview With William McNabb: Masters in Business (Audio)

Transcript

Interview With William McNabb: Masters in Business (Audio) · Masters in Business

• 0:00
  Speaker 1: Brought to you by Bank of America. Merrill Lynch seeing
• 0:03
  Speaker 1: what others have seen, but uncovering what others may not.
• 0:06
  Speaker 1: Global Research that helps you harness disruption. Voted top global
• 0:10
  Speaker 1: research firm five years running. Merrill Lynch, Pierre, Spinner and
• 0:13
  Speaker 1: Smith Incorporated. This is Masters in Business with Barry Ridholes
• 0:21
  Speaker 1: on Bloomberg Radio. This week on the podcast, I have
• 0:25
  Speaker 1: a spectacular guest. I have a very special guest. His
• 0:30
  Speaker 1: name is Bill McNabb. He is chairman and CEO of
• 0:35
  Speaker 1: the Vanguard Group, a small little shop in Pennsylvania that
• 0:39
  Speaker 1: runs about four trillion dollars um. This is one of
• 0:44
  Speaker 1: the few guests we've had back for a second time.
• 0:47
  Speaker 1: We had him on eighteen months ago, and there's almost
• 0:50
  Speaker 1: no overlap between the two interviews. If you are either
• 0:56
  Speaker 1: an individual investor, an institutional investor, a registered investment advisor,
• 1:02
  Speaker 1: or a broker, this is a conversation you're going to
• 1:07
  Speaker 1: want to hear. This might be one of the most
• 1:11
  Speaker 1: influential people in all of finance. Certainly, Vanguard has become
• 1:17
  Speaker 1: one of the most influential shops there are. It's called
• 1:19
  Speaker 1: the Vanguard effect. Any space they step into sees costs
• 1:24
  Speaker 1: to investors Plummet. A Bloomberg article not too long ago
• 1:29
  Speaker 1: estimated that Vanguard has helped pull forty billion dollars in
• 1:35
  Speaker 1: fees out of wall streets pockets and and put it
• 1:39
  Speaker 1: in the hands of investors by not only them charging
• 1:43
  Speaker 1: a very low price, but by the competition being forced
• 1:47
  Speaker 1: to compete with Vanguard and lower their fees. I'm gonna
• 1:52
  Speaker 1: make two recommendations for those of you who are listening
• 1:56
  Speaker 1: to this. First, listen to the podcast. Enjoy it. He's
• 2:00
  Speaker 1: incredibly knowledgeable and eloquent, and I loved having a conversation
• 2:05
  Speaker 1: with him. But second, go back onto iTunes or SoundCloud
• 2:09
  Speaker 1: or the Big Picture at Reholts dot com and and
• 2:13
  Speaker 1: pull out that previous conversation. I'll link to it on
• 2:18
  Speaker 1: the blog when when I when I write about this,
• 2:22
  Speaker 1: you should really listen to both of these. They are
• 2:25
  Speaker 1: master class in the business of running an investment business.
• 2:30
  Speaker 1: There's there's none better than Bill McNabb. With no further ado,
• 2:34
  Speaker 1: my conversation with Vanguard Groups CEO and chairman, Bill McNabb.
• 2:42
  Speaker 1: This is master's in business with Barry Ridholts on Bloomberg Radio.
• 2:46
  Speaker 1: I'm Barry Ridholts. You're listening to Masters in Business on
• 2:50
  Speaker 1: Bloomberg Radio. My special guest this week is a returning guest.
• 2:55
  Speaker 1: His name is William McNabb. He is Chairman and see
• 3:00
  Speaker 1: EO of the Vanguard Group, which currently manages just about
• 3:04
  Speaker 1: four trillion dollars. That's trillion with the t uh. Bill
• 3:08
  Speaker 1: has been with the Vanguard Group since so his thirtieth
• 3:12
  Speaker 1: anniversary was not too long ago. He became CEO in
• 3:16
  Speaker 1: two thousand and eight and chairman in oh nine. And
• 3:19
  Speaker 1: he is the third CEO and Vanguard's history, following Jack
• 3:24
  Speaker 1: Brennan before him, and prior to that, uh, a gentleman
• 3:28
  Speaker 1: named John Bogel, the founder of Vanguard. Bill McNabb, welcome
• 3:31
  Speaker 1: to Bloomberg. Great to be here, Barry, Thanks, and I
• 3:34
  Speaker 1: should say welcome back to Bloomberg. Uh. The last time
• 3:37
  Speaker 1: we had a conversation, it was really quite fascinating. So
• 3:41
  Speaker 1: I want to jump right into some of the really
• 3:45
  Speaker 1: interesting going zones these days and and get the Vanguard
• 3:48
  Speaker 1: perspective of things. Uh, let's jump right to your competitors.
• 3:53
  Speaker 1: How do you see the lay of the lands when
• 3:55
  Speaker 1: it comes to managing other people's money? So I think
• 3:58
  Speaker 1: what we're seeing right now, say, um, you know, there's
• 4:01
  Speaker 1: a secular change that's gone on and will continue to
• 4:04
  Speaker 1: go on in terms of costs being a much more
• 4:06
  Speaker 1: important component of investing. Obviously that's played out most purely
• 4:10
  Speaker 1: with indexing firms doing better. But I think it's gonna
• 4:14
  Speaker 1: lead to further consolidation in the industry. UM. So you know,
• 4:19
  Speaker 1: we saw a week ago Janis and Henderson UM big
• 4:22
  Speaker 1: big merger that was clearly uh, let's get more economies
• 4:26
  Speaker 1: of scale kind of play. I think more of that
• 4:28
  Speaker 1: may happen. UM. I also think that you will see
• 4:32
  Speaker 1: UM on the other side of it, maybe some boutiques
• 4:35
  Speaker 1: emerge who are more specialized, and so you you may
• 4:38
  Speaker 1: end up with a more barbeled industry where you've got
• 4:40
  Speaker 1: a lot of really you know, nimble small players and
• 4:44
  Speaker 1: you know some some larger players who can really exploit
• 4:46
  Speaker 1: economies of scale. So is it all about the economies
• 4:50
  Speaker 1: of scale or when we look at let's look at
• 4:53
  Speaker 1: some of your competitors who are Giant, black Rock, Pimco,
• 4:57
  Speaker 1: State Street, these are all trillion all the firms there
• 5:00
  Speaker 1: are probably close to a dozen trillion dollar asset managers
• 5:04
  Speaker 1: around the world. Is that the cost of admission these
• 5:07
  Speaker 1: days in order to to get to where you can
• 5:10
  Speaker 1: start driving costs now for investors, you know, I think, um,
• 5:14
  Speaker 1: I think you could do it at lower levels than that,
• 5:16
  Speaker 1: but certainly when you're at that kind of level, UM,
• 5:19
  Speaker 1: you know, you're spreading your fixed costs across a very
• 5:21
  Speaker 1: large asset base, and you know that helps. And you know,
• 5:25
  Speaker 1: I think Vanguard is like the purest form of transparency
• 5:29
  Speaker 1: if you will, into economies of scale, if you look
• 5:31
  Speaker 1: at how our costs have come down over time, you
• 5:34
  Speaker 1: can see the power of technology, you know, um, spreading
• 5:38
  Speaker 1: fixed costs over a broader asset base and so forth.
• 5:42
  Speaker 1: It's been called the Vanguard effect, the impact of you
• 5:46
  Speaker 1: moving in a particular space. Last time we talked about
• 5:50
  Speaker 1: your desire to drive prices lower, but really, how much
• 5:54
  Speaker 1: more fat is out there? How much cheaper can invest
• 5:56
  Speaker 1: and get It's you know, we're getting down to you know,
• 5:59
  Speaker 1: it's an assem taught to kind of relationship at this point.
• 6:02
  Speaker 1: And uh, you know, there's room to go, but it's
• 6:06
  Speaker 1: not going to be the kind of uh declines we've
• 6:08
  Speaker 1: seen in the last decade. Most of the fat has
• 6:11
  Speaker 1: been wrong out of I think that's right, But you know,
• 6:15
  Speaker 1: again there's still our economies of scale to be gained. Barry.
• 6:18
  Speaker 1: You know, I'm such a huge believer in the power
• 6:21
  Speaker 1: of technology, and in a sense, I don't know what
• 6:24
  Speaker 1: I don't know. And the more you see, UM in
• 6:28
  Speaker 1: the technology arena, you know, some of the new things
• 6:31
  Speaker 1: that are emerging, you know, the use of big data,
• 6:34
  Speaker 1: that the emergence of the cloud. Um, I'm not sure
• 6:37
  Speaker 1: we even know what we can do going forward. And
• 6:40
  Speaker 1: you know we're spending a lot of time and effort
• 6:42
  Speaker 1: in that arena as well. So we're gonna talk more
• 6:45
  Speaker 1: about technology, UM shortly. When what about the people who
• 6:50
  Speaker 1: are running some of your competitors. Do you ever get
• 6:53
  Speaker 1: to chat with the Larry Fins and the Bill Grosses
• 6:57
  Speaker 1: of the world. So I was until just a couple
• 7:01
  Speaker 1: of weeks ago chairman of the Investment Company Institute, which
• 7:04
  Speaker 1: is the Mutual Fund trade Association, and as such I
• 7:08
  Speaker 1: met with many of the leaders in our industry on
• 7:11
  Speaker 1: a very regular basis, and you know, I get a
• 7:14
  Speaker 1: chance to you know, talk about industry issues, talk about
• 7:18
  Speaker 1: regulatory changes with them. Uh. You know, I think Larry
• 7:23
  Speaker 1: and I have actually shared the stage on a couple
• 7:25
  Speaker 1: of occasions. UM, talking about governance for example, talking about
• 7:28
  Speaker 1: long term versus short term and so yeah, you know,
• 7:31
  Speaker 1: you get a chance every now and then to compare notes.
• 7:33
  Speaker 1: So we'll talk more about governance UM in a few minutes.
• 7:37
  Speaker 1: Let's talk about the Index Fund. It just had a birthday,
• 7:40
  Speaker 1: It just celebrated its forty anniversary. Tell us what what
• 7:44
  Speaker 1: that means. You know, it's an amazing thing. So UM
• 7:47
  Speaker 1: and this is really the power of Jack Bogel's imagination,
• 7:51
  Speaker 1: if you will, in the ninety six so Jack, you know,
• 7:54
  Speaker 1: had this concept UM that he had written about extensively
• 7:57
  Speaker 1: that you know, this idea of a broad market in
• 8:00
  Speaker 1: might make sense, as you know from the history um
• 8:04
  Speaker 1: Wells Fargo in particular, I think did some work on
• 8:06
  Speaker 1: the pension area, and you know the first separate account.
• 8:09
  Speaker 1: And what Jack did was he said, if it's good
• 8:12
  Speaker 1: enough for a sophisticated institution, why not for everybody? And
• 8:16
  Speaker 1: that was really the concept. And you know when it
• 8:18
  Speaker 1: was first introduced in seventy six, people laughed at it.
• 8:22
  Speaker 1: They said, it's you know, mediocrity, it's never gonna work
• 8:26
  Speaker 1: on American w Jack actually has hanging outside his office
• 8:30
  Speaker 1: a print of an ed taken tell us about that.
• 8:34
  Speaker 1: So Yeah, it was UM. You know this this because
• 8:38
  Speaker 1: it was viewed as almost communistic, UM people called it
• 8:42
  Speaker 1: on American And you know, for Jack, it was always
• 8:44
  Speaker 1: a game of math. You know, at the end of
• 8:46
  Speaker 1: the day, UM investing was going to become a zero
• 8:49
  Speaker 1: sum game. And eventually, when you looked at active versus
• 8:54
  Speaker 1: index on average, the index guys were gonna win UM
• 8:58
  Speaker 1: just because both were gonna add up to the market
• 9:00
  Speaker 1: and one had a much higher cost structure than the other.
• 9:02
  Speaker 1: I'm Barry Ri Hults. You're listening to Masters in Business
• 9:05
  Speaker 1: on Bloomberg Radio. My special guests this week is Bill McNab.
• 9:09
  Speaker 1: He is chairman and CEO of the Vanguard Group, which
• 9:13
  Speaker 1: manages about four trillion dollars. And let's talk about the
• 9:18
  Speaker 1: size of van going and what that means. You guys
• 9:21
  Speaker 1: essentially own about five percent of just about every publicly
• 9:26
  Speaker 1: traded company in America and some proportion of non US equities.
• 9:33
  Speaker 1: What does that due to your thinking about corporate governance issues?
• 9:37
  Speaker 1: You guys really are the eight hundred pound gerrilla when
• 9:39
  Speaker 1: it comes to that. You know, I think for us,
• 9:41
  Speaker 1: Barry it it really underscores the unbelievable responsibility we have
• 9:47
  Speaker 1: you know, it's we're here representing, you know, the hopes
• 9:49
  Speaker 1: and dreams of millions of investors who have entrusted they're
• 9:53
  Speaker 1: hard earned assets into our funds. And so we've got
• 9:56
  Speaker 1: to make sure that the port the constituent portfolio companies
• 9:59
  Speaker 1: are being governed in in a sense with long term
• 10:03
  Speaker 1: value creation for the end investor as a very big goal.
• 10:08
  Speaker 1: And we've had to up our game. We've had to
• 10:10
  Speaker 1: increase our staff who engage in this. You know, the
• 10:14
  Speaker 1: difference between us and say a traditional active manager, and
• 10:17
  Speaker 1: we do have as you know, traditional active third at
• 10:21
  Speaker 1: that's that's still a trillion and changed a lot of money, um.
• 10:24
  Speaker 1: But on the index side, we're a permanent holder of
• 10:27
  Speaker 1: these of these companies and so you have to You
• 10:30
  Speaker 1: can't sell the stock if you're not happy with the
• 10:32
  Speaker 1: way the company is performing, but you can agitate if
• 10:35
  Speaker 1: there's something we could talk about gap accounting or stock
• 10:38
  Speaker 1: options or CEO pay if you if Vanguard says we're
• 10:42
  Speaker 1: not happy about this, you're not a entity without resources.
• 10:48
  Speaker 1: So and that's a really good segue into what I
• 10:51
  Speaker 1: think has been one of the really interesting evolutions in
• 10:55
  Speaker 1: the last couple of years, and it's been this whole
• 10:56
  Speaker 1: concept of shareholder engagement and one of the things we
• 11:00
  Speaker 1: really did agitate for. And you know, we we get
• 11:03
  Speaker 1: a couple of us gave talks on this maybe to
• 11:05
  Speaker 1: three years ago, and we've really seen a change in
• 11:09
  Speaker 1: the way boards are working as a result, we said,
• 11:12
  Speaker 1: you need to engage with your big owners, not just Vanguard,
• 11:15
  Speaker 1: but anybody who owns a significant UM steak, and you
• 11:19
  Speaker 1: need to be thinking about how are you creating long
• 11:22
  Speaker 1: term value not short term. No one's interested in the
• 11:25
  Speaker 1: short term here. And so we have a set of
• 11:27
  Speaker 1: principles that we ask people to follow in terms of governance.
• 11:30
  Speaker 1: And that's the first sort of screen for us is
• 11:32
  Speaker 1: what what sort of principles? So you know, we we
• 11:35
  Speaker 1: want UM transparent, transparency. We want the board you know,
• 11:39
  Speaker 1: composition to be right. We want the UM defined by
• 11:43
  Speaker 1: what do you mean by right, you know, a complementary
• 11:45
  Speaker 1: set of skills, UM independent not not just golf buddies
• 11:48
  Speaker 1: of the CEO totally and and real independence. And we
• 11:52
  Speaker 1: want there to be linkages between executive pay and long
• 11:55
  Speaker 1: term value creation and not short term so another word,
• 11:59
  Speaker 1: not pay people on the basis of how well the
• 12:02
  Speaker 1: SMP has done recently, because that seems by just granting
• 12:05
  Speaker 1: stock options, you basically compensating executives for what the stock
• 12:09
  Speaker 1: market does, not how their company does relative to everybody else, Right,
• 12:13
  Speaker 1: And you know you've actually written a fair amount of
• 12:15
  Speaker 1: this in your blog, and you know, I'm, as you know,
• 12:18
  Speaker 1: I'm in big agreement with a lot of your points
• 12:20
  Speaker 1: there that in the eighties and nineties, in particular, especially
• 12:24
  Speaker 1: in the nineties after the compensation rules changed, um, there
• 12:28
  Speaker 1: were a lot of just blanket granting of options and
• 12:30
  Speaker 1: it really was a rising tide and closed to performance
• 12:34
  Speaker 1: really driving it. Talk about unanticipated effects of a legislative
• 12:39
  Speaker 1: change for those those folks who may not be aware
• 12:41
  Speaker 1: of this. We changed the rules on exact compensation in
• 12:45
  Speaker 1: the United States. We capped dollar compensation and pretty much
• 12:50
  Speaker 1: allowed unlimited stock option compensation, and so people were paid
• 12:54
  Speaker 1: not based on how well the company did, but how
• 12:57
  Speaker 1: well the stock market did. So, so what can Vanguard
• 13:00
  Speaker 1: do and what what can a board do to to
• 13:04
  Speaker 1: change that? So I think what boards have been doing,
• 13:06
  Speaker 1: and you know, there's actually been a couple of academic
• 13:08
  Speaker 1: studies recently that have pointed out that there's been real
• 13:11
  Speaker 1: progress here is they have been doing a better job
• 13:13
  Speaker 1: defining longer term objectives for the company and linking executive
• 13:18
  Speaker 1: pay to those objectives, and you're seeing less use of options,
• 13:22
  Speaker 1: more use of restricted stock grants, and the grants are
• 13:25
  Speaker 1: made only if certain objectives are achieved, and then the
• 13:28
  Speaker 1: vesting on those grants may actually take place over pretty
• 13:31
  Speaker 1: long periods of time. We think that's actually helping drive
• 13:36
  Speaker 1: executive teams to think longer term. It's still not you know,
• 13:40
  Speaker 1: we we it's not universal, and it's not where it
• 13:42
  Speaker 1: should be. It's not where it should be. M there's
• 13:44
  Speaker 1: still too much short termism in the market. Is it?
• 13:46
  Speaker 1: Is it safe to say you were in agreement with
• 13:49
  Speaker 1: the Larry Fink letter of black Rock basically went out
• 13:53
  Speaker 1: to the SMP five hundred and some big European companies saying, hey,
• 13:57
  Speaker 1: you're too focused on the quarter and you're none of
• 13:59
  Speaker 1: the thing in R and D and you're not thinking
• 14:01
  Speaker 1: long term. Yeah. I I give Larry and Blackrock a
• 14:04
  Speaker 1: lot of credit for that letter. It was very complimentary
• 14:06
  Speaker 1: actually to the letter. The last couple of letters we'd
• 14:09
  Speaker 1: sent out, you know, we had um really emphasized with
• 14:12
  Speaker 1: our portfolio companies that think long term and you know,
• 14:17
  Speaker 1: we we really stressed the need for better engagement. You know,
• 14:20
  Speaker 1: he hit particularly hard on the long term issues, and
• 14:24
  Speaker 1: you know, I think together it's actually a pretty good message.
• 14:27
  Speaker 1: So let's talk a little bit about UM other issues
• 14:31
  Speaker 1: in in corporate governance. What do you think about E
• 14:34
  Speaker 1: s G investing, Environmental, sustainable and governance seems to be
• 14:38
  Speaker 1: a rising UH theme these days. I think it's a
• 14:42
  Speaker 1: very complex topic, you know, So UM, I can tell
• 14:45
  Speaker 1: you my my mailbox is filled UM every week with
• 14:48
  Speaker 1: different UM constituencies having particular social issues UM that they
• 14:53
  Speaker 1: want to expressed in the way we run money. Actually,
• 14:57
  Speaker 1: I think if I added it all up, we would
• 14:58
  Speaker 1: exclude almost every company in the S and P five hundred.
• 15:01
  Speaker 1: So one of the things we've done is we created
• 15:04
  Speaker 1: UM a socially responsible index fund, the foot see and
• 15:08
  Speaker 1: foot See, and you know it hits some of your
• 15:09
  Speaker 1: big screens, and I think it's been successful at meeting
• 15:13
  Speaker 1: a lot of investor needs we see UM. You know,
• 15:16
  Speaker 1: it's a it's a fairly significant fund at this point.
• 15:19
  Speaker 1: Is that only European or is that US or global?
• 15:22
  Speaker 1: It's actually UM, it is a global phenomenon, and I
• 15:26
  Speaker 1: could see US doing more in that product space over time,
• 15:29
  Speaker 1: you know, perhaps adding a couple of more complementary kinds
• 15:32
  Speaker 1: of offerings. I will say that the other evolution in
• 15:37
  Speaker 1: E s G for us is looking at sort of
• 15:40
  Speaker 1: broad E s G principles and how do they affect
• 15:43
  Speaker 1: long term value creation? And so you know, the easy
• 15:46
  Speaker 1: example would be if you have a company who's got
• 15:49
  Speaker 1: a bad track record in terms of environmental issues. What
• 15:53
  Speaker 1: you know is that's going to hurt the stock price
• 15:55
  Speaker 1: over the long run. It's a cost that will eventually
• 15:57
  Speaker 1: come back to it is and you see it time
• 16:00
  Speaker 1: after time. So one of the things you can agitate
• 16:04
  Speaker 1: for as a large owner is, hey, let's make sure
• 16:06
  Speaker 1: we've got a long term environmentally sound set of principles
• 16:11
  Speaker 1: that were operating under so the shareholder doesn't bear the
• 16:14
  Speaker 1: brunt of that cost down the road. UM. That's you
• 16:17
  Speaker 1: know that there's judgment involved there obviously in terms of
• 16:21
  Speaker 1: how you actually have those conversations. But we're finding companies
• 16:25
  Speaker 1: are actually doing a better job beginning to disclose that.
• 16:28
  Speaker 1: You're seeing it more and more in UM some of
• 16:30
  Speaker 1: the management write ups and so forth, in the proxy
• 16:32
  Speaker 1: statements and in the annual reports. Might we see a
• 16:36
  Speaker 1: US version of the Footsie E s G portfolio anytime.
• 16:40
  Speaker 1: So yeah, I mean we we clearly will have I
• 16:44
  Speaker 1: think a range of opportunities for people. I'm Barry rid Hults.
• 16:48
  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
• 16:52
  Speaker 1: special guest today is William McNabb. He is CEO and
• 16:56
  Speaker 1: chairman of the Vanguard Group. They manage about four trillion
• 17:00
  Speaker 1: dollars and he is the third CEO, following Jack Brennan
• 17:05
  Speaker 1: and Vanguard founder Jack Bogel. Um. So, Bill, let's let's
• 17:11
  Speaker 1: talk a little bit about technology. You referenced it earlier,
• 17:14
  Speaker 1: the impact of it, what's the potential upside for technology
• 17:19
  Speaker 1: as well as the downside uh that technology presents. So
• 17:24
  Speaker 1: we've historically approached technology as needing to do one of
• 17:28
  Speaker 1: three things. You know, First, um, create automation where automation
• 17:34
  Speaker 1: is possible, so you can generate economies of scale for
• 17:36
  Speaker 1: your investors. That's kind of classic automate things that are, um,
• 17:40
  Speaker 1: you know, very manual in nature, you know. Second, can
• 17:43
  Speaker 1: you use technology to make your people better, so better
• 17:46
  Speaker 1: systems so that when you're talking to clients over the
• 17:48
  Speaker 1: phone or you're doing you know, increasingly video conferencing and
• 17:52
  Speaker 1: so forth with them. You're you're it's a better experience.
• 17:55
  Speaker 1: And then the third is how do you make it
• 17:56
  Speaker 1: more convenient for your investors. So we been, you know,
• 18:01
  Speaker 1: historically trying to I'll say, you know, Bucket are investing
• 18:04
  Speaker 1: that way, and it's been it's been pretty productive for us. UM.
• 18:08
  Speaker 1: You know, one of the figures I always love to
• 18:11
  Speaker 1: describe to people is UM in two thousand, the Internet
• 18:15
  Speaker 1: was just starting to take hold. We had about five
• 18:17
  Speaker 1: billion dollars under management, twelve thousand people. You know, today
• 18:20
  Speaker 1: we're a little less than fifteen thousand people and we have,
• 18:23
  Speaker 1: as you referenced, nearly four trillion. So technology has actually
• 18:28
  Speaker 1: made that possible. So it's an eight fold increase in
• 18:30
  Speaker 1: assets and you're barely a increase in in personnel. Yeah,
• 18:34
  Speaker 1: and and and as you know, during that period, the
• 18:36
  Speaker 1: market hasn't been you know, tremendous lift. There a lot
• 18:39
  Speaker 1: of that has just been true organic growth, so we're
• 18:42
  Speaker 1: able to do more for people. So, you know, technology
• 18:45
  Speaker 1: has just been a phenomenal um tail wind for us,
• 18:49
  Speaker 1: if you will, UM the you know, one of the
• 18:53
  Speaker 1: challenges I think we see in one particular area, and
• 18:56
  Speaker 1: you allude to in your question, is you know, the
• 18:59
  Speaker 1: rise of social media and instantaneous information on everything, or
• 19:04
  Speaker 1: misinformation or misinformation and as you know, one of the
• 19:06
  Speaker 1: new sort of fads out there. Maybe it's more than
• 19:09
  Speaker 1: a fad. Maybe it's the way it's going to be.
• 19:12
  Speaker 1: Is get the headline out there, or get the item
• 19:15
  Speaker 1: out there, and then we'll check for veracity later. And
• 19:19
  Speaker 1: we're seeing, you know, when when that kind of information proliferates,
• 19:23
  Speaker 1: it really does make investors struggle because you know, they're like,
• 19:27
  Speaker 1: what should I do? And of course we're trying to
• 19:29
  Speaker 1: console them. Hey, there's noise in in the system here.
• 19:32
  Speaker 1: You need to avoid, you know, reacting to that noise.
• 19:36
  Speaker 1: But the more there is, the hard artist to make
• 19:38
  Speaker 1: that point. Last time we spoke, um two things. First,
• 19:42
  Speaker 1: you mentioned the web call you did in the midst
• 19:46
  Speaker 1: of the crisis. I would tell listeners go find that.
• 19:49
  Speaker 1: It's on iTunes and SoundCloud and Bloomberg dot com and
• 19:52
  Speaker 1: listen to that. But you were also just launching your
• 19:56
  Speaker 1: robo advisor, your automated investment platform. They've all come to
• 20:01
  Speaker 1: me known as a robo advisor. So that was with
• 20:05
  Speaker 1: a few billion dollars. How has that been working out
• 20:08
  Speaker 1: what what's it managing these days? So we launched at
• 20:11
  Speaker 1: last May. So it's about eighteen months now. And as
• 20:14
  Speaker 1: you as you allude, we had um sort of a
• 20:17
  Speaker 1: legacy business of about ten billion at the time. It's
• 20:21
  Speaker 1: now approaching fifty UM in eighteen months. And so I
• 20:25
  Speaker 1: lose the bed. I said it was going to be
• 20:26
  Speaker 1: a hundred in a year. Well, but um, I think
• 20:30
  Speaker 1: you're going to be right directionally though. There's there's tremendous
• 20:34
  Speaker 1: appetite for this in the marketplace, and you know, our
• 20:37
  Speaker 1: our whole thing was to be able to give really sound,
• 20:41
  Speaker 1: personalized advice for very small accounts. You know, we wanted
• 20:45
  Speaker 1: somebody with fifty thou dollars to be able to get
• 20:47
  Speaker 1: the same kind of service that people with a million
• 20:49
  Speaker 1: dollars we're getting just five years ago. So you're you're
• 20:52
  Speaker 1: anticipating my next question, which is what sort of pushback
• 20:55
  Speaker 1: has there been? Van God is very popular amongst advisors
• 20:59
  Speaker 1: who are are based. I know some people complained about it.
• 21:03
  Speaker 1: They're obviously not interested in the fifty dollar account, But
• 21:06
  Speaker 1: what sort of pushback has there been and what does
• 21:08
  Speaker 1: Vanguard say in response to that? So, you know, we'd
• 21:12
  Speaker 1: be naive to think there's been no pushback UM, although
• 21:15
  Speaker 1: I can you know, the mentions are in the dozens,
• 21:17
  Speaker 1: if you will, from advisors. We serve something like fifty
• 21:20
  Speaker 1: thou advisors today and I think maybe I've heard from
• 21:24
  Speaker 1: a hundred over the course of eighteen months, but you know,
• 21:27
  Speaker 1: you take it very seriously. I think that my pushback
• 21:31
  Speaker 1: is this technology is upon us, and this this is
• 21:35
  Speaker 1: going to happen. You can't just ignore it and hope
• 21:37
  Speaker 1: it can't ignore it and hope it goes away. And
• 21:39
  Speaker 1: you know, if it's not us, it's gonna be somebody else.
• 21:42
  Speaker 1: And the real message here is, let us help you
• 21:46
  Speaker 1: work on your value proposition. I think it's more important
• 21:50
  Speaker 1: than ever for advisors to be able to explain clearly
• 21:54
  Speaker 1: what value am I providing to you as a client.
• 21:57
  Speaker 1: The second point I think is really important is for
• 22:00
  Speaker 1: UM advisors to look at this technology and say, what
• 22:04
  Speaker 1: can I use, you know, technologically to make my business
• 22:07
  Speaker 1: more efficient UM. I don't think any of the so
• 22:10
  Speaker 1: called robo UM firms are gonna put the advisor community
• 22:14
  Speaker 1: out of business, but I think people who ignore their
• 22:17
  Speaker 1: technology are going to put themselves at risk. To say
• 22:20
  Speaker 1: the least. I'm Barry Ridhults. You're listening to Masters in
• 22:23
  Speaker 1: Business on Bloomberg Radio. My special guest today is William McNabb.
• 22:28
  Speaker 1: He is the chairman and CEO of the Vanguard Group,
• 22:32
  Speaker 1: which runs a couple of dollars for investors around the
• 22:35
  Speaker 1: world close to four trillion. We briefly talked about the
• 22:40
  Speaker 1: forty birthday of indexing and the index funds. Uh, let's
• 22:45
  Speaker 1: let's get into a little more detail with that. There
• 22:47
  Speaker 1: was a whole special in the Wall Street Journal about
• 22:50
  Speaker 1: indexing and active versus passive investing. My favorite headline was
• 22:55
  Speaker 1: the dying business of picking stocks. I thought there was
• 22:58
  Speaker 1: a little hyperbole. There is stockpicking really a dying business?
• 23:03
  Speaker 1: So I don't think so. I you know, look, I
• 23:05
  Speaker 1: think there's a secular element to this shift to indexing,
• 23:09
  Speaker 1: and it's really less about indexing and it's about cost.
• 23:12
  Speaker 1: So I think low cost investing is the secular change here. Um.
• 23:16
  Speaker 1: I think there will be opportunities for active managers, but
• 23:19
  Speaker 1: I think if you're a high price active manager, you're
• 23:22
  Speaker 1: you're going to really struggle. So based on that, how
• 23:26
  Speaker 1: can we explain the success of high priced hedge funds,
• 23:30
  Speaker 1: high price venture capital, high price private equity, of which
• 23:34
  Speaker 1: there is always one shootout the light spectacular funds, and
• 23:39
  Speaker 1: then a whole bunch of gee, we wish we were
• 23:41
  Speaker 1: performing like that. Well, you know, I think it does.
• 23:44
  Speaker 1: It does underscore that human behavior is always looking for
• 23:48
  Speaker 1: you know, the home run, right people, people love that
• 23:51
  Speaker 1: idea of you know, outsize returns. Look, you know, if
• 23:54
  Speaker 1: you if you take each of those three categories in turn,
• 23:57
  Speaker 1: you know, venture you should make you should get paid
• 24:00
  Speaker 1: for the risk you're taking a lot of capitalists and
• 24:02
  Speaker 1: you know, as an asset class over the last fifteen years,
• 24:04
  Speaker 1: it's done okay. And you know, even even more broadly
• 24:07
  Speaker 1: than just the very very best funds, and you're getting
• 24:11
  Speaker 1: a risk premium for liquidity and for you know, the
• 24:14
  Speaker 1: kinds of companies that you're investing in. I think it's
• 24:16
  Speaker 1: a very vibrant thing not accessible to the average investor.
• 24:21
  Speaker 1: You know, private equity is an asset class over time. Um,
• 24:25
  Speaker 1: you know, at least the last fifteen years not been
• 24:27
  Speaker 1: a great place. And I think your point on the
• 24:30
  Speaker 1: fee side there is probably detracted from those returns. And
• 24:34
  Speaker 1: again by you know, the way I look at private
• 24:36
  Speaker 1: equity is again you should get a significant premium over
• 24:39
  Speaker 1: the public markets for the liquidity that you're giving up.
• 24:41
  Speaker 1: We don't see that over the last fifteen to twenty years.
• 24:44
  Speaker 1: You know, the hedge funds um You've written about that
• 24:47
  Speaker 1: better than I'll ever be able to articulate. It makes
• 24:50
  Speaker 1: no sense to me. It makes no sense to me.
• 24:53
  Speaker 1: The my my perspective has evolved in a minor nuanced way.
• 24:58
  Speaker 1: If you're in one of those hedge funds that has
• 25:00
  Speaker 1: a long term track record of outperforming and they're continuing
• 25:04
  Speaker 1: to outperform, well why not stay with it? But finding
• 25:08
  Speaker 1: those guys in advance, and it's almost always guys, but
• 25:11
  Speaker 1: finding the emerging managers who are gonna be the superstars,
• 25:16
  Speaker 1: it's all but impossible. It's very difficult. You know, a
• 25:19
  Speaker 1: few of the big endowments have done a decent job
• 25:22
  Speaker 1: identifying people early in their careers, you know, the Yales
• 25:26
  Speaker 1: of the world and the notre Dames of the world,
• 25:29
  Speaker 1: and uh, very few others have been able to do that.
• 25:32
  Speaker 1: And everybody who's imitator, it has has come to rue
• 25:35
  Speaker 1: that that chase and by the way, I agree with you,
• 25:37
  Speaker 1: there are a handful of people who um their returns
• 25:41
  Speaker 1: in retrospect have been pretty persistent as well. So you know,
• 25:45
  Speaker 1: you look at the Seth Clarmon's and the Steve Mandel's
• 25:47
  Speaker 1: of the world, and you know, I have tremendous respect
• 25:50
  Speaker 1: for what they've accomplished. And all you need is a
• 25:52
  Speaker 1: time machine to go back twenty years and give them
• 25:54
  Speaker 1: money when they were taking its right. So, UM, let's
• 25:58
  Speaker 1: let's stay with with the concept of UM indexing. One
• 26:02
  Speaker 1: of the criticisms I hear all the time is we're
• 26:05
  Speaker 1: at peak indexing. This so much money has flown into
• 26:08
  Speaker 1: indexing it can possibly continue to work. So you know,
• 26:12
  Speaker 1: I think, UM, one of the things I love about
• 26:15
  Speaker 1: your columns. You like data, and so you know, today
• 26:19
  Speaker 1: indexing represents about thirty five percent of the mutual fund world,
• 26:23
  Speaker 1: and I think that's where people focus a lot. It's
• 26:26
  Speaker 1: only of the US equity market. It's less than five
• 26:29
  Speaker 1: percent of global markets, so there's a long way to
• 26:32
  Speaker 1: go here. Um. Second, when you look at UM, I
• 26:35
  Speaker 1: think even more importantly, trading volume. You know in the US,
• 26:39
  Speaker 1: indexing is like five trading volume. Well, isn't that because
• 26:43
  Speaker 1: by definition there's not a lot of trading going on.
• 26:46
  Speaker 1: That's that's exactly right. But the point is there's there.
• 26:50
  Speaker 1: We're we're a long way from you know where this
• 26:53
  Speaker 1: this could end up. And I think it's a global phenomenon,
• 26:57
  Speaker 1: and you're going to see indexing take a bigger share
• 27:00
  Speaker 1: of global equity assets over the next decade. I think
• 27:03
  Speaker 1: it's almost inexorable. Um, it'll be inexorable progress. At what
• 27:08
  Speaker 1: point is it too big? Or is there just no
• 27:12
  Speaker 1: point at that? Do we ever see this at fifty
• 27:15
  Speaker 1: or seventy five percent? Think theoretically, then then you you
• 27:19
  Speaker 1: wonder where price discoveries, you're creating opportunities for stock price exactly.
• 27:25
  Speaker 1: I don't think there's a in the in the let's
• 27:27
  Speaker 1: say the next ten years. UM. I think it's going
• 27:31
  Speaker 1: to continue to grow. Whether it becomes I don't think
• 27:32
  Speaker 1: it becomes fifty percent of the US market, um, even
• 27:35
  Speaker 1: in that period, could be in the mutual fund market. Really,
• 27:39
  Speaker 1: that of which right now it's thirty the mutual fund market,
• 27:43
  Speaker 1: it's of US assets five percent of global assets. That
• 27:49
  Speaker 1: really that that's that's astounding. Let let me shift it
• 27:52
  Speaker 1: up on you a little bit and talk about valuation.
• 27:55
  Speaker 1: I keep hearing that stocks in the US are over priced,
• 27:58
  Speaker 1: But I've been hearing that now out for four or
• 28:00
  Speaker 1: five years, and the market doesn't seem to care. It
• 28:03
  Speaker 1: keeps going higher. Where are we in the world of
• 28:06
  Speaker 1: stock prices? So I would still say historically there on
• 28:09
  Speaker 1: the high end um and you know a lot of
• 28:13
  Speaker 1: stins get covered with essentially zero percent short rates. And
• 28:18
  Speaker 1: you know, our view is hasn't changed the last couple
• 28:22
  Speaker 1: of years. I've been pretty public about UM. If we
• 28:25
  Speaker 1: look out over ten years, we think the central tendency
• 28:28
  Speaker 1: is for equity returns to be a couple hundred basis
• 28:32
  Speaker 1: points below long term averages. That that's Bob Shiller's perspective.
• 28:36
  Speaker 1: You don't use CAPE as a timing tool. Just look
• 28:38
  Speaker 1: out ten years. It'll tell you if you have average
• 28:40
  Speaker 1: above or below. And that's kind of our philosophy as well, burying.
• 28:43
  Speaker 1: You know, we run a lot of sophisticated models to
• 28:46
  Speaker 1: get there, but that's where it ends up. And you know,
• 28:49
  Speaker 1: I think UM from a planning perspective, it's a it's
• 28:52
  Speaker 1: a it's it's a reasonable place the other sort of thing.
• 28:56
  Speaker 1: And UM, I can't remember if I've read this with
• 28:58
  Speaker 1: Schiller or not, but if you look at you know,
• 29:00
  Speaker 1: long term treasuries, you know, take the tenure and compare it. UH,
• 29:05
  Speaker 1: you know, a kind of typical equity risk premium, you
• 29:09
  Speaker 1: get to the same kind of a couple of percentage
• 29:11
  Speaker 1: points below long term averages. So I think there's a
• 29:14
  Speaker 1: lot of kind of convergence around that. The difference. I
• 29:19
  Speaker 1: just read this, and I don't know who I'm stealing
• 29:21
  Speaker 1: this from. UH. With bonds, rates could go negative, but
• 29:24
  Speaker 1: with yield on stocks you can't get to a negative
• 29:27
  Speaker 1: number because you're paying for the equity. That's fair. Let
• 29:30
  Speaker 1: let me mix it up with you again and talk
• 29:31
  Speaker 1: about politics. We're recording this not too long before the election,
• 29:37
  Speaker 1: the day before the last debate. What should the role
• 29:40
  Speaker 1: of politics be in the average investors portfolio? So, despite
• 29:47
  Speaker 1: all of the headlines, despite all of the noise, despite
• 29:50
  Speaker 1: all of the speculation, it really should play no role,
• 29:53
  Speaker 1: no role, what's role whatsoever. We've looked at this going
• 29:56
  Speaker 1: back to the eighteen fifties. There's no difference. But that's
• 30:01
  Speaker 1: measurable between having a Democrat president versus a Republican president.
• 30:05
  Speaker 1: There's no difference, you know, on how the House and
• 30:08
  Speaker 1: Senate work out, and so everything that goes on, it's
• 30:12
  Speaker 1: kind of speculation and what you typically see is some
• 30:16
  Speaker 1: dislocations right before and right after, and usually within about
• 30:20
  Speaker 1: a hundred days of a new administration being in you
• 30:23
  Speaker 1: get back to kind of what what we could call normal.
• 30:26
  Speaker 1: So it's it's noisy, you have some short term ebbs
• 30:29
  Speaker 1: and flows, and then if it does, I think there
• 30:33
  Speaker 1: is a bigger question out here. UM. And you know,
• 30:36
  Speaker 1: it always the risk of leading with my chin. UM.
• 30:39
  Speaker 1: You know, I would say, Um, there's some really good
• 30:41
  Speaker 1: work that's been done. You know, Harvard just issued their
• 30:45
  Speaker 1: US competitiveness study. UM. I think just two weeks ago,
• 30:48
  Speaker 1: Mike Porter and the Gang and we studied it pretty carefully,
• 30:52
  Speaker 1: and you know, it's key takeaway from me was the
• 30:58
  Speaker 1: political dysfunction that we're seeing is causing you know, a
• 31:03
  Speaker 1: real rise and uncertainty. And I think that uncertainty holds
• 31:06
  Speaker 1: back growth. And I think that's a more macro issue,
• 31:09
  Speaker 1: if you will, UM, probably somewhat divorced from what's going
• 31:13
  Speaker 1: to happen in the stock and bond markets in the
• 31:15
  Speaker 1: intermediate term. I can't say I disagree with with a
• 31:19
  Speaker 1: single a single word of that. UM. Let's talk a
• 31:22
  Speaker 1: little bit about buy backs. So we've seen a huge
• 31:25
  Speaker 1: run of buy backs the past five or six years.
• 31:28
  Speaker 1: Some people blame or credit those zero rture referencing UM,
• 31:34
  Speaker 1: but they're starting to tail off this year, they've dropped
• 31:37
  Speaker 1: a bit. What do you think the proper role of
• 31:40
  Speaker 1: buy back should be? Would you rather see dividends or
• 31:43
  Speaker 1: investment or what? What do you think about the general
• 31:46
  Speaker 1: buy back phenomena? So I think the buyback phenomena has
• 31:49
  Speaker 1: definitely UM gotten a lot of UM tail ones, if
• 31:55
  Speaker 1: you will, from the low rates I mean, and I
• 31:58
  Speaker 1: don't think levering up to increased buybacks is a good
• 32:01
  Speaker 1: thing in general. Now, some some companies have done that
• 32:04
  Speaker 1: because their cashes overseas and they don't wanna pay the
• 32:07
  Speaker 1: taxes on which is a whole broader issue UM. You know. Second,
• 32:11
  Speaker 1: I think the uncertainty that I talked about UM actually
• 32:15
  Speaker 1: has caused a lot of companies to be more conservative
• 32:19
  Speaker 1: with their cash. So they're either keeping it on the
• 32:21
  Speaker 1: balance sheet or doing what they can to keep their
• 32:23
  Speaker 1: stock price up. Because they they're so unsure about what
• 32:27
  Speaker 1: the future is, they don't want to invest in the business.
• 32:30
  Speaker 1: I would love to see us get away from that.
• 32:33
  Speaker 1: So let's talk a little bit about that. Overseas cash
• 32:37
  Speaker 1: the rumor, and we've heard it from both political parties,
• 32:41
  Speaker 1: they'll be a some sort of a deal for a
• 32:44
  Speaker 1: cash repatriation overseas capital repatriation, UH, in exchange for some
• 32:50
  Speaker 1: infrastructure spending and some reform of the corporate task code.
• 32:55
  Speaker 1: What what is that feasible, possible, desirable. I think it's feasible,
• 33:01
  Speaker 1: and I think directionally desirable. You know. Look, I think
• 33:04
  Speaker 1: we're our corporate tax code is I think a hindrance
• 33:08
  Speaker 1: to business here, you know. Um, And again I'm somebody
• 33:12
  Speaker 1: who wants to see the markets do really well, especially
• 33:15
  Speaker 1: here and in my home country. Is um, we we
• 33:19
  Speaker 1: should be doing. We should have economic policies in place
• 33:22
  Speaker 1: that actually our pro economic growth. And I think a
• 33:28
  Speaker 1: more simplified and um you know, probably a net net
• 33:33
  Speaker 1: lower corporate tax code would be UM beneficial in that regard.
• 33:37
  Speaker 1: I also think getting clarity around international you know, we're
• 33:41
  Speaker 1: we're an outlier, as you know, in the developed world
• 33:43
  Speaker 1: in terms of the way we treat um international earnings.
• 33:46
  Speaker 1: And I think we shouldn't be going forward. I think
• 33:49
  Speaker 1: it again, it's those kind of policies are actually restricting
• 33:54
  Speaker 1: good economic growth and long term thinking, and we should
• 33:57
  Speaker 1: be doing everything from a policy perspective. To clear that up.
• 34:00
  Speaker 1: The last point I'd make is, um, I I am
• 34:03
  Speaker 1: a believer that infrastructure probably needs improvement here, I don't
• 34:08
  Speaker 1: in fact's not probably it does you know? I travel
• 34:11
  Speaker 1: the world and nice in Europe and Asia, isn't it?
• 34:14
  Speaker 1: You know? You you see things? Um, you know, sometimes
• 34:17
  Speaker 1: I'd like to lift all of our lawmakers up and
• 34:20
  Speaker 1: take them on a global tour. I think in order
• 34:23
  Speaker 1: to promote you know, good economic growth, you need to
• 34:27
  Speaker 1: have some basic infrastructure in place. Um. You know. No
• 34:29
  Speaker 1: one wants to see um, higher government debt levels and
• 34:34
  Speaker 1: so forth. But I think there's got to be some
• 34:37
  Speaker 1: some balance here. Sure bandwidth in Asia, sell coverage in Europe,
• 34:43
  Speaker 1: and just the roads in Austria, Germany, Brussels and it's amazing.
• 34:47
  Speaker 1: And how about those airports around the world, spectacular, absolutely spectacular.
• 34:51
  Speaker 1: We've been speaking with Bill McNabb. He is CEO and
• 34:54
  Speaker 1: chairman of the Vanguard Group. If you would like to
• 34:57
  Speaker 1: learn more about bills the shop, you can go to
• 35:01
  Speaker 1: Vanguard dot com. There are regular bulletin's updates. The video
• 35:05
  Speaker 1: from the two thousand and nine crisis is up there
• 35:09
  Speaker 1: as well. And be sure and check out our prior conversation.
• 35:14
  Speaker 1: Be sure and stick around and listen to the podcast extras.
• 35:16
  Speaker 1: Will we keep the tape rolling and continue chatting about
• 35:19
  Speaker 1: all things investing. Check out my daily column on Bloomberg
• 35:24
  Speaker 1: View dot com or follow me on Twitter at rit Halts.
• 35:28
  Speaker 1: I'm Barry Hults. You've been listening to Masters in Business
• 35:31
  Speaker 1: on Bloomberg Radio, brought to you by Bank of America
• 35:35
  Speaker 1: Merrill Lynch committed to bringing higher finance to lower carbon
• 35:39
  Speaker 1: Named the most innovative investment bank for climate change and
• 35:42
  Speaker 1: sustainability by the banker. That's the power of Global Connections.
• 35:46
  Speaker 1: Bank of America North America member f D I C.
• 35:50
  Speaker 1: Welcome to the podcast portion Bill, Thank you so much
• 35:53
  Speaker 1: for doing this. I'm really excited about this. You you
• 35:56
  Speaker 1: said something earlier off air that I have to ask
• 36:00
  Speaker 1: you about. Um, we were talking about Lehman Brothers and
• 36:03
  Speaker 1: A I G. And your first day as CEO was
• 36:07
  Speaker 1: September fift oh nine. Is that right? First two weeks? Really? Yeah?
• 36:11
  Speaker 1: I became CEO August thirty one, and um, I was
• 36:15
  Speaker 1: actually standing on stage. Um where was this event? This
• 36:20
  Speaker 1: was in Washington, d C. And we had our largest
• 36:24
  Speaker 1: pension clients. There and I was giving my first talk
• 36:27
  Speaker 1: as CEO, and the whole emphasis was on long term
• 36:31
  Speaker 1: perspective and the need to tune out the noise and
• 36:34
  Speaker 1: as as the world is falling apart, I have a
• 36:36
  Speaker 1: separate soundtrack going through my head saying the world is
• 36:39
  Speaker 1: ending as I know at how my how, my reconciling.
• 36:41
  Speaker 1: I gotta looked past this. The really funny story Barry
• 36:45
  Speaker 1: was um our CEO. Gus Souder was due on stage
• 36:49
  Speaker 1: a couple of hours later, and um, we basically drafted
• 36:53
  Speaker 1: his UM replacement and said, you're gonna go give Gus
• 36:58
  Speaker 1: his talk, and we sent Gus to Valley Forge, you know,
• 37:02
  Speaker 1: back to the office is to um, you know, oversee
• 37:04
  Speaker 1: the trading desk and make sure everything was working the
• 37:07
  Speaker 1: way it should. And uh, there were like no rental cars.
• 37:10
  Speaker 1: So he ended up I think, cruising into Vanguard's campus
• 37:13
  Speaker 1: in a Mustang convertible. And if you knew Gusts, that
• 37:18
  Speaker 1: was not his style. Um, he was like a Pontiac
• 37:21
  Speaker 1: bonavel guy. So coming in, especially with the world melting down,
• 37:26
  Speaker 1: the the only story I know of that's similar to that. Uh.
• 37:30
  Speaker 1: Dave Rosenberg used to be chief economist at Meryl. He
• 37:34
  Speaker 1: was a government economist, like sleepy backwoods in in Canada,
• 37:38
  Speaker 1: and he goes to the private sector and his first
• 37:41
  Speaker 1: day at work is Black Monday crash, and he didn't
• 37:45
  Speaker 1: understand that anything was unusual. He's like, wow, it's so
• 37:48
  Speaker 1: exciting here. What are you talking about? The markets down? Oh,
• 37:53
  Speaker 1: this is not the normal. No, this is not how
• 37:56
  Speaker 1: it usually uh not how it usually goes well, you know,
• 38:00
  Speaker 1: actually mentioning my former colleague Gus Sauer, that was his
• 38:03
  Speaker 1: second week on the job, really and he was running
• 38:06
  Speaker 1: our then only index fund index and it had about
• 38:10
  Speaker 1: a billion six I think at the beginning of the
• 38:14
  Speaker 1: day and then you know, a billion two at the
• 38:17
  Speaker 1: end of the day. And he went home and his
• 38:19
  Speaker 1: wife said, do you still have a job? You just
• 38:23
  Speaker 1: lost a quarter of the fund and uh he said,
• 38:26
  Speaker 1: you know, I don't know. I have to go back
• 38:27
  Speaker 1: and see if my batch still works the next day.
• 38:29
  Speaker 1: And so you still you told the story that in
• 38:32
  Speaker 1: the midst of the crisis, you wanted to reassure your staff,
• 38:38
  Speaker 1: all the employee, the twelve thousand plus employees at Vanguard. Hey,
• 38:44
  Speaker 1: you can't be nervous. You can't sound like you're afraid
• 38:46
  Speaker 1: for your job, especially the people who are client facing.
• 38:50
  Speaker 1: What did you do to try and resolve that sort
• 38:53
  Speaker 1: of tension? So we we told people, don't worry about
• 38:55
  Speaker 1: your job. UM, we're not going to have any enforced
• 38:58
  Speaker 1: reductions where we want people to be there for the client.
• 39:02
  Speaker 1: And you know, we found um and and what we
• 39:05
  Speaker 1: told people we anticipated there'll be some areas where the
• 39:08
  Speaker 1: volume of work might decrease because the world was melting down,
• 39:12
  Speaker 1: and if that happened, we would pick people up and
• 39:14
  Speaker 1: we put them into areas that needed more help. And
• 39:17
  Speaker 1: we ended up moving several hundred people around. But you know,
• 39:21
  Speaker 1: it turned out to be a great thing for us
• 39:22
  Speaker 1: because the whole focus from that point on was what's
• 39:26
  Speaker 1: the client need? And I think all of us who
• 39:30
  Speaker 1: lived through that, um, you know, you're you certainly have
• 39:32
  Speaker 1: the battle scars, but you also have a lot of
• 39:34
  Speaker 1: pride in what we were able to achieve on behalf
• 39:36
  Speaker 1: of our clients, and I think that message went a
• 39:38
  Speaker 1: long way. So I was at the Vanguard campus in
• 39:42
  Speaker 1: Valley Forge when I met Jack Bogel, and it's a
• 39:46
  Speaker 1: really large place. It reminds me a little bit of
• 39:49
  Speaker 1: the Microsoft campus, which is just building after building after
• 39:52
  Speaker 1: building that. What first of all, what was the thinking like, um,
• 39:57
  Speaker 1: because you were there, even though you weren't CEO at
• 39:59
  Speaker 1: the time, to create this far away from Wall Street
• 40:03
  Speaker 1: space in the hills of Pennsylvania. Well again, I give
• 40:07
  Speaker 1: I give Jack Bogil a ton of credit for just
• 40:10
  Speaker 1: he he wanted there to be UM, you know, for
• 40:14
  Speaker 1: us not to be Wall Street. You know, it was
• 40:16
  Speaker 1: a very clear message from him. Actually, our predecessor, firm Wellington,
• 40:22
  Speaker 1: was headquartered in Philly. Jack moved them out to the suburbs,
• 40:25
  Speaker 1: you know he. I think part of it was tax reasons,
• 40:28
  Speaker 1: you know Jack, you know, Jack like to save a
• 40:30
  Speaker 1: buck for the investor. But I also think it was
• 40:34
  Speaker 1: you know, a place too in a sense, create separation
• 40:37
  Speaker 1: so that people weren't unduly influenced by short term h forces.
• 40:42
  Speaker 1: I think Jack Brennan, who succeeded him UM, built on
• 40:46
  Speaker 1: that UM. I remember interviewing with him, uh and I said, so,
• 40:50
  Speaker 1: you know, what's your view of the future here, you know,
• 40:52
  Speaker 1: what do you want this company to look like? And
• 40:55
  Speaker 1: he said, I'd like to I'd like us to have
• 40:57
  Speaker 1: Wall Street Smarts with Midwestern values. That's a good comment,
• 41:01
  Speaker 1: and you know it really it really resonated with me,
• 41:04
  Speaker 1: Barry and UM, I think the headquarters and the whole
• 41:07
  Speaker 1: campus atmosphere really reinforces that. Does does that create a
• 41:11
  Speaker 1: challenge at all in finding employees flanks that so you're
• 41:15
  Speaker 1: in you're in Philadelphia. Outside of Philadelphia and Pennsylvania, it's
• 41:19
  Speaker 1: from New York on a two hour drive. Maybe, UM,
• 41:23
  Speaker 1: does it make it difficult to find people? I would
• 41:26
  Speaker 1: imagine that part of the world, it's a different salary
• 41:29
  Speaker 1: scale than New York or San Francisco. So UM it
• 41:33
  Speaker 1: poses challenges occasionally, and and in the biggest places, if
• 41:36
  Speaker 1: we're trying to bring somebody in at a more senior
• 41:38
  Speaker 1: level from the outside. Sometimes the dual career thing. UM.
• 41:43
  Speaker 1: You know, in New York there's just so many more
• 41:44
  Speaker 1: opportunities and that that actually occasionally imposes a challenge. But
• 41:50
  Speaker 1: it's interesting once we get people to the area and
• 41:54
  Speaker 1: they see the quality of living, UM, it ends up
• 41:57
  Speaker 1: turning into a selling point. UM. I've just added two
• 42:00
  Speaker 1: new members to our executive team in the last UM
• 42:03
  Speaker 1: six months, and first time we've gone outside in a
• 42:07
  Speaker 1: long time, more than a decade. And that was their reaction.
• 42:12
  Speaker 1: Both their reactions when they came there like, Wow, it's
• 42:15
  Speaker 1: very kicked back, it's very chill. It doesn't feel like
• 42:18
  Speaker 1: a frenetic Wall Street firm. A campus is really a
• 42:22
  Speaker 1: good time. It feels like you run a college campus
• 42:24
  Speaker 1: and you know one of the UM I would say,
• 42:27
  Speaker 1: better to be lucky than smart aspects of where we are,
• 42:29
  Speaker 1: and lucky you should always acknowledge your luck. There are
• 42:32
  Speaker 1: a hundred and eight universities within two hours of our campus.
• 42:36
  Speaker 1: UM we produce in that region more masters and graduate
• 42:41
  Speaker 1: degrees per capita than any area in the country. I
• 42:44
  Speaker 1: think on undergraduate degrees, we were it's between us in Boston,
• 42:48
  Speaker 1: and so we got a lot of young people who
• 42:52
  Speaker 1: want to come and you know, they want to stay
• 42:54
  Speaker 1: close to home, and we're really the biggest UM you know,
• 42:58
  Speaker 1: financial services firm, you know, miles around. I read a
• 43:02
  Speaker 1: crazy statistic. I don't know if it's true, something like
• 43:06
  Speaker 1: of the c f as in the state of Pennsylvania
• 43:10
  Speaker 1: worked for Vanguard and Value. Is there any truth to that?
• 43:13
  Speaker 1: Is that? A? I think directionally, it's it's close. It's close.
• 43:17
  Speaker 1: I I know certified Financial Planners, which is a broader thing.
• 43:21
  Speaker 1: I think we have FI now of well, the whole
• 43:25
  Speaker 1: state in valley for that's pretty Uh, that's pretty fascinating. Um,
• 43:30
  Speaker 1: let's let me take a look at some of the
• 43:31
  Speaker 1: questions we might have skipped through before. So those are
• 43:36
  Speaker 1: my favorite questions. We really covered a decent amount of stuff.
• 43:40
  Speaker 1: We covered technology, we covered indexing, we covered E S
• 43:44
  Speaker 1: g um, we we actually discussed buy backs and all right,
• 43:52
  Speaker 1: let's keep going. There's there's so much stuff to do.
• 43:54
  Speaker 1: And and at this point, I'm going to remind people
• 43:57
  Speaker 1: if you haven't heard the first conversation Bill and I
• 44:00
  Speaker 1: add which was eighteen months ago, it's one of the
• 44:03
  Speaker 1: favorite masses in business we've had. We got tremendous feedback
• 44:06
  Speaker 1: about it. Really, there's almost no overlap between this and
• 44:09
  Speaker 1: that we've really covered very very You've done a good
• 44:12
  Speaker 1: job breaking that apart. I've tried, and you will also
• 44:15
  Speaker 1: make it easy. I know how to anticipate with you
• 44:17
  Speaker 1: know it. There are some people where I ask questions
• 44:19
  Speaker 1: and I have no idea what it's gonna be. I
• 44:22
  Speaker 1: have a general sense of what the vanguard philosophy is.
• 44:25
  Speaker 1: So when I asked Bill McNab about indexing, you're not
• 44:29
  Speaker 1: gonna come out and say, well, you know, I pretty
• 44:32
  Speaker 1: much know where you're gonna go with that. Um So,
• 44:35
  Speaker 1: let's let's talk a little bit about um the evidence
• 44:38
  Speaker 1: based conference that's coming up, because we were discussing that
• 44:41
  Speaker 1: off air, and and I think it's interesting. Um So,
• 44:45
  Speaker 1: coming up in November, we have an evidence based investing conference.
• 44:49
  Speaker 1: You're one of the speakers, and you said you thought
• 44:52
  Speaker 1: it was an interesting concept. Let's let's chat about that. Well,
• 44:57
  Speaker 1: I think one of the things that's really fascinating to
• 44:59
  Speaker 1: me is, um you spend a lot of time on data,
• 45:03
  Speaker 1: and we think data rule. You know, it's a there's
• 45:06
  Speaker 1: not just your gun instinct. You don't want to go
• 45:08
  Speaker 1: with how it feels at the moment. Look, you know
• 45:10
  Speaker 1: there's a place for judgment and instinct, there's no question
• 45:13
  Speaker 1: about that. But um, you know being well informed and
• 45:16
  Speaker 1: you know, to me as an analyst in particular, it's
• 45:19
  Speaker 1: you know, the second and third layers, if you will,
• 45:22
  Speaker 1: when you're peeling that proverbial onion where sometimes you really
• 45:25
  Speaker 1: get the insights you know we have. Um just as
• 45:29
  Speaker 1: an example, our chief economists has done some really cool
• 45:32
  Speaker 1: work on you know, what's going on from a growth perspective,
• 45:35
  Speaker 1: and he doesn't accept the we're in secular stagnation, and
• 45:41
  Speaker 1: he he talks a lot about the evolution of tasks
• 45:45
  Speaker 1: within occupations, and you know, we take some um comfort,
• 45:51
  Speaker 1: if you will, that actually there's been a lot of
• 45:53
  Speaker 1: change and it's been absorbed and there's a lot more coming.
• 45:58
  Speaker 1: And the question is how well prepared are we for that?
• 46:02
  Speaker 1: And you know, it goes back to one of our
• 46:04
  Speaker 1: earlier conversations around are there things sort of from a
• 46:08
  Speaker 1: policy standpoint that could be going on to help that.
• 46:12
  Speaker 1: You know, we think infrastructure, we think education, probably the
• 46:14
  Speaker 1: two big categories. But you know, he his his um
• 46:20
  Speaker 1: work is so data driven that it makes you think
• 46:24
  Speaker 1: a little bit differently about the problem. And that's what
• 46:27
  Speaker 1: I loved about your concept and I can't wait to
• 46:29
  Speaker 1: see it. The the idea behind it is, there are
• 46:33
  Speaker 1: all these things that over the past twenty years worth
• 46:36
  Speaker 1: of academic research we've learned to be true, and it
• 46:40
  Speaker 1: turns out that a lot of things that most of
• 46:43
  Speaker 1: Wall Street used to believe turns out to be false.
• 46:47
  Speaker 1: It looks good, it feels good, but in the real
• 46:49
  Speaker 1: world it doesn't work. So the idea was, hey, let's
• 46:52
  Speaker 1: create a way to have a group of people come
• 46:56
  Speaker 1: and discuss investing in markets strictly from what do we
• 47:00
  Speaker 1: know to be factually true? What do we know to
• 47:01
  Speaker 1: be have evidence behind it that demonstrates the veracity of
• 47:06
  Speaker 1: a certain investment philosophy. When I sum up Vanguard for people,
• 47:10
  Speaker 1: it's nothing matters more than costs. If you keep costs low,
• 47:14
  Speaker 1: everything else all other good things will follow. But that's
• 47:17
  Speaker 1: not the only truth that we've learned to be true
• 47:19
  Speaker 1: over the past couple of decades. And yet it's amazing.
• 47:23
  Speaker 1: How so this comes back to the four trillion advantguard
• 47:27
  Speaker 1: and the rise of indexing. And maybe this is a
• 47:30
  Speaker 1: question better asked of Dick Faylor or or Bob Schiller,
• 47:35
  Speaker 1: But why have these truths taken so long to infiltrate
• 47:41
  Speaker 1: the mind of the average investor or the institutional investor?
• 47:46
  Speaker 1: You know, I think it's because there is an irrational
• 47:50
  Speaker 1: expectation that we, you know, many people have that I know,
• 47:54
  Speaker 1: if I pay a little more attention, I can outperform,
• 47:59
  Speaker 1: you know, in the simplest way. You know, one of
• 48:02
  Speaker 1: the best lessons I learned, and you know, it was
• 48:05
  Speaker 1: kind of a blinding flash of the obvious. But I
• 48:06
  Speaker 1: often say that's all I'm good for these days, is
• 48:10
  Speaker 1: um average is not average. You know people used to
• 48:13
  Speaker 1: say indexing while you're just accepting average returns. Actually that's
• 48:17
  Speaker 1: not true. As you know, if you take the average
• 48:20
  Speaker 1: index funds return and compare it against the whole universe,
• 48:25
  Speaker 1: you're gonna you're gonna be in the top quartile from
• 48:27
  Speaker 1: a performance standpoint over any long period of time. So
• 48:30
  Speaker 1: you're not accept you're not actually accepting being average. You're
• 48:34
  Speaker 1: you're saying, I'm going to be in the top quartile guaranteed.
• 48:38
  Speaker 1: And you know it's things like that that aren't intuitive
• 48:41
  Speaker 1: to people, and you know you need to sort of
• 48:45
  Speaker 1: lay it out, you know. Um, it's it's interesting you
• 48:47
  Speaker 1: mentioned Taylor. Um, we are huge fans of their work. Um,
• 48:52
  Speaker 1: you know Thaylor and BERNARDSI on the four oh one
• 48:55
  Speaker 1: case space did some of the best work where they
• 48:57
  Speaker 1: took the behavioral principles and said, Okay, instead of using
• 49:02
  Speaker 1: it just to explain what's happening, let's use them actually
• 49:06
  Speaker 1: to help influence what should happen. And this is where
• 49:09
  Speaker 1: the idea of automatic enrollment, automatic escort everything he told them,
• 49:15
  Speaker 1: you know, changing the default so that it's a positive outcome.
• 49:19
  Speaker 1: One of the examples in his book that I found
• 49:20
  Speaker 1: fascinating is if you're default organ donor check is set
• 49:27
  Speaker 1: for um, yes, donate my organs. Nine plus percent of
• 49:31
  Speaker 1: people in certain European countries that have that default donate organs.
• 49:35
  Speaker 1: If you don't have that as a default, it's ten
• 49:38
  Speaker 1: or fifteen percent, and there's a giant waiting list. If
• 49:41
  Speaker 1: you change that default, suddenly they're on people dying past
• 49:46
  Speaker 1: there isn't a kidney available, or it's such a powerful thing. Um.
• 49:49
  Speaker 1: You know, we funded some work that UM they are
• 49:52
  Speaker 1: and BERNARDSI did in the late nineties, well it was
• 49:55
  Speaker 1: probably early two thousand's and it really led us to
• 49:58
  Speaker 1: get much more rest of about you know, the target
• 50:01
  Speaker 1: date phenomenon and these auto four O one K plans,
• 50:05
  Speaker 1: and we've seen better results, I mean, and again to
• 50:08
  Speaker 1: your evidence based principles, it's absolutely clear when you look
• 50:14
  Speaker 1: at the investment results of people who have followed you
• 50:18
  Speaker 1: know sort of UM where we've used behavioral finance to
• 50:21
  Speaker 1: shape the plan design and shape behavior versus leaving people
• 50:25
  Speaker 1: to their own And you can see it and it
• 50:29
  Speaker 1: boils down to dollars and cents. You have more money
• 50:31
  Speaker 1: if you if you follow these principles. So, so let's
• 50:34
  Speaker 1: talk about four oh one K and best practices UM,
• 50:38
  Speaker 1: and I want to make sure I don't keep you
• 50:40
  Speaker 1: here too long. We were pretty good on time UM
• 50:44
  Speaker 1: best practices. So default should be automatic, regular contributions? And
• 50:51
  Speaker 1: should it be a target date fund? Should it be? Uh?
• 50:55
  Speaker 1: What should the default be for the typical small companies
• 50:58
  Speaker 1: setting up before oh one K? So I think the
• 51:00
  Speaker 1: target date is the easiest one. I think any you know,
• 51:04
  Speaker 1: UM well diversified balanced option will suffice. But the beauty
• 51:07
  Speaker 1: about the target date fund is you can give you know,
• 51:10
  Speaker 1: you're a lot younger than I am, so you can
• 51:13
  Speaker 1: get that. You can you can get the equity exposure
• 51:15
  Speaker 1: you you need versus what I might need UM automatically,
• 51:19
  Speaker 1: you don't have to think about it. So that's why
• 51:22
  Speaker 1: I like the target date And you know, I've I've
• 51:25
  Speaker 1: made the point to you know, thousands of investors at
• 51:28
  Speaker 1: this point. I don't care what your income level is
• 51:31
  Speaker 1: in a four oh one K plan, whether you're making
• 51:34
  Speaker 1: dollars year or two d fifty dollars year. A target
• 51:36
  Speaker 1: date fund is a great solution for you if you
• 51:39
  Speaker 1: want to put more time and energy into it, and
• 51:41
  Speaker 1: you you. You know you you love this stuff. Great,
• 51:43
  Speaker 1: you can construct a portfolio and I don't think he'll
• 51:46
  Speaker 1: do any better. But you know, maybe it's something that
• 51:48
  Speaker 1: you get a lot of satisfaction out out of. But
• 51:51
  Speaker 1: I think this default thing is really powerful. And you know,
• 51:55
  Speaker 1: we're seeing almost every new investor who comes into the
• 51:58
  Speaker 1: system just stay with the default and just leave it
• 52:01
  Speaker 1: like that. So let's talk a little institutional. UM. I've
• 52:05
  Speaker 1: seen white papers from Vanguard about hey, a sixty forty
• 52:10
  Speaker 1: portfolio has beaten nearly all of the alternatives we've we
• 52:14
  Speaker 1: mentioned earlier, the hedge funds, the private equity, and the
• 52:17
  Speaker 1: venture capital. How does Vanguard present itself to the institutional community.
• 52:24
  Speaker 1: I've spoken at various state pension funds, and I'm astonished
• 52:28
  Speaker 1: at the level of let's just say, influence outside UM
• 52:35
  Speaker 1: consultants have. How do you get past that? How how
• 52:39
  Speaker 1: does that work when you're dealing with either a CalPERS
• 52:42
  Speaker 1: or and I you obviously don't want to speak to
• 52:45
  Speaker 1: any specific UM client, but a state pension fund or
• 52:50
  Speaker 1: a large retirement or endowment. So UM, there's no question
• 52:55
  Speaker 1: that there's lots of outside influences, whether it's the consultant community,
• 52:59
  Speaker 1: or other. You know, people circling around and complexity usually
• 53:05
  Speaker 1: is the friend. Um. You know, the more complex relationship is,
• 53:08
  Speaker 1: the more complex they want the solution to be. And
• 53:11
  Speaker 1: again we found simple works better in most cases. Um.
• 53:15
  Speaker 1: So you know, we just go out and we try
• 53:18
  Speaker 1: to tell the story and sometimes it doesn't work right away,
• 53:22
  Speaker 1: and you just keep sort of knocking at the door
• 53:24
  Speaker 1: and you just keep telling the story. In the four
• 53:27
  Speaker 1: oh one case base, it's worked really well. In the
• 53:30
  Speaker 1: endowments and foundations, we're finding in the sort of up
• 53:33
  Speaker 1: to mid you know, several hundred million dollars were Actually
• 53:36
  Speaker 1: the story is really resonating there the big some of
• 53:41
  Speaker 1: the big pension funds, especially in you know, the States
• 53:44
  Speaker 1: and so forth, we're having you know, we don't have
• 53:46
  Speaker 1: as much access there. Interesting though, you are starting to
• 53:50
  Speaker 1: see some of the messages that we've been promoting actually adopted.
• 53:54
  Speaker 1: I don't know if they got it from us or
• 53:56
  Speaker 1: they're coming up with it independently, but you're starting to
• 53:58
  Speaker 1: hear some of the same things. O, Hey, maybe we're
• 54:00
  Speaker 1: paying too much for investment management overall, and we need
• 54:04
  Speaker 1: to think about a different approach. What do you think
• 54:07
  Speaker 1: happens in that space over the next decade, because clearly
• 54:12
  Speaker 1: everything's in flux. New Jersey turned out to have a
• 54:16
  Speaker 1: horrific state run pension funds. Lots of money went to
• 54:19
  Speaker 1: hedge funds who coincidentally were donors to various political campaigns.
• 54:24
  Speaker 1: There's a ton of conflicts of interest. New York City
• 54:27
  Speaker 1: announced last year that they were re looking at their
• 54:31
  Speaker 1: alternative investments and what they're getting for their bucks. We've
• 54:34
  Speaker 1: seen that in California, We've seen that all over the country.
• 54:38
  Speaker 1: So so what does this dynamic mean going forward? Is
• 54:43
  Speaker 1: there going to be a big shift um? Is that
• 54:45
  Speaker 1: already underway? What what's happening in the institutional space? So
• 54:49
  Speaker 1: I think the shift is already underway, and some of
• 54:52
  Speaker 1: the leading UM plans are actually moving pretty quickly in
• 54:56
  Speaker 1: this regard. And you know, I think what you'll end
• 54:58
  Speaker 1: up seeing is a little bit more um bifurcation in
• 55:02
  Speaker 1: what they do. So they will keep some non traditional
• 55:06
  Speaker 1: but it will be more in the liquid space, where
• 55:10
  Speaker 1: again in theory it's less about the manager, although as
• 55:14
  Speaker 1: you and I know, maybe it's more about the manager
• 55:16
  Speaker 1: than anybody wants to admit. But you should get paid
• 55:19
  Speaker 1: more in some of those spaces, and then for the
• 55:23
  Speaker 1: liquid portion, you're going to see a real emphasis on cost,
• 55:26
  Speaker 1: I think, and you know, so you'll see more passive
• 55:28
  Speaker 1: investing overall. UM, My guess is that continues. UM. I
• 55:34
  Speaker 1: think the big wild card, and it is the most
• 55:37
  Speaker 1: interesting part of the equation is everybody is looking at
• 55:40
  Speaker 1: the expected returns and the equity and bond market and
• 55:45
  Speaker 1: they're looking at their own assumptions for their plans, and
• 55:48
  Speaker 1: there's a disconnect. You know, you'll you'll see some very prominent,
• 55:53
  Speaker 1: you know, um public plants that have you know, seven
• 55:56
  Speaker 1: and a half eight percent expected returns. I don't know
• 56:00
  Speaker 1: where that's going to come from. I I can answer
• 56:02
  Speaker 1: that question for you. They have an expected return of
• 56:05
  Speaker 1: five percent on the equity, two on the bonds. You
• 56:08
  Speaker 1: add five and two you end up with seven, although
• 56:11
  Speaker 1: any account will tell you the math doesn't really work
• 56:13
  Speaker 1: out that way. I've had that exact same conversation with people,
• 56:18
  Speaker 1: and the thing that I'm still wrestling with is, so
• 56:22
  Speaker 1: those are fair numbers. Two percent on fixed income, five
• 56:25
  Speaker 1: percent on equity, and yet on the hedge funds they
• 56:29
  Speaker 1: have expected returns of eight nine And I don't know
• 56:33
  Speaker 1: where these numbers came from other than someone wants explained
• 56:37
  Speaker 1: to me. Well, we're state entity, and if we have
• 56:40
  Speaker 1: a short form our pension in the pensions expected returns,
• 56:44
  Speaker 1: we have to actually add taxpayer dollar, so we'll crank
• 56:47
  Speaker 1: up the hedge fund portion of it. They can't crank
• 56:50
  Speaker 1: up the fixed income of a bond portion because everyone
• 56:52
  Speaker 1: would scream about that. But somehow alternatives are generating a
• 56:57
  Speaker 1: greater return at no greater risk than the asset asses
• 57:00
  Speaker 1: of trading. It doesn't make sense, but it allows them
• 57:03
  Speaker 1: and out to not It allows them to continually underfund
• 57:06
  Speaker 1: their obligations. And I think you're seeing um at least
• 57:11
  Speaker 1: I don't know if it's a new breed, but you
• 57:13
  Speaker 1: know you're starting to see some serious leaders in that
• 57:16
  Speaker 1: space say wait a minute, we've got to we've got
• 57:18
  Speaker 1: to re examine what's been going on. So I'll be
• 57:21
  Speaker 1: the optimists and say that people are going to start
• 57:23
  Speaker 1: to get their hands around it, but it's gonna it
• 57:26
  Speaker 1: will highlight that there's gonna be some there's some real
• 57:29
  Speaker 1: gaps here in in terms of what's been promised and
• 57:31
  Speaker 1: what's actually funded and how that plays out politically. UM,
• 57:36
  Speaker 1: I'll leave it to you speculate on. I will before
• 57:40
  Speaker 1: I get to my my favorite questions. I wanted to
• 57:43
  Speaker 1: ask you. Is there anything I didn't ask you or
• 57:46
  Speaker 1: any topics you think are worth mentioning that we we
• 57:50
  Speaker 1: haven't discussed on air. We've covered almost everything we really have. Um, yeah,
• 57:56
  Speaker 1: I think we've hit it. So so let's jump to
• 57:58
  Speaker 1: our our favorite questions. Um, so you joined Vanguard thirty
• 58:05
  Speaker 1: years ago. What were you doing before Vanguard? So? I
• 58:08
  Speaker 1: had had two jobs before Vanguard. My first job out
• 58:11
  Speaker 1: of college was teaching first year of Latin school. Of course,
• 58:15
  Speaker 1: that leads right to asset management totally in coaching three sports. Um,
• 58:19
  Speaker 1: I was it was nine. It was pretty deep procession.
• 58:23
  Speaker 1: Unemployment was high. I was happy to have a job
• 58:26
  Speaker 1: and and my parents were happy to have me off
• 58:29
  Speaker 1: the doll and it worked out, um and I loved it.
• 58:32
  Speaker 1: It was a great couple of years. And then I
• 58:34
  Speaker 1: went back to business school. My first job out of
• 58:37
  Speaker 1: business school was at what's now JP Morgan Chase. It
• 58:40
  Speaker 1: was the Chase part, and I did a lot of
• 58:42
  Speaker 1: different things. But the last thing I did was really
• 58:45
  Speaker 1: work on a lot of highly leveraged transactions, actually undoing
• 58:49
  Speaker 1: some in in for the most part, but you was
• 58:53
  Speaker 1: with us. So that was eight three day eighty six
• 58:57
  Speaker 1: and I got hired by Vanguard be a guaranteed investment
• 59:02
  Speaker 1: contract product manager. What does that mean? I had no
• 59:06
  Speaker 1: idea when they were interviewing me. Um. Guaranteed investment contracts
• 59:09
  Speaker 1: were a fixed income instrument issued by insurance companies as
• 59:14
  Speaker 1: an investment option in four oh one K plans. And
• 59:17
  Speaker 1: we were just getting in the four oh one K
• 59:19
  Speaker 1: business and UM, you know, we we wanted to take
• 59:23
  Speaker 1: a little bit more sophisticated approach. I think we had
• 59:25
  Speaker 1: a couple hundred million dollars in the program at the time.
• 59:29
  Speaker 1: I'm pretty sure I got hired because Jack Brennan was
• 59:33
  Speaker 1: intrigued by the credit background I had, and it wasn't
• 59:37
  Speaker 1: convinced that we had analyzed the insurance industry properly for
• 59:40
  Speaker 1: the g I C s we were buying, and so
• 59:43
  Speaker 1: I think that had something to do with it. Um.
• 59:46
  Speaker 1: I'm not sure why else, because nothing in my background
• 59:49
  Speaker 1: really pointed toward that, but turned out Again, you'll hear
• 59:53
  Speaker 1: me use the phrase over and over better to be
• 59:54
  Speaker 1: lucky and smart Sometimes I totally agree. So you mentioned
• 59:57
  Speaker 1: Jack Brennan, who were some of your ment so UM.
• 1:00:01
  Speaker 1: You know Jack, certainly before I worked directly for him,
• 1:00:04
  Speaker 1: with somebody I would go to for um, just advice
• 1:00:07
  Speaker 1: around career, family, UM, how to think about business problems.
• 1:00:11
  Speaker 1: Jack was one of the great UM strategic thinkers I
• 1:00:14
  Speaker 1: think of the entire industry during his his time. And
• 1:00:20
  Speaker 1: you know, he was just a really good sounding board
• 1:00:22
  Speaker 1: for a lot of things. So he clearly was a mentor.
• 1:00:25
  Speaker 1: We also, UM, I became pretty friendly with Charlie Ellis
• 1:00:29
  Speaker 1: UM before he came on our board. Um, Charlie was
• 1:00:32
  Speaker 1: running Greenwich Research. You know, I really count Charlie as
• 1:00:36
  Speaker 1: somebody that I learned a ton from. You know, his
• 1:00:39
  Speaker 1: book is arguably one of the two or three great
• 1:00:42
  Speaker 1: his first book, you know, Winning the Losers Game, one
• 1:00:45
  Speaker 1: of the two or three greatest things I ever written
• 1:00:47
  Speaker 1: about investing. And um, Charlie gave me really really good
• 1:00:51
  Speaker 1: advice UM when I took over running the four oh
• 1:00:54
  Speaker 1: one K business, and he kept focusing in and don't
• 1:00:59
  Speaker 1: worry abou growth. Worry about the quality of what you're
• 1:01:03
  Speaker 1: doing for your existing clientele, and growth will take care
• 1:01:05
  Speaker 1: of itself. And you know, of course Greenwich did sort
• 1:01:08
  Speaker 1: of an assessment of who was the highest quality provider,
• 1:01:10
  Speaker 1: and I don't forget coming when he came in one
• 1:01:13
  Speaker 1: day and he said, hey, congratulations, you've won UM first time.
• 1:01:18
  Speaker 1: And he goes, now you're the hunted, so what are
• 1:01:20
  Speaker 1: you gonna do? And you know it just it's a
• 1:01:23
  Speaker 1: great way to describe that, isn't it. Yeah, and you
• 1:01:25
  Speaker 1: know it just so he was a really positive mentor.
• 1:01:29
  Speaker 1: But by the way, for people who may not know
• 1:01:31
  Speaker 1: who Charlie Ellis is. In addition to being on the
• 1:01:34
  Speaker 1: Vanguard Board, he worked with Swenson on the Yale and
• 1:01:37
  Speaker 1: down and arguably the most successful endowmen in history. Harvard's
• 1:01:42
  Speaker 1: is bigger, but their performance has been appreciably worse. And
• 1:01:46
  Speaker 1: Greenwich Associates were really a huge, huge institutional advisor for
• 1:01:52
  Speaker 1: many years. Absolutely um legendary, legendary firm and really changed
• 1:01:57
  Speaker 1: the nature of how people provided services in the institutional space.
• 1:02:02
  Speaker 1: And then you know, I have a couple of unconventional mentors. UM.
• 1:02:05
  Speaker 1: I have a an individual he's eighties six now. He's
• 1:02:10
  Speaker 1: like a second father to me. He was my rowing
• 1:02:13
  Speaker 1: coach um when I go out of college, and while
• 1:02:16
  Speaker 1: I was teaching, he and I were coaches together. But
• 1:02:19
  Speaker 1: he was also my coach because I was continuing to compete,
• 1:02:23
  Speaker 1: and I actually owe him a lot. Um. What's his name?
• 1:02:26
  Speaker 1: His name is Jim Barker, and we still talk a lot.
• 1:02:30
  Speaker 1: And I went to him when I was interviewing at Vanguard,
• 1:02:34
  Speaker 1: and Jim lives in Roxborough, Um, sort of in a
• 1:02:38
  Speaker 1: row house in Philly, and uh we went. We got
• 1:02:41
  Speaker 1: a couple of cheese steaks at what I considered to
• 1:02:43
  Speaker 1: be the best cheese steak place in all Philadelphia, delessandros
• 1:02:46
  Speaker 1: and uh six pack of beer and talking about life.
• 1:02:49
  Speaker 1: And he was the one who really said, you gotta
• 1:02:52
  Speaker 1: go someplace where your values and your passion match up
• 1:02:57
  Speaker 1: with what the organizations trying to do. And he said,
• 1:03:01
  Speaker 1: you know, you've got choice. He said, that's what it
• 1:03:03
  Speaker 1: should come down to. And you know, it was that
• 1:03:05
  Speaker 1: it was sort of the final thing I needed to,
• 1:03:07
  Speaker 1: you know, like I got to do this because you
• 1:03:09
  Speaker 1: know Vanguard there was something special about it thirty years ago. Well,
• 1:03:13
  Speaker 1: you'll have to let us know if it works out.
• 1:03:15
  Speaker 1: I'm I'm still I'm still striving there. Um, still working
• 1:03:18
  Speaker 1: at it, Barry, I'm gonna guess it worked out, okay. Um,
• 1:03:22
  Speaker 1: So let's talk about UM investors that influenced you, be
• 1:03:27
  Speaker 1: CAUSISTL will lead to a few people other than Charlie Alice,
• 1:03:31
  Speaker 1: who clearly is a tremendously influential investor. Who else do
• 1:03:36
  Speaker 1: you think influenced your your approach to thinking about the
• 1:03:40
  Speaker 1: world of investing. So, you know, it's interesting, you know,
• 1:03:44
  Speaker 1: obviously I have to say Jack Bogol just you know,
• 1:03:46
  Speaker 1: his his just the his analytic approach and the way
• 1:03:51
  Speaker 1: he tried to simplify everything was really powerful. We had
• 1:03:55
  Speaker 1: a really great um sort of um duo in we
• 1:04:00
  Speaker 1: had Jack as UM chairman and CEO, and you know,
• 1:04:03
  Speaker 1: Keith Thinker on all this. We also had Bert Malkiel,
• 1:04:07
  Speaker 1: great Princeton economists on our board, and I got some
• 1:04:10
  Speaker 1: pretty early exposure to the board. And you know Bert's
• 1:04:12
  Speaker 1: again random Walked down Wall Street one of the greatest
• 1:04:15
  Speaker 1: treatise ever written. One point eight million I'm sorry, is it?
• 1:04:18
  Speaker 1: It's in the eleventh printing. It's a million and a
• 1:04:21
  Speaker 1: half copies in prints. So you know, so I certainly
• 1:04:24
  Speaker 1: have to give Bert, you know, a lot of credit.
• 1:04:27
  Speaker 1: And then, um, this may surprise you, um, given how
• 1:04:31
  Speaker 1: important I think indexing is. But there have been a
• 1:04:34
  Speaker 1: couple of active managers who I had exposure to fairly
• 1:04:38
  Speaker 1: early on, and I just liked the way they think,
• 1:04:42
  Speaker 1: and I actually think it's very compatible with the way
• 1:04:45
  Speaker 1: I described the power of indexing and the great John
• 1:04:48
  Speaker 1: neff Um, who ran Windsor Fund for thirty years and
• 1:04:52
  Speaker 1: one of the best track records ever for an active manager.
• 1:04:56
  Speaker 1: The thing about John that was so powerful and you know,
• 1:04:59
  Speaker 1: you're evidence it's based investing makes me think about this.
• 1:05:02
  Speaker 1: John knew the companies better than the companies knew themselves.
• 1:05:05
  Speaker 1: And I can remember sitting in sessions where he would
• 1:05:07
  Speaker 1: be going through the details of what was happening at
• 1:05:10
  Speaker 1: a large, you know, a Fortune fifty company and sitting
• 1:05:13
  Speaker 1: across from the management teams and they had no idea
• 1:05:15
  Speaker 1: what he was talking about, and he was so much
• 1:05:17
  Speaker 1: more in depth. And then Um, there was another fellow
• 1:05:21
  Speaker 1: at Wellington who sort of flew the public radar. But
• 1:05:26
  Speaker 1: when you look at his track record at Owens, who
• 1:05:29
  Speaker 1: ran our healthcare fund and he since handed it over
• 1:05:32
  Speaker 1: to his successor, who has done a phenomenal job, Gene Hines.
• 1:05:37
  Speaker 1: But Ed and his team, you know that healthcare fund
• 1:05:40
  Speaker 1: for thirty years. When Ed retired, no fund in the
• 1:05:43
  Speaker 1: industry had a better track record. Really it was at
• 1:05:47
  Speaker 1: the time four basis points ahead of the next best
• 1:05:51
  Speaker 1: fund in the industry. And the thing when did retire,
• 1:05:55
  Speaker 1: so about three years ago now. And the thing that
• 1:05:59
  Speaker 1: was so impressed about Ed and John was their knowledge
• 1:06:02
  Speaker 1: of their companies was deep. But even as active managers,
• 1:06:06
  Speaker 1: they were very much into long term value creation. So
• 1:06:10
  Speaker 1: you look at their portfolio turnover and it was really
• 1:06:12
  Speaker 1: low compared to other active funds, and they actually took
• 1:06:16
  Speaker 1: pretty concentrated bets. And you know, I've come to believe
• 1:06:20
  Speaker 1: that if an active manager is going to add value,
• 1:06:23
  Speaker 1: it's probably going to be by being very different. So
• 1:06:26
  Speaker 1: each of them would have of their portfolio in their
• 1:06:30
  Speaker 1: top ten names, and you know, coupled with an index
• 1:06:34
  Speaker 1: as a base, that was actually a pretty good way
• 1:06:36
  Speaker 1: to invest. So that that raises a question not from
• 1:06:40
  Speaker 1: our our favorite lists, but we talked earlier about recruiting.
• 1:06:44
  Speaker 1: You you get rock stars like that who can jump
• 1:06:47
  Speaker 1: ship to another place and and maybe pick up a
• 1:06:50
  Speaker 1: bunch of stock options and make more money. How does
• 1:06:53
  Speaker 1: Vanguard retain their top talent like that? Well, so, you know,
• 1:06:57
  Speaker 1: interesting on the active management side, some of those folks
• 1:07:00
  Speaker 1: I UM reference, they don't actually work for us. They
• 1:07:03
  Speaker 1: outside manager outside managers and so you know, they work
• 1:07:07
  Speaker 1: for Wellington or for prime Cap or you know any
• 1:07:09
  Speaker 1: of the other firms around the world. Bailey Gifford in Scotland. Um.
• 1:07:12
  Speaker 1: And it's a pretty unique arrangement, isn't it. For a
• 1:07:14
  Speaker 1: big mutual funds. We're the only ones who employ this
• 1:07:18
  Speaker 1: strategy as extensively as we do. And really all of
• 1:07:21
  Speaker 1: our active equity, with a couple of very minor exceptions,
• 1:07:25
  Speaker 1: is run by external firms and we scour the world
• 1:07:28
  Speaker 1: for the best firms. And today I think we have
• 1:07:30
  Speaker 1: about seventy five different mandates run by thirty firms and
• 1:07:34
  Speaker 1: it's been a really um it's been a really good
• 1:07:36
  Speaker 1: way to approach active and we find people who are
• 1:07:40
  Speaker 1: aligned with us in terms of low cost and long
• 1:07:43
  Speaker 1: term view and so forth. Um, you know, in terms
• 1:07:46
  Speaker 1: of the broader question though, how do we retain talent? Um? Yeah,
• 1:07:50
  Speaker 1: I'd say there are a couple of things. One, you know,
• 1:07:52
  Speaker 1: we we do compensate people well, I mean in our
• 1:07:55
  Speaker 1: own firm, our fixed income teams are our index teams
• 1:07:58
  Speaker 1: are client service people. You know, we pay struct attention
• 1:08:01
  Speaker 1: to what's going on in the industry, but you you're
• 1:08:03
  Speaker 1: reputed at the CEO level down. Look, if Jamie Diamond
• 1:08:07
  Speaker 1: would leave and you would say, hey, knock knocked, sure,
• 1:08:11
  Speaker 1: I'll run JP Morgan for you. I imagine JP Morgan
• 1:08:14
  Speaker 1: with its stock options is a multiple of what you're not.
• 1:08:20
  Speaker 1: Not that you're underpaid advantguard. I'm sure it's a reasonable
• 1:08:23
  Speaker 1: check each week, but when you go to any of
• 1:08:25
  Speaker 1: the publicly traded Goldman, Sachs, Morgan, Stanley, those are crazy numbers.
• 1:08:31
  Speaker 1: So it gets to the question how much is enough? Right?
• 1:08:34
  Speaker 1: So you know, at the end of the day, um,
• 1:08:36
  Speaker 1: I think the kind of people we've been able to track. Look,
• 1:08:38
  Speaker 1: we want people to make a good living, We want
• 1:08:40
  Speaker 1: people to be able to take care of their families
• 1:08:42
  Speaker 1: and you know, support whatever. It doesn't have to be
• 1:08:45
  Speaker 1: a hundred million dollars. It doesn't. And you know, we
• 1:08:48
  Speaker 1: want people who are mission based and the thing. And
• 1:08:51
  Speaker 1: you know you've been to the campus, you felt it.
• 1:08:53
  Speaker 1: I mean, everybody there is there because they really believe
• 1:08:56
  Speaker 1: in the mission of the firm. You don't feel that
• 1:08:59
  Speaker 1: there dripping with excess. And I've been to other places
• 1:09:02
  Speaker 1: that you're like, what do you think that costs? On? Yeah,
• 1:09:06
  Speaker 1: I had. There's a funny story. Um somebody, um, a
• 1:09:10
  Speaker 1: reporter came to my office a couple of weeks after
• 1:09:12
  Speaker 1: I had become CEO, and she sort of looked around
• 1:09:15
  Speaker 1: and she said, this isn't really what I expected. And
• 1:09:17
  Speaker 1: she had been somewhere else where I think they had
• 1:09:19
  Speaker 1: spent a million dollars on art or whatever, and she said, well,
• 1:09:22
  Speaker 1: how much did that print costs? And then and I said, well,
• 1:09:25
  Speaker 1: it's a print. It was fifteen bucks. And then we
• 1:09:26
  Speaker 1: got it reframed and you know, and a lot of
• 1:09:29
  Speaker 1: the art was actually went all the way back to
• 1:09:32
  Speaker 1: Jack Bogel and Jack Brennaday's. You know, it was just
• 1:09:35
  Speaker 1: stuff we had. Look we we we we remind ourselves.
• 1:09:39
  Speaker 1: And I know it sounds really Polly Anishberry, but it's
• 1:09:41
  Speaker 1: not our money. You know. The question always I don't
• 1:09:44
  Speaker 1: think that there's a there's a there's a question. I
• 1:09:48
  Speaker 1: get asked a lot out there. People say, what's it
• 1:09:50
  Speaker 1: like to you know, be have three and a half
• 1:09:52
  Speaker 1: trillion or four trillion. I always like, I have no idea.
• 1:09:55
  Speaker 1: It's not my money, it's you know, we we we
• 1:09:57
  Speaker 1: go to bed every night. Actually, I think about the
• 1:10:00
  Speaker 1: responsibility that's been entrusted with us, and I think that's
• 1:10:04
  Speaker 1: why the people are there. You know, you look at
• 1:10:06
  Speaker 1: our senior team and people. The tenure of our organization
• 1:10:10
  Speaker 1: is incredible. Um. You know, we have half the company
• 1:10:14
  Speaker 1: has been in Vanguard more than ten years. And I
• 1:10:16
  Speaker 1: think I don't have this stat right off the top
• 1:10:18
  Speaker 1: of my head, but I'm going to guess it's at
• 1:10:20
  Speaker 1: least the company has been more than twenty And that
• 1:10:24
  Speaker 1: belief in what we do is really palpable. And you
• 1:10:27
  Speaker 1: know it's and then you know, you make it get
• 1:10:29
  Speaker 1: pay well, you make it a really good environment, and
• 1:10:32
  Speaker 1: you know, we try to treat people really well. There's
• 1:10:34
  Speaker 1: no one this was Jack Bogel is um you know, um,
• 1:10:41
  Speaker 1: no problem, you know, in a sense differentiating by how
• 1:10:45
  Speaker 1: you know people's contributions are to the firm. But from
• 1:10:48
  Speaker 1: a behavior standpoint, you know, Jack never cared what level
• 1:10:53
  Speaker 1: you were. You treated everybody with respect. And I remember hearing,
• 1:10:57
  Speaker 1: you know, learning that like my first three days, they're
• 1:10:59
  Speaker 1: just watching what was going on, and that really again,
• 1:11:03
  Speaker 1: for a lot of us, that's what gets us up
• 1:11:05
  Speaker 1: in the morning. There's a firm culture. It's still there
• 1:11:07
  Speaker 1: and it hasn't attenuated yet. Uh, you know, we work
• 1:11:10
  Speaker 1: really hard at that. All right, back to our favorite questions,
• 1:11:13
  Speaker 1: Let's talk about favorite books. You You mentioned Winning The
• 1:11:16
  Speaker 1: Losers Game by Charlie Ellis and Random Walk Down Wall
• 1:11:21
  Speaker 1: Street by Burton Malkiel. By the way, two previous guests
• 1:11:25
  Speaker 1: on the show, what are some of your other favorite books? Fiction,
• 1:11:28
  Speaker 1: non fiction, finance related or not. So I'll give you two.
• 1:11:30
  Speaker 1: Finance one, so I can't not mention bail out nations
• 1:11:33
  Speaker 1: can skip everybody knows, but everybody knows that my so
• 1:11:37
  Speaker 1: it's but it's you know again, you captured a lot.
• 1:11:40
  Speaker 1: There's another book that I think does um it's it's
• 1:11:43
  Speaker 1: less extensive than yours, but gives everybody everything they need
• 1:11:47
  Speaker 1: to know about that here it's The Lost Bank by
• 1:11:49
  Speaker 1: Kirsten Grind The Loss Bank. It's about Washington Mutual and
• 1:11:56
  Speaker 1: it's a fantastic insight into what corporate culture, how corporate
• 1:12:02
  Speaker 1: culture can go awry. L O s t The Lost
• 1:12:05
  Speaker 1: Lost Bank. Um it's it's really a good read. You
• 1:12:09
  Speaker 1: you'd enjoyed, especially given what you've done. You know. On
• 1:12:12
  Speaker 1: the fiction side, So I tend to be accused of
• 1:12:14
  Speaker 1: being very eclectic. Um. I have a huge science fiction collection. Too,
• 1:12:20
  Speaker 1: and what do you like? Well, I'm i'm so. I
• 1:12:23
  Speaker 1: love all the classic guys. So I've read everything. I
• 1:12:28
  Speaker 1: just reread the Lasnie on a plane flight. Um? Which one?
• 1:12:32
  Speaker 1: This Immortal which is favorite classic? Um Dune obviously, Hyperion
• 1:12:38
  Speaker 1: by Dan Simmons one of my favorites. I love all
• 1:12:41
  Speaker 1: the cyberpunk guys. Neil Stevenson Um in particular, and he's
• 1:12:45
  Speaker 1: got a new great book out called Seven Eves. I
• 1:12:50
  Speaker 1: read this summer while I was on vacation and it
• 1:12:54
  Speaker 1: was fantastic. So. Um, that's kind of how I amuse
• 1:12:57
  Speaker 1: myself in in the fiction world. How far into the
• 1:13:00
  Speaker 1: cyberpunk do you go? You William Gibson or so you know?
• 1:13:02
  Speaker 1: I think Gibson? Um, you know Neuromanswers one of my
• 1:13:06
  Speaker 1: top books. Mona Lisa Overdrive one of my favorite books. Um,
• 1:13:11
  Speaker 1: So I I like those guys. Um you know? To me? Um,
• 1:13:14
  Speaker 1: how abstract do you get with with science fiction? You
• 1:13:18
  Speaker 1: can test me, Philip K. Dick, I've read them all. Really,
• 1:13:21
  Speaker 1: you haven't read you Bick. I've got you Buck. I
• 1:13:24
  Speaker 1: haven't read you Bick. So you're right, I read you Bick,
• 1:13:26
  Speaker 1: and I'm the only person I know and I started
• 1:13:29
  Speaker 1: you Buck, and I couldn't figure it out. It's it's
• 1:13:31
  Speaker 1: the spray. It's um. People don't realize. Decades after he
• 1:13:36
  Speaker 1: passed away, his books became these Hollywood Black Blade Runner
• 1:13:41
  Speaker 1: was based on a short story Do Androids Dream of
• 1:13:44
  Speaker 1: Electric Shape? Total Recall was based on We Can Remember
• 1:13:47
  Speaker 1: It for your Wholesale. So if when someone tells me
• 1:13:50
  Speaker 1: they've read Philip K. Dick, I know that they've gone
• 1:13:53
  Speaker 1: through the whole genre. And one of the best, um
• 1:13:56
  Speaker 1: new TV series on Netflix or is an Amazon Pro
• 1:14:00
  Speaker 1: It's Amazon Prime and it's The Man in the High Castle.
• 1:14:03
  Speaker 1: They did it. It's a pretty good treatment. Um, I'm
• 1:14:06
  Speaker 1: in the first I'm halfway through the first season. It's
• 1:14:08
  Speaker 1: it's a it's good. It's a good extrapolation and it
• 1:14:11
  Speaker 1: looks great. Yeah, it makes me think of what I read. So, yeah,
• 1:14:14
  Speaker 1: I love all that stuff. Yeah that that was really
• 1:14:16
  Speaker 1: a fascinating book. A talk show host awakes one morning
• 1:14:19
  Speaker 1: to discover that America has lost World War Two and
• 1:14:23
  Speaker 1: the Japanese and Germans have split up America and he
• 1:14:26
  Speaker 1: can't figure out why. So they haven't quite gone that
• 1:14:30
  Speaker 1: that route. But in the book, it's this Dick loved
• 1:14:34
  Speaker 1: alternative levels of reality. It's a so so I I have.
• 1:14:39
  Speaker 1: I like to say I misspent my youth and my
• 1:14:43
  Speaker 1: adulthood reading a lot of science fiction. But you know,
• 1:14:46
  Speaker 1: for me it's actually very stimulating because things like and
• 1:14:49
  Speaker 1: you know there's cyberspace, um, virtual reality. This has been
• 1:14:53
  Speaker 1: part of my world for twenty years. So what technology
• 1:14:57
  Speaker 1: is always fifty years behind science fiction writer? And so
• 1:15:00
  Speaker 1: like you could, you could look at every major innovation
• 1:15:03
  Speaker 1: and somebody has was writing about it half a century ago. Yeah.
• 1:15:06
  Speaker 1: I'm now about to start a new book on um
• 1:15:11
  Speaker 1: that's about the X Prize and you know, the first
• 1:15:14
  Speaker 1: group to win the X Prize in in you know,
• 1:15:16
  Speaker 1: was the space launch of the driverless car Space Launch,
• 1:15:20
  Speaker 1: And so I'm really interested in what's the name of
• 1:15:23
  Speaker 1: the book? You know, I'm drawn a blank now. It
• 1:15:25
  Speaker 1: just came out and um, it's literally it just showed
• 1:15:30
  Speaker 1: up on my doorstep. And before I so rudely interrupted
• 1:15:33
  Speaker 1: you talking about science fiction, what was the other fiction
• 1:15:37
  Speaker 1: that you were going to reference? Now? I I think
• 1:15:39
  Speaker 1: that's the where I spend most of my fiction, and
• 1:15:42
  Speaker 1: then I do a decent amount of history for nonfiction. Um,
• 1:15:46
  Speaker 1: what have you read recently liked. So my my favorite
• 1:15:50
  Speaker 1: one in the last couple of years is a book
• 1:15:51
  Speaker 1: called Valiant Ambition UM by Natt Philbrick. Valiant Ambition, and
• 1:15:58
  Speaker 1: it's it's basically a follow up to a book he
• 1:16:01
  Speaker 1: did a couple of years ago called Bunker Hill, and
• 1:16:03
  Speaker 1: it's the second year of the Revolutionary War and it's
• 1:16:07
  Speaker 1: really um he he focuses on Washington and Benedictdonald. You
• 1:16:12
  Speaker 1: get a really deeper appreciation for what led to Benedict
• 1:16:15
  Speaker 1: Donald's treason, and it's it's part. It's a story I
• 1:16:19
  Speaker 1: didn't know, so it was really fasting. That's interesting. And
• 1:16:21
  Speaker 1: if memory serves you liked McCullough's Wright Brothers. I love
• 1:16:26
  Speaker 1: Wright Brothers. You loved it, can I tell you it's
• 1:16:28
  Speaker 1: one of those books that have been in my queue
• 1:16:31
  Speaker 1: and I just haven't gotten to it. When when you
• 1:16:33
  Speaker 1: read it, you're so inspired by UM. A lot of
• 1:16:37
  Speaker 1: people love that book. So, you know what what's so
• 1:16:40
  Speaker 1: interesting to me is these guys had a vision and
• 1:16:44
  Speaker 1: they didn't let anything get in their way and they
• 1:16:47
  Speaker 1: just kept pursuing it. And the discipline and the passion, um.
• 1:16:52
  Speaker 1: You know, it's everything I love. You know, it's the
• 1:16:53
  Speaker 1: American Dream writ large. All right, let's um, let's keep
• 1:16:57
  Speaker 1: going because I know I only have you for a
• 1:16:59
  Speaker 1: few more. It's um. So there's a new question I've
• 1:17:03
  Speaker 1: added to my regular list at the request of of listeners.
• 1:17:08
  Speaker 1: What is it that you do to keep mentally and
• 1:17:12
  Speaker 1: or physically fit? What do you do to relax outside
• 1:17:15
  Speaker 1: of the office. So I I have a background in
• 1:17:19
  Speaker 1: endurance sports, and in particular and rowing. Um, you know,
• 1:17:22
  Speaker 1: I took up rowing in college, and I could argue
• 1:17:25
  Speaker 1: that it was taking up rowing that's led to everything.
• 1:17:28
  Speaker 1: You know it really it led me to take the
• 1:17:31
  Speaker 1: teaching job in Philadelphia so I could continue rowing. It
• 1:17:35
  Speaker 1: brought me back to Philadelphia. Um. You know, this coach
• 1:17:38
  Speaker 1: I mentioned as a mentor gave me the best career
• 1:17:41
  Speaker 1: advice I've ever gotten. And um, in a sense, everything
• 1:17:46
  Speaker 1: good that's happened since I can trace back to that
• 1:17:48
  Speaker 1: decision to start rowing. So I'm pretty passionate about the sport.
• 1:17:51
  Speaker 1: Are you still rowing regularly? You know it's hard with
• 1:17:54
  Speaker 1: my schedule, So I'll go out on the weekends. UM,
• 1:17:56
  Speaker 1: I have a show a single and I will occasionally
• 1:18:00
  Speaker 1: jump into a team boat. I'm going to actually race
• 1:18:02
  Speaker 1: this coming weekend in Boston at the head of the
• 1:18:05
  Speaker 1: Charles and a master's event, so the age handicap at
• 1:18:09
  Speaker 1: which in my case is really necessary. And I'm going
• 1:18:13
  Speaker 1: to row with in one I'm rowing in two events
• 1:18:15
  Speaker 1: actually which I may regret later and I think they
• 1:18:18
  Speaker 1: may need oxygen when I'm done. But I'm gonna row
• 1:18:22
  Speaker 1: with three of my teammates and the first time we
• 1:18:23
  Speaker 1: got in a boat together was forty one years ago.
• 1:18:26
  Speaker 1: Oh really, which so it's pretty cool to reunite. And
• 1:18:29
  Speaker 1: then I'm going to row with another group of alumni
• 1:18:32
  Speaker 1: from do they all still still stay active rowing? They do?
• 1:18:35
  Speaker 1: And and what we do is we we all try
• 1:18:38
  Speaker 1: to get together and race this race in Boston periodically.
• 1:18:43
  Speaker 1: And then UM. The other thing I do UM with
• 1:18:46
  Speaker 1: actually a number of my Vanguard colleagues is I bicycle
• 1:18:50
  Speaker 1: and we typically do one or two charity events in
• 1:18:54
  Speaker 1: the summer to raise money for cancer. There's one in
• 1:18:57
  Speaker 1: Massachusetts that's again you love it from um UM. Just
• 1:19:00
  Speaker 1: an economics standpoint, forty million dollars raised in one weekend.
• 1:19:06
  Speaker 1: That's big to benefit Dana Farber and cancer research and
• 1:19:09
  Speaker 1: in particular a lot of emphasis on pediatric cancer and
• 1:19:13
  Speaker 1: UM it's a really cool event. And I think this
• 1:19:16
  Speaker 1: past year we probably had ten or twelve of us
• 1:19:18
  Speaker 1: go up and do it. So how do how does
• 1:19:20
  Speaker 1: the money raising work? Is it a per mile per that?
• 1:19:23
  Speaker 1: However you want to do it, you're you, You you
• 1:19:25
  Speaker 1: tell the organization you will raise a minimum of I
• 1:19:29
  Speaker 1: think the minimum is probably four or five dollars now,
• 1:19:32
  Speaker 1: and you get sponsors, friends. You know, I tend to
• 1:19:36
  Speaker 1: my wife and I tend to you know, it's cancer
• 1:19:38
  Speaker 1: research pretty important to us, so we tend to do
• 1:19:40
  Speaker 1: it ourselves. But everybody has their own approach. And UM,
• 1:19:45
  Speaker 1: it makes you train, you know. You it's two hundred
• 1:19:47
  Speaker 1: miles and two days double centurion. That's pretty impressive. So
• 1:19:51
  Speaker 1: you know, I can't fake it through that anymore. So, UM,
• 1:19:55
  Speaker 1: I've got to do so again. Long rides on the weekend. Then, UM,
• 1:20:01
  Speaker 1: we have a gym on campus. I'll do a spinning
• 1:20:03
  Speaker 1: class a couple of times a week. So there's really
• 1:20:05
  Speaker 1: a lot of you're you're getting ready to do. That's
• 1:20:07
  Speaker 1: a that's a big ride, a hundred miles a day.
• 1:20:09
  Speaker 1: But you know, to your original question, UM, I find that. Um,
• 1:20:15
  Speaker 1: And this was a lesson I learned from Jack Brennan.
• 1:20:18
  Speaker 1: The discipline is staying UM fit has helped me immeasurably
• 1:20:24
  Speaker 1: career wise. UM, you don't get sick as often. You
• 1:20:28
  Speaker 1: understandina is great. You know when you go through crises,
• 1:20:30
  Speaker 1: you you know, long days just sort of bounce off you.
• 1:20:34
  Speaker 1: And so to me, it's become very self reinforcing of
• 1:20:37
  Speaker 1: kind of basic leadership principles. You know something that you
• 1:20:40
  Speaker 1: want to emulate to other people, do it, so you
• 1:20:42
  Speaker 1: have to take care of yourself so you can take
• 1:20:44
  Speaker 1: care of business. That makes sense. Our last two and
• 1:20:48
  Speaker 1: favorite questions what sort of advice would you give to
• 1:20:51
  Speaker 1: a millennial or a recent college graduate who might be
• 1:20:54
  Speaker 1: interested in going into the field of finance or investment management.
• 1:20:59
  Speaker 1: So I think it's a really interesting time UM for that.
• 1:21:03
  Speaker 1: And you know, I first I'd always tell them whatever
• 1:21:07
  Speaker 1: sector they're going into, the accounty, but in particular and
• 1:21:10
  Speaker 1: financial services, find a place where your values match up,
• 1:21:14
  Speaker 1: so you know, really probe a lot around the values
• 1:21:18
  Speaker 1: of a firm, and you've got to go to a
• 1:21:20
  Speaker 1: place that you're comfortable with and where your values really
• 1:21:24
  Speaker 1: match up. I think very related UM is have a
• 1:21:29
  Speaker 1: passion for it too. UM don't do anything just for
• 1:21:32
  Speaker 1: the paycheck, UM. And you know sometimes I mean, you
• 1:21:35
  Speaker 1: know what it's like coming out of school, You're in
• 1:21:36
  Speaker 1: debt and you're you're you're tempted to just do whatever
• 1:21:39
  Speaker 1: to to to h to meet those those obligations. But
• 1:21:44
  Speaker 1: I think passion is really important. You know, when I
• 1:21:47
  Speaker 1: first came out of school, I did have a passion
• 1:21:49
  Speaker 1: around education. So you know, the first couple of years
• 1:21:51
  Speaker 1: for me, you know, I got to fulfill that. You know,
• 1:21:54
  Speaker 1: my first for a into finance, I wasn't is connected
• 1:22:00
  Speaker 1: um from a mission standpoint, and it was finding vanguard
• 1:22:04
  Speaker 1: that really reinforced how important that is. I was just
• 1:22:07
  Speaker 1: so much happier about the work makes sense. And our
• 1:22:10
  Speaker 1: final question, what is it that you know about the
• 1:22:13
  Speaker 1: world of investing and running a company today that you
• 1:22:17
  Speaker 1: wish you knew thirty years ago? Thirty years ago? Um,
• 1:22:23
  Speaker 1: crazy number? Right, Yeah. I I think the speed with
• 1:22:28
  Speaker 1: which technology is evolving UM is much. And you know,
• 1:22:33
  Speaker 1: here for a science fiction guy to admit this, it's
• 1:22:35
  Speaker 1: really hard. But I didn't see it all coming as
• 1:22:37
  Speaker 1: fast as it came. And I think it's because it's
• 1:22:40
  Speaker 1: not linear. I don't think humans are wired to think
• 1:22:43
  Speaker 1: exponentially Um, just the smartphone was such a people don't
• 1:22:48
  Speaker 1: realize there's more power in this than went to them
• 1:22:50
  Speaker 1: took men to the moon, and it's amazing how that's changed,
• 1:22:54
  Speaker 1: you know, not having as good an appreciation about that.
• 1:22:57
  Speaker 1: And then I think it's probably related. But the globalization
• 1:23:01
  Speaker 1: that's occurred, especially the last decade. UM, it's spectacular, but
• 1:23:07
  Speaker 1: also you know, it's it comes with challenges, with a
• 1:23:10
  Speaker 1: lot of challenges, and I think that's really um. You know,
• 1:23:14
  Speaker 1: if I could go back in time and anticipate that
• 1:23:17
  Speaker 1: a little better, I think I would have made smarter
• 1:23:20
  Speaker 1: decisions in terms of helping us as a firm think
• 1:23:22
  Speaker 1: through some of those things. I think we've done okay,
• 1:23:25
  Speaker 1: But you know it's it's. Um. Those two phenomena, the
• 1:23:29
  Speaker 1: acceleration of technology and globalization, again probably very inter related.
• 1:23:34
  Speaker 1: They they really are defining our era in in so
• 1:23:38
  Speaker 1: many ways, and I think they're going to define the
• 1:23:40
  Speaker 1: next ten years too. I don't doubt it for a second. Bill,
• 1:23:44
  Speaker 1: Thank you for being so generous with your time we
• 1:23:47
  Speaker 1: have been speaking. I want to make sure I say
• 1:23:49
  Speaker 1: this right. Is it William McNabb The third because I
• 1:23:51
  Speaker 1: keep calling you Bill, Bill, is what I prefer. Okay,
• 1:23:54
  Speaker 1: it's technically Frederick William the third, and my mother insisted
• 1:23:58
  Speaker 1: that i'd be Bill Um since my father was fred
• 1:24:01
  Speaker 1: All right, that works. If you enjoy this conversation, be
• 1:24:04
  Speaker 1: sure and look up an inch or down an inch
• 1:24:07
  Speaker 1: on Apple iTunes and you can see any of the
• 1:24:09
  Speaker 1: other hundred and eight or so. Uh such conversations we've had. Uh.
• 1:24:14
  Speaker 1: If you want more information on Vanguard, UH, they're a
• 1:24:17
  Speaker 1: small company in Pennsylvania, you could go to Vanguard dot
• 1:24:20
  Speaker 1: com and learn all about them. I would be remiss
• 1:24:23
  Speaker 1: if I failed to thank Taylor Riggs, our booker, Michael
• 1:24:27
  Speaker 1: bat Nick, my head of research, and Charlie Volmer, our
• 1:24:30
  Speaker 1: recording engineer. We love your comments, feedbacks and suggestions, and
• 1:24:35
  Speaker 1: if you've made it this far into the podcast, we'd
• 1:24:38
  Speaker 1: love to hear from you right to us at m
• 1:24:41
  Speaker 1: IB podcast at Bloomberg dot net. I'm Barry rid Holtz.
• 1:24:46
  Speaker 1: You've been listening to Masters in Business on Bloomberg Radio,
• 1:24:53
  Speaker 1: brought to you by Bank of America. Merrill Lynch, committed
• 1:24:56
  Speaker 1: to bringing higher finance to lower carbon named the most
• 1:24:59
  Speaker 1: innovative and spent bank for Climate change and Sustainability by
• 1:25:02
  Speaker 1: the Banker that's the power of global connections. Bank of
• 1:25:06
  Speaker 1: America North America member f d I C