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Vanguard CEO Bill McNabb: Masters in Business (Audio) · Masters in Business

• 0:03
  Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
• 0:08
  Speaker 1: I am just beyond thrilled to introduce our special guest today.
• 0:13
  Speaker 1: And I know I say this every week we have
• 0:15
  Speaker 1: a special guest. Today we have a special guest. His
• 0:19
  Speaker 1: name is Bill McNab. He is the chief executive officer
• 0:24
  Speaker 1: and chairman of the Vanguard Group, which is one of
• 0:27
  Speaker 1: the world's largest investment firms managing three point one trillion dollars.
• 0:34
  Speaker 1: Everybody knows who Vanguard is. They are essentially the father
• 0:38
  Speaker 1: of indexing UM and have have really just made a
• 0:43
  Speaker 1: tremendous dent on the world of investing. Uh. Bill was
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  Speaker 1: really generous with his time. He spoke to hung out
• 0:50
  Speaker 1: for almost two hours and we talked about everything from
• 0:54
  Speaker 1: what Vanguard was like in the old days too, who
• 0:58
  Speaker 1: influenced him, and where van Art is going in the future.
• 1:02
  Speaker 1: I thought this was a master class in exactly what
• 1:07
  Speaker 1: is happening in the world of investing today and what
• 1:10
  Speaker 1: is the right approach to either being an investor or
• 1:16
  Speaker 1: being an investment management firm. UM. He is incredibly accomplished.
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  Speaker 1: He joins Vanguard thirty years ago. Next month is his
• 1:25
  Speaker 1: thirty year anniversary. He became CEO just before the financial
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  Speaker 1: crisis blew up. A month before Lehman and A I
• 1:34
  Speaker 1: G and City and everybody else blew up. He was
• 1:36
  Speaker 1: named UH CEO and really talk about having a front
• 1:41
  Speaker 1: seat on the past thirty years of changes in the
• 1:45
  Speaker 1: financial world. For those of you who are either investors
• 1:51
  Speaker 1: or work in the world of investing, this is a
• 1:55
  Speaker 1: absolute master class. We spoke for so long I think
• 1:59
  Speaker 1: you may want to listen to this in two halfs.
• 2:01
  Speaker 1: All of it is absolutely fascinating. He's really an incredibly insightful,
• 2:07
  Speaker 1: accomplished guy, and um, I think you're in for a treat. So,
• 2:11
  Speaker 1: without any further ado, here is my interview with Vanguard
• 2:16
  Speaker 1: CEO Bill McNabb. This is Masters in Business with Barry
• 2:24
  Speaker 1: Ridholds on Bloomberg Radio. My special guest today and I
• 2:28
  Speaker 1: say special guest every week, but this is really a
• 2:31
  Speaker 1: special guest is Bill McNabb. He is the CEO and
• 2:35
  Speaker 1: chairman of the Vanguard Group, which manages a little over
• 2:39
  Speaker 1: three point one trillion dollars. Bill, Welcome to the show.
• 2:43
  Speaker 1: Thanks Berry. It's a privilege to be here. So let's
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  Speaker 1: give a quick I don't want to spend too much
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  Speaker 1: time on your cv UM. But a quick background. You've
• 2:52
  Speaker 1: been with Vanguard since June. That means you're thirty year
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  Speaker 1: anniversary coming up next month. That's that's amazing, it's been.
• 3:02
  Speaker 1: It was really a remarkable turn of good luck. I
• 3:05
  Speaker 1: was working for a firm here which is now JP
• 3:08
  Speaker 1: Morgan Chase, and UH got a call to go to
• 3:11
  Speaker 1: Vanguard and Vangard was this little tiny mutual fund firm
• 3:15
  Speaker 1: in n and I went down, loved it. And you know,
• 3:19
  Speaker 1: sometimes better to be lucky than smart. That that's certainly
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  Speaker 1: for sure. Today you are the third CEO in Vanguard history,
• 3:27
  Speaker 1: following Jack Brennan, who was actually a prior guest on
• 3:30
  Speaker 1: the show, and some guy named John Bogel, some some
• 3:34
  Speaker 1: guy who's sort of legendary out there, to say the
• 3:37
  Speaker 1: least legendary. I would love to bring him. In fact,
• 3:40
  Speaker 1: he may be one of the few people I'm willing
• 3:41
  Speaker 1: to travel to him with a recorder and interview him,
• 3:45
  Speaker 1: because he is truly one of the giants, the legends
• 3:48
  Speaker 1: in finance. Absolutely, um, you know, founder of the firm.
• 3:53
  Speaker 1: What was it like to work with Bogel? That had
• 3:55
  Speaker 1: to be mind blowing. Well, I think the great thing
• 3:58
  Speaker 1: Jack did was at the beginning of the firm, and
• 4:01
  Speaker 1: I was there, you know, a few years after the
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  Speaker 1: founding was he created this corporate structure which is very
• 4:07
  Speaker 1: different than anything else. As you know, we're owned by
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  Speaker 1: our funds and therefore our investors, in other words, people
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  Speaker 1: by Vanguard mutual funds essentially are the owners of Vanguard Group.
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  Speaker 1: That's right, And we have a saying that Jack promoted
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  Speaker 1: a lot in the early days that strategy follows structure,
• 4:24
  Speaker 1: so everything we do had to be had to reflect
• 4:28
  Speaker 1: that structure, which basically means just put the investor first
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  Speaker 1: and everything you do. And that culture really permeated the
• 4:34
  Speaker 1: organization right from the get go. And the other thing
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  Speaker 1: Jack did a really good job of was the internal culture,
• 4:41
  Speaker 1: which was, for lack of a better phrase, lived by
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  Speaker 1: the Golden rule. And so they're really not a lot
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  Speaker 1: of hierarchy at Vanguard. I'm certainly you know, we pay
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  Speaker 1: our you know, best performing portfolio managers higher than those
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  Speaker 1: who aren't. And you know, you have all kinds of
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  Speaker 1: different compensation arrangements, but at the end of the day,
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  Speaker 1: everybody treats each other um peer to peer, and it
• 5:03
  Speaker 1: doesn't matter what your role is and you know, it
• 5:05
  Speaker 1: makes it very different than most firms where there's often
• 5:09
  Speaker 1: an all star kind of cast to it. And uh,
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  Speaker 1: it makes it coming to work every day up last
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  Speaker 1: because of the people's side that that must be um,
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  Speaker 1: a crazy fantastic environment. So let's talk a little bit
• 5:22
  Speaker 1: about your background. Undergraduate government major at Dartmouth and then
• 5:26
  Speaker 1: you end up getting an NBA from Wharton. How did
• 5:29
  Speaker 1: you find your way to finance? What did you do
• 5:31
  Speaker 1: in between? So there was a little bit of a
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  Speaker 1: side tour there. Um. After I graduated from Dartmouth, I think,
• 5:38
  Speaker 1: much to my mom's chagrin, instead of coming to work
• 5:41
  Speaker 1: in New York, I ended up going to teach first
• 5:46
  Speaker 1: year of Latin at a boys school. First year Latin?
• 5:49
  Speaker 1: Are you fluent in Latin? Not anymore? I think back
• 5:54
  Speaker 1: in the day I was reasonably good at it. But
• 5:56
  Speaker 1: I think the real thing was it was a private school.
• 5:59
  Speaker 1: I could coach three sports, so I was looked at
• 6:02
  Speaker 1: as a very cheap asset. You know. I could do
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  Speaker 1: a lot of things for not a lot of money.
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  Speaker 1: It was a recession when I graduated, and I remember,
• 6:11
  Speaker 1: you know, so any any any, any kind of work
• 6:13
  Speaker 1: was good work as far as I was concerned, but
• 6:15
  Speaker 1: those couple of years of teaching actually were really um
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  Speaker 1: in some ways, very instrumental in terms of shaping the
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  Speaker 1: way I think about the world. I then went to Wharton, UM,
• 6:25
  Speaker 1: you know, got a great education there. I spent a
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  Speaker 1: couple of years at what's now JP Morgan Chase, and
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  Speaker 1: then found my way back to Vanguard. So was it
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  Speaker 1: kind of surprised to get a phone call from a
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  Speaker 1: Vanguard How how many years have you been with JP Morgan?
• 6:40
  Speaker 1: So I've been with I've been I've been at the
• 6:43
  Speaker 1: bank for three years and I was working basically in
• 6:46
  Speaker 1: a group that was undoing bad leverage buyouts and UM
• 6:51
  Speaker 1: we were sort of the precursor to what became the
• 6:54
  Speaker 1: private equity desk farther down the road, and it was
• 6:58
  Speaker 1: really fascinating work. I I love the work. I actually
• 7:00
  Speaker 1: liked the team I was on, but it was a
• 7:02
  Speaker 1: little dissatisfied with the bank's overall strategy and some of
• 7:06
  Speaker 1: the cultural aspects. And I my wife was from Philly.
• 7:10
  Speaker 1: I had gone to grad school there, so we thought
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  Speaker 1: about UM going back and I get this call from
• 7:16
  Speaker 1: this upstart firm, UM, they were looking to hire a
• 7:19
  Speaker 1: G I c product manager. I had no idea what
• 7:23
  Speaker 1: that was before the internet, and it's guaranteed investment contracts,
• 7:27
  Speaker 1: which were early on the biggest asset class in four
• 7:31
  Speaker 1: oh one K plans. Really, so this is before a
• 7:34
  Speaker 1: number of tax changes that kinda yeah they that go away, yeah,
• 7:38
  Speaker 1: and and and really you know what happened when when
• 7:41
  Speaker 1: as interest rates came down, g I sees were a
• 7:43
  Speaker 1: great deal. You could basically when i UH was investing
• 7:47
  Speaker 1: in them, you could get an eight or nine percent
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  Speaker 1: yield and you could keep a constant dollar price because
• 7:52
  Speaker 1: it was an insurance contract. So you know, basically investors
• 7:56
  Speaker 1: were getting three year bonds with a money market price.
• 8:01
  Speaker 1: And so for the four oh one K investor, it
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  Speaker 1: was a godsend. And you know, it's these plans were
• 8:05
  Speaker 1: just you know, beginning, Um, this was really a very
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  Speaker 1: popular asset class. I didn't know anything about it though.
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  Speaker 1: In the last minute we have left in this segment
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  Speaker 1: there there are a number of new products will talk
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  Speaker 1: about a little later in the conversation. But aside from Bogel,
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  Speaker 1: who were your early mentors, so, um, a couple um,
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  Speaker 1: you know Jack Brennan who was my predecessor. He and
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  Speaker 1: I struck up a pretty good friendship early on, and
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  Speaker 1: you know, he ended up being a little bit of
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  Speaker 1: a mentor before I went to work for him directly.
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  Speaker 1: There was another fellow, Jim Gately, who um one of
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  Speaker 1: our great leaders at Vanguard, who I would tell you
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  Speaker 1: I learned a ton from him. He he was a
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  Speaker 1: guy who had been at Prudential Asset Management and had
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  Speaker 1: bought a lot of boutiques, and he brought with him
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  Speaker 1: a worldliness that I had never experienced before and really
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  Speaker 1: taught me what it was like to be a professional.
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  Speaker 1: I'm are Ridholts. You're listening to Masters in Business on
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  Speaker 1: Bloomberg Radio. My guest today is Bill McNabb. He is
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  Speaker 1: the chairman and chief executive officer of a little shop
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  Speaker 1: called the Vanguard Group. They manage about three trillion, that's trillion,
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  Speaker 1: with the t three trillion dollars. Let's talk a little
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  Speaker 1: bit about what took place over the past five years.
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  Speaker 1: Vanguard garnered somewhere around six hundred and fifty billion dollars
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  Speaker 1: in inflows and net cash flows. That's more than the
• 9:30
  Speaker 1: next six companies combined. And and there are some estimates
• 9:35
  Speaker 1: that say about a billion dollars per day flow into Vanguard.
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  Speaker 1: What is that about? Well, I think you know, our
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  Speaker 1: focus on cost and doing the right thing for investors
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  Speaker 1: has resonated at a level that even we are surprised by.
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  Speaker 1: And uh, it's been very gratifying um to say the least.
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  Speaker 1: But we think we're we think we're again all humility aside.
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  Speaker 1: We think we're winning for the right re sasons. You know,
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  Speaker 1: we're not out there trying to promote something that we're not.
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  Speaker 1: So let's I'm gonna skip ahead to another question about cost.
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  Speaker 1: Why is it that managing costs is so effective UM
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  Speaker 1: for investors? So when you look at all the work
• 10:15
  Speaker 1: that's been done, and you know, Morning started a pretty
• 10:17
  Speaker 1: seminal piece to three years ago where they broke off
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  Speaker 1: funds into quartiles and the highest expense quartile had the
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  Speaker 1: worst performance and the lowest expense quartile had the best performance.
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  Speaker 1: And the performance was very consistent and persistent. And so
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  Speaker 1: it just reinforced a notion that we've had cost is
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  Speaker 1: the one thing you can control and it's not like
• 10:40
  Speaker 1: other consumer goods where you know, you pay more, you
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  Speaker 1: in theory get more UM and investing that has not
• 10:46
  Speaker 1: been the case. Right, So a BMW and a Volkswagen.
• 10:50
  Speaker 1: The BMW may costs more and maybe you get a
• 10:52
  Speaker 1: little more, but it's the opposite in investing. So let's
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  Speaker 1: talk about what some people have called the vanguard effect.
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  Speaker 1: Well again this was dubbed um. As we enter new markets,
• 11:06
  Speaker 1: you immediately see prices fall. In fact, I think what's
• 11:10
  Speaker 1: happening here is our competitors are getting a little bit smarter.
• 11:12
  Speaker 1: Rather than waiting for us to take a lot of
• 11:16
  Speaker 1: market share, they're actually trying to meet us more quickly.
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  Speaker 1: A couple of my colleagues at Vangardive said, you know,
• 11:21
  Speaker 1: are you worried about it? And I said, not really,
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  Speaker 1: because at the end of the day, first of all,
• 11:25
  Speaker 1: we're built to do this every day um, and we're
• 11:27
  Speaker 1: built to get better and better. But second of all,
• 11:30
  Speaker 1: it's great for investors. So if investors have more choice,
• 11:33
  Speaker 1: low costs, then we've got to get smarter and more
• 11:35
  Speaker 1: innovative and quicker as to how we compete on that
• 11:39
  Speaker 1: at that level, Who asked you if if you're worried
• 11:42
  Speaker 1: about it, clearly a billion a day. Hey, you guys
• 11:46
  Speaker 1: are doing this wrong. You're only getting a billion a
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  Speaker 1: day and new inflows. You gotta mix it all up.
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  Speaker 1: It seems like you guys have cracked the code. You know.
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  Speaker 1: I think it's again. We we feel great about what's
• 11:58
  Speaker 1: been going on. But um, Indy Grove is one of
• 12:01
  Speaker 1: my favorite executives and he has this phrase, only the
• 12:05
  Speaker 1: paranoid survive, and uh, I really believe that. So the
• 12:09
  Speaker 1: minute minute any complacency starts to show itself at Vanguard,
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  Speaker 1: we get very skittish. So let's go back to your
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  Speaker 1: original principles. There are four principles which I really like,
• 12:21
  Speaker 1: and this will give people a sense of how you
• 12:24
  Speaker 1: approach the world. Have a goal, maintain a balanced and
• 12:28
  Speaker 1: diversified portfolio, pay attention to costs, and focus on the
• 12:33
  Speaker 1: long term. How did these four principles come about? So
• 12:38
  Speaker 1: I would say these four principles have been present since
• 12:41
  Speaker 1: our founding and and we had talked about him in
• 12:45
  Speaker 1: different ways. But about four or five years ago, as
• 12:48
  Speaker 1: we were kind of rethinking our message to the world,
• 12:52
  Speaker 1: it became clear to us that we needed needed to
• 12:54
  Speaker 1: distill it in even simpler English for people and really
• 12:58
  Speaker 1: make it stark. And I think these do that and
• 13:02
  Speaker 1: people look at it and they say, boy, it's not
• 13:04
  Speaker 1: complicated and I say, yeah, but how many people don't
• 13:06
  Speaker 1: follow this? And you know, for me, especially the goal setting,
• 13:11
  Speaker 1: this is the place where I see most investors miss.
• 13:14
  Speaker 1: They don't have very clear, well defined goals, and you
• 13:17
  Speaker 1: need to know that if you're gonna, you know, construct
• 13:20
  Speaker 1: an appropriate portfolio. One of the comments that I often
• 13:23
  Speaker 1: hear from people who have already accumulated a lot of
• 13:27
  Speaker 1: wealth is all right, what am I going to need
• 13:29
  Speaker 1: to do to beat the benchmarks over the next couple
• 13:31
  Speaker 1: of years? And the response is always why do you
• 13:34
  Speaker 1: feel you've already won? You've got enough money, you can
• 13:38
  Speaker 1: never spend it all. Why do you feel the need
• 13:40
  Speaker 1: to keep competing? You have to that pivot from wealth
• 13:43
  Speaker 1: accumulation to okay, now we have to preserve this and
• 13:47
  Speaker 1: eventually distribute it, whether it's philanthropy or what have you.
• 13:50
  Speaker 1: People have a hard time wrapping their heads around that.
• 13:52
  Speaker 1: I could agree more. You know, at the end of
• 13:54
  Speaker 1: the day, it's it's define what you're trying to do,
• 13:57
  Speaker 1: and then we want to be able to help you
• 13:59
  Speaker 1: get there. So let's talk about something that's really quite fascinating.
• 14:03
  Speaker 1: You're probably best known for indexing, although we'll get to
• 14:07
  Speaker 1: some of the active funds, which is about a third UM.
• 14:11
  Speaker 1: But the story of indexing is really quite fascinating. It
• 14:16
  Speaker 1: came out of Wells Fargo, which had created it for
• 14:20
  Speaker 1: institutional clients. How did you guys end up taking over
• 14:24
  Speaker 1: the Wells Fargo index product and turning it around and
• 14:28
  Speaker 1: offering it to retail investors. So when when Vanguard was
• 14:32
  Speaker 1: founded formally in nive Um, Jack Bogel and the team
• 14:37
  Speaker 1: I think correctly identified that cost was a differentiator. So
• 14:42
  Speaker 1: even before indexing, we were talking about costs, and we
• 14:45
  Speaker 1: weren't particularly low cost at that point, but we were
• 14:48
  Speaker 1: aspiring to be. So um this idea about indexing seemed
• 14:54
  Speaker 1: to be the perfect manifestation of a low cost, very
• 14:56
  Speaker 1: efficient way to invest. And you had the Wells phenomenon
• 15:00
  Speaker 1: in the pension side. You had you know, Burt mal
• 15:03
  Speaker 1: Kill's Random Walk Down Wall Street, which was written around
• 15:05
  Speaker 1: the same time. You had Charlie ellis Is Winning The
• 15:08
  Speaker 1: Loser's Game, which was written, you know, around the same time.
• 15:11
  Speaker 1: Charlie also on your board of directors and he was
• 15:14
  Speaker 1: a guest here. What a tremendous gentleman, tremendous, tremendous person,
• 15:19
  Speaker 1: And I think the genius was to say, if this
• 15:22
  Speaker 1: idea is good enough for a sophisticated institution, why isn't
• 15:26
  Speaker 1: it good enough for the average small investor? And so
• 15:29
  Speaker 1: we took the indexing concept and turned it into a
• 15:32
  Speaker 1: mutual fund, which no one had done. So in the
• 15:35
  Speaker 1: last minute we have left, Let's talk about what percentage
• 15:39
  Speaker 1: of the investable universe is now indexed? Um, how big
• 15:43
  Speaker 1: is too big for indexes? I've I've read some things
• 15:46
  Speaker 1: by people I don't agree with it, that say, hey,
• 15:48
  Speaker 1: at a certain point, you know, indexing is just too
• 15:51
  Speaker 1: big and you need to be more active. Yeah, So,
• 15:55
  Speaker 1: first of all, I don't agree with the premise, but
• 15:57
  Speaker 1: even if you did, indexing is still a very small
• 15:59
  Speaker 1: per centage of the world's market cap. So in the US,
• 16:03
  Speaker 1: the you know, the big change in mutual funds has
• 16:05
  Speaker 1: been indexing has now risen to be about US mutual funds.
• 16:10
  Speaker 1: But mutual funds on the equity side only represent about
• 16:14
  Speaker 1: of the equity market, and in the institutional side it's
• 16:18
  Speaker 1: it's a much smaller percentage. So indexing is still less
• 16:20
  Speaker 1: than twenty overall in the US, and if you go abroad,
• 16:24
  Speaker 1: it's a couple of percentage points. So there's a huge
• 16:28
  Speaker 1: opportunity for it to become much more significant. I'm Barry Ridhults.
• 16:32
  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
• 16:34
  Speaker 1: special guest today is Bill McNabb, who took over as
• 16:38
  Speaker 1: CEO of the Vanguard Group. How's this for timing? August
• 16:42
  Speaker 1: two thousand and eight, and in case you forgot, that
• 16:45
  Speaker 1: was about a month before the world's really blew up.
• 16:49
  Speaker 1: What was it like running an asset management shop in
• 16:53
  Speaker 1: the middle of that turmoil? In a word, it was frightening,
• 16:57
  Speaker 1: to be very honest. It was at the same time,
• 17:03
  Speaker 1: probably will be one of the defining parts of my
• 17:05
  Speaker 1: career in that the team that I worked with we
• 17:08
  Speaker 1: got a chance to experience things I hope no one
• 17:11
  Speaker 1: else ever gets to experience, and we got a chance
• 17:14
  Speaker 1: to i think, influence events a little bit um and
• 17:18
  Speaker 1: hopefully move things in a good direction for our clients.
• 17:22
  Speaker 1: But it was it was amazing to to watch it
• 17:24
  Speaker 1: all unfold. So what were the some of the specific
• 17:27
  Speaker 1: challenges both you personally as a new CEO. I mean,
• 17:31
  Speaker 1: you had been with Vanguard since six but you're taking
• 17:35
  Speaker 1: over running the shop. What challenges did you face and
• 17:38
  Speaker 1: what sort of challenges did the staff have to deal
• 17:40
  Speaker 1: with in the midst of that. So there were sort
• 17:43
  Speaker 1: of three levels of challenges. So the first was pretty
• 17:47
  Speaker 1: tactical but big. The whole money fund industry was under
• 17:50
  Speaker 1: UM you know, fire, and what were we going to
• 17:53
  Speaker 1: do with UM the money market funds that we were managing,
• 17:57
  Speaker 1: and how was the Treasury's rules and and and the
• 18:01
  Speaker 1: intervention that was occurring, So you know, that was a
• 18:03
  Speaker 1: big topic. The second that that was the whole breaking
• 18:06
  Speaker 1: the buck situation Reserve fund broke the dollar, and the
• 18:10
  Speaker 1: question was would anybody else? You know, we believe very
• 18:13
  Speaker 1: strongly that our funds were incredibly well positioned. UM our
• 18:16
  Speaker 1: Prime Fund, which you know is supposed to be in
• 18:19
  Speaker 1: commercial paper CDs and so forth. We were sixty percent
• 18:22
  Speaker 1: government treasury at that point, so it was super safe.
• 18:25
  Speaker 1: We had been very worried about what was going on
• 18:27
  Speaker 1: in the housing market, but they were still you were
• 18:31
  Speaker 1: watching the rest of the industry UM struggle with it.
• 18:34
  Speaker 1: You know. The second thing was we were watching our
• 18:36
  Speaker 1: investors behavior and and listening to them call and ask us,
• 18:43
  Speaker 1: you know, what's happening, and you know, what should we do?
• 18:45
  Speaker 1: That was the biggest question, what should we do? And
• 18:48
  Speaker 1: then the third thing, we actually had our staff saying
• 18:51
  Speaker 1: what's this mean to all of us? Because, as you
• 18:53
  Speaker 1: may recall, it was arm again in financial services and
• 18:57
  Speaker 1: people were laying um, thousands of workers off. And so
• 19:01
  Speaker 1: we we did, you know, three really important things. One
• 19:04
  Speaker 1: we you know, on the money fund side, we knew
• 19:06
  Speaker 1: we were we were in really good shape, um, and
• 19:10
  Speaker 1: we got engaged with the SEC in terms of beginning
• 19:13
  Speaker 1: to move the reforms forward right from the get go. Second,
• 19:18
  Speaker 1: in terms of our investors, UM, most of our competitors
• 19:21
  Speaker 1: actually stopped talking, you know, to the press, and stopped
• 19:24
  Speaker 1: going out and meeting with clients. At least that's what
• 19:27
  Speaker 1: we heard. We were very vocal and very visible, and
• 19:31
  Speaker 1: we were very clear that we didn't know how this
• 19:33
  Speaker 1: was going to all unfold, but that you had to
• 19:35
  Speaker 1: step back and again sort of go back to basic
• 19:38
  Speaker 1: investment principles here. And what we saw was it had
• 19:42
  Speaker 1: a real calming influence on our investors. And I did
• 19:46
  Speaker 1: a webcast um probably October of oh nine or oh eight,
• 19:51
  Speaker 1: and I think it was downloaded a hundred thousand times
• 19:54
  Speaker 1: in twenty four hours. It was it was a remarkable number.
• 19:57
  Speaker 1: People were hungry for information right they wanted, and not
• 20:00
  Speaker 1: just hand waving people running around screaming. But you come
• 20:04
  Speaker 1: across as a if I may say this personally, rather
• 20:08
  Speaker 1: calm collected individual, You're not one of these people that
• 20:11
  Speaker 1: are gonna be running around with your quote unquote hair
• 20:14
  Speaker 1: on fire. I think it was really important to project
• 20:16
  Speaker 1: that because you know, there were certainly lots of commentary
• 20:19
  Speaker 1: out there that the world was ending as we knew it.
• 20:21
  Speaker 1: We didn't see it that way, but we knew it
• 20:23
  Speaker 1: was going to be rough. And then the third thing
• 20:25
  Speaker 1: we did um which again will seem tactical, but it
• 20:27
  Speaker 1: was really important. We said to our people, don't worry
• 20:30
  Speaker 1: about your jobs. You all have jobs and you're you're
• 20:32
  Speaker 1: here to serve the client, and stop worrying about nobody's
• 20:36
  Speaker 1: gonna lose their job over this. We want you focused
• 20:39
  Speaker 1: on being here for the client, and boy, that set
• 20:41
  Speaker 1: a tone inside. I also think it really helped with
• 20:44
  Speaker 1: the client interactions because people had confidence when they were
• 20:47
  Speaker 1: talking to clients. I was gonna say that really has
• 20:49
  Speaker 1: to come across in all sorts of subliminal ways. If
• 20:53
  Speaker 1: you can tell when you're on the phone with someone
• 20:54
  Speaker 1: who's worried about their job I've never heard or read
• 20:58
  Speaker 1: that before. Has that been publicly disclosed? Now, I haven't
• 21:01
  Speaker 1: really talked much about it, but in the midst of
• 21:03
  Speaker 1: the crisis, you said, so, how many people work at
• 21:05
  Speaker 1: Vanguard back then? Back then it was about twelve thousand,
• 21:09
  Speaker 1: five hundred. So you said, nobody's getting fired, there are
• 21:12
  Speaker 1: no layoffs. We're good, We're going to make it through
• 21:14
  Speaker 1: this five And I think what it allowed us to
• 21:17
  Speaker 1: do was to be really well positioned as the markets
• 21:20
  Speaker 1: began to turn and you know, activity began to pick up.
• 21:23
  Speaker 1: We were firing on all cylinders and we were ready
• 21:27
  Speaker 1: to serve clients. We were We actually kept our investment
• 21:30
  Speaker 1: in the business going during this period. So in our
• 21:33
  Speaker 1: last minute or so in this in the segment, the
• 21:36
  Speaker 1: one data point that really stunned me, would really surprised me,
• 21:41
  Speaker 1: transaction levels during the Great Financial Crisis at Vanguard were
• 21:45
  Speaker 1: actually much lower than normal. What does that say about
• 21:50
  Speaker 1: the firm and what does that say about your investors? Well,
• 21:52
  Speaker 1: I think it says a couple of things. One um
• 21:54
  Speaker 1: our our investors were listening to um all of the
• 21:59
  Speaker 1: things we've been trying to put forth over the years
• 22:01
  Speaker 1: that you have to think long term to UM. We
• 22:04
  Speaker 1: have a lot of four oh n K investors and UM,
• 22:08
  Speaker 1: they were saving for retirements long term. So don't react.
• 22:13
  Speaker 1: I'm Barry Rehults. You're listening to Masters in Business on
• 22:15
  Speaker 1: Bloomberg Radio. My guest today Bill McNabb. He is the
• 22:19
  Speaker 1: chairman and CEO of the Vanguard Group, which manages three
• 22:24
  Speaker 1: point one trillion. Is that right? That's right, three point
• 22:26
  Speaker 1: one trillion. That's trillion with a T. I have to
• 22:29
  Speaker 1: keep emphasizing that. And let's talk a little bit about
• 22:34
  Speaker 1: the future of investing in the way things have been
• 22:37
  Speaker 1: developing changing. You had you had a comment not too
• 22:40
  Speaker 1: long ago about some of the worst products that Wall
• 22:45
  Speaker 1: Street has thought of. I have a few of them.
• 22:47
  Speaker 1: I want to bounce them off off. You see what
• 22:49
  Speaker 1: you think. I assume you're not a big fan of
• 22:52
  Speaker 1: the liquid alts. What do you think of those? So again,
• 22:56
  Speaker 1: everything in theory can have its place, But in general,
• 22:59
  Speaker 1: what we're seeing in the liquid all spaces UM not
• 23:02
  Speaker 1: all that attractive from an investor perspective. It's really expensive
• 23:06
  Speaker 1: and I'm not sure it's providing any kind of real
• 23:08
  Speaker 1: value add and not especially liquid, not especially liquid, and
• 23:11
  Speaker 1: maybe not as much of a diverse fire as you
• 23:13
  Speaker 1: would hope. It doesn't mean it can't be done, okay,
• 23:16
  Speaker 1: unconstrained bond funds. So predicting which way interest rates are
• 23:21
  Speaker 1: going to go and currencies are going to go really
• 23:23
  Speaker 1: difficult to do. I haven't seen more than a couple
• 23:26
  Speaker 1: of human beings do it, and it's a question whether
• 23:28
  Speaker 1: they're lucky or whether they're actually doing it well. So
• 23:31
  Speaker 1: we're big fans of define what you're trying to do
• 23:34
  Speaker 1: in the bond market and stick to it. Hedge funds
• 23:37
  Speaker 1: with a mutual fund wrapper, in other words, allowing individuals
• 23:42
  Speaker 1: to buy what we've called muppet funds, buying hedge funds
• 23:46
  Speaker 1: through a mutual funds. It's a compensation scheme as far
• 23:50
  Speaker 1: as I'm concerned. You know, people are just figuring out
• 23:52
  Speaker 1: how to get paid a lot for I'm not adding
• 23:54
  Speaker 1: a lot of value. How about structured derivatives. Structured derivatives,
• 23:59
  Speaker 1: it's so again, in general, I think not a good idea. Um,
• 24:04
  Speaker 1: these are instruments that derivatives in general are incredibly helpful
• 24:09
  Speaker 1: in de risking portfolios and managing um subtle changes to
• 24:14
  Speaker 1: a portfolio. But what you see in a lot of
• 24:16
  Speaker 1: these is a lot of leverage or a lot of
• 24:18
  Speaker 1: implicit leverage, and not clear to be um that the
• 24:22
  Speaker 1: investors really understand the risk they're taking, not not a
• 24:25
  Speaker 1: whole lot of d risking in these instruments. So, but
• 24:29
  Speaker 1: old technology isn't bad. And very recently you guys launched
• 24:33
  Speaker 1: what some people have derisively called a robo advisor, but
• 24:37
  Speaker 1: essentially a software algorithm driven online advisor which immediately leapt
• 24:45
  Speaker 1: over all the other advisors and at the time of
• 24:48
  Speaker 1: the announcement or shortly thereafter, it had eight billion in
• 24:51
  Speaker 1: it um. What what do you call that? And let's
• 24:54
  Speaker 1: talk a little bit about We call it Personal Advisor Services.
• 24:58
  Speaker 1: And the idea here was we had been running an
• 25:01
  Speaker 1: advisory service for clients with a million dollars and we'd
• 25:05
  Speaker 1: actually dropped the minimum to half a million. But you know,
• 25:07
  Speaker 1: it's a big number for a lot of people, and
• 25:10
  Speaker 1: so the challenge we put out to our team was,
• 25:12
  Speaker 1: can we take the same quality that we're providing our
• 25:15
  Speaker 1: millionaire clients, can we take it all the way down
• 25:17
  Speaker 1: to a fifty client. And so we invested tens of
• 25:22
  Speaker 1: millions of dollars in the technology. We trained an awful
• 25:25
  Speaker 1: lot of people because what we're doing is really a
• 25:28
  Speaker 1: combination of technology with a personal touch and the and
• 25:31
  Speaker 1: the the stark objective was to get this to a
• 25:34
  Speaker 1: price where all in so advice fee plus the underlying
• 25:38
  Speaker 1: product would be roughly in the half a percentage point
• 25:42
  Speaker 1: range and it would be really high quality. And so
• 25:47
  Speaker 1: we're very excited about this. I think it's going to
• 25:49
  Speaker 1: redefine for certain type of client how advice is provided.
• 25:53
  Speaker 1: And you know, it's not going to supplant um the
• 25:57
  Speaker 1: whole advisor world, um, but it gives small investors in particular,
• 26:02
  Speaker 1: a really professional choice which they don't have today. I
• 26:06
  Speaker 1: spoke to some of the group in your office who
• 26:09
  Speaker 1: actually put that together. They had some questions for us,
• 26:12
  Speaker 1: and I made them a bet that you guys would
• 26:14
  Speaker 1: have that at a hundred billion dollars within a year
• 26:17
  Speaker 1: or two. And they kind of this was just as
• 26:18
  Speaker 1: it was launching, and they kind of laughed. Um, but
• 26:22
  Speaker 1: you launched with eight billion in the first week. What
• 26:25
  Speaker 1: is this up to already? So you know, we had
• 26:28
  Speaker 1: some existing client business move over, so it's up to
• 26:31
  Speaker 1: about seventeen or eighteen billion, So it's a pretty big
• 26:34
  Speaker 1: thing already. Not not so I'm really not out there
• 26:37
  Speaker 1: on a limb. This is a hundred billion dollar business
• 26:39
  Speaker 1: for you guys relatively soon. The team gets very nervous
• 26:42
  Speaker 1: when I talk about it as well, because I've been
• 26:45
  Speaker 1: a real promoter of the concept. In fact, they're they're
• 26:47
  Speaker 1: really happy that they're officially launched, since I've pre announced
• 26:51
  Speaker 1: to launch about three different times by accidents. So so
• 26:54
  Speaker 1: that that's pretty fascinating. And clearly you're looking at at
• 26:58
  Speaker 1: that technology and using software as a future product. That's
• 27:04
  Speaker 1: that's gonna just do nothing but grow in terms of
• 27:07
  Speaker 1: asset management. So let's talk about some of the other
• 27:11
  Speaker 1: products that are out there. Some people use the UM
• 27:14
  Speaker 1: phrase fundamental indexing. Other people call it smart beta. Smart
• 27:18
  Speaker 1: beta has almost become a buzzword. You guys really don't
• 27:23
  Speaker 1: play in that sandbox, but I have a feeling that
• 27:26
  Speaker 1: one day you're eventually going to end up there. Yes, so, UM,
• 27:30
  Speaker 1: very fair point. And in implicit question there so a
• 27:34
  Speaker 1: couple of things. UM. You know, we had growth and
• 27:37
  Speaker 1: value index funds a long time, which you could argue
• 27:41
  Speaker 1: were sort of a version of UM. Some of these
• 27:45
  Speaker 1: factor based funds is the way I think about them. So, look,
• 27:48
  Speaker 1: I don't have a problem with the concept UM as
• 27:51
  Speaker 1: long as you understand what you're investing in UM smart
• 27:55
  Speaker 1: bata is one of the great marketing terms of all time.
• 27:58
  Speaker 1: You know, it implies that it's a better way of indexing.
• 28:01
  Speaker 1: To me, all it is is you're taking an active bet,
• 28:04
  Speaker 1: and you're betting on either a single factor or a
• 28:07
  Speaker 1: series of factors, and you're betting that those factors are
• 28:09
  Speaker 1: going to outperform the broad market over some particular period
• 28:13
  Speaker 1: of time. And you know, right now, you know, MidCap,
• 28:16
  Speaker 1: you know, MidCap value over the last fifteen year has
• 28:19
  Speaker 1: been a really good place to be. But all of
• 28:23
  Speaker 1: the value oriented investors were scratching their head saying is
• 28:26
  Speaker 1: value investing dead? Because large cap growth was dominating. And
• 28:30
  Speaker 1: so you go through these market cycles where different factors
• 28:34
  Speaker 1: seem to work, and they work for you know, fairly
• 28:37
  Speaker 1: long periods of time, and then they don't. So to me,
• 28:40
  Speaker 1: it's a bet. And as long as the investor knows
• 28:42
  Speaker 1: that they're taking a bet they're either overexposed to value,
• 28:45
  Speaker 1: they're overexposed to growth, or some combination UM, then I
• 28:50
  Speaker 1: think it can be a legitimate, low cost way for
• 28:52
  Speaker 1: somebody to make that investment bet. And you know, in
• 28:56
  Speaker 1: a sense, if you're if instead of investing in a
• 28:59
  Speaker 1: traditional act of growth manager, if you're buying if you're
• 29:02
  Speaker 1: buying a factor based fund that's growth oriented, you're hopefully
• 29:06
  Speaker 1: doing it at a much lower cost and you're getting
• 29:09
  Speaker 1: the same factor exposure that you would from that traditional
• 29:12
  Speaker 1: growth manager. So you guys don't offer anything that's fundamentally index.
• 29:17
  Speaker 1: There have been pretty I thought significant criticisms about market
• 29:22
  Speaker 1: cap waiting an index. Um, any chance we're going to
• 29:26
  Speaker 1: see a factor based vanguard fund anytime in the next
• 29:29
  Speaker 1: few years. So two things there so on on the
• 29:32
  Speaker 1: market cap index. The reason we're so passionate about that
• 29:37
  Speaker 1: is it's just math at the end of the day.
• 29:39
  Speaker 1: And you know, if you add up everybody in the world,
• 29:42
  Speaker 1: all investors, let's just use the US for now to
• 29:45
  Speaker 1: keep it simple, you add up to the market and
• 29:47
  Speaker 1: it that is a market capped market. If you take
• 29:50
  Speaker 1: all your active managers and put them in a box,
• 29:53
  Speaker 1: and then you take all your passive managers and put
• 29:54
  Speaker 1: them in a box. Um, there's really no third category
• 29:58
  Speaker 1: right there. There's it used to be individuals were a
• 30:01
  Speaker 1: big group, but today that's di minimous. All your active
• 30:05
  Speaker 1: managers by definition have to add up to the market,
• 30:09
  Speaker 1: and so it's a market minus costs. Indexers by definition
• 30:14
  Speaker 1: add up to the market minus cost and so it's
• 30:16
  Speaker 1: a zero sum game at the end of the day.
• 30:18
  Speaker 1: And that's why indexing works. It's just lower costs. It's
• 30:21
  Speaker 1: not that markets are more efficient or whatever. Um. When
• 30:24
  Speaker 1: you're doing factor based stuff, you are making a bet
• 30:28
  Speaker 1: against that broad market, and for every winner, there's a
• 30:31
  Speaker 1: loser because in the end it all adds up to
• 30:33
  Speaker 1: the market. And so to us, if you're going to
• 30:38
  Speaker 1: truly index, you want to take advantage of the cost side,
• 30:41
  Speaker 1: and that's why market cap makes sense. Now, if you
• 30:45
  Speaker 1: want to make an active bet, you have a view
• 30:49
  Speaker 1: that you know value is is cheap today versus growth,
• 30:54
  Speaker 1: then you could argue that a factor based fund can
• 30:57
  Speaker 1: be a really efficient way of doing that. And as
• 31:01
  Speaker 1: we think that through, I think that is gonna perhaps
• 31:03
  Speaker 1: influence our product development in the future because it could
• 31:07
  Speaker 1: very well be a good way for a manager to
• 31:10
  Speaker 1: make you know, an advisor in particular like yourself, make
• 31:14
  Speaker 1: that kind of um bad if that's something that you
• 31:17
  Speaker 1: wanted to do. You know, we've had rob are not
• 31:20
  Speaker 1: of a research affiliates on And the argument that he's
• 31:23
  Speaker 1: made is, hey, towards the end of the cycle, when
• 31:26
  Speaker 1: things get a little crazy, and you could think of
• 31:30
  Speaker 1: as a perfect example, all of the cap weighted items
• 31:34
  Speaker 1: just went berserk and then got crushed on the other
• 31:38
  Speaker 1: side of the cycle. A index that was weighted on
• 31:42
  Speaker 1: earnings or sales or some proportionate measure to the impact
• 31:47
  Speaker 1: they have on the economy may not quite go quite
• 31:51
  Speaker 1: as high, but it also won't go quite as low.
• 31:52
  Speaker 1: And over the long haul, reducing a little bit of
• 31:55
  Speaker 1: volatility might add some performance. Um. And he's got you know,
• 31:59
  Speaker 1: a number of papers on it, and you, of all
• 32:01
  Speaker 1: the people who actually offer that sort of fundamental based index,
• 32:06
  Speaker 1: you're the notable emission. And why why I kind of think, hey,
• 32:10
  Speaker 1: that's a huge, potentially huge marketplace and if anyone could
• 32:13
  Speaker 1: do it inexpensively, it would be you guys. And that's
• 32:17
  Speaker 1: a very fair point, I would say. Um. And again,
• 32:20
  Speaker 1: we have a lot of respect for what Rob and
• 32:22
  Speaker 1: his team have done. And look, you know, you when
• 32:25
  Speaker 1: you look at the data, it's so time dependent. Um.
• 32:30
  Speaker 1: And you may get a little reduction and volatility depending
• 32:34
  Speaker 1: when you start your period and when you end it.
• 32:36
  Speaker 1: I'm not convinced that over very long market cycles that
• 32:39
  Speaker 1: really matters. And you know, to me, then it becomes
• 32:42
  Speaker 1: the cost get the lowest cost index fund you can
• 32:47
  Speaker 1: and that's really what's going to drive performance. So in
• 32:50
  Speaker 1: the last minute we have in this segment, let's talk
• 32:52
  Speaker 1: a little bit about high frequency trading UM. Your predecessor
• 32:55
  Speaker 1: Jack Brennan said, you know, I've been somewhat critical of
• 32:59
  Speaker 1: h f T s running Grandma's mutual fund, but Jack
• 33:03
  Speaker 1: tells me and told me it helps bring costs down.
• 33:07
  Speaker 1: What what's your perspective? So you know, net net it
• 33:10
  Speaker 1: has brought costs down. And the way you can look
• 33:12
  Speaker 1: at this is you can you can look at the
• 33:15
  Speaker 1: history of our index funds and our traders have actually
• 33:19
  Speaker 1: done this, and we can see that the costum of
• 33:23
  Speaker 1: trading has been reduced dramatically, and you see that in
• 33:27
  Speaker 1: terms of our tracking error and so forth. UM and
• 33:31
  Speaker 1: you know, again the data are actually overwhelming over the
• 33:33
  Speaker 1: last fifteen years. It doesn't mean that there aren't practices
• 33:36
  Speaker 1: within the high frequency trading community that we don't UM.
• 33:40
  Speaker 1: You know that we're not critical of. But one of
• 33:42
  Speaker 1: the things during sort of the flash crash aftermath there
• 33:46
  Speaker 1: was a lot of let's just ban high frequency trading,
• 33:49
  Speaker 1: and what we were very afraid of is if you
• 33:51
  Speaker 1: pull that thread, not quite clear what would be left. UM,
• 33:55
  Speaker 1: because the high frequency trading actually does knit together. That's
• 33:59
  Speaker 1: very you know, this very granular, disparate market that we have.
• 34:03
  Speaker 1: So again we'd like to see I'd like to see
• 34:06
  Speaker 1: some guardrails put in place to protect people from the
• 34:09
  Speaker 1: front running. UM. You know, again, I've never been a
• 34:12
  Speaker 1: fan that, you know, latency should give you an advantage
• 34:16
  Speaker 1: versus somebody who's a mile further away. It doesn't really
• 34:19
  Speaker 1: make any logical sense. I don't think it's making markets better,
• 34:22
  Speaker 1: but I do think conceptually, UM, you've got to be
• 34:26
  Speaker 1: careful around um being too critical or you know, undoing everything,
• 34:31
  Speaker 1: or the markets aren't going to be knit together the
• 34:33
  Speaker 1: way they need to be knitted together. I mean, I'm
• 34:35
  Speaker 1: not sure anybody would design the markets with a blank
• 34:38
  Speaker 1: sheet of paper the way they are. But since we've
• 34:41
  Speaker 1: had UM, you know, really since the late nineties, UM,
• 34:44
  Speaker 1: when we've seen this tremendous expansion of pools of trading,
• 34:47
  Speaker 1: you know, we've really seen a pre it's a very
• 34:49
  Speaker 1: different market than when I started out to say the least. Bill,
• 34:53
  Speaker 1: Thank you so much for spending so much time. You
• 34:55
  Speaker 1: can hang around a little bit. We'll continue this conversation.
• 34:58
  Speaker 1: Be sure and check out daily column on Bloomberg View
• 35:03
  Speaker 1: dot com, follow me on Twitter at rid Holts, and
• 35:06
  Speaker 1: check out the rest of our conversation. You could see
• 35:08
  Speaker 1: that at Bloomberg dot com or on Apple iTunes. I'm
• 35:12
  Speaker 1: Barry Ridholtz. You've been listening to Masters in Business on
• 35:15
  Speaker 1: Bloomberg Radio. Welcome back to the podcast portion of our interview,
• 35:21
  Speaker 1: where I basically take the mic out of my ear
• 35:23
  Speaker 1: and not worry about radio segments and loosen my tie.
• 35:27
  Speaker 1: I'm literally literally doing that. Goes my subway card bill.
• 35:32
  Speaker 1: Thank you so much for doing this. I'll tell you
• 35:34
  Speaker 1: I was really looking forward to this. You guys know
• 35:38
  Speaker 1: I'm a huge Vanguard fan. I'm a big Jack Brennan fan.
• 35:43
  Speaker 1: I'm somewhat of a Bogel fan, although I do have
• 35:46
  Speaker 1: uh I have a little bit of a beef with
• 35:48
  Speaker 1: with Mr Bogel. And by the way, I think I
• 35:52
  Speaker 1: know where that one's going. If you, if you ever
• 35:55
  Speaker 1: wanna have like a miserable couple of days, write something
• 35:59
  Speaker 1: really negative about Apple. Not that I do that. I've
• 36:02
  Speaker 1: been a Mac fanboy forever, and the emails light up.
• 36:06
  Speaker 1: I wrote what I thought was a very measured, very
• 36:10
  Speaker 1: circumspect I don't even want to call it critique. Just hey.
• 36:15
  Speaker 1: You know, Jack Bogel is a legend, and he created
• 36:19
  Speaker 1: one one of the most successful investing companies in the world.
• 36:23
  Speaker 1: But he's kind of anti e t f s. He
• 36:26
  Speaker 1: thinks people potentially overtrade them, and he's not a big
• 36:31
  Speaker 1: fan of international. And you and I both you you
• 36:35
  Speaker 1: really have expanded the whole international business. So so let's
• 36:38
  Speaker 1: talk a little bit about um Mr Bogel, who, by
• 36:41
  Speaker 1: the way, I would love to interview. I would love
• 36:44
  Speaker 1: to sit and talk to him because I think he's
• 36:46
  Speaker 1: a fascinating guy. I'm sure he would love to do it. Okay,
• 36:49
  Speaker 1: well we'll set that up. But what about this E
• 36:53
  Speaker 1: t F thing and what about international? So you know,
• 36:55
  Speaker 1: E t f S we look at E t S
• 36:57
  Speaker 1: is just another product structure for frankly, and what it's
• 37:01
  Speaker 1: allowed us to do is to take the indexing story,
• 37:04
  Speaker 1: the low cost story, to a much broader group of investors.
• 37:08
  Speaker 1: And because of the way e t f S work
• 37:12
  Speaker 1: for many advisors from especially if you're on a brokerage platform,
• 37:15
  Speaker 1: it's just a lot easier to implement than traditional funds.
• 37:19
  Speaker 1: It does not mean that we endorse day trading or
• 37:22
  Speaker 1: you know, minute by minute trading of ETFs. In fact,
• 37:25
  Speaker 1: just the opposite. We believe very strongly that, you know,
• 37:28
  Speaker 1: long term investing is the way to really accumulate wealth.
• 37:32
  Speaker 1: There there was an article in the wool Street Journal
• 37:35
  Speaker 1: that I remember reading and just falling off my jail
• 37:38
  Speaker 1: laughing about somebody wants to park forty million dollars in
• 37:43
  Speaker 1: short term bonds and there's a cost to move in
• 37:47
  Speaker 1: and out of that, and you guys said no thanks,
• 37:49
  Speaker 1: and the person lost their minds. So if you're focused
• 37:52
  Speaker 1: on long term and someone says, here's forty million dollars
• 37:55
  Speaker 1: from for six months or ninety days, your answer was no,
• 37:58
  Speaker 1: Well that all that call comes on the investors, and
• 38:01
  Speaker 1: that's wrong to do, comes on the current investors. And
• 38:03
  Speaker 1: in that particular case, we were in a declining yield environment,
• 38:07
  Speaker 1: so it was gonna also diminish the yield of the
• 38:10
  Speaker 1: portfolio pretty dramatically. So our portfolio manager appropriately said no,
• 38:15
  Speaker 1: we're not going to accept the money. Actually did end
• 38:18
  Speaker 1: up on the front page of the Wall Street Journal. Um.
• 38:21
  Speaker 1: The guy went to the sec um, He went to
• 38:24
  Speaker 1: every major news publication and it it turned out to
• 38:27
  Speaker 1: be actually one of the best things that we couldn't
• 38:30
  Speaker 1: have asked for a better story because it really underscored.
• 38:34
  Speaker 1: But we believe, which is take care of the existing investor,
• 38:37
  Speaker 1: and the next investor will find you if you if
• 38:39
  Speaker 1: you have a reputation for doing that. I think one
• 38:41
  Speaker 1: of your competitors had come out and said, they're absolutely right.
• 38:44
  Speaker 1: Why would you put your existing investors cost structure at risk?
• 38:49
  Speaker 1: So someone hey, there were there were mecha, their tools.
• 38:52
  Speaker 1: You want to put in a money market fund, you
• 38:53
  Speaker 1: want to put it somewhere. There's a place to put it,
• 38:56
  Speaker 1: just not short term in that fund, right that I
• 38:59
  Speaker 1: always that was pretty amazing because everybody else is so
• 39:03
  Speaker 1: desperately chasing assets to turn around and say forty million
• 39:07
  Speaker 1: dollars is a chank of money, but no, thanks that
• 39:09
  Speaker 1: that just always stayed with me. Well, in that particular time,
• 39:13
  Speaker 1: we were a lot littler firm than we are today
• 39:15
  Speaker 1: and it was a pretty significant purchase. But again, you know,
• 39:19
  Speaker 1: it sounds really simplistic, but if you do the right thing,
• 39:22
  Speaker 1: usually in the end, it's a good strategy, not not
• 39:24
  Speaker 1: a bad um business mantra um. So I have so
• 39:28
  Speaker 1: many questions. I don't even know where to begin. So
• 39:32
  Speaker 1: let me let me ask you the question that when
• 39:34
  Speaker 1: I was describing this upcoming interview to somebody, someone said
• 39:39
  Speaker 1: to me, Hey, you know those guys only fly coach.
• 39:43
  Speaker 1: Is this true? So we only book coach and I
• 39:46
  Speaker 1: have flown so many miles that I do get upgraded
• 39:48
  Speaker 1: every now and then. By the way, for radio listeners,
• 39:51
  Speaker 1: you're six two three? How told you? Six five? Okay,
• 39:56
  Speaker 1: I'm I'm giving you permission to book a little more
• 39:59
  Speaker 1: leg room. Don't have to book coach. I fortunately have
• 40:03
  Speaker 1: enough miles on a couple of airlines that it's almost automatic.
• 40:06
  Speaker 1: But I you know, we do. Look, it's the shareholders
• 40:08
  Speaker 1: money at the end of the day, and you know,
• 40:10
  Speaker 1: we're not trying to um be holier than now, but
• 40:14
  Speaker 1: you have to always put yourself in the shareholders shoots,
• 40:19
  Speaker 1: and you know, basically, is this a good investment or
• 40:21
  Speaker 1: is this time well spent for the shareholder? That it's
• 40:26
  Speaker 1: a refreshing thing to hear that that is not standard
• 40:30
  Speaker 1: standard operating procedure at a lot of places and I
• 40:34
  Speaker 1: think the proof is in the pudding. It's pretty clear
• 40:36
  Speaker 1: that whatever you guys are doing, it seems to be working.
• 40:40
  Speaker 1: And if if it's a matter of putting shareholders first,
• 40:43
  Speaker 1: how come everybody isn't doing it? Well? Um, I'd like
• 40:47
  Speaker 1: to think that we're hopefully influencing the marketplace so that
• 40:51
  Speaker 1: people are are focusing more on it. But look, I
• 40:54
  Speaker 1: think in most organizations, to be very fair, there's a
• 40:58
  Speaker 1: natural conflict. You know, we're owned by our funds and
• 41:02
  Speaker 1: therefore our investors. So for us, when we say we're
• 41:04
  Speaker 1: putting shareholders first, we're putting both the shareholders of the company,
• 41:08
  Speaker 1: if you will, as well as our clients first. They're
• 41:10
  Speaker 1: the same most organizations. They're either privately held or they're
• 41:15
  Speaker 1: publicly traded, and so they have their public shareholders that
• 41:19
  Speaker 1: they have to earn a return for and then they
• 41:21
  Speaker 1: have their clients. By definition, that's a conflict. And how
• 41:24
  Speaker 1: you balance that, you know, I'm unfortunately I'm not that smart,
• 41:26
  Speaker 1: so I need the simplicity. Well, the simplicity works, um,
• 41:31
  Speaker 1: So I mentioned I'm just thrilled you're doing this interview.
• 41:34
  Speaker 1: But you guys, really under normal circumstances, aren't out there
• 41:39
  Speaker 1: in the media. There's not a lot of talking heads.
• 41:42
  Speaker 1: There's not a lot of blah blah blah. By definition,
• 41:46
  Speaker 1: you're not gonna be here's my favorite stock, here's where
• 41:49
  Speaker 1: we think the market is going to be in a year.
• 41:51
  Speaker 1: That's an mathematic to you. Why so so little media generally,
• 41:57
  Speaker 1: and what motivated you to say, hey, this is all
• 42:00
  Speaker 1: a financial crisis. Let's say a few words. Well, I
• 42:03
  Speaker 1: think you know, we we do get it's interesting our
• 42:06
  Speaker 1: media coverage sort of waxes and ways. We get a
• 42:08
  Speaker 1: lot of nice things written about us and said about us.
• 42:11
  Speaker 1: Um but in terms of you know, doing the in
• 42:13
  Speaker 1: person stuff, we find we're in demand when there's a crisis.
• 42:17
  Speaker 1: When things are really a brilliant people think we're boring
• 42:20
  Speaker 1: because we're not going to give them the hot stock
• 42:22
  Speaker 1: tip or whatever. But is an investing is supposed to
• 42:24
  Speaker 1: be bored? I think it is, and I think it's
• 42:26
  Speaker 1: three yards in a cloud of dust, you know, And
• 42:28
  Speaker 1: if you can just repeat that over and over, you'll
• 42:30
  Speaker 1: be successful. You know. During the crisis, though we were
• 42:33
  Speaker 1: we tried to be more front and center. We we
• 42:35
  Speaker 1: felt that there was a real need to um stressed
• 42:39
  Speaker 1: to people. We did not think the world was going
• 42:41
  Speaker 1: to end, and as a result, they needed despite all
• 42:45
  Speaker 1: the emotional trauma that was going on due to the market,
• 42:48
  Speaker 1: they needed to be able to see through that and
• 42:51
  Speaker 1: if we could help that in any way, you know,
• 42:53
  Speaker 1: we really felt it was our responsibility to do that.
• 42:56
  Speaker 1: And so you guys ventured out and did a little
• 42:58
  Speaker 1: more media than usual, and we did a lot more
• 43:00
  Speaker 1: media than usual. Um you know, either our own private
• 43:03
  Speaker 1: webcasts or you know, um I, our chief investment officer
• 43:07
  Speaker 1: at the time, Gus Souder and I probably did half
• 43:10
  Speaker 1: a dozen television shows within a month, which would be
• 43:12
  Speaker 1: typically more than we would do in a couple of years.
• 43:15
  Speaker 1: So let's talk a little bit about Gus. So do we.
• 43:17
  Speaker 1: We briefly hinted at at it earlier. UM he's kind
• 43:22
  Speaker 1: of a legendary guy, isn't he. Yeah. I love Gus
• 43:25
  Speaker 1: and UM I was very blessed. Um I joined Vanguard
• 43:28
  Speaker 1: ninety six. Gus joined in nine seven and moved in
• 43:32
  Speaker 1: two doors down if you will, from my office, and
• 43:35
  Speaker 1: we became really good friends right from the get go.
• 43:38
  Speaker 1: And one of the things that really was remarkable about
• 43:41
  Speaker 1: Gus is um the the investment guys would all talk about, UM,
• 43:46
  Speaker 1: what how great he was with computer science and he
• 43:49
  Speaker 1: could sort of translate investment ideas into code, and the
• 43:52
  Speaker 1: computer guys were all talking about how Grady was on
• 43:54
  Speaker 1: the investment side and math and how he could explain
• 43:58
  Speaker 1: all that to them, and he just had this ability
• 44:01
  Speaker 1: to get stuff done. He also was a great spokesman
• 44:04
  Speaker 1: for us because he got out there and he could
• 44:06
  Speaker 1: take really complicated ideas and boil them down to UM,
• 44:09
  Speaker 1: you know, sort of their their real basic, most simple concepts.
• 44:14
  Speaker 1: So who fills that role today? So UM Fortunately for
• 44:18
  Speaker 1: us UM. One of the things gusted was he developed
• 44:21
  Speaker 1: an incredibly deep team and we then moved one of
• 44:26
  Speaker 1: our key leaders, UM, Tim Buckley, who had run our
• 44:29
  Speaker 1: retail business over and some people saw it as a
• 44:31
  Speaker 1: non traditional move because Tim hadn't grown up in the
• 44:34
  Speaker 1: investment portion of the business, but he had spent his
• 44:37
  Speaker 1: whole career getting deep on on the investment side. And
• 44:41
  Speaker 1: Gus told me something really interesting right before he retired.
• 44:44
  Speaker 1: He said, look, when you're looking for my replacement, you're
• 44:46
  Speaker 1: not going to get somebody who came up the way
• 44:49
  Speaker 1: I did. You know he started out He traded stocks,
• 44:52
  Speaker 1: He he wrote the original code for optimizing our index funds.
• 44:55
  Speaker 1: You know, he was very hands on. The group had
• 44:59
  Speaker 1: gotten to be very low. Are you know our investment
• 45:01
  Speaker 1: team now several hundred people. Um, you know we run
• 45:04
  Speaker 1: two plus trillion in Malvern and so um he said,
• 45:08
  Speaker 1: you're gonna need somebody who's a great leader of people
• 45:12
  Speaker 1: and developer of talent, and you're gonna need somebody who
• 45:15
  Speaker 1: can really sort of think, um about the intersection of
• 45:19
  Speaker 1: technology and investing going forward. And Tim met both those
• 45:23
  Speaker 1: criteria really well. And he's just done a fabulous job.
• 45:26
  Speaker 1: So who else has what other investors have influenced your
• 45:30
  Speaker 1: thought process? And it's really a two part question. Part
• 45:34
  Speaker 1: one is about investing and thinking about managing all the
• 45:37
  Speaker 1: people's money. But the second part is about running an
• 45:42
  Speaker 1: investment business, which I don't know if people realize, is
• 45:45
  Speaker 1: a very unique animal compared to other businesses. So outside
• 45:49
  Speaker 1: of Vanguard, because I've had a ton of influences inside
• 45:52
  Speaker 1: the company, um, you know, from just a pure investment perspective,
• 45:57
  Speaker 1: two of my Actually I run a risk here because
• 46:01
  Speaker 1: I have a lot of people I really enjoy talking to.
• 46:03
  Speaker 1: But um, there's the original Winsor team John Neff, who
• 46:09
  Speaker 1: was the legendary value investor, watching him Um talk about
• 46:13
  Speaker 1: stocks and the way he thought about the markets. UM
• 46:17
  Speaker 1: is a young UM person in Vanguard. You know, it
• 46:20
  Speaker 1: was like a free education. It was unbelievable. It was
• 46:24
  Speaker 1: like getting your master's PhD and Advanced PhD all at once.
• 46:29
  Speaker 1: Because he just was so insightful. He knew more about
• 46:32
  Speaker 1: the companies he was investing in the their own management
• 46:34
  Speaker 1: stay UM. I also had the great privilege of watching
• 46:38
  Speaker 1: Prime Cap evolved as a firm. We hired prime Cap
• 46:42
  Speaker 1: very early, and prime Cap was a group that spun
• 46:44
  Speaker 1: out of Capital Research and the founder was Gonna named
• 46:47
  Speaker 1: Howe Scow and the original team UM again, they were
• 46:52
  Speaker 1: just so talented. They were and they were very different
• 46:54
  Speaker 1: than the Windsor team. They weren't nearly, they weren't deep value.
• 46:58
  Speaker 1: They were kind of growthy, but growth at a reasonable price.
• 47:01
  Speaker 1: But it was more just we're gonna find really good companies,
• 47:04
  Speaker 1: invest in them and watch. And what was interesting is UM.
• 47:08
  Speaker 1: You know, so we're from NAP, I learned being a
• 47:10
  Speaker 1: contrarians never a bad thing. And from Prime Gap I
• 47:14
  Speaker 1: learned about patients. UM. They have very low portfolio turnover,
• 47:18
  Speaker 1: one of the lowest turnovers of any active manager and
• 47:22
  Speaker 1: they would make very concentrated bets as well, which if
• 47:26
  Speaker 1: you're going to invest in active, if you can get
• 47:29
  Speaker 1: low cost and some concentration, I think it gives you
• 47:32
  Speaker 1: your best chance about performing. That's exactly right. So those
• 47:37
  Speaker 1: two UM people had huge influence early in my career,
• 47:42
  Speaker 1: you know, in terms of running the business UM Uh.
• 47:46
  Speaker 1: Charlie Ellis and Bert Malkiel, who you know we're both
• 47:50
  Speaker 1: on our board, certainly were very influential, and more at
• 47:54
  Speaker 1: a philosophical level. And again it was all about the
• 47:56
  Speaker 1: client coming first, and and and and it was so
• 48:00
  Speaker 1: around taking a very rigorous academic approach, if you will.
• 48:04
  Speaker 1: One of the things we've tried to do advant gardis
• 48:06
  Speaker 1: take really complicated ideas and then bring them to the masses.
• 48:10
  Speaker 1: So indexing certainly fit that bill. But even the way
• 48:13
  Speaker 1: we run active you know, we sub we use subadvisors
• 48:15
  Speaker 1: from all around the world. That was very much the
• 48:17
  Speaker 1: way pension funds and foundations and endowments worked. Early on
• 48:22
  Speaker 1: in the mutual fund business, everybody's active teams were all
• 48:25
  Speaker 1: in house, so we were really the only guys doing this.
• 48:28
  Speaker 1: And again that the Charlie's and the Berths were very
• 48:31
  Speaker 1: influential and helping us think that through. How do you
• 48:33
  Speaker 1: go about finding these outside teams to manage a chankamany
• 48:38
  Speaker 1: So we have UM. We have a really deep team
• 48:41
  Speaker 1: who've grown up doing this and they have a very
• 48:44
  Speaker 1: rigorous process and they actually today travel the world looking
• 48:48
  Speaker 1: for talent. And so we've got firms all around the world. UM,
• 48:52
  Speaker 1: I think thirty plus firms now managing about seventy five
• 48:56
  Speaker 1: man dates for us. So let me UM shift gears
• 48:59
  Speaker 1: a little bit of on you. You recently had an
• 49:01
  Speaker 1: op ed in the Wall Street Journal that I thought
• 49:05
  Speaker 1: was very interesting and there were really two parts that
• 49:08
  Speaker 1: leapt out. The first was the city issue that's systemically
• 49:13
  Speaker 1: important financial institutions. Do we really think mutual fund companies
• 49:18
  Speaker 1: are going to end up being citfies? I mean, fifty
• 49:21
  Speaker 1: billion dollars is a the minimus cut off. That is
• 49:24
  Speaker 1: not a lot of money these days. So UM, the
• 49:27
  Speaker 1: short answer is, you would not think it would be
• 49:29
  Speaker 1: logical UM because funds are first of all, it's an
• 49:32
  Speaker 1: agency based business model, not a proprietary based business model. UM. Second,
• 49:37
  Speaker 1: because of the UM prohibitions against leverage, there's no leverage
• 49:41
  Speaker 1: and funds so so, how can this be so systemically
• 49:46
  Speaker 1: important if you're not leveraged up, you're not trading derivatives,
• 49:49
  Speaker 1: you're not You would think it would be of all
• 49:51
  Speaker 1: the pushback against Dodd Frank, you would think this is
• 49:54
  Speaker 1: the easiest thing in the universe to carve out an
• 49:57
  Speaker 1: exception for no leverage, no heavy derivative usage. No. I mean,
• 50:04
  Speaker 1: there was an article in The Times the other day
• 50:06
  Speaker 1: about how many mutual funds are loading up on these
• 50:09
  Speaker 1: pre public companies, and there's a risk because so many
• 50:12
  Speaker 1: of those go. But if those go belly yup, there's
• 50:14
  Speaker 1: no subsequent domino effect. It's not like subprime house and
• 50:19
  Speaker 1: it's not Again, there's idiosyncratic risk there, which you shouldn't
• 50:23
  Speaker 1: be trying to prevent because without risk, there's no return.
• 50:26
  Speaker 1: But it's not systemic. Um. The reason I wrote the
• 50:29
  Speaker 1: op ed in the timing of it was Um. The
• 50:32
  Speaker 1: FSB in in the in Europe, in the UK has
• 50:36
  Speaker 1: issued its second consultation and there was a huge emphasis
• 50:40
  Speaker 1: that big is bad and if funds are big, or
• 50:43
  Speaker 1: fun families are big, then they should be deemed systemically important.
• 50:47
  Speaker 1: And the consequences of being systemically important is I is
• 50:50
  Speaker 1: I pointed out in the editorial, are very asymmetric. If
• 50:54
  Speaker 1: you're a shareholder of a fund that's designated as a city,
• 50:57
  Speaker 1: you're gonna not gonna get any benefit from that, but
• 51:00
  Speaker 1: you potentially could be charged higher fees. You could be
• 51:03
  Speaker 1: providing capital to bail out too big to fail firms.
• 51:07
  Speaker 1: If one of the competitors of yours uses leverage, engages
• 51:11
  Speaker 1: in risks and collapses somehow, it's Vanguard investors responsibility to
• 51:17
  Speaker 1: Let's let's make it even simpler. Um we already have
• 51:20
  Speaker 1: um City Group. I don't want to pick on City,
• 51:23
  Speaker 1: but Citi is a systemically important institution. If City Group,
• 51:26
  Speaker 1: for whatever reason failed for the fourth time, fifth time,
• 51:29
  Speaker 1: how many times have they been insolvent? But I could
• 51:31
  Speaker 1: say that you can't. But if let's look at the
• 51:33
  Speaker 1: history of city If if City fails under this underdog frank,
• 51:37
  Speaker 1: all cities will be required to help out. So if
• 51:42
  Speaker 1: if you're in the forget it's Vanguard, any large fund
• 51:45
  Speaker 1: that's been designated systemically important, you're potentially on the hook
• 51:49
  Speaker 1: for that. That does not seem right to us, because
• 51:53
  Speaker 1: if your fund goes down, we're certainly not going to
• 51:56
  Speaker 1: get a capital injection from the banking system to get up,
• 52:00
  Speaker 1: because that's the risk you're bearing in the fund. So
• 52:03
  Speaker 1: it just it it seems completely irrational to us. So
• 52:07
  Speaker 1: what we think, and again I think is you know Advangard,
• 52:10
  Speaker 1: you know, um, I did get a couple of I've
• 52:12
  Speaker 1: got a lot of fan mail on this. I've gotten
• 52:14
  Speaker 1: a few people saying, you know, this is not Vanguard.
• 52:16
  Speaker 1: You guys are never anti regulation, and I'm like, we're
• 52:19
  Speaker 1: not anti regulation, actually, wet well, we're we want effective regulation.
• 52:24
  Speaker 1: And where the concentration should be are what activities, what
• 52:29
  Speaker 1: practices are in play that actually could lead to a
• 52:32
  Speaker 1: systemic issue. And so those are the sorts of things
• 52:35
  Speaker 1: that we'd like to see f stock focused on. So
• 52:37
  Speaker 1: you you mentioned earlier, you know companies, you know, funds
• 52:41
  Speaker 1: that are buying a lot of liquid securities. All right,
• 52:45
  Speaker 1: I think it's perfectly legitimate for f stock to look
• 52:47
  Speaker 1: at that and say is that activity going to create
• 52:51
  Speaker 1: systemic risk? Now we could have a debate about that,
• 52:54
  Speaker 1: but it's a it's a very fair question. And if
• 52:56
  Speaker 1: the answer is yes, then okay, then you've got to
• 52:58
  Speaker 1: you either you give them the oportunity to de risk
• 53:01
  Speaker 1: or designate them. But if the answer is no, then
• 53:03
  Speaker 1: you move on. But it's certainly a good line of question.
• 53:06
  Speaker 1: But just because the funds big doesn't mean it should
• 53:09
  Speaker 1: be automatically systemically important. You get the sense they don't
• 53:12
  Speaker 1: understand what different companies do in different roles. Now, if
• 53:16
  Speaker 1: you guys suddenly set up, all right, here's our new
• 53:18
  Speaker 1: structured products division, and here's our new leverage derivatives division,
• 53:23
  Speaker 1: and here's our liquid alts division, that's a different story.
• 53:26
  Speaker 1: But and if we were doing proprietary trading for our
• 53:29
  Speaker 1: own behalf, absolutely there would be a completely different story.
• 53:32
  Speaker 1: And now the other half of that, which I'm not
• 53:35
  Speaker 1: sure exactly where you fall on, is the money market funds.
• 53:39
  Speaker 1: And I always scratch my head and wondered, why does
• 53:42
  Speaker 1: the taxpayer have to backstop money market funds? These are
• 53:46
  Speaker 1: risk instruments. Hey, if you want to buy something that's
• 53:49
  Speaker 1: risk free, there are lots of short term notes you
• 53:52
  Speaker 1: can do, but this is going to generate a yield
• 53:55
  Speaker 1: that's above risk free return. Therefore you're assuming some risk.
• 54:00
  Speaker 1: So look, the way I look at money funds is
• 54:03
  Speaker 1: money funds were essentially a convenience. If you look at
• 54:07
  Speaker 1: um a very short term, very short duration portfolio, the
• 54:12
  Speaker 1: price fluctuates, you know, point to one point oh one,
• 54:19
  Speaker 1: and you know, under lots of different circumstances. And so
• 54:23
  Speaker 1: the idea of keeping a constant NAV was a convenience
• 54:27
  Speaker 1: that allowed people to use it for transactional purposes. Now,
• 54:30
  Speaker 1: what happened over time, and and this is this is
• 54:34
  Speaker 1: a very fair criticism of the fund industry, is that
• 54:37
  Speaker 1: simple product evolved into something different, especially on the institutional side.
• 54:43
  Speaker 1: It became much more of a cash management vehicle. And
• 54:45
  Speaker 1: what you saw were you know, multiple na vs being
• 54:48
  Speaker 1: struct during the day and so forth, and and lots
• 54:50
  Speaker 1: of interesting things being done where it really was away
• 54:54
  Speaker 1: from the original spirit of the product. So UM, the
• 54:58
  Speaker 1: way the sec forms ended up, we were actually we
• 55:01
  Speaker 1: actually thought it was a pretty balanced approach. There were,
• 55:04
  Speaker 1: you know, first of all, lots of tightening of UM,
• 55:08
  Speaker 1: you know, in potential, you know, what can be in
• 55:10
  Speaker 1: in a portfolio and so forth, and durations and whatnot.
• 55:14
  Speaker 1: But very importantly, UM institutional funds, institutional prime funds are
• 55:19
  Speaker 1: actually no longer constant NAV because of their because of
• 55:23
  Speaker 1: their nature the words for for people who may not
• 55:25
  Speaker 1: be familiar with money market funds, this used to always
• 55:28
  Speaker 1: report as one dollar, right, even if it was worth
• 55:31
  Speaker 1: a little over a little less. So there was never
• 55:34
  Speaker 1: any concerns. So when you wrote a check, you didn't
• 55:36
  Speaker 1: have a taxable event was you know, from a convenient standpoint.
• 55:39
  Speaker 1: That's what it was all about. Now, during the crisis, UM,
• 55:43
  Speaker 1: the Reserve Fund which broke the buck had a pretty
• 55:45
  Speaker 1: big concentration of institutional investors, and the other funds that
• 55:49
  Speaker 1: were under duress UM were all institutionally oriented. Now you
• 55:54
  Speaker 1: mentioned the taxpayer element. You know, when the Treasury came
• 55:56
  Speaker 1: in and put the guarantee on. To be fair, nobody
• 56:00
  Speaker 1: asked for that, and actually it was just sort of
• 56:03
  Speaker 1: imposed and you didn't really have a lot of choice,
• 56:07
  Speaker 1: but there was a deep sigh of relief after they
• 56:10
  Speaker 1: did that. So it was but everybody kind of unclenched
• 56:15
  Speaker 1: a little bit. Book. I went out and talked to
• 56:17
  Speaker 1: hundreds of clients afterwards, and they did. And you know,
• 56:21
  Speaker 1: for us UM, you know, I kind of always knew
• 56:24
  Speaker 1: this would circle back though, because UM our prime fund
• 56:27
  Speaker 1: at that point was government and treasury. So unless the
• 56:32
  Speaker 1: US government defaulted, that prime fund could have withstood anything.
• 56:36
  Speaker 1: So shouldn't you guys have been more rewarded by client
• 56:40
  Speaker 1: flows and the people who were more reckless or less
• 56:44
  Speaker 1: astute is really the right word. Should shouldn't the marketplace
• 56:48
  Speaker 1: have been allowed to separate winners or losers? Or was
• 56:51
  Speaker 1: this systemically important? I think it was really you know,
• 56:57
  Speaker 1: it's one of those will never really know. Um. You know,
• 57:00
  Speaker 1: I'm a market space person. I like to let the
• 57:03
  Speaker 1: market shake out. Look the short term, the short term
• 57:07
  Speaker 1: markets were in turmoil, um, and you know, certainly the
• 57:12
  Speaker 1: breaking of the buck by the Reserve Fund contributed to that.
• 57:15
  Speaker 1: But um, you remember Triple A companies were having a
• 57:19
  Speaker 1: hard time rolling over their commercial paper. There was so
• 57:21
  Speaker 1: much uncertainty as to what was going to be allowed
• 57:25
  Speaker 1: and what wasn't not going to be allowed. It's it's
• 57:28
  Speaker 1: really tough to go back and say, well, you know,
• 57:30
  Speaker 1: this would have happened if only these things have been done,
• 57:33
  Speaker 1: or this would have happened if only these things have
• 57:34
  Speaker 1: been done. I'm not sure we'll ever really know. Um.
• 57:38
  Speaker 1: I think I think the regulators did the best they
• 57:40
  Speaker 1: could with the information that they had at the time.
• 57:43
  Speaker 1: We need to run a series of controlled experiments. In
• 57:47
  Speaker 1: one universe, we allow city group to go under, and
• 57:50
  Speaker 1: in another universe we save Leaman and then we run
• 57:53
  Speaker 1: these simulations and see what happens. Unfortunately we didn't get
• 57:57
  Speaker 1: a chance to do that. Let's let's stick with regulation
• 58:00
  Speaker 1: a little bit. I have two related questions. First, what
• 58:04
  Speaker 1: what should the SEC be doing better? What does good
• 58:08
  Speaker 1: financial regulation look like? Yeah, so I think the SEC
• 58:13
  Speaker 1: um has been moving in a in a very constructive
• 58:17
  Speaker 1: UM direction. I think Mary Joe White has put some
• 58:20
  Speaker 1: real um, you know, clear markers in the sand around
• 58:24
  Speaker 1: what her priorities are. And I think she's done a
• 58:26
  Speaker 1: pretty good job. Um. You know, she's tough. I mean
• 58:29
  Speaker 1: she's that's a reputation, and she's long time she's very tough.
• 58:35
  Speaker 1: But I think she's very fair. She's you know, incredibly
• 58:38
  Speaker 1: um open to getting feedback, and she you know, she
• 58:41
  Speaker 1: really processes it very quickly. I think what the SEC
• 58:46
  Speaker 1: is trying to do in terms of gathering UM, doing
• 58:50
  Speaker 1: a better job gathering data UM so that they really
• 58:54
  Speaker 1: have a better view into what's happening into markets is
• 58:57
  Speaker 1: a really good thing. And a lot of it. You know,
• 58:59
  Speaker 1: the fund industry, UM, we're the most transparent. There's all
• 59:04
  Speaker 1: this money outside the fund industry that they need to
• 59:06
  Speaker 1: get their handle hands around what's actually happening, and I
• 59:10
  Speaker 1: think they're actually trying to move in that direction. So
• 59:12
  Speaker 1: to me, that's a top priority. When you say outside
• 59:14
  Speaker 1: the fund industry, private equity, hed hedge funds, private equity, um,
• 59:20
  Speaker 1: but separate accounts, I mean, you know, there's there's more
• 59:23
  Speaker 1: money and separate, separately managed accounts on the institutional side
• 59:26
  Speaker 1: than there is in mutual funds. And that's a big number.
• 59:29
  Speaker 1: It's a huge number. And so, um, they're trying to
• 59:33
  Speaker 1: get their handle on all of that so that they
• 59:35
  Speaker 1: can really appropriately assess, you know, what, where are their
• 59:38
  Speaker 1: risks and so forth. I think, um, they need to Uh,
• 59:44
  Speaker 1: there's still some opportunity for harmonization with the other agencies.
• 59:49
  Speaker 1: I mean, it's it's pretty complicated to figure out who's
• 59:52
  Speaker 1: in charge of what you know, between the CFTC, the SEC,
• 59:55
  Speaker 1: now the d o L and on certain issues, let's
• 59:57
  Speaker 1: talk about the d o L because that's a fast
• 59:59
  Speaker 1: and in conversation. Um. So, after the financial crisis, part
• 1:00:05
  Speaker 1: of Dodd Frank more or less directed the SEC to
• 1:00:09
  Speaker 1: review some of the issues that involved brokers, advisors, are as, etcetera.
• 1:00:16
  Speaker 1: And I think it was the SEC comes out with
• 1:00:19
  Speaker 1: the report that said, we think the fiduciary standard, which
• 1:00:23
  Speaker 1: is quote unquote whatever is in the client's best interest,
• 1:00:26
  Speaker 1: is really the appropriate standard for everybody, and let's enforced
• 1:00:30
  Speaker 1: this uniformly. And it never made it out of committee.
• 1:00:34
  Speaker 1: At three to two it lost, But then the Department
• 1:00:37
  Speaker 1: of Labor kind of said, okay, we'll pick this up
• 1:00:41
  Speaker 1: backdoor and pretty much mandated that four oh one K
• 1:00:45
  Speaker 1: management and my wife has a four oh three B
• 1:00:48
  Speaker 1: which is PS mostly Vanguard m essentially said this new
• 1:00:55
  Speaker 1: fiduciary or not so new fiduciary standard is now the
• 1:00:58
  Speaker 1: new standard for anybody was advising on these retirement accounts,
• 1:01:02
  Speaker 1: which are really under the pur of view of salary,
• 1:01:05
  Speaker 1: not outside investing. And that's why it's our per of view,
• 1:01:08
  Speaker 1: not the SEC. So that's a long winded wind up
• 1:01:12
  Speaker 1: for a question. But where is Vanguard on the issue
• 1:01:15
  Speaker 1: of fiduciary versus suitability? So at the highest level, we're
• 1:01:19
  Speaker 1: actually comfortable with the raising the fiduciary standard. I think,
• 1:01:24
  Speaker 1: as with all new regulation, the devil's going to be
• 1:01:27
  Speaker 1: in the details. And you know when the d o
• 1:01:30
  Speaker 1: L actually tried to do this a couple of years ago,
• 1:01:33
  Speaker 1: as you may recall, and ran into a sort of
• 1:01:36
  Speaker 1: a hornet's nest because under a RISSA there's some really
• 1:01:40
  Speaker 1: technical in the weeds UM issues around prohibited transactions. And basically,
• 1:01:45
  Speaker 1: if you were a four oh one K provider, you
• 1:01:48
  Speaker 1: would have been prohibited from doing certain really basic things
• 1:01:52
  Speaker 1: for your investors, such as, UM, potentially you know, giving
• 1:01:56
  Speaker 1: guidance around rebalancing a portfolio. UM. And I don't think
• 1:02:01
  Speaker 1: that was the intent. And so what would you do.
• 1:02:03
  Speaker 1: You'd have to bring in a third party to to
• 1:02:06
  Speaker 1: you know, be independent and more cost layer another layer exactly.
• 1:02:10
  Speaker 1: So so it was it was actually counter to what
• 1:02:13
  Speaker 1: the original intent. So they you know, they stepped back.
• 1:02:16
  Speaker 1: The new rule is out, UM. You know, the proposal
• 1:02:20
  Speaker 1: is out and people are studying its four hundred pages.
• 1:02:23
  Speaker 1: So we're sort of working our way through it as
• 1:02:25
  Speaker 1: we speak actually right now. So I can't give you
• 1:02:28
  Speaker 1: a definitive do they have it right? I'm pretty sure
• 1:02:31
  Speaker 1: they've thought about the prohibited transaction elements UM in in
• 1:02:36
  Speaker 1: in the in the rules. As we go forward, hopefully
• 1:02:39
  Speaker 1: they've got that right, because that's going to be important
• 1:02:42
  Speaker 1: for us. That's really important. UM at the highest level,
• 1:02:45
  Speaker 1: you know, you know, higher fiduciary standards for people handling
• 1:02:49
  Speaker 1: money makes a lot of sense. You would think there
• 1:02:52
  Speaker 1: was some issues that the target date funds somebody had suggested,
• 1:02:57
  Speaker 1: essentially came about as a solution to some of the
• 1:03:02
  Speaker 1: four oh one k rules. You guys are pretty substantial
• 1:03:05
  Speaker 1: footprint and target date funds we haven't really gotten to that.
• 1:03:09
  Speaker 1: Let's let's talk a little bit about that. Who is
• 1:03:11
  Speaker 1: that appropriate for? What's the thinking behind these? I've read
• 1:03:16
  Speaker 1: some criticisms of target date funds, about half of which
• 1:03:20
  Speaker 1: the criticism is on costs, so I know who I'm
• 1:03:23
  Speaker 1: speaking with, and the other half is they have a
• 1:03:27
  Speaker 1: tendency to be a little too conservative given modern lifespans. Yeah,
• 1:03:32
  Speaker 1: so a couple of things the target date funds really
• 1:03:35
  Speaker 1: came about, Um, you have. When the Pension Protection Act
• 1:03:38
  Speaker 1: was passed in two thousand seven, one of the things
• 1:03:41
  Speaker 1: that allowed it made very clear that you could have
• 1:03:43
  Speaker 1: a default option that was a more balanced approach. UM.
• 1:03:48
  Speaker 1: So it sort of gave regulatory permission for something a
• 1:03:50
  Speaker 1: lot of for forward thinking companies had already been doing.
• 1:03:54
  Speaker 1: You you guys also, and it may even be closed.
• 1:03:56
  Speaker 1: Didn't you have just a basic sixty forty portfolio? We do?
• 1:04:00
  Speaker 1: And one one fun balance index um. People still use it.
• 1:04:05
  Speaker 1: Is it closed close the name of it balance index funds,
• 1:04:09
  Speaker 1: And that's perfectly fine. It's it's a perfectly good default.
• 1:04:13
  Speaker 1: The you know, in the early days of target date funds,
• 1:04:17
  Speaker 1: what was really fascinating is people said, it's too simplistic.
• 1:04:21
  Speaker 1: You know, you're only looking at age. And you know,
• 1:04:23
  Speaker 1: you and I are. You're younger than I am, but
• 1:04:25
  Speaker 1: we're in the same band. So you may have a
• 1:04:28
  Speaker 1: much different risk tolerance than I do. And does that
• 1:04:30
  Speaker 1: mean we should be in different portfolios? And in the
• 1:04:33
  Speaker 1: short answer that is, of course it does. But when
• 1:04:36
  Speaker 1: you think about target daid funds were designed for people
• 1:04:39
  Speaker 1: who did not want to make a decision, nor often
• 1:04:42
  Speaker 1: they weren't making a decision, so their money was going
• 1:04:45
  Speaker 1: into a money market fund where they were earning almost nothing,
• 1:04:48
  Speaker 1: certainly no real return. And so the idea was, you know,
• 1:04:51
  Speaker 1: could you put together a professionally managed balanced fund that
• 1:04:56
  Speaker 1: would rebalance periodically that was age appropriate. Um, given somebody's
• 1:05:01
  Speaker 1: you know, a traditional lifespan, and um, you know what
• 1:05:05
  Speaker 1: we've done is we've got pretty sophisticated global asset allocation
• 1:05:09
  Speaker 1: portfolio for people, very low cost periodically rebalances UM. And
• 1:05:16
  Speaker 1: you know, if somebody wants to talk about their risk
• 1:05:19
  Speaker 1: tolerance and wants to get into more subtleties, we've got
• 1:05:22
  Speaker 1: a million different options that we can give them, and
• 1:05:24
  Speaker 1: we can we can help them with that. But for
• 1:05:26
  Speaker 1: the person who's like, I don't know what to do,
• 1:05:29
  Speaker 1: tell me, you're tell me when you want to retire,
• 1:05:31
  Speaker 1: put your money in that fund and you and and
• 1:05:33
  Speaker 1: I'll tell you, verry, if you look at the performance
• 1:05:35
  Speaker 1: of these things over a long period of time, it's
• 1:05:39
  Speaker 1: it's it's really solid, very difficult um actually for you know,
• 1:05:43
  Speaker 1: any active managers to beat. And it's a it's one
• 1:05:47
  Speaker 1: of those things you will always be happy that you
• 1:05:49
  Speaker 1: put an investor there. So that that's kind of interesting
• 1:05:53
  Speaker 1: and it's very global by the way, that that was
• 1:05:55
  Speaker 1: one of the questions that seems to come out of
• 1:05:59
  Speaker 1: the fiduciary discussion because somehow, I don't know if I'm
• 1:06:03
  Speaker 1: I'm getting this right. There was an issue of well,
• 1:06:06
  Speaker 1: if you impose this fiduciary obligation on brokers or other advisors,
• 1:06:11
  Speaker 1: they won't be able to do this. And I didn't
• 1:06:13
  Speaker 1: really under the arguments against the fiduciary standard, none of
• 1:06:18
  Speaker 1: them have been and full disclosure were fiduciaries. We we
• 1:06:22
  Speaker 1: play in that sandbox. So I'm I'm completely biased. I'm
• 1:06:26
  Speaker 1: not pretending to be objective, but every time I see
• 1:06:29
  Speaker 1: an argument against it, it they just seemed to be
• 1:06:33
  Speaker 1: really working hard to you know, it's zero inches in
• 1:06:37
  Speaker 1: a cloud of dust. It doesn't seem like they're very persuasive.
• 1:06:40
  Speaker 1: I think the fear, especially in some of the smaller
• 1:06:44
  Speaker 1: planned market and where which are sold through many of
• 1:06:48
  Speaker 1: which are sold through advisors, and for smaller investors, that
• 1:06:52
  Speaker 1: this will UM, you'll move away from any kind of
• 1:06:56
  Speaker 1: transaction based and you know, fee based for real little
• 1:06:59
  Speaker 1: investors can be more expensive sometimes than transaction based. I think,
• 1:07:03
  Speaker 1: you know, there's a way, you know, people need to
• 1:07:05
  Speaker 1: think about their costs anyway. So, but that's the argument
• 1:07:08
  Speaker 1: that you hear some people that works. UM. I love
• 1:07:12
  Speaker 1: this quote of yours. I want to talk about a
• 1:07:14
  Speaker 1: little bit. Looking at investments in less than a five
• 1:07:17
  Speaker 1: to ten year window is time wasted. I know I'm
• 1:07:21
  Speaker 1: changing gears on you, but let's talk about that concept
• 1:07:25
  Speaker 1: of this is for the long term. Yeah, I look,
• 1:07:29
  Speaker 1: I you know, I really I really believe that UM.
• 1:07:34
  Speaker 1: Actually one of the things I enjoy reading the most
• 1:07:36
  Speaker 1: of yours is your commentary around short term predictions. And
• 1:07:41
  Speaker 1: I think you and I are aligned on this that
• 1:07:44
  Speaker 1: very much. You read. You read these predictions for the year,
• 1:07:48
  Speaker 1: and you might as well just throw darts. And unfortunately,
• 1:07:51
  Speaker 1: people do pay attention to them, and they actually occasionally invest,
• 1:07:55
  Speaker 1: at least on the margin, based on them, and I
• 1:07:57
  Speaker 1: think they're making a huge mistake. And so we really
• 1:08:00
  Speaker 1: want people thinking out you know, I say five to ten,
• 1:08:03
  Speaker 1: but ten, you know, people should be thinking in ten
• 1:08:06
  Speaker 1: year increments um around their portfolios because it's really difficult
• 1:08:13
  Speaker 1: to have any sense in the short run what's going
• 1:08:16
  Speaker 1: to happen, you know, pretty random. I mean, if you
• 1:08:19
  Speaker 1: believe Burton Burton Malkiel has a clue what he's talking about,
• 1:08:23
  Speaker 1: it's a fairly random walk, isn't it. You probably remember
• 1:08:26
  Speaker 1: the article, but I think it was maybe a decade
• 1:08:28
  Speaker 1: or more ago. The New York Times ran a piece
• 1:08:30
  Speaker 1: where they looked at twenty year returns and they compared
• 1:08:33
  Speaker 1: treasury you know, treasury bonds to equities, and I think
• 1:08:38
  Speaker 1: if I have the stat right, if you took the
• 1:08:40
  Speaker 1: ten best days out of a twenty year period, your
• 1:08:44
  Speaker 1: equity returned dropped from roughly ten percent down to the
• 1:08:48
  Speaker 1: level of a Treasury bond. And so that whole risk premium,
• 1:08:52
  Speaker 1: if you will, that you were being paid was earned
• 1:08:54
  Speaker 1: in ten days, not you. And I know it's not
• 1:08:55
  Speaker 1: quite that simple, but I think the message was are
• 1:08:59
  Speaker 1: you that good that you're gonna you're gonna be in
• 1:09:02
  Speaker 1: those ten days? And my view is nobody's that good.
• 1:09:06
  Speaker 1: And if you look at the distribution those ten days,
• 1:09:09
  Speaker 1: they tend to come near some of the worst days, right,
• 1:09:13
  Speaker 1: So if you're stepping aside to miss those worst days,
• 1:09:16
  Speaker 1: you're also missing some of the best. That's actually a
• 1:09:19
  Speaker 1: great point in what I hadn't even thought of. But
• 1:09:20
  Speaker 1: you're absolutely right when I think about that, what what
• 1:09:22
  Speaker 1: what the periods are? And so again our view is,
• 1:09:26
  Speaker 1: you know, really be be very long term oriented in
• 1:09:30
  Speaker 1: what you're doing, and that's actually what gives the ability
• 1:09:34
  Speaker 1: for you know, and obviously this sounds like I'm talking
• 1:09:37
  Speaker 1: you know, Vanguard's book, if you will, But you know,
• 1:09:40
  Speaker 1: low cost the low cost advantage, it's it's that compounding
• 1:09:45
  Speaker 1: effect over a decade that really shows up. You know that,
• 1:09:49
  Speaker 1: you know, when you look at say active versus passive
• 1:09:51
  Speaker 1: as the extreme examples of low cost investing. UM you know,
• 1:09:55
  Speaker 1: a year to year can be you know, half of
• 1:09:57
  Speaker 1: your active funds. Some some years will beat your passive funds.
• 1:10:00
  Speaker 1: But when you look over ten year period, it's consistently
• 1:10:03
  Speaker 1: you know less than and that's that compounding cost differential
• 1:10:07
  Speaker 1: over you know, a long period of time. You guys
• 1:10:10
  Speaker 1: have a research piece which um I mentioned Jay had
• 1:10:14
  Speaker 1: had fo to j Tenny is the person for Vanguard
• 1:10:17
  Speaker 1: who I shouldn't say covers us. We just know him
• 1:10:19
  Speaker 1: personally and he's a great guy. But he sent this
• 1:10:22
  Speaker 1: research piece and showed the difference between low fee and
• 1:10:25
  Speaker 1: high fee over thirty years. And if I'm doing the
• 1:10:29
  Speaker 1: math right at the end of the period, especially thirty
• 1:10:34
  Speaker 1: if you're looking at three decades, the return difference is
• 1:10:38
  Speaker 1: an order of magnitude. It's just a tremendous impact. And
• 1:10:42
  Speaker 1: think about what one percent compounded for thirty years is
• 1:10:46
  Speaker 1: going to do to uh any sort of PORTFOLI I'll
• 1:10:49
  Speaker 1: give you an example. So I just did this for
• 1:10:51
  Speaker 1: somebody where we looked at sort of a high cost
• 1:10:53
  Speaker 1: versus low cost sort of total cost of investing, if
• 1:10:56
  Speaker 1: you will. UM so looking at a place where they
• 1:10:59
  Speaker 1: were getting ice and whatnot. The um the difference in
• 1:11:03
  Speaker 1: the ending balances UM translated into a difference in an
• 1:11:10
  Speaker 1: So you know, basically, imagine your your standard of living
• 1:11:14
  Speaker 1: up or down based on on this effect. That that's
• 1:11:19
  Speaker 1: a meaningful that's a meaningful swing. Um. Let's talk about valuation.
• 1:11:25
  Speaker 1: So you guys, if you're thinking long term, I keep
• 1:11:28
  Speaker 1: hearing from people and reading stocks are high, bonds are high,
• 1:11:32
  Speaker 1: everything's high. Expect low returns going forward, which is sort
• 1:11:36
  Speaker 1: of a prediction. Some people say it's really just basic math,
• 1:11:40
  Speaker 1: but to me, it looks like a prediction that the
• 1:11:43
  Speaker 1: economy isn't going to accelerate, that earnings aren't going to normalize,
• 1:11:47
  Speaker 1: that we're not going to eventually come out of this
• 1:11:49
  Speaker 1: de leveraging period, of which we're still you know, I
• 1:11:52
  Speaker 1: think the US population is deleveraged about of their excess
• 1:11:57
  Speaker 1: pre crisis debt, so we could still only be halfway
• 1:12:01
  Speaker 1: through the healing process. What what's your perspective evaluation and
• 1:12:06
  Speaker 1: what does it mean to forward expected return? So I'll
• 1:12:09
  Speaker 1: give you, I'll give you all the appropriate caveats. So one,
• 1:12:13
  Speaker 1: you know, we're living in a period like none we've
• 1:12:16
  Speaker 1: ever lived. We've never seen the FED do what it's
• 1:12:18
  Speaker 1: done in the last six years. And if you put
• 1:12:20
  Speaker 1: the pre crisis easy money period on top of that,
• 1:12:23
  Speaker 1: you know we've lived in a decade of a decade
• 1:12:26
  Speaker 1: of very easy money. I don't know how to think
• 1:12:29
  Speaker 1: about that, to be perfectly honest, I've killed myself thinking
• 1:12:32
  Speaker 1: about it all the time, and I don't know when
• 1:12:35
  Speaker 1: it ends and how it ends. UM, So let me
• 1:12:39
  Speaker 1: I'll send you an email afterwards explain it all, to
• 1:12:42
  Speaker 1: which I'm I'm ill. That would be good because nobody knows.
• 1:12:45
  Speaker 1: This is clearly you're you're nailing it. It worries me
• 1:12:48
  Speaker 1: a lot. This is clearly uncharted territory. I know you
• 1:12:52
  Speaker 1: could people have made the argument. You know, you look
• 1:12:54
  Speaker 1: from nineteen thirty to nineteen fifty rates were low, but
• 1:12:58
  Speaker 1: you can't say they were. It's zero for six years
• 1:13:02
  Speaker 1: and and there wasn't QUEI back then. Clearly this is
• 1:13:07
  Speaker 1: uncharted me if you think, I mean again, I'm going
• 1:13:09
  Speaker 1: to oversimplify it. But if you think about it UM
• 1:13:13
  Speaker 1: short term, you know money fund should be yielding about
• 1:13:16
  Speaker 1: two That's what inflation is. Historically, the money markets UM
• 1:13:21
  Speaker 1: produce roughly inflation UM no real return and so we've
• 1:13:25
  Speaker 1: gone through a period of distortion in the markets for
• 1:13:29
  Speaker 1: this prolonged period of time where essentially the short end
• 1:13:32
  Speaker 1: we're producing negative real returns. UM. We've never lived through that.
• 1:13:37
  Speaker 1: And typically, um, when you study history, the longer something
• 1:13:41
  Speaker 1: is distorted, the less predictable and the and the harsher
• 1:13:45
  Speaker 1: the outcome is. So that's my big, long winded caveat UM.
• 1:13:49
  Speaker 1: Not much of a caveat that. We we we look
• 1:13:52
  Speaker 1: at So we look at um. You know, if you
• 1:13:54
  Speaker 1: look at let's say ten years, if you look at
• 1:13:57
  Speaker 1: yield to maturity on a bond, it's your best predictor
• 1:13:59
  Speaker 1: of your returns um. You know, plus or minus fifty
• 1:14:02
  Speaker 1: basis points. Typically, so yield to maturity on corporate bonds
• 1:14:06
  Speaker 1: is less than three right now or right around let's
• 1:14:08
  Speaker 1: say three, just around the numbers. So that's our best
• 1:14:11
  Speaker 1: guess is to what bonds are going to return over
• 1:14:13
  Speaker 1: the next decade. I can dream up a scenario where
• 1:14:16
  Speaker 1: it's worse. I can dream up a scenario where it's better.
• 1:14:18
  Speaker 1: Not many that it's better. Um, But if you do
• 1:14:21
  Speaker 1: sort of we do a we sort of a distribution
• 1:14:24
  Speaker 1: and returns the in the square, you know, the bulk
• 1:14:28
  Speaker 1: of the distribution, if you will, is in around that
• 1:14:31
  Speaker 1: three percent number for a corporate bond. If you look
• 1:14:34
  Speaker 1: at equities, you know, we're at a pretty high valuation
• 1:14:38
  Speaker 1: place UM, probably top decile historically. And again when we
• 1:14:43
  Speaker 1: run we so we run a capital markets model which
• 1:14:45
  Speaker 1: you know basically runs and Monte Carlos simulation UM. And
• 1:14:50
  Speaker 1: when historically, when markets have been valued this way, the
• 1:14:54
  Speaker 1: central tendency would be to be a couple hundred basis
• 1:14:57
  Speaker 1: points below long term average, and so that would typically
• 1:15:01
  Speaker 1: you know, and again it's a much flattered distribution with
• 1:15:06
  Speaker 1: much longer tails, but the central tendency is in the
• 1:15:09
  Speaker 1: six to eight range. And so we've actually been It's
• 1:15:12
  Speaker 1: not horrible, No, it's not um and considering what we've
• 1:15:15
  Speaker 1: lived through all things, if that's the future returns, there's
• 1:15:19
  Speaker 1: certainly worse scenarios. So yeah, you and I could both
• 1:15:22
  Speaker 1: dream up a lot of worse ones, and we can
• 1:15:24
  Speaker 1: certainly what could lead to them, and you can you
• 1:15:26
  Speaker 1: can dream up a few better. Um. You know, you
• 1:15:28
  Speaker 1: mentioned some things that could accelerate earnings and whatnot. But
• 1:15:32
  Speaker 1: if you look at if you look at that, what
• 1:15:34
  Speaker 1: it says is a sixty portfolio is probably going to
• 1:15:38
  Speaker 1: be in the five so three fifty reel let's say,
• 1:15:42
  Speaker 1: just for um estimates, that's on the low end of
• 1:15:46
  Speaker 1: you you know, but it's not crazy. And so what
• 1:15:50
  Speaker 1: we've been doing is we've been pretty vocal about this
• 1:15:54
  Speaker 1: because again, to me, it's an asymmetric risk for an investor.
• 1:15:58
  Speaker 1: If we're wrong, if we're wrong on the if we're
• 1:16:02
  Speaker 1: too high, then it's going to be a really rough ride.
• 1:16:06
  Speaker 1: If we're too low, then great, you know, everybody will
• 1:16:10
  Speaker 1: be happy at the end, although there'll be some inflation.
• 1:16:12
  Speaker 1: There'll be some inflation. What um. The real messages, especially
• 1:16:17
  Speaker 1: for people who are in the bulk of their their
• 1:16:20
  Speaker 1: earning years and in their savings years, is don't expect
• 1:16:24
  Speaker 1: the markets to bail you out over the next decade.
• 1:16:26
  Speaker 1: You need to be saving at a higher rate than
• 1:16:28
  Speaker 1: you are. And you know, well that's always one of
• 1:16:31
  Speaker 1: the inputs whenever we whenever our cfps run a scenario
• 1:16:36
  Speaker 1: with people, it's you have to either plan on spending
• 1:16:39
  Speaker 1: less when you retire, or working longer or saving more.
• 1:16:44
  Speaker 1: Those are the three which which is your first choice
• 1:16:46
  Speaker 1: and there and there're no there're no other levers and
• 1:16:49
  Speaker 1: so what you've got to do what you have to do.
• 1:16:51
  Speaker 1: You know, I think it's a very much incumbent on
• 1:16:54
  Speaker 1: us as professionals to make that case to people. UM.
• 1:16:59
  Speaker 1: And it's hard, it's not sexy, it's not necessarily a
• 1:17:02
  Speaker 1: fun message. But the flip side is, um, it's the
• 1:17:05
  Speaker 1: responsible thing to do. And Charlie Ellis's most recent book,
• 1:17:09
  Speaker 1: right UM, which is on my it's literally sitting on
• 1:17:13
  Speaker 1: my night table. That's the next book I'm reviewing, basically describes, Hey,
• 1:17:19
  Speaker 1: here's the situation and we have a potential problem down
• 1:17:23
  Speaker 1: the road if we don't take steps immediately to fix it.
• 1:17:26
  Speaker 1: You just summarize the book perfectly in your three times
• 1:17:29
  Speaker 1: only I'm only three chapters and you got the levers.
• 1:17:32
  Speaker 1: That's I mean, that's the book I had that. You know,
• 1:17:34
  Speaker 1: Charlie was kind enough to send me the book early
• 1:17:36
  Speaker 1: and I had a chance to review it, and it's
• 1:17:39
  Speaker 1: exactly his message. And look it's there, it is what
• 1:17:43
  Speaker 1: it is. And you know it's up to us, I think,
• 1:17:45
  Speaker 1: to really make that case. You know, look, um, I'll
• 1:17:47
  Speaker 1: say something, it'll sound sacrilegious and it's not meant to.
• 1:17:50
  Speaker 1: But you know, if I go back to UM and
• 1:17:54
  Speaker 1: do I have any regrets, And one of them is, um,
• 1:17:57
  Speaker 1: you know, we didn't have the sophistication around our capital
• 1:17:59
  Speaker 1: market model. We you know, we weren't doing all these
• 1:18:02
  Speaker 1: Monte Carlo simulations and predicting future returns and so forth.
• 1:18:06
  Speaker 1: But you knew in nine that the next decade couldn't
• 1:18:09
  Speaker 1: be great. I mean you just knew. I mean when
• 1:18:11
  Speaker 1: stock when p s were where they were earning. You know,
• 1:18:14
  Speaker 1: however you want to measure valuation. And I wish we
• 1:18:18
  Speaker 1: as an industry had done a better job telling people that.
• 1:18:22
  Speaker 1: And you know, there were people out there who were
• 1:18:24
  Speaker 1: saying it, but it wasn't the strong voice. And um,
• 1:18:29
  Speaker 1: you know, to me, I certainly don't want to go
• 1:18:32
  Speaker 1: through that again. I don't think we're in that territory,
• 1:18:34
  Speaker 1: by the way. But on the other hand, um, we
• 1:18:38
  Speaker 1: we're farther along. Let me also point out then, and
• 1:18:41
  Speaker 1: so I began as a trader in the nineties, and
• 1:18:45
  Speaker 1: there was no frame of reference for anybody who was
• 1:18:49
  Speaker 1: buying stocks, actively trading playing the dot com game. Think
• 1:18:54
  Speaker 1: about it, you you had even you know, people kind
• 1:18:59
  Speaker 1: of have blanched. I'm guilty of it. Also, when Ronald
• 1:19:02
  Speaker 1: Reagan came out and said, hey, this is just a correction.
• 1:19:05
  Speaker 1: People snickered. He turned out to be right. It was
• 1:19:09
  Speaker 1: just everyone forgets eighty seven finished the year up one
• 1:19:13
  Speaker 1: so that I don't want to call it a flash crash,
• 1:19:16
  Speaker 1: that major structural plumbing snaffoo. There was no frame of
• 1:19:22
  Speaker 1: reference for what would happen in two thousand, maybe seventy three,
• 1:19:25
  Speaker 1: seventy four. But ham I know that because I'm be calm,
• 1:19:29
  Speaker 1: I've made myself a student of market history after all
• 1:19:33
  Speaker 1: these years. But back then I had no idea what night.
• 1:19:37
  Speaker 1: So you're absolutely right in seventy seventy four is the closest.
• 1:19:40
  Speaker 1: And you know you asked it an earlier question. You
• 1:19:43
  Speaker 1: know who were some of my people who influenced me, Well,
• 1:19:46
  Speaker 1: they all lived through that, so I got to hear
• 1:19:48
  Speaker 1: their stories. And so even though I was a teenager
• 1:19:51
  Speaker 1: and somebody I remember sitting in gas lines for my
• 1:19:54
  Speaker 1: dad too, I got to I got to use the
• 1:19:58
  Speaker 1: car if I sat in the line, even or not.
• 1:20:01
  Speaker 1: You know, it was today even but um so I
• 1:20:05
  Speaker 1: was vaguely aware how bad it was out there. But
• 1:20:08
  Speaker 1: you know, we didn't live through it as professionals, and so,
• 1:20:11
  Speaker 1: but some of my early mentors did, and so you
• 1:20:14
  Speaker 1: you look at that and you say, Okay, what can
• 1:20:17
  Speaker 1: I learn from them? And yeah, So now I think
• 1:20:21
  Speaker 1: going forward, I'm hoping we're going to do a much
• 1:20:23
  Speaker 1: better job with this. So so let me ask a
• 1:20:26
  Speaker 1: somewhat related question, um, because I've asked similar questions to
• 1:20:31
  Speaker 1: people who did live through the early part of the
• 1:20:35
  Speaker 1: eighties and as as professionals. So here we are with
• 1:20:39
  Speaker 1: six years into this bullmarket. We're up two hundred plus percent,
• 1:20:44
  Speaker 1: and there's still an awful lot of skepticism the fact
• 1:20:47
  Speaker 1: that we're talking about, hey, let's lower expectation for future returns.
• 1:20:52
  Speaker 1: You know, I tell some of the younger guys who
• 1:20:54
  Speaker 1: weren't on trading or or managing money in housing, you
• 1:21:01
  Speaker 1: think this is euphoric. There's no euphori now compared to then.
• 1:21:05
  Speaker 1: It's for every bull, there's a bear and sometimes too.
• 1:21:09
  Speaker 1: So the question is, six years into this bull market
• 1:21:13
  Speaker 1: plus two, which is a heck of return, why know
• 1:21:17
  Speaker 1: you for you yet? Is it still post financial crisis? Uh? Trauma?
• 1:21:23
  Speaker 1: I think you know, if you think about the last
• 1:21:25
  Speaker 1: fifteen years, we've had two really bad markets, right, you
• 1:21:29
  Speaker 1: have the dot com crash and then you have the GFC,
• 1:21:32
  Speaker 1: and then on top of that you have the housing
• 1:21:34
  Speaker 1: collapse right in the middle, right in the middle. So
• 1:21:37
  Speaker 1: you know, to me, I I think the I do
• 1:21:39
  Speaker 1: think the GFC it certainly didn't have the impact that
• 1:21:43
  Speaker 1: the depression had on my parents. My parents were born
• 1:21:46
  Speaker 1: right in the middle of the depression, and you know,
• 1:21:49
  Speaker 1: have great stories to tell about growing up then. But
• 1:21:53
  Speaker 1: this is pretty close, you know, in terms of I
• 1:21:56
  Speaker 1: think a psychic impact on people. It was you know,
• 1:22:00
  Speaker 1: for people who had been saving their whole life, it
• 1:22:02
  Speaker 1: was a pretty scary moment and you've certainly seen, you know,
• 1:22:06
  Speaker 1: some change in behavior as a result. So, um, I
• 1:22:10
  Speaker 1: think that partly explains the lack of euphoria. UM. But look,
• 1:22:15
  Speaker 1: you know, I think despite the fact that I don't
• 1:22:17
  Speaker 1: think the next ten years the markets are going to
• 1:22:19
  Speaker 1: be as robust is certainly they've been the last five,
• 1:22:22
  Speaker 1: by almost definition, they can't be. It's still really important
• 1:22:26
  Speaker 1: to keep investing. It's still really important to have that
• 1:22:29
  Speaker 1: diversified portfolio. And so I think, actually that's gonna be
• 1:22:32
  Speaker 1: one of our challenges is to keep people. You know,
• 1:22:35
  Speaker 1: you're you're putting out this message that's not all that
• 1:22:38
  Speaker 1: you know, Um, optimistic, but at the same time, don't
• 1:22:41
  Speaker 1: try to time it, don't try to avoid it, try
• 1:22:44
  Speaker 1: to keep investing on a regular basis. If anything, try
• 1:22:46
  Speaker 1: to save a little bit more. The interesting thing is
• 1:22:49
  Speaker 1: some of the folks we've had through here, like Jeff's
• 1:22:53
  Speaker 1: out of Raymond James and Laslow Berrini and um Ralph Akumpora,
• 1:22:58
  Speaker 1: who were all act of money managers or strategists in
• 1:23:02
  Speaker 1: the early eighties, have made the case that the first
• 1:23:05
  Speaker 1: five years of this bull market, we're not unlike eighty
• 1:23:08
  Speaker 1: two to eighty seven, when there was a tremendous amount
• 1:23:11
  Speaker 1: of skepticism. You had the eighty seven crash and everybody
• 1:23:14
  Speaker 1: came out and said told you so, and the markets
• 1:23:17
  Speaker 1: sort of gathered themselves up in the next decade wasn't
• 1:23:21
  Speaker 1: too shabby. So so we theoretically, I wonder if we're
• 1:23:26
  Speaker 1: potentially in that sort of secular market, if that's what's
• 1:23:31
  Speaker 1: developing here. So you know, look, we'd all love it
• 1:23:35
  Speaker 1: if that were the case. Um, I guess I don't
• 1:23:39
  Speaker 1: quite yet see the um what's going to accelerate earnings
• 1:23:43
  Speaker 1: to the level that you would need to see earnings
• 1:23:45
  Speaker 1: accelerate to sort of make the valuations make sense, which
• 1:23:48
  Speaker 1: you saw me in the beginning of that period, you
• 1:23:51
  Speaker 1: certainly saw earnings growing at tremendous rates, and then obviously
• 1:23:55
  Speaker 1: evaluations got you know, kind of crazy towards the end.
• 1:23:58
  Speaker 1: But if even if you back out the last a
• 1:24:00
  Speaker 1: couple of years, companies, you know, companies have done an
• 1:24:04
  Speaker 1: awful lot to improve margins over the last decade. They
• 1:24:07
  Speaker 1: you know, they've they've been very conservative and in fact,
• 1:24:10
  Speaker 1: one could argue in some cases they may have even
• 1:24:12
  Speaker 1: under invested in in in the future. But what we
• 1:24:16
  Speaker 1: don't UM, top line growth is getting tougher to come by,
• 1:24:20
  Speaker 1: and ultimately you need top line growth. And so I'm
• 1:24:25
  Speaker 1: again I'm not optimistic or pessimistic. I just don't know
• 1:24:28
  Speaker 1: on that score whether we'll see sort of a revitalization
• 1:24:32
  Speaker 1: of top line growth that leads to, you know, really
• 1:24:35
  Speaker 1: sustained earnings growth over the next five six years, which
• 1:24:38
  Speaker 1: would make the case that you described come true. So
• 1:24:42
  Speaker 1: let's talk a little bit about UM investors today. What
• 1:24:46
  Speaker 1: are they doing right? What are they doing wrong? So, look,
• 1:24:50
  Speaker 1: I think UM at the highest level, we're seeing better
• 1:24:55
  Speaker 1: behavior UM in in two things. One, they're paying a
• 1:24:59
  Speaker 1: lot more attention to cost and again I know that
• 1:25:00
  Speaker 1: sounds self serving, but you know the results of actually
• 1:25:04
  Speaker 1: boring it out um from a return standpoint, So UM,
• 1:25:08
  Speaker 1: there's certainly been much more attention to that too. Again,
• 1:25:12
  Speaker 1: during the crisis, we didn't see, um, you know, a
• 1:25:16
  Speaker 1: big uptick in transaction vol In fact, we actually saw
• 1:25:19
  Speaker 1: a decline in transaction volume and people actually stayed the course,
• 1:25:23
  Speaker 1: which is amazing because most shops did not experience that.
• 1:25:27
  Speaker 1: So you know, we were we were pleased to see that,
• 1:25:30
  Speaker 1: and again I think as a result, people benefited from that.
• 1:25:34
  Speaker 1: You know, you're the the advent of target date funds,
• 1:25:37
  Speaker 1: which we talked about a little bit earlier. Um, it's
• 1:25:40
  Speaker 1: amazing how much money is going into those in the
• 1:25:42
  Speaker 1: four oh one case system. Really now, is that because
• 1:25:45
  Speaker 1: they've become a default if somebody doesn't select a different portfolio.
• 1:25:49
  Speaker 1: The default certainly explains some of it, but we've seen
• 1:25:52
  Speaker 1: people make wholesale changes to really encourage their their folks
• 1:25:57
  Speaker 1: to go into it. Um as much as fifty percent
• 1:26:00
  Speaker 1: of a cash flow going into our four oh one
• 1:26:03
  Speaker 1: case system, and we have four million people on our
• 1:26:05
  Speaker 1: record keeping system, so we get to watch this closely.
• 1:26:08
  Speaker 1: Is going into target a funds and so yeah, and
• 1:26:12
  Speaker 1: we feel great about that because it's highly diversified, you know,
• 1:26:15
  Speaker 1: very global, very balanced, and you know, you can argue
• 1:26:19
  Speaker 1: on the margins, but it's a really good UM solution
• 1:26:22
  Speaker 1: for most people. So I think actually investors are more
• 1:26:26
  Speaker 1: well diversified, probably even more than they know in some cases. UM.
• 1:26:30
  Speaker 1: And that's going to really stand them in good stead
• 1:26:32
  Speaker 1: over the next decade. So what aren't they doing is well, UM,
• 1:26:37
  Speaker 1: I think the savings rates I've already mentioned. You know,
• 1:26:40
  Speaker 1: if you look at the average in the four oh
• 1:26:42
  Speaker 1: one case system is a proxy. Um, they're not where
• 1:26:45
  Speaker 1: they need to be. UM. I think the average large
• 1:26:47
  Speaker 1: plan it's about the number needs to be more like
• 1:26:50
  Speaker 1: twelve or fifteen. So that's one. Two. I do think
• 1:26:54
  Speaker 1: people still on the margin pay too much attention to
• 1:26:58
  Speaker 1: macroeconomic factor. Well, it makes for fascinating conversation and it is,
• 1:27:02
  Speaker 1: and you know, it's one of the things that we
• 1:27:04
  Speaker 1: found as a provider is we need to put more
• 1:27:07
  Speaker 1: macro economic information out on our website and arm our
• 1:27:11
  Speaker 1: reps with that and so forth. But at the same
• 1:27:13
  Speaker 1: time we're telling people, despite all this really interesting stuff,
• 1:27:17
  Speaker 1: don't act on it. Well, we we call those folks
• 1:27:19
  Speaker 1: macro tourists, the hedge funds that suddenly all right, Now
• 1:27:23
  Speaker 1: I'm an expert expert on the Ukraine, and I'm sure
• 1:27:26
  Speaker 1: at X y Z and those funds have all gotten
• 1:27:29
  Speaker 1: show laughed over the past couple of years. Very difficult
• 1:27:32
  Speaker 1: to do, as you know. And and again I'm not
• 1:27:34
  Speaker 1: gonna there are firms out there who have made a
• 1:27:37
  Speaker 1: you know, they this is all they do. But for
• 1:27:40
  Speaker 1: the average investor it's really tough. But I'll give you
• 1:27:42
  Speaker 1: an interesting um just this is an anecdote. About a
• 1:27:47
  Speaker 1: year and a half ago. I did a day on
• 1:27:48
  Speaker 1: Facebook and Twitter for Vangard, you know, the Vanguard accounts,
• 1:27:52
  Speaker 1: and I got more macro questions than anything else. And
• 1:27:56
  Speaker 1: that was very different than what I used to experience,
• 1:27:59
  Speaker 1: answering phones and so forth. You wait, you answer phones that, Yeah,
• 1:28:03
  Speaker 1: we we all do a day. Yeah, where you want it.
• 1:28:06
  Speaker 1: So you want to hear what investors are saying and
• 1:28:08
  Speaker 1: what they're thinking, and um see what our people are
• 1:28:11
  Speaker 1: going through as well. Have you ever done to read it?
• 1:28:13
  Speaker 1: Asked me anything? Um well, basically on the Twitter and
• 1:28:20
  Speaker 1: Facebook it was and I got to ask all kinds
• 1:28:22
  Speaker 1: of stuff, you know, from you should you should tag
• 1:28:25
  Speaker 1: read it because that's a unique community. It's a little
• 1:28:29
  Speaker 1: it's a little different than Twitter or Facebook because there
• 1:28:33
  Speaker 1: are these sub communities and they're investing. Group is absolutely
• 1:28:38
  Speaker 1: robust and articulate and informed, and they'll give you questions
• 1:28:41
  Speaker 1: that I'm lobbying you softball SMPAD what they're going to
• 1:28:45
  Speaker 1: throw now, that'd be that would be great. Actually we
• 1:28:46
  Speaker 1: like doing that. But you know what was interesting is
• 1:28:49
  Speaker 1: we got so many macro questions that you know, we
• 1:28:52
  Speaker 1: went back and said, gee, we're not putting enough information
• 1:28:54
  Speaker 1: out there. Yeah, but people are hearing a lot of it.
• 1:28:57
  Speaker 1: And look, let's be honest. The newspapers and magazine ends,
• 1:29:00
  Speaker 1: the television stations, they've got a lot of commentes and
• 1:29:03
  Speaker 1: a lot of time to fill. I have this argument
• 1:29:07
  Speaker 1: all the time with people, Hey, how did the sequester
• 1:29:10
  Speaker 1: affect your your portfolio? No impact? What's the GDP of Ukraine?
• 1:29:15
  Speaker 1: It's about a year's GDP of Ukraine is about two
• 1:29:17
  Speaker 1: days a day and a half of US GDP. And
• 1:29:20
  Speaker 1: every time, oh what's going on with the Israelis and
• 1:29:23
  Speaker 1: the Syrian every time one of these things come up,
• 1:29:25
  Speaker 1: not to be Look, there's real human tragedy involved in
• 1:29:29
  Speaker 1: all these stories. And I'm not I'm not downgrading or
• 1:29:32
  Speaker 1: annoying that, but from a portfolio manager's perspective, the question
• 1:29:36
  Speaker 1: is always what is this gonna do to global economic activity?
• 1:29:40
  Speaker 1: How is this going to impact revenues? Right? So I so,
• 1:29:43
  Speaker 1: first of all, I couldn't agree with you more and
• 1:29:45
  Speaker 1: and I actually think that's the education that has to
• 1:29:47
  Speaker 1: take place. So when I said we were getting more
• 1:29:49
  Speaker 1: inquiries around it, um, what we've tried to do with
• 1:29:53
  Speaker 1: it is put out the information with a and here's
• 1:29:56
  Speaker 1: what it means, and here's what it doesn't mean. And
• 1:29:59
  Speaker 1: generally it's don't let it change your portfolio allocation at all,
• 1:30:03
  Speaker 1: which is, you know, sort of your basic message. You know.
• 1:30:06
  Speaker 1: Art cash And tells this delightful story. He's been on
• 1:30:09
  Speaker 1: the floor of the New York Exchange for fifty years,
• 1:30:12
  Speaker 1: and he tells the story about back then, supposedly the
• 1:30:15
  Speaker 1: specialists all got the inside dope, they got the real story,
• 1:30:19
  Speaker 1: and and a rumor circulated that the Russians had hit
• 1:30:23
  Speaker 1: the button the Soviets and that the nukes were on
• 1:30:26
  Speaker 1: the way and we all had eight minutes to live.
• 1:30:29
  Speaker 1: So Art runs around and tries to get a short
• 1:30:31
  Speaker 1: off to sail into the nuclear armageddon, and he go
• 1:30:36
  Speaker 1: couldn't get it execute. And he comes to his boss
• 1:30:38
  Speaker 1: and says, I tried to short the market, and in
• 1:30:41
  Speaker 1: light of the rumor, I couldn't get it done. And
• 1:30:43
  Speaker 1: the boys says, art, when we find out the nukes
• 1:30:45
  Speaker 1: are coming, you want to take the other side of
• 1:30:48
  Speaker 1: that trade. You want to get long. Why do I
• 1:30:50
  Speaker 1: want to get long? Because if the new kids, who cares?
• 1:30:53
  Speaker 1: But if the rumor turns out not to be true,
• 1:30:55
  Speaker 1: we're long and the market comes snapping back. And that's
• 1:30:59
  Speaker 1: just goes to show how ridiculous those macro trades are.
• 1:31:04
  Speaker 1: You know, how is anybody going to trade on any
• 1:31:07
  Speaker 1: of this stuff? You know, it's been a somebody puts
• 1:31:11
  Speaker 1: this out. I can't remember who it is. I'll dig
• 1:31:13
  Speaker 1: it up and send it to you where they have
• 1:31:15
  Speaker 1: this chart of the past fifty years and every year
• 1:31:19
  Speaker 1: there's a balloon as to what the macro disaster of
• 1:31:23
  Speaker 1: that year is going to be. And every year the
• 1:31:25
  Speaker 1: market kind of shrugs it off and keeps going. It's
• 1:31:27
  Speaker 1: almost like just an annoying distraction with no impact on portfolios. Yeah,
• 1:31:33
  Speaker 1: we've actually there's a great research paper out on our
• 1:31:35
  Speaker 1: website that looks at macro economic data and essentially GDP
• 1:31:41
  Speaker 1: growth and market returns, as you know are there's almost
• 1:31:44
  Speaker 1: no correlation in the short run, certainly not in real time.
• 1:31:47
  Speaker 1: You're not gonna see it over the long haul. Growing
• 1:31:51
  Speaker 1: markets should be growing if a GDP stops growing, like
• 1:31:53
  Speaker 1: we've seen in some kind. But you know, one of
• 1:31:55
  Speaker 1: the one of the great, one of the one of
• 1:31:57
  Speaker 1: the great statistics that it's out there. If you if
• 1:31:59
  Speaker 1: you went back to UM late eighteen hundreds, so eight nineties,
• 1:32:03
  Speaker 1: so what was the number one economy? Was the UK
• 1:32:06
  Speaker 1: and US close on its heels, And then subsequent hundred years,
• 1:32:10
  Speaker 1: obviously the US economy grew at I think twice the
• 1:32:13
  Speaker 1: rate of the UK economy. And so the trick question
• 1:32:16
  Speaker 1: is what were the returns in the equity markets. I
• 1:32:18
  Speaker 1: think they're almost identical. They're very similar within a tent
• 1:32:21
  Speaker 1: within a tenth of a percentage point. So much for
• 1:32:23
  Speaker 1: g d P. Well, and you sort of you sort
• 1:32:26
  Speaker 1: of peel the onion one level and it's like, well,
• 1:32:29
  Speaker 1: really smart UK companies made their money in the US
• 1:32:33
  Speaker 1: of course, became global and that makes a lot of sense.
• 1:32:36
  Speaker 1: So let's talk a little bit about active management, because
• 1:32:39
  Speaker 1: that's an active management question. So everybody knows Vanguard for indexing,
• 1:32:44
  Speaker 1: but we mentioned a third of your funds are active,
• 1:32:49
  Speaker 1: and the key question is not only active, but very
• 1:32:53
  Speaker 1: successful track records. So a why has Vanguard active funds
• 1:32:59
  Speaker 1: been so successful? And I think I know what your
• 1:33:01
  Speaker 1: ranch is gonna be. But so what makes what makes
• 1:33:04
  Speaker 1: you're active better than the average active? So I think
• 1:33:07
  Speaker 1: there are um two big factors. One is we run
• 1:33:11
  Speaker 1: our active funds at a lower cost than everybody. That's
• 1:33:13
  Speaker 1: a huge, huge advantage. You're eliminating that drag from from active. Second, um,
• 1:33:19
  Speaker 1: we didn't think we could attract all the best active
• 1:33:22
  Speaker 1: talent to Malvern, Pennsylvania, as bucolic and beautiful as it is,
• 1:33:26
  Speaker 1: And so for all of our active equity funds, we
• 1:33:29
  Speaker 1: actually travel the world and look for the best subadvisor,
• 1:33:33
  Speaker 1: so much like a foundation or an endowment would do.
• 1:33:35
  Speaker 1: If you're looking for a large cap growth manager, who's
• 1:33:38
  Speaker 1: the best large cap growth manager you can find? So
• 1:33:40
  Speaker 1: we go and we we have a team that does
• 1:33:42
  Speaker 1: nothing than but that. So, so how do you set
• 1:33:45
  Speaker 1: these guys up? It's it's there in London or they're
• 1:33:47
  Speaker 1: in Hong Kong, or they're in Los Angeles or San Francisco.
• 1:33:51
  Speaker 1: When you basically say you're gonna run your fund out
• 1:33:55
  Speaker 1: of the Vanguard San Francisco office, No, so you're gonna
• 1:33:58
  Speaker 1: run your fund, We're gonna we're gonna do all the
• 1:34:00
  Speaker 1: back office, all the administration. You're gonna just manage money
• 1:34:04
  Speaker 1: and um, you know, they'll transmit um data to the
• 1:34:08
  Speaker 1: custodian and so forth, you know, or you know, they'll
• 1:34:10
  Speaker 1: do their own trading and so forth, but it'll be
• 1:34:14
  Speaker 1: a Vanguard fund and will be the distributor. And basically
• 1:34:17
  Speaker 1: our premise is if you do a really good job
• 1:34:20
  Speaker 1: over the long run, our clients are really smart, they'll
• 1:34:23
  Speaker 1: probably invest more with you. And so, you know, the
• 1:34:26
  Speaker 1: outside managers love it because they don't have to do
• 1:34:28
  Speaker 1: any service. They don't have to do any marketing, any sales.
• 1:34:31
  Speaker 1: All they do is run money or like they most
• 1:34:34
  Speaker 1: of them tell us we're their best institutional account. That's
• 1:34:38
  Speaker 1: really fascinating. And so what's the team like that goes
• 1:34:42
  Speaker 1: out looking for these people? So it's it's an experience group.
• 1:34:45
  Speaker 1: UM typically, um all you know, mostly all c f
• 1:34:50
  Speaker 1: A s at this point, UM A number of them
• 1:34:53
  Speaker 1: have actually worked before they came to Vanger. They might
• 1:34:55
  Speaker 1: have been working for a consultant, so you know an
• 1:34:58
  Speaker 1: NSCNUP for example, or some any like that who is
• 1:35:00
  Speaker 1: you know, really good at manager selection. A lot of
• 1:35:03
  Speaker 1: them have been homegrown though, but UM really highly trained
• 1:35:06
  Speaker 1: and UM we just put a lot of time and energy.
• 1:35:09
  Speaker 1: And again this may surprise you, but so we have
• 1:35:13
  Speaker 1: thirty one firms. They run about seventy five mandates for
• 1:35:18
  Speaker 1: us UM and there's a small group of UM our
• 1:35:23
  Speaker 1: executive team, a subset of my executive team, but this
• 1:35:27
  Speaker 1: includes me along with the senior members of this portfolio
• 1:35:30
  Speaker 1: review department that I just described. We'll do a hundred
• 1:35:34
  Speaker 1: manager meetings on campus a year at a minimum. So
• 1:35:39
  Speaker 1: these firms will come and spend an hour with me
• 1:35:43
  Speaker 1: and my team and then half a day with the
• 1:35:47
  Speaker 1: broader portfolio review group, and we'll put them through their paces,
• 1:35:51
  Speaker 1: and of course we'll do things in their office as well,
• 1:35:53
  Speaker 1: but we bring them in formally every year, and then
• 1:35:56
  Speaker 1: of course they're in front of our board on a
• 1:35:58
  Speaker 1: rotating basis as well. So there's a ton of rigor
• 1:36:02
  Speaker 1: that goes on and it's very senior management. A lot
• 1:36:05
  Speaker 1: of senior management time. And I've I've even had a
• 1:36:08
  Speaker 1: couple of my directors say to me, gosh, you guys
• 1:36:10
  Speaker 1: spend an awful lot of time, and I said, this
• 1:36:11
  Speaker 1: is what we do. I mean, this is the most
• 1:36:14
  Speaker 1: important thing we do on the active side is select managers.
• 1:36:17
  Speaker 1: And so we're not selecting emerging managers so to speak.
• 1:36:21
  Speaker 1: These are fairly seasoned people. Yeah, although you know, we've
• 1:36:24
  Speaker 1: we've we have found a few firms um in early
• 1:36:29
  Speaker 1: in their in their existence, but they generally were seasoned
• 1:36:33
  Speaker 1: people who spun out of bigger firms, and you know,
• 1:36:36
  Speaker 1: some of our most well known managers actually started that way.
• 1:36:40
  Speaker 1: Do you find active is better in less efficient markets?
• 1:36:44
  Speaker 1: And what I mean by less efficient emerging markets distressed
• 1:36:48
  Speaker 1: small cap where there there's not a lot of coverage
• 1:36:51
  Speaker 1: and there's opportunity there or is there something else going
• 1:36:55
  Speaker 1: on and you're active? So Um, the short answers, we
• 1:37:00
  Speaker 1: don't see, you know, we don't see in those quote
• 1:37:03
  Speaker 1: unquoteless efficient markets. Um. And I think the reason for
• 1:37:06
  Speaker 1: that is the costs are so much higher there that
• 1:37:08
  Speaker 1: you know, even trading costs, it's such a drag, you know,
• 1:37:12
  Speaker 1: when you look at index results versus UM small cap
• 1:37:14
  Speaker 1: active for example, it's it's it's not quite the same
• 1:37:18
  Speaker 1: extreme as in the large cap, but it's close. UM.
• 1:37:22
  Speaker 1: But we UM. The things that we see are they're
• 1:37:28
  Speaker 1: they're more soft. There's there's one quantitative thing that we see,
• 1:37:32
  Speaker 1: which is for the most part, they're they're much lower
• 1:37:35
  Speaker 1: turnover than their counterparts. They they tend to be, you know,
• 1:37:39
  Speaker 1: very focused on that. But then the UM the other
• 1:37:42
  Speaker 1: things are they have great, great talent retention, they have
• 1:37:48
  Speaker 1: great process for UM, they're very consistent in what they do,
• 1:37:53
  Speaker 1: and they're really good at developing the next generation UM.
• 1:37:57
  Speaker 1: You know, in our business, so many firms have employed it,
• 1:38:00
  Speaker 1: going from first to second to third generation. And so
• 1:38:04
  Speaker 1: what we've seen over time is that people side is
• 1:38:07
  Speaker 1: really important and that that is a qualitative thing. But
• 1:38:10
  Speaker 1: when you you know, we've got a group of people
• 1:38:12
  Speaker 1: have been doing this for a long time. You know,
• 1:38:13
  Speaker 1: I've been part of this um UH process for almost
• 1:38:18
  Speaker 1: twenty five years now, so I've seen a lot. It
• 1:38:20
  Speaker 1: doesn't I'm going to make my share mistakes, but I've
• 1:38:22
  Speaker 1: seen a lot, and many of my peers have been
• 1:38:25
  Speaker 1: involved for you know, fifteen twenty years. So hopefully that
• 1:38:29
  Speaker 1: experience allows you to assess the people side a little
• 1:38:32
  Speaker 1: bit better. So so you're looking at low turnover, good
• 1:38:36
  Speaker 1: employee retention because that tells you a lot, and as
• 1:38:40
  Speaker 1: a succession planning that seems to be well thought out.
• 1:38:44
  Speaker 1: None of those things really speak directly too, so the
• 1:38:48
  Speaker 1: investing So so on the investing side, what we're really
• 1:38:51
  Speaker 1: looking for is an explainable process that's very consistent. And
• 1:38:56
  Speaker 1: again I'll give you I'll oversimplify, but if if someone
• 1:38:59
  Speaker 1: says I'm a bottom up stock picker, and you know,
• 1:39:02
  Speaker 1: we don't think about sector allocation, we don't think about um,
• 1:39:07
  Speaker 1: the benchmarket all etcetera, etcetera. When you do a portfolio
• 1:39:11
  Speaker 1: attribution analysis and let's say they've outperformed the outperformed abroad
• 1:39:16
  Speaker 1: market by two basis points, and you see when you
• 1:39:18
  Speaker 1: do the attribution analysis, there's no nothing from stock selection,
• 1:39:24
  Speaker 1: and it's all from sector selection. It's all because of
• 1:39:26
  Speaker 1: what sectors they were in. Well, you may you may
• 1:39:29
  Speaker 1: be happy that you have two d basis points about performance,
• 1:39:32
  Speaker 1: but you have it for the wrong reason. So you're
• 1:39:34
  Speaker 1: that's something that actually would raise a flag with us.
• 1:39:36
  Speaker 1: Is that's not what you say you do on the
• 1:39:39
  Speaker 1: other hand, if you have a manager who, um, you know,
• 1:39:42
  Speaker 1: maybe their performance is only average because they've had some
• 1:39:46
  Speaker 1: factor headwinds or whatever. But if they say bottom up
• 1:39:48
  Speaker 1: stock selection is really what's driving it, and you look
• 1:39:51
  Speaker 1: at the portfolio attribution and you see stock selections actually
• 1:39:53
  Speaker 1: added value, well then you know that begins to reinforce
• 1:39:56
  Speaker 1: what they're saying is what they're doing. And then you know,
• 1:39:58
  Speaker 1: we really do roll up our sleeves and you know,
• 1:40:00
  Speaker 1: we meet with the analyst teams and we get into
• 1:40:03
  Speaker 1: you know, how does a good idea get into the portfolio?
• 1:40:06
  Speaker 1: How does an idea get out of the portfolio? What?
• 1:40:08
  Speaker 1: You know, what, what are you looking at next? Etcetera, etcetera.
• 1:40:11
  Speaker 1: So we actually get into a lot of the weeds
• 1:40:13
  Speaker 1: around the portfolio. But we what at the end of
• 1:40:16
  Speaker 1: the day, what we really want to see is a
• 1:40:18
  Speaker 1: consistency between what they say and what actually happens. So
• 1:40:22
  Speaker 1: it makes sense, It makes a whole lot of sense. Um,
• 1:40:25
  Speaker 1: So who are the buyers of the active side. If
• 1:40:28
  Speaker 1: everybody knows you as the index are in chief, who
• 1:40:33
  Speaker 1: are the ideal investor buying a vanguard active funds? So
• 1:40:38
  Speaker 1: we see a lot of um, We see a lot
• 1:40:41
  Speaker 1: of investors on our retail direct side, UM, you know,
• 1:40:44
  Speaker 1: the do it yourself investors who do a combination of
• 1:40:47
  Speaker 1: they'll build a core portfolio around an index strategy, and
• 1:40:51
  Speaker 1: then they may add one or two or three of
• 1:40:53
  Speaker 1: our active funds, almost like a course satellite kind of approach. UM.
• 1:40:58
  Speaker 1: That's become pretty prevalent, and that's most prevalent in the
• 1:41:01
  Speaker 1: retail side. Before one case side, UM used to follow
• 1:41:06
  Speaker 1: that trend as well, but certainly the last five years,
• 1:41:09
  Speaker 1: the advent of target date funds has changed some of that,
• 1:41:12
  Speaker 1: so we see a little less interest there. You know,
• 1:41:15
  Speaker 1: on the advisor side, you know, our financial advisors with
• 1:41:18
  Speaker 1: whom we work UM, many of them employ that kind
• 1:41:22
  Speaker 1: of strategy where they mix indexing and active, but historically
• 1:41:27
  Speaker 1: I think they've looked to us more for our indexing
• 1:41:29
  Speaker 1: prowess than our active prowess. Well, it makes sense because
• 1:41:32
  Speaker 1: if you're looking for low costs and that's what you wanna,
• 1:41:35
  Speaker 1: that's what you want to focus on, that that's where
• 1:41:37
  Speaker 1: you're gonna go. So let's talk a little bit about
• 1:41:40
  Speaker 1: I know I only have you for so many times,
• 1:41:42
  Speaker 1: so many minutes left, and I want to get to
• 1:41:44
  Speaker 1: a few of my favorite questions, So since you've joined Vanguard,
• 1:41:49
  Speaker 1: what has changed at Vanguard? And since you've become CEO
• 1:41:54
  Speaker 1: what changes have you implemented? So you know, UM, I
• 1:41:58
  Speaker 1: joined in eighty six and UM, you know, obviously the
• 1:42:02
  Speaker 1: biggest changes have been UM. You know that just the
• 1:42:05
  Speaker 1: growth and scope of the scale that's has to be
• 1:42:08
  Speaker 1: immense To have had a front row I mean, that's
• 1:42:11
  Speaker 1: hard to imagine having a front row seat. So when
• 1:42:14
  Speaker 1: you joined, how big was Vigor was under a thousand
• 1:42:17
  Speaker 1: crew members people and um less just about twenty billion
• 1:42:22
  Speaker 1: under management. So you've been there from twenty billion to
• 1:42:25
  Speaker 1: three point one billion trillion. That's that's unfathomable of a growth.
• 1:42:32
  Speaker 1: So the breath and scale of what we do is
• 1:42:35
  Speaker 1: certainly huge. UM. The change in technology has been breathtaking,
• 1:42:39
  Speaker 1: I mean breath taking. You know, it's the biggest technological
• 1:42:41
  Speaker 1: innovation when I joined was the eight hundred toll free number.
• 1:42:45
  Speaker 1: And you know, now all transactions are conducted on the web. UM,
• 1:42:50
  Speaker 1: and then and and and you see people doing all
• 1:42:52
  Speaker 1: this stuff with smartphones and tablets and it's just incredible
• 1:42:56
  Speaker 1: to see. So that's that's been a huge change. You know,
• 1:42:59
  Speaker 1: the change has been actually the adoption of indexing. So
• 1:43:04
  Speaker 1: you say, wait a minute, you invented the first index
• 1:43:06
  Speaker 1: one in seventy six, but we only had one index
• 1:43:09
  Speaker 1: fund when I joined. We were in the process of
• 1:43:11
  Speaker 1: rolling out our second one, and no one had really
• 1:43:14
  Speaker 1: come to the party at that point. Um. You know,
• 1:43:16
  Speaker 1: we were still primarily an active shop. And to see
• 1:43:20
  Speaker 1: the adoption of indexing is a major force in the
• 1:43:23
  Speaker 1: mutual fund space. Um. You know, we always believe it
• 1:43:28
  Speaker 1: would take hold, but I'm not sure even we saw
• 1:43:30
  Speaker 1: it taking hold to the level that it's that it's gone,
• 1:43:33
  Speaker 1: so that that's had a pretty profound change. And then um,
• 1:43:37
  Speaker 1: probably the last thing, um, and then we'll get the
• 1:43:41
  Speaker 1: second part of the question is, um, the globalization. And
• 1:43:44
  Speaker 1: you know we've globalized our investment thinking. Um, so we
• 1:43:49
  Speaker 1: you know, we we were very heartily recommending people, you know,
• 1:43:53
  Speaker 1: check their home bias at the door and really diversify globally.
• 1:43:57
  Speaker 1: And if we if we look at Europe and we
• 1:43:59
  Speaker 1: look at them markets somewhat less expensive than US markets, yeah,
• 1:44:03
  Speaker 1: I mean yeah, much even after the most recent run ups,
• 1:44:07
  Speaker 1: still cheaper than it's Again, it's a great case for
• 1:44:11
  Speaker 1: why you want to be globally diverse UM in your portfolio,
• 1:44:14
  Speaker 1: and UM our client base is increasingly becoming global. UM.
• 1:44:18
  Speaker 1: You know, we've got pretty significant footprint in Australia, Hong Kong,
• 1:44:22
  Speaker 1: the UK, Canada. UM. You know, we serve Europe from
• 1:44:26
  Speaker 1: the UK. So we're seeing, you know, our ability to
• 1:44:30
  Speaker 1: take our story to many disparate markets. UM, and that's
• 1:44:34
  Speaker 1: been pretty exciting to watch, and that's really happened in
• 1:44:36
  Speaker 1: the last five years. So you mentioned UM, almost of
• 1:44:40
  Speaker 1: your transactions are digital. What are you guys doing with
• 1:44:44
  Speaker 1: all that data? I would imagine that the ability to
• 1:44:48
  Speaker 1: take the reams of quantitative metrics that are developed in
• 1:44:52
  Speaker 1: house just from your own client transactions, and look at
• 1:44:56
  Speaker 1: it geographically in the US, look at the globally, look
• 1:44:59
  Speaker 1: at how people are using that UM interacting with Vanguard.
• 1:45:05
  Speaker 1: Have you guys come up with some interesting ways to
• 1:45:08
  Speaker 1: slicensese that well. So I would tell you we're probably
• 1:45:13
  Speaker 1: not as far along in that as you would think,
• 1:45:15
  Speaker 1: and hope in some ways. UM. You know, one, you've
• 1:45:19
  Speaker 1: got all the privacy issues, so you want to make
• 1:45:20
  Speaker 1: sure you have your structures to protect privacy. But I
• 1:45:24
  Speaker 1: think the big data concept that a lot of people
• 1:45:26
  Speaker 1: are talking about is probably the next going to be
• 1:45:29
  Speaker 1: a really important thing going forward. You know, we we
• 1:45:33
  Speaker 1: we certainly look at all the transactional activity and and
• 1:45:36
  Speaker 1: um we it gives us a very good sense of
• 1:45:39
  Speaker 1: what investors are thinking and doing. And we can watch
• 1:45:41
  Speaker 1: what people do on the web, so we know where
• 1:45:43
  Speaker 1: they're spending time and where they're not and that actually
• 1:45:46
  Speaker 1: gives us some insights as to how investors are thinking.
• 1:45:49
  Speaker 1: But um, we probably are in you know, the second
• 1:45:53
  Speaker 1: inning of that game, if you really Yeah, so I
• 1:45:57
  Speaker 1: think there's just an immense amount more that can be done.
• 1:46:00
  Speaker 1: So aside from big data, what do you want to
• 1:46:02
  Speaker 1: accomplish as CEO of Vanguard for the next five years?
• 1:46:06
  Speaker 1: And I understand if there are a company secrets you
• 1:46:08
  Speaker 1: you don't want to share, but you have to have
• 1:46:10
  Speaker 1: a fairly public set of goals. Yeah, so let me
• 1:46:14
  Speaker 1: let me just step back to you know, coming out
• 1:46:17
  Speaker 1: of the crisis, just the context. So you know, we
• 1:46:21
  Speaker 1: we did a lot of work coming out of the
• 1:46:22
  Speaker 1: crisis about things that we thought were going to really matter.
• 1:46:25
  Speaker 1: So you know, one of them was, you know, we
• 1:46:27
  Speaker 1: thought et f s were gonna be a bigger part
• 1:46:30
  Speaker 1: of our future, so we put a lot of emphasis there.
• 1:46:32
  Speaker 1: We thought target date funds in the four oh one
• 1:46:34
  Speaker 1: K market would be a bigger part of our future.
• 1:46:36
  Speaker 1: We put a lot of emphasis there. We thought global
• 1:46:38
  Speaker 1: would be a really much bigger part of what we're
• 1:46:40
  Speaker 1: going to do um and so we put a lot
• 1:46:42
  Speaker 1: of emphasis there. There were a lot of internal things
• 1:46:45
  Speaker 1: that we worked on in terms of developing the next
• 1:46:47
  Speaker 1: generational leaders and so forth. And what you've seen in
• 1:46:50
  Speaker 1: you know, the last half dozen years is you know,
• 1:46:52
  Speaker 1: obviously the E t F side has you know, it's
• 1:46:54
  Speaker 1: played out pretty much the way we saw it. We
• 1:46:58
  Speaker 1: weren't in the we we didn't serve people like you
• 1:47:01
  Speaker 1: financial advisors a decade ago. It's a trillion dollar business
• 1:47:04
  Speaker 1: today for trillion dollars one trillion dollars um. From a startup.
• 1:47:12
  Speaker 1: You know, we were late in the target date fund.
• 1:47:15
  Speaker 1: We're now the largest provider. We we actually are the
• 1:47:17
  Speaker 1: largest four oh one K manager today, you know, three
• 1:47:19
  Speaker 1: quarters of a trillion dollars in in four oh one
• 1:47:23
  Speaker 1: K assets. So and then our global business has gone
• 1:47:26
  Speaker 1: from you know, I don't know, seventy or eighty billion
• 1:47:29
  Speaker 1: to two fifty billion in that time frames. So all
• 1:47:33
  Speaker 1: those sort of strategic pushes UM have paid off to
• 1:47:39
  Speaker 1: date UM, and then we did a lot of internal things.
• 1:47:42
  Speaker 1: As I said, so going forward, UM, I think the
• 1:47:46
  Speaker 1: E t F phenomenon is not done. So I think
• 1:47:48
  Speaker 1: ETFs UM are not only gonna be front and center
• 1:47:52
  Speaker 1: in the US. I think they're going to be more
• 1:47:53
  Speaker 1: prevalent around the world. We're seeing are they not especially
• 1:47:58
  Speaker 1: prevalent overseas like there and you look at as you
• 1:48:00
  Speaker 1: look at Europe, are people not in pockets of Europe?
• 1:48:05
  Speaker 1: They are, but they haven't really taken hold of the
• 1:48:07
  Speaker 1: way they have here. So we think that's coming. And
• 1:48:10
  Speaker 1: we think the indexing story broadly is coming around the
• 1:48:14
  Speaker 1: world because it's still a it's less than five percent
• 1:48:16
  Speaker 1: of all assets under management outside the US, so I
• 1:48:19
  Speaker 1: think that's a huge opportunity UM, so the whole global
• 1:48:24
  Speaker 1: so E t F s global. UM. I think this
• 1:48:28
  Speaker 1: UM intersection of robo and personal advice that we're calling
• 1:48:33
  Speaker 1: our personal advisor service is going to be a really
• 1:48:35
  Speaker 1: big thing for US UM the next five years. And
• 1:48:39
  Speaker 1: then I think, UM, maybe it may not sound as big.
• 1:48:43
  Speaker 1: There's a lot to be done on the technology front
• 1:48:46
  Speaker 1: to make US even easier to deal with, and so
• 1:48:49
  Speaker 1: some of that will be more evolutionary than revolutionary. But
• 1:48:53
  Speaker 1: so much of what we did over the last decade
• 1:48:56
  Speaker 1: was focused on making the PC experience better on our websites,
• 1:48:59
  Speaker 1: really robust. As you know, we gotta we have to
• 1:49:02
  Speaker 1: have smartphone and tablet technology that's equally robust. We're I
• 1:49:06
  Speaker 1: think we're sort of leading in that, but I don't
• 1:49:10
  Speaker 1: think it's anywhere near where it needs to get, so, um,
• 1:49:13
  Speaker 1: you should expect a lot there. And then the last
• 1:49:16
  Speaker 1: thing I would say is, um, we're not done on
• 1:49:18
  Speaker 1: the cost side. So you think you can extract more
• 1:49:21
  Speaker 1: costs make things cheaper, I do so more vanguard effect.
• 1:49:26
  Speaker 1: You're going to raise the bar and make everybody else
• 1:49:28
  Speaker 1: we come to you. We we we we we think
• 1:49:31
  Speaker 1: we need to keep raising the bar on that because again, um,
• 1:49:34
  Speaker 1: it's certainly a institutional in your d N, a part
• 1:49:40
  Speaker 1: of part of the corporate culture. But you guys have
• 1:49:43
  Speaker 1: an enormous advantage. You're so far ahead of just about
• 1:49:47
  Speaker 1: everybody in that space. Why not press that further? Well?
• 1:49:51
  Speaker 1: And you know the other as I mentioned any Grove
• 1:49:55
  Speaker 1: earlier in this, you know, um, the idea about the
• 1:49:58
  Speaker 1: parent only the paranoid surrive. You can't get complacent. Um.
• 1:50:01
  Speaker 1: You know, there's a lot of tough competitors out there.
• 1:50:04
  Speaker 1: They're not going to just roll over and say, oh,
• 1:50:05
  Speaker 1: Vanguard's won the game, it's over. I wish they would. Um,
• 1:50:08
  Speaker 1: I'd be happy if if market. That's not the way
• 1:50:11
  Speaker 1: markets work. And that's what I love about you know.
• 1:50:13
  Speaker 1: I mean, so you have to suit up every day.
• 1:50:15
  Speaker 1: You you don't sound like a guy. Hey we have
• 1:50:18
  Speaker 1: three trillion dollars. I'm just gonna kick back and uh,
• 1:50:22
  Speaker 1: you know we our team goes to bed every night
• 1:50:24
  Speaker 1: nervous about what tomorrow is gonna bring. And I think
• 1:50:27
  Speaker 1: it's a really healthy, um, healthy thing for us. So
• 1:50:30
  Speaker 1: you know you can't um. Jack Brennan, who I know
• 1:50:33
  Speaker 1: you you you spent some time on this very doing
• 1:50:36
  Speaker 1: the same thing. Jack had his favorite saying, I think
• 1:50:40
  Speaker 1: um was complacencies the seven deadly sins all rolled into one,
• 1:50:46
  Speaker 1: which I think is a justice brand. Ice I think
• 1:50:48
  Speaker 1: was the originator of it. And Jack used to preach
• 1:50:51
  Speaker 1: that to us, and you know, I think it's part
• 1:50:53
  Speaker 1: of our d n A at this point. So in
• 1:50:55
  Speaker 1: the last few minutes we have before because I know, um,
• 1:51:00
  Speaker 1: your associate is gonna be jumping up and down a second.
• 1:51:02
  Speaker 1: Let me let me give you my final three or
• 1:51:05
  Speaker 1: four questions that I ask everybody. And I know this
• 1:51:09
  Speaker 1: is gonna be, um, really interesting. First, what sort of
• 1:51:13
  Speaker 1: advice would you give to a millennial or someone just
• 1:51:17
  Speaker 1: starting out their career, whether it's in the investment business
• 1:51:20
  Speaker 1: or just more broadly, so more broadly, um, you know,
• 1:51:25
  Speaker 1: it's to me, it's all about save early. You know. Actually,
• 1:51:30
  Speaker 1: let me back it up. Live below your means, you know,
• 1:51:33
  Speaker 1: whatever you think you can afford, just notch it down
• 1:51:35
  Speaker 1: a little bit, save more than you you think you're
• 1:51:39
  Speaker 1: gonna need to be very aggressive early and then get
• 1:51:43
  Speaker 1: exposure um to you know, a highly diversified portfolio. If
• 1:51:47
  Speaker 1: you're young, if you're a young millennial, you should be
• 1:51:49
  Speaker 1: mostly equities, um volatilities your friend, it's not your enemy
• 1:51:53
  Speaker 1: at this point. Be very global and and and then
• 1:51:56
  Speaker 1: you know, obviously we're gonna say, pay a lot of
• 1:51:57
  Speaker 1: attention to cost, but I would I would really start
• 1:52:00
  Speaker 1: early and try to save as much as you can early.
• 1:52:03
  Speaker 1: It makes a huge difference, you know. We just have
• 1:52:05
  Speaker 1: this conversation the other day. I think back about my
• 1:52:10
  Speaker 1: cars that I had when I was I'm a car guy.
• 1:52:13
  Speaker 1: Early in my career and in hindsight, who really cares
• 1:52:17
  Speaker 1: what you're driving when you're just starting out. You're supposed
• 1:52:20
  Speaker 1: to be broke and and and it's just you know,
• 1:52:23
  Speaker 1: if you do it on the front end, the compounding
• 1:52:26
  Speaker 1: effect is just amazing. You know, for somebody coming into
• 1:52:30
  Speaker 1: our business. UM, I would say, really important to develop
• 1:52:35
  Speaker 1: a global perspective. UM, I still see it. It's it's
• 1:52:39
  Speaker 1: getting better and home country biases everywhere. It's it's not
• 1:52:42
  Speaker 1: just here. And in the US it's not as bad
• 1:52:45
  Speaker 1: because the US is about half of the global markets,
• 1:52:48
  Speaker 1: so it doesn't grow as much. But if you're in
• 1:52:50
  Speaker 1: the UK, where you're six or seven percent of the
• 1:52:53
  Speaker 1: global markets and of your equity exposure is local, that's
• 1:52:58
  Speaker 1: a problem. So if you're going to be if you're
• 1:52:59
  Speaker 1: going to be in our business, you've got to develop
• 1:53:02
  Speaker 1: a global mindset to UM, you've gotta work really hard.
• 1:53:06
  Speaker 1: UM I think it's you know, I think it's gonna
• 1:53:07
  Speaker 1: get even harder. And you know, whether you're on the
• 1:53:09
  Speaker 1: business side or the investment side, hard work really really
• 1:53:13
  Speaker 1: separates people. UM. And then three, UM, you know, line
• 1:53:17
  Speaker 1: yourself up with organizations that really put integrity above all else.
• 1:53:25
  Speaker 1: Our business. Um, you know a lot of really good people,
• 1:53:28
  Speaker 1: a lot of really good firms, but you know there
• 1:53:29
  Speaker 1: are some stuff on the margin that you just is
• 1:53:32
  Speaker 1: not good. And I think if you're young, pay a
• 1:53:35
  Speaker 1: lot of attention to that early on. UM, and you know,
• 1:53:39
  Speaker 1: try to find the firm who's got a value system
• 1:53:42
  Speaker 1: that really matches up with your own. So my my
• 1:53:44
  Speaker 1: second to last question, I kind of asked you already,
• 1:53:47
  Speaker 1: so I'm gonna change it up. I was gonna say
• 1:53:49
  Speaker 1: what has changed for better or worse since you've joined
• 1:53:52
  Speaker 1: the industry. But we've really talked about that a lot,
• 1:53:55
  Speaker 1: So let me mix it up a little bit and
• 1:53:58
  Speaker 1: say what changes would you lie to see take place
• 1:54:01
  Speaker 1: going forward in the industry. So look, I think the industry,
• 1:54:05
  Speaker 1: uh again, it's not gonna shock you the cost side, um.
• 1:54:10
  Speaker 1: And and it's it's not just about price, by the way,
• 1:54:13
  Speaker 1: it's about value. The industry really needs to think about
• 1:54:16
  Speaker 1: what value are we providing? And um, there's there's an
• 1:54:20
  Speaker 1: immediate reaction when you say low costs to you know, um,
• 1:54:24
  Speaker 1: people people flinch. I think the value you know, you
• 1:54:28
  Speaker 1: have to understand your value proposition, and I don't think
• 1:54:31
  Speaker 1: everybody does that. As well as they should. Um. You know,
• 1:54:34
  Speaker 1: you don't have to be the low price guy all
• 1:54:35
  Speaker 1: the time if you're really adding something, um that's valuable
• 1:54:39
  Speaker 1: to a client at the end of the day. So
• 1:54:41
  Speaker 1: I think people need to really understand the value of
• 1:54:44
  Speaker 1: the side of their equations better. I'd also like to
• 1:54:47
  Speaker 1: see um uh, the industry a little bit more focused
• 1:54:53
  Speaker 1: on the long term. Um. You know, a lot of firms,
• 1:54:56
  Speaker 1: despite the fact that they talk long term from an
• 1:54:59
  Speaker 1: investment perspective, they run themselves very short term with a
• 1:55:02
  Speaker 1: very short term orientation. You know. One of the things
• 1:55:05
  Speaker 1: we really pride ourselves on is trying to run ourselves
• 1:55:08
  Speaker 1: the same way we tell people to invest, which was
• 1:55:10
  Speaker 1: you know, don't think in terms of quarters or even years,
• 1:55:13
  Speaker 1: think in terms of you know, five, ten, twenty year blocks.
• 1:55:17
  Speaker 1: And I think the industry is still too short term oriented,
• 1:55:21
  Speaker 1: and you see that in some of the discussions around
• 1:55:23
  Speaker 1: regulation and things like that. You know, I think the
• 1:55:26
  Speaker 1: third thing, um, you know, for the industry um to
• 1:55:29
  Speaker 1: really to really focus on is the people's side. Um.
• 1:55:33
  Speaker 1: And this is going to sound a little bit um
• 1:55:36
  Speaker 1: uh paternalistic perhaps, but you know, when I talked to
• 1:55:41
  Speaker 1: a lot of young professionals in the business, and it's
• 1:55:44
  Speaker 1: a wide distribution of experiences in terms of whether they
• 1:55:48
  Speaker 1: really feel satisfied or not. And I think it's really
• 1:55:51
  Speaker 1: important that, um, for you know, you know, you know,
• 1:55:55
  Speaker 1: in your own work, having a purpose that matters really
• 1:55:59
  Speaker 1: makes coming to work every day better. I think more
• 1:56:01
  Speaker 1: firms need to think about what's our real purpose? Why
• 1:56:05
  Speaker 1: why do we exist? And why does somebody want to
• 1:56:07
  Speaker 1: work here? Not just for the paycheck. As the paycheck
• 1:56:09
  Speaker 1: is important, but it's not it's not actually what you're
• 1:56:12
  Speaker 1: going to remember, you know after thirty five years. Um,
• 1:56:15
  Speaker 1: you know, what I'll remember in Vanguard are the people
• 1:56:18
  Speaker 1: and the clients and the culture and you know, the
• 1:56:21
  Speaker 1: compensation and all that will be nice, but that that's
• 1:56:25
  Speaker 1: what I'm going to remember. One of the things we've
• 1:56:27
  Speaker 1: talked about, and when we sit around and have a
• 1:56:31
  Speaker 1: couple of glasses of wine or beer, is how things
• 1:56:34
  Speaker 1: have changed. And and so I'm the oldest guy in
• 1:56:37
  Speaker 1: my office. I'm a couple of years younger than you,
• 1:56:40
  Speaker 1: but mostly young younger folks. And the conversation is, when
• 1:56:45
  Speaker 1: I was coming up, it was very much a mentorship
• 1:56:49
  Speaker 1: philosophy that was very widespread and maybe this is someone anecdotal,
• 1:56:55
  Speaker 1: but I don't see as much of that around today
• 1:56:59
  Speaker 1: as I used to. And it was a very very
• 1:57:03
  Speaker 1: big thing to have someone taking onto the kid Camille.
• 1:57:07
  Speaker 1: Let me let me you're doing it wrong. Let me
• 1:57:09
  Speaker 1: let me show you the ropes. And I know there's
• 1:57:12
  Speaker 1: still some of them around. But I'm not sure if
• 1:57:15
  Speaker 1: the people who are twenty five or so, we're thirty
• 1:57:19
  Speaker 1: arguing able to answer the same question in twenty five
• 1:57:22
  Speaker 1: years who your influences, who your mentors, who really affected
• 1:57:27
  Speaker 1: the way you think? And I think that's a great
• 1:57:30
  Speaker 1: loss these days. Yeah, you know, and and and some
• 1:57:32
  Speaker 1: of that you know, you you earlier you talked a
• 1:57:35
  Speaker 1: little bit about the change in the industry composition. I mean,
• 1:57:37
  Speaker 1: you know, there's a lot of more money with you know,
• 1:57:41
  Speaker 1: a handful of bigger firms. And what you hope is
• 1:57:44
  Speaker 1: the big firms don't lose that. I think some of
• 1:57:47
  Speaker 1: them do. And you know, investment management for some firms,
• 1:57:50
  Speaker 1: it's just a little piece of a bigger set of
• 1:57:52
  Speaker 1: financial services they're providing. And we've definitely seen that. Um
• 1:57:56
  Speaker 1: when we hire people from some of those firms, you
• 1:58:01
  Speaker 1: know they're they're after they've been with us for a
• 1:58:03
  Speaker 1: year to tack aground. This is really different and I
• 1:58:06
  Speaker 1: think maybe it's getting to what you're describing, and I
• 1:58:09
  Speaker 1: think again it's the human element side of this business
• 1:58:14
  Speaker 1: is really important if you're going to really add value.
• 1:58:17
  Speaker 1: You know, one of the ways you add values through
• 1:58:18
  Speaker 1: your people, and you need to put a lot of
• 1:58:22
  Speaker 1: time and energy into that. And you can't treat people
• 1:58:24
  Speaker 1: just as another asset on the books. Um, who you
• 1:58:27
  Speaker 1: know that happens to walk out at night. You gotta
• 1:58:29
  Speaker 1: really treat it specially. And finally we get to our
• 1:58:32
  Speaker 1: last question. I asked this of all of my guests,
• 1:58:36
  Speaker 1: what do you know today about investing that you wish
• 1:58:39
  Speaker 1: you knew thirty years ago when you started your career?
• 1:58:43
  Speaker 1: Global is good. That's the big change from thirty years ago.
• 1:58:47
  Speaker 1: So are you saying thirty years you were domestic focused
• 1:58:50
  Speaker 1: and you weren't thinking globally. Yeah. I would not have
• 1:58:53
  Speaker 1: thirty years ago. It just would not have occurred to
• 1:58:56
  Speaker 1: me to be thinking nearly as globally. And that's the
• 1:58:58
  Speaker 1: big change for me. It's been. Um, you know, uh,
• 1:59:02
  Speaker 1: I'd like to think thirty years ago, you know, I
• 1:59:04
  Speaker 1: believed in low costs because I joined Vanguard. I believed
• 1:59:07
  Speaker 1: in indexing because we are a pioneer, um, you know,
• 1:59:11
  Speaker 1: getting acid allocation right with something we preach right from
• 1:59:14
  Speaker 1: the get go. But I was not nearly as global
• 1:59:16
  Speaker 1: in my thinking as I needed to be. And and
• 1:59:18
  Speaker 1: that's really a fascinating change. Hey, Listen, when we look
• 1:59:21
  Speaker 1: around the world, the US is more than a developed economy,
• 1:59:24
  Speaker 1: it's a mature economy. The same thing with Japan and Europe.
• 1:59:27
  Speaker 1: When you look globally, the developing markets and the emerging
• 1:59:31
  Speaker 1: markets are where all the global growth is likely to
• 1:59:34
  Speaker 1: come from. So, uh, you're you're I'm drinking from the
• 1:59:38
  Speaker 1: same cup that you are. There's little doubt that that's
• 1:59:41
  Speaker 1: what the future has been. Bill I. I can't thank
• 1:59:43
  Speaker 1: you enough for being so generous with your time. This
• 1:59:46
  Speaker 1: has really been absolutely fascinating. UM. I just want to review.
• 1:59:51
  Speaker 1: People want to find your your research and your work.
• 1:59:54
  Speaker 1: It's at Vanguard Vanguard dot com. UM. I meant to
• 1:59:59
  Speaker 1: ask you about the no whole theme? Is it true?
• 2:00:01
  Speaker 1: Everything is everything? So the galley we have a galley,
• 2:00:05
  Speaker 1: or we don't have a gym. We have ship shape.
• 2:00:07
  Speaker 1: We don't have employees, we have crew members. You hinted
• 2:00:10
  Speaker 1: at that in the last answer. That's what checking it off.
• 2:00:13
  Speaker 1: It's it's it's very nautical, but it builds a strong
• 2:00:16
  Speaker 1: culture to say the very least. Well, this has been
• 2:00:19
  Speaker 1: absolutely delightful. Thank you so much for spending so much
• 2:00:23
  Speaker 1: time with us. You've been listening to my interview with
• 2:00:27
  Speaker 1: Bill McNabb. He's the chairman and CEO of Vanguard Group.
• 2:00:32
  Speaker 1: If you'd like more information, you know what, you can
• 2:00:34
  Speaker 1: check it out. Be sure and listen to all our
• 2:00:37
  Speaker 1: other podcasts and by this point, if you're still with us,
• 2:00:40
  Speaker 1: just look an inch or two above or below on
• 2:00:43
  Speaker 1: iTunes and you can see all the rest. I'm Barry Ridhults.
• 2:00:46
  Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.