Fran Kinniry Discusses Diversified Portfolios

five point something trillion dollars. He has an absolutely fascinating career and the work he's done at Vanguard on a concept called Advisors Alpha is absolutely essential and part of the single largest trends UH in investment management today, which has to do with the shift from transactional brokerage type investments two more UM fee only long term asset allocation from advisors. This is one of the single biggest trends in investing and has seen literally trillions of dollars shift UH.

This is a big part of the shift from active to passive, from transactional UM to long term. And if you are an advisor, if you work in the industry, or if you're just simply UM, if you're just simply an investor who is interested in learning what's going on in the world of investment management, you're going to find this conversation to be absolutely fascinating. So, with no further ado, my conversation with Vanguards Franken I Re. This is Master's

in Business with Barry Ridholts on Boomberg Radio. My special guest this week is fran Kinnary. He is the global head of Portfolio Construction at the Vanguard Group, which manages over five trillion. That's trillion with a T five trillion dollars. He's a principal in the Investment Strategy Group, where as an m BE a slash chartered financial analyst, he helps to develop Vanguard's investment philosophy, methodology, and portfolio construction strategies.

At Vanguard, he helped to create the firm's investment counseling and research departments, it's asset management services, and the Vanguard Advisory Services. But perhaps he is best known for creating the concept of advisor's Alpha. Fran Kinnary, Welcome to Bloomberg. Thank you so much, Barry. It's great to be here. I've been a big fan of your show and so just a pleasure to be here. I um I have had as a guest on the show just about all of your CEO s since the firm began. I have

to track down the new guy. He's he's been elusive, but I will eventually. He's been busy, I can imagine. So so let's start a little bit with with some background. I hear that index funds are are a bubbler. Are you guys at Vanguard about to crash the economy? Yeah,

that's an interesting one. The the author I guess of the or the creator of the big short came out recently, and I know your team covered at Josh covering it as well, and I think people, you know, I have to really take a step back when I see stories like this. There's a lot of confusion even on index and active and I think people don't even understand. As long as they've been around, they're still very confused. So so let's delve into the details, explain the broad difference

and why it matters. Yeah, first off, I think people confused this idea of you know, indexing maybe surpassing active management, right, so in the US, and you actually just did that, did that exactly, But I think people forget that that's forty ACT funds, forty ACT being mutual funds and e t f s, and that is a very small part of the capital market structure. So what is not included under the forty Act, separate accounts, institutional investors, sovereign wealth funds.

So actually the mutual fund and ETFs are somewhere between thirty and thirty five percent. So if you do that math, index equities on the U S side is somewhere around so still relatively small. Indexing passive investing much more than active investing exactly. And I think the other big confusion is that people think that indexing moves price. If there's

only two active managers. Let's say it's you and I Berry, and you and I are playing golf and we're not at our trading desk, the index doesn't move, so the index is taking their direction. They index will replicate active managers. So this idea that indexing is driving price or price discovery, if there were only two active managers and they decided to take the day off, the index wouldn't move. There would be no index trading. That's that's interesting. So as

long as we're we're talking about this bubble. Over the past couple of years, i've heard indexing is a threat to the economy. Is an American, it's Marxist. It seems like a lot of people are flailing and Jack Bogel very famously said when Vanguard first rolled out their initial

index funds, they were accused of being un American. Yeah, and I think some of the assaults that you're hearing is back to incentives, right, and and um, you know, Charlie Munger famously said that his whole life he believed that of what people say or do is due to incentives, and his whole life he underestimated incentives. Uh So, I think there's a large crowd that would love to talk about this indexing bubble or all the negatives of indexing.

You have to look at the incentives there. The bottom line is indexing is broadly diversified, low cost exposure, and probably one of the greatest things that have happened to investors in the last fifty years. So so you suggesting that the people who are critics of indexing are the ones who are seeing outflows and losing market share? Is is that how cynical you are? Yeah? I think when you your your survival and uh, you know, depends on it,

you'll say whatever makes that right. The famous Upton Sinclair quote. So you've been at Vanguard since nineteen seventy seven, what path took you there. What what was your first role at the Vanguard Group. Well, I'm not that old, Barry. I joined in nineteen nineties seven, is that? What did I say? I said seventy seven you you were going into high school? Yes, exactly, exactly, So I joined in nineteen ninety seven. By the way, Vanguard's only been around

with what's in seventy four? So so ninety seven, Yes, so nineteen ninety seven I joined Vanguard. UM. The backstory is like yourself, I was at a registered investment advisory firm. Back at that time. We had a billion dollars, which was was quite large. We were a multi family office and institutional advisory firm. To be fair, in nineteen ninety seven, a billion dollars was a lot of money. Now it's

walking around money exactly. So it seems with six trillion and five trillion and just crazy a UM numbers exactly and so UM. I was a big fan and studied Vanguard from AFAR, from my prior firm, and I ended up at Vanguard because our r I a business, got rolled up into a you know, they were going through a roll up stage and roll up being other big advisory shops bringing other advisors together. I had about a year to figure out whether I was gonna stay or

move somewhere, and I just was. I was a c f A and I happened to be at a CFA event and Vanguard was entering the advice business. And so a lot of people know about Vanguard's advice today and they may think it's new, but I was, you know, at the very very early beginning of Vanguard's starting advice, and my role was to develop the investment methodology we used in our advice services. So so let's talk a little bit about that. Vanguard has been a giant advocate

of the sixty forty portfolio. Equity bonds advisors embrace that, uh in giant numbers. Uh. Is the sixty forty portfolio still a desired sort of miss Yeah. I think some context, they're just like we we started with the context on indexing. The context is, I think Vanguard believes in broadly diverse fight portfolios, low cost, whether it's active or passive, because

we actually believe in active. You're almost two trillion and active, that's right, And so I think the sixty forty gets thrown out there, you know, um as a starting point. But we we believe that the asset allocation should reflect the client's goals and objectives. So we have clients, uh, for example, our target retirement funds, it's a glide pass. It starts out nine ten and gets all the way down to thirty seventy and otherwise, as you get older,

you assume less risk with equities and more stability with bonds. Absolutely, So the sixty forty, while you know, that's one spot on that frontier, I think the main part is having an asset allocation and investment policy. You know that you're navigating back to, so you're rebalancing to that, being broadly diversified and either having high talent and low costs. That would be our formula for success for an investor. Whether

it's sixty forty or forty sixty UM doesn't really matter. Um, But yeah, the sixty tends to be that starting point for many investors, and a lot of the institutional funds, endowments, foundations were that for a very long time. Quite fascinating. So let's talk a little bit about Advisor's alpha. Um, your team effectively created this concept in two thousand and one.

Let's define it. What is Advisor's alpha? Yeah, so advisor's alpha, as you mentioned, we created in two thousand and one, and it really changed the value proposition or the framework of what it means to you know, why hire an advisor? And um my prior role, I was an advisor, and I think our value proposition was probably similar to most and that was a myopic value proposition. Hire me and

I'll outperform a policy portfolio whatever. That's the traditional chasing alpha wool Street pursue the hot hands will beat the market, right, and so whether you do that through security selection, market timing, fund selection, the value proposition for a long time and the advice community was outperform a policy portfolio, and and none of the data supported anybody's ability or at least the vast majority of investors and fund manager's ability to

do that consistently over time. Yeah, and think about what a high hurdle that is if if you're charging you know, let's say one percent in a fee based uh an arrangement, and then you now so not only that, you have to outperform by one percent plus any product fee. So that's a really tough hurdle. So it's a value proposition that you're setting up. You know, you own your value proposition as the advisor, and you're telling your client, you know, judge me on this, and you're you know, you're really

handicapping yourself. And that's what led to a lot of churn, a lot of churn over and unhappy clients. So we kind of broadened the value proposition. So Advisor's alpha, you know, is a much more holistic value proposition. It still has investment management if you believe that that is a you know, skill you want to do. But what about financial planning, tax planning, wealth planning, saving planning, retirement income? How do I get a paycheck to me? And then behavioral coaching

also the service model. I work with a lot of investors that are very busy, you know, they could be a doctor, a lawyer, an entrepreneur, and they don't want to you know, come home at the end of the day and manage their assets. So a service model, you know, I came up with the acronym t W A you know, client may not have the time, willingness or ability to do it on their own. And for most of those clients, it's worth you know, the hundred basis points of advice.

So you you mentioned, um, something that reminds me of the Vanguard concept of total return. I want to explain what that is because most people think total return, they think capital appreciation plus diven ends. But Vanguard has a slightly different definition. Yeah, our our turtle return is um. I think a lot of people try to engineer a return.

And what I mean by that is, let's take this low yield environment and they think that they you know, they may need five or six percent for their spending, so they kind of start with widow is my liability stream? And we see this a lot in the institutional space with endowments and foundations. Um or they have a five percent bogy. If they want to stay completely, they must spend five percent otherwise they're risk losing their texas and

status exactly. And we're a client who's in retirement. Had earth client who's in retirement, Let's say they want to spend the four percent rule. How do you know that works for you know, if you look at a bond chart. The sixties, seventies, eighties, and nineties, interest rates were above the spend rate, so you could have you canna have a fixed income portfolio and it was quite easy. But now you have dividend yields it on the equity market of let's say one eight, one nine, and the bond

marketed somewhere like two. So how do you get to a spending policy of four or five percent? Uh and them together? Well, you see people taking risks. They go out on the yield carve, they high yield junk bonds. You see a lot of duration doesn't work, doesn't work inverted yield care of going out duration art. Yeah, and

you see a lot of these that's there's nothing. This is not an anti alternative investment or private investment conversation, but you know, you you see people going in reaching for you know, alpha that may or may not be there. But well, when you say may or may not be there, the data is pretty overwhelming that for the most part, it's not there. And and a lot of people who dabble alternatives seem to my joke has come for the high fees, stay for the under performance. But that has

not been the solution. That has not been the magic bullet, especially for pension funds that have pushed in giant numbers into private equity and hedge funds and venture capital. It's like everything else, a winner take all. There's a handful of You know, if you can't get into renaissances, medallion funds or d E shaw, the odds are you're not

going to do as well as a simple sixty. Yeah, and I think that goes even for liquid space, right, So, and I still think that this gets back to the marketplace being very sophisticated but maybe not understanding the math. And then and then math is and most of your listeners will probably be familiar with zero sum game, which means that if you and I are counterparties, one of us is going to win on that trade and one

is gonna lose. So on average active management, whether they be liquid or ill liquid or alternatives or traditional, it's going to be impossible at the fiftie percentile and zero some game to win that doesn't. But but I think what misses that is someone is on the right side of that distribution. Someone is winning. And so you know, if you can find talent, you mentioned a few vanguards,

active funds have actually done very well. So if you have good talent and you have your costs below your talent, which is a key component of total return total return, then you know, so we're we're in the total return or outcomes. You know, we we believe that what's the most important thing is what our client outcomes. And so what I mean by that it doesn't have to be all index or that alternatives are bad or you know,

private investments are bad. What you really want to end up with is is my talent greater than my friction? And if that works, then there's a real strong case for active and a strong case for privates and alternatives. Um, the question is do you have access to that? Right?

Not everyone is going to have access to world class talent and they just need a couple of billion dollars and you're in yeah, or you work with you work with a professional fiduciary, so you could work with you know, not not to say you could work with someone like Vanguard that actually can you know, find great managers, get access to great managers and deliver outcomes that are superior even though the cost structure is above an index cost structure. Let me give you a quote from one of your

research papers that I found interesting. Left alone investors often make choices that impair the returns jeopardize their ability to fund their long term objectives. Many are influenced by capital market performance and This is often evident in market cash flows, mirroring what appears to be emotional responses fear or agreed rather than rational ones. Explain the idea of behavioral coaching and what that means. Yeah, so behavioral coaching is one

of the key pillars of Advisor's alpha. And what we mean by that is investing is emotional right, and we know that, you know, you have to be, you know, in a decision state where your emotions are calm, and you know it's hard to stay calm. Let's go back to the global financial crisis, oh eight oh nine. It's hard to stay calm when you've lost you know, forty

of your value of your equities. And what you're asking the investor to do is it, let's just take a two million dollar portfolio, a million in stocks, a million in bonds. Your million in stocks now is five hundred thousand, and you're asking without an advisor, You're you're saying, I'm going to sell two and fifty thousand of bonds that are actually doing quite well in GFC and add to this stock portfolio. So now I have seven fifty seven fifty right to rebalance that. And when I've studied cash

flow at Vanguard for my twenty plus years. And what we see is that you know, investors especially in the extreme. So you go back to that O eight oh nine environment, there was huge outflows of equities in the money market,

and so investors were not rebalancing on their own. And so working with a behavioral coach who's going to help you through the emotions to stay committed to your policy, we think and had a tremendous amount of out and I I personally noticed the outflows going just reaching their plateau that February March oh nine the worst possible time for it, right at the bottom. You know, we study

that right and and and equities went pre GFC. So if you go back to you know O seven, pre GFC, equities were at about sixty eight percent on the household balance sheet, and that means that you know, the thirty two was in more risk off assets. At the bottom you mentioned February of oh nine, equities dropped the thirty six percent. So I call this the most hated bull market of all time because this bull market was very front end loaded, meaning a lot of the returns came

out of March O nine. In that very first and investors only had thirty And so if you look about the I R R, the compound that returned that goes to an investor, the behavioral gap, you know that. You know, we we talk a lot about Advisor's outfit. It's you know, one to two percent, it's episodic. But investors, you know, tend not to do the right thing at the right time for sure. Let's talk a little bit about UM Vanguard Group, which does things quite a bit differently than

the rest of Wall Street. Here's another quote of yours. What Vanguard really believes in is high talent and low cost. Aren't those two things contradictory? Aren't we taught? Hey, if you want the best, you're gonna have to pay up

for it. How do you combine low costs with high talent? Yeah, well, the asset management business is one of the more scalable businesses out there, right, and so UM, what we've been meaning by scalable meaning it doesn't take a whole lot more to manage a billion dollars than it does to manage it depends on the strategy. But yes, that's exactly right. So you know, if if I'm managing a billion dollars, versus a million dollars. My cost should not be my

marginal contents. My marginal costs should shrink, right if we and so what we've been able to do at Vanguard, I think the most important thing is to take a giant step back is you know, when Jack Bogel started the Vanguard Group, it was a mutual mutual fund. And what that means is that we are owned by our investors. And so there's different ways that you can set up

an organization. You can be public public equity, where the public shareholders you know, get the the p and L. You could be a private partnership where the partners get the excess P n L. What Vanguard does and sometimes people think at Vanguard is a nonprofit, but we are actually fiercely for profit. Everything we do is try to maximize our profit. It's what we do with the profit.

We end up giving it back to our sharehold it's our owners, So the owners of our funds through lower costs in the future, and so we pass along the you know, the P and L access back to our investors, either in the form of lower costs coming out of that or higher service levels. Uh and that so that gives us that advantage relatives to some of our competitors. I think people confuse unfair advantage, and it is an unfair advantage with an illegal advantage. It's a perfectly legal advantage.

Any other mutual fund could have set up this way, they chose not to. That's exactly right, I mean. So, and and again everyone has to pick their ownership structure. We're not here to say that public is wrong or

private right. They're just different, right. And so we are owned by our investors, and you kind of think about one master as opposed to multiple masters, and so that allows us, UM, you know, to kind of pass back through where you can actually your original question of how can you have high towent and low cost, Well A, we have our ownership ructure and be we pass along scale back to our investors. We also think our brand

is very attractive. So what I mean by that is we're able to attract world class active managers who want to work with us because they know just the brand to be, you know, working with Vanguard. But they also know we're very patient with our active managers. UM. And so if you actually want to be a pure asset manager and let you know, Vanguard take the client servicing and the distribution. It's a it's an arrangement that works very well and it's probably one of the reasons why

we're so successful and active managers. So so let's let's focus a little more on the active management you rolled out. You Vanguard rolled out a group of quantitative funds not too long ago. I don't want to call them smart data, but a fundamental factor based set of funds. UM. The one thing there's really hasn't been a big push into yet, but I've heard rumors of is an E s G type of fund. I know, you the foot see in

the UK the Footsie E s G funds. Where else is Vanguard gonna go with some of these active UM funds? And and what are the areas that have done very well under active at Vanguard? Yeah, so the areas have done very well for us is is UM you know, the full suite first off, So a lot of people don't know, but we are one of the largest managers in tax exempt so municipal bond funds, so high net

worth clients that might be at your practice. UM. You know, we're like world class in tax exempt fixed income and also taxable fixed income. On the active side. So you on the MUNI, So let's talk about that because it's so attractive in a low um yield environment because post tax makes a big difference, or or um tax equivalent yield makes a huge difference. Is this on a national basis? Is it a state by state basis? How do you put these together? Yeah, So we have a full suite

of of tax exem bond funds UM. You know, we have as you mentioned, we have multi state, so you would own the US in a multi state way, but we also have single state where there's actually a higher state tax like New York it's quite high. So we offer both. We offer a lot of things in active and passive because we have an e t F on the tax exempt as well. But our active funds on the fixed income side, both tax exempt and taxable, have done quite well. You also talked about some of our

factor funds. Uh. You know, I've I've been an author of a lot of papers on smart beta and so we were really just critical of the term. We didn't

think it was smart or it was beta UM. And we were kind of, you know, early in kind of being critical of the narrative, you know, because you know, but we believe that there's factors, you know, if you think about a factor, the value factor, momentum factor, that actually have a different risk and return stream, and they have some premiums to them, and you can even kind of think about why those premiums would exist. Some of them could be behavioral, some of them could be um

just back to misunderstanding the risk. So we do have a series of quant factor funds out there, and and and a whole list of traditional bottom up funds that that you're probably familiar with. The Vanguard has offered for many, many years. You mentioned earlier target date funds UM, which used to get kind of a bad rap, but they have for the most part become the default setting for four oh one K plans. If you don't pick something, you tend to go right into a target date funds.

These have done pretty well over the past decade. Tell us a little bit about the Vanguard target date funds, because I think these are attracting a whole lot more money every month. Yeah, I mean, outside of the invention of index funds, I think target retirement funds, you know, will go down as one of the more helpful innovations for the average person trying to save for retirement. And if you go back before target retirement funds, the four oh one K space, which is where most of these

are used. Um, let's say I'm starting day one at Vanguard. I would get a brochure about all the Vanguard funds, and I had to make these decisions for myself. As as an employee. You start you feel out, here's my healthcare choice, here's my ten or W two tax choice. And now I got a deploy money in my form on K exactly. And so here's a hundred funds like

you know that you have to select from. And we call that unbundled, meaning that think about going into a restaurant and you're at the buffet and you now have to pick it. You know, they're everything overwhelmed with choice. And we talked earlier about investor behavior. What you probably saw most often his investors buying the things that had great five and tenure returns. And so investors month or quarter was whatever the flavor of the month was. Everybody closing.

And so that's a hard thing for the average investor to be successful. Target retirement funds now are the default option, as you mentioned, where you it's a basket of multi asset class funds, so stocks, bonds. So in order to talk about van Guards target retirement funds, you virtually own the world. You own, you know over ten thousand US you know non U s stocks, three thousand US stocks.

You own the global equity and fixed income, and it stays rebalanced automatically throughout your life up until your retirement automatically, and it glides down in risk. And so you think about it's starting out. If if I'll use my son, my son just graduated from Bucknell, he joins the workforce, he starts out, and he glides gradually down through time, and on his last day of work it'll be thirty seventy. So here's the question about that that I'm I'm intrigued by.

People are living much longer. They need to have, I suspect additional risk assets in order to carry them through their entire lifespan so they don't run out of money. Howard target date funds dealing with the rising longevity stats amongst forget your son, someone who's sixty eight next week, probably he is gonna live twenty five plus years, assuming they're healthy at retirement. It used to be that, all right, the average lifespan with seventy two seventy four, we need

just five years. Now you need twenty five years. How do target dates adjust to that? Yeah, so we uh do a lot of modeling on you know, sufficiency, Will this meet sufficiency savings on a life horizon of a hundred you know, if not more in years? And so at thirty seventy you think about thirty stock seventy percent bonds um in most environments is gonna, you know, give you a real return over inflation that's going to last you. Number one and number two, this is not meant to

be a percent. Most clients are people that use them will have Social Security, at least they have it today, and we hope that they'll have it tomorrow. That's a different topic for a different day. But I think that's career suicide for any petition wants to vote against that, because because the retired they vote exactly the young kids today, they're voting more than they used to, but they're still

far below their numbers. So I can't imagine anyone is foolish enough to, yeah, let's get rid of Social Security. That's just political career suicide. Yes, I totally agree, And and so I think the thirty seventy we we will continue to challenge that. So to your point, maybe if investors start living to a hundred and ten or a hundred and twenty, we're not We're not fixed to that final allocation. We tested every year, and we tested very thoroughly.

But if we were hypothetically that's how you wanted to take more risk, you know you risk is kind of a trade off of longevity risk versus capital, you know, depreciation. So if you get O eight oh nine and your versus you know, value at risk is gonna be much, so you're you're trading one risk for the other. Makes perfect sense. Let's talk a little bit about bonds. We were discussing target date funds earlier. What does an investor

who's looking for yield do in the carrent environment? Interest rates are relatively low, inflation is relatively low, valuations on the equity side are relatively high. What's an investor to do? Yeah, I think what an investor should do is, you know, really think about and you asked me earlier on total return, is don't think about the individual components of your portfolio.

So don't look at bonds and isolation of stocks or stocks and isolation of bonds, because what you see is some bonds, if you're reaching for yield, it could have equity like beta to it. For example, if you're going into high yield bonds or emerging market bonds and the equity market we're to have a sell off, they're gonna have equity correlation to it. So you know, you really want to be careful if you were to do that, because you know, for most investors, bonds are the diversifire

to your equity risk. And we see that time and time again, and we saw it a No. Eight oh nine, We saw it into the Internet tech bubble, We saw it in December of eight team where we had that little mini sell off where bonds have very nice our relation properties, meaning that they they serve really well when

equities are doing poorly. And so, but if you have ballast during a ballast or in a downturn in most environments, I don't want to say all environments, but certainly in all environments, if you increase the risk of your bond portfolio, it's gonna look more and more like equities. So let's talk a little bit about all right, So that's credit risk. What about duration, and what about um other bonds like

tips that are index to inflation. Yeah, duration is kind of a It's another one of those tricky areas because I think what most people don't feel to understand is these risks are trade off risks. So if you wanted to increase duration, let's just say increase duration, you're taking on interest rate risk, right, So if I went from a five duration to attend and interest rates go up, I'm gonna lose twice the amount of money because I

went from a five duration to attend. But if you're using duration in hope that if the equities go down and bonds are the ballast, you would double your returns in equity contagion in that environment. So it's really what is the role of a bond portfolio. So, you know, there are some institutional investors, some pretty sophisticated investors that have length and duration because they really want the bonds to have that high you know, negative correlation and positive

offset to equities. But we are taking on his interest rate risks. So it is hard to you know, kind of think about these risks and and make sure that you're talking about the tradeoffs. So so let's talk about another trade off. We we in the United States pretty much have the highest yields in the developed world. But we look at Japan negative interest rates, we look at Germany negative interest rates, we look at a lot of Europe negative interest rates. First, is that possibly going to

come here? On? Second? What can an an investor do if they don't want to pay for the privilege of owning bonds? Yeah? I mean, you know what you mentioned is true, and it's hard to believe that, you know, the US market being you know, actually offering some pretty good yields relative to some of the other high quality developed sovereigns that are out there. Um. So I just would caution everyone, you know, regardless of how low rates go, even if they go to zero or negative, what is

the role of bonds and a portfolio? Um, if it is the ballast of the portfolio, then trying not to stretch for yield, you know, kind of take with the market gives you. Anytime we see people trying to engineer returns that the market isn't giving you, that's usually when they get themselves in trouble. Well, it worked out so well in oh eight or nine yields? What what what could possibly I remember hearing salespeople pitch me on safest treasuries but paying two hundred fifty to three hundred basis

point more. Well, someone's either gonna win a Nobel prize or go to jail. There's nothing in between, right, It's you've just changed the fundamental rules of economics. The only problem is no one went to jail. So I was not fully uh correct about that. So taking what the market gives you as opposed to reaching for yields, what does that do to that draw down calculus we talked about for people in retirement who need to take money

out of their portfolio to live on. Yeah, And I think education, and I think also the role of the advisor. The advisor is doing a great job educating their clients. The way I've always looked at total return is it's a partnership between the capital markets and the investor in themselves. And what I mean by that is, for a lot of periods, the capital markets did all the heavy lifting.

The individual didn't need necessarily to save as much. And so if you're thinking about this partnership of how much the capital markets is going to contribute to your total return versus how much you personally are going to contribute. If we are in a muted return environment, which I

think is pretty much consensus. It's certainly Vanguard's outlook to have a muted return, then the partnership is going to have to come more from saving more, spending less, and making sure that you're doing your end of the bargain as the saver worked longer, or if not, just expect a lower retirement income stream in retirement. So I think investors may not have realized how lucky they were in the second half of the twentieth century. That was a

fantastic period of time. If you were fortunate enough to be born, pick a decade, the thirties, forties, fifties, the next fifty years of your investing returns have been spectacular. We're not likely to see that over the next twenty plus years or so, are we absolutely not. I mean, even from eighty two to the stock market was up eighteen compounded annually. In the bomb market was up about ten eighteen percent a year, eighteen percent a year. I know the Dow went up about a thousand points a

thousand percent over that time. So you think about a balanced investor over that time and use the demograph. Think of being born in the thirties. If you were at your peak earning or near near retirement, and you were able to get fourteen percent from a balanced portfolio, I'll take it. I'll take it right now. And but I think one another thing is people have to understand is if you are saving to eventually spend it or gift it, you have to think about real returns, meaning after test,

after tax, and after inflation. Okay, so in that environment with I my my my mom is always saying, oh, I want to go back to those days where CDs were eighteen percent, And I say, mom, interest, you know inflation was fift so you've got three nets. So I think you know, in this environment, you also have to understand that inflation is quite loss. So it's a little misleading. It is. It was better then, but once you're back on inflation, it wasn't as it looks much better than

it was. It was still better, but not as overwhelmingly better than today. Is that the implication that's right. Let's say that the stock market gets you five to seven percent hypothetically, and don't go by the first half of this year, we're up twenty. But you look at the that's year to day. You look the previous twelve to eighteen months, it's essentially flat. Right, So so five to seven percent going forward? Is that a reasonable expected return?

I think if you were think about a ten year horizon, and and then if you say you're sixty forty or you know, we can pick whatever ratio you want stock bonds two to three on bonds um you know, all of a sudden to balance portfolio is probably closer to four percent, right. Net of inflation, you mean, well it's probably nominal. And then if you add any one and a half to to inflation, your your real returns two to three percent. Two to three percent. That seems light.

Where the periods we were talking about before, for someone born in the thirties and the forties was probably five to seven perk. Wow, that's a big difference. So and that's gonna really then what is the education coming out of that? You can't choose when you were born, right, So this idea of taking with the market will give you, Uh, the person today who's going to look at the future with reality that it is, they're gonna have to save a little bit more back to our you know, talk

about target retirement funds. We do think with auto and roll, Auto Save, Auto Escalate and companies matching during a much better position to maybe generate those kind of returns on their own behavior and and to take the behavior component and bring it back to advisors Alpha. We seem to be much smarter these days about understanding our own emotions, our own biases, and why investors are typically their own

worst enemies. And this is anecdotal, but my observations are people seem to be doing a better job of not blowing themselves up the way they did so much in the nineties and two thousands. They still messed up in O nine and we we saw a lot of people dragging their feet in to get back into the markets. But on average, is it fair to say people seem to be a little smarter about their own behavior and

how it impacts investing. Yeah, you're exactly right. So we I mean the Advisor's Alpha work that my team and I work on and created. We created the Vanguard Wrists Pedometer, and the Vanguard Wrists pometer looks at cash flow through time, and so what we actually have seen is that throughout most of history, investors would be known as momentum investors, meaning whatever category or sector was doing well, that's where

all the flows went. The hot hand. You're talking about fun flows two different funds to not only the funds, but the categories let's say growth, value, US non US, emerging stocks, and bonds. And that was a theme that was pretty much as you know, you know, the sun coming up, you know tomorrow. That was the church of

what's working now, the church of what's working now. And so investors were, you know, whether you want to use pro cyclical or momentum based wherever the wherever the hot hand was or the asset class, that's where the flows have gone. The last five to six years. We've seen behavior, believe it or not, contrary into that, which is which is hard to think about. So right now you think about you know, the top performing category in the US

is large cap growth. It's actually one of the bottom cash flow categories really, so if it's not going into large cap growth, it's going into value. In small well, it was actually going into fixed thing like so who would have ever, I would have never thought in my career that would be in one of the largest and longest bull markets in equities trail in six months and you have negative equity flow year to day, you know, in equities year to date August and all the money

going in the fixed income. That's a big contrarian play. And and to me, that's a complement to the education to the advisor community. To back to target retirement funds, I think what is really changed is it went from a fun picker world where people were picking stocks and building a portfolio bottom up to a top down way.

Meaning yeah, you know, so, whether it's whether it's you know, target retirement funds, advisors such as your, your firm, UM and the firms out there, the amount of money that are in the systematic auto rebalance programs et F models that by definition, if stocks are they're gonna sell stocks

and put him in bonds. And isn't isn't there a ton of UM research and data And I'm trying to remember, was you or your firm or another firm that basically had reached the conclusion that stock picking, as much fun and interest as it can be, the asset allocation decision is far more impactful to the portfolio returns over time. Yeah, And so going all the way back to Brinson, you know, so Brinson has covered this work. Jankee has covered this work.

Me and my team actually covered the Brinson Jankee debate, which is really about how much of the return is coming from policy acid allocation versus security selection and timing and and so both both of the arguments are right, right, So, and this is where context is important. If you're sixty forty, Barry, but you only have two stocks, and I'm sixty forty and I have two stocks, but those stocks are different

than security selection, dry the policy doesn't quite matter. But when we're sixty forty, you're sixty broad indexes and but just wanted to give a context when when you're talking about broadly diversified portfolios, the allocation drives everything. Timing decisions in which mutual fund or securities you selected get almost to be you know, decimal places relative to the policy portfolio. Can you stick around a little bit. I have a ton more questions for you. I'd love to I love this.

We have been speaking with fran Canary. He is the head of Global UH portfolio Construction at the Vanguard Group. If you enjoy this conversation, well, be sure and come back for the podcast extras where we keep the tape rolling and continue discussing all things asset allocation. You can find that at Apple iTunes, Google podcast, Stitcher, Spotify, wherever you're funding, podcasts are sold. We love your comments, feedback and suggestions. You can write to us at m IB

podcast at Bloomberg dot net. Give us a lovely review at Apple iTunes. You can check out my weekly column at Bloomberg dot com, or are signed up from my daily reads at revolts dot com. Follow me on Twitter at ridolts. You might guess I'm Barry Results. You're listening to Masters in Business on Bloomberg Radio. Welcome to the podcast, Fran. Thank you so much for doing this. You and I have met on on several occasions previously, and I've been a fan of your work, and obviously I am a

fan of Vanguard for a long time. But I've been meaning to sit down with you for forever, and I'm glad we finally got you into New York from from Pennsylvania. I have a ton of questions I didn't get to during the pod during the broadcast portion, um, but the first one is a little funny, and I have to ask you about this because it's such a ridiculous statistic I either heard or read somewhere it's one of these like urban legends. Vanguard has nine percent of the certified

financial planners in the state of Pennsylvania. Is that remote lead possible? Is that true? It's it's probably. I can't confirm the exact number, but I would imagine we have a high percentage, So, you know, I think that's probably true. Again, I think context is in order. We're probably one of the largest employers in that area and and financial services, so we're likely to have maybecent of the c f as in the community, and maybe even of the phone

representatives and financial services. So I think it's our size, UM. And it's also our dedication to advice and why we think advice really matters, and our commitment to it, you know, having professional advice. UM. Let's talk a little bit about that advice, because there's some really interesting um debates back and forth with that. Who needs a financial advisor? So I get this question all the time, and my answer is, well,

if you could do it yourself, do it yourself. But you have to be disciplined, you have to know yourself, you have to manage your own behavior, and you have to put a little time and elbow grease in. But it's not hard stuable. Um. But not everybody seems to be able to manage yourselves. So the question is who

should have an advisor? Um? Out of out of people who have been self directed and are not happy with with what it's taking, how do you decide who should really be working with an advisor and who should be doing this themselves? Yeah, I mean, and not to be too curt with it, but I do think if you're human, because of emotion, you probably most the vast majority of clients would be well served working with an advisor. Really, that's a bit when you say vast majority, that's a

bigger number than I was expecting from you. And I don't mean to tee up softballs, but you're you're answering this in a way that was different than than I expected. Yeah, I mean, I'll give you a great, great little story of my brother and hopefully he doesn't listen to the show, but I'll throw one of the smartest individuals I know. He's head of medicine at PEN so you know Columbia

Med School, Pen Med School, just very very smart. Yeah, ten years ago he calls me up and you know, ten years ago, like the middle, and he calls me, he says, he like, I'm I'm like literally the worst investor ever. I study this. I put so much time into it. Vanguard has the you know, his four oh one K. So he's in the right place, he's in

the right funds, right place. But he himself, who studies it, is shooting himself in the foot because he studies this analytically like he would study anything else you would study

in school. And what we know, um I wrote a paper several years ago about decision making right, and so decision making there's a lot of credibility on persistence, meaning that what you know, if you top doctors, top hotels, top restaurants tend to stay top the investment market, you know, asset classes, strategies, there is not that same persistence, right. You see almost some some reversion and no patterns to it.

And so most investors, whether you know it, is a rare person that who in two thousand and eight, two thousand and nine, you know, back to my analogy earlier, a million in stocks, a million in bonds. Investor, you just lost five hundred thousand dollars in stocks, and you're gonna sell bonds that are actually doing well and by two or fifty thousand dollars in February about now that there there are obviously some investors who can do that, or maybe some investors will use a single fund solution.

We talked about target retirement funds or balanced funds to do it for you. But if a lot of investors would be, you know, benefit from working with an advisor to not only help them with emotions, but you know retirement income, uh, tax planning, you know, generational planning. So I think it's more than most people would think. So your brother doctor, you're saying, doctor, and he's with an advisor.

So so my experience with doctors, and I'm gonna say this very specifically so you can send your angry emails to me, I have found that doctors are exceedingly bright. They've been very studious their whole life, and they are genuinely surprised when all that intelligence and all that studying does not readily translate to investing, and they find it to be very frustrating. Um. And I've actually said to doctors, listen,

I have to cut the conversation showed. I'm going to Wikipedia to learn how to take out a gall bladder and I have surgery this afternoon, and ha ha, it's funny, But the reality is, Okay, this is in brain surgery, but it's not the sort of thing that you could do casually and very often. Because doctors are so successful and they're so smart, and they've done so well educationally, there is a lack of Hey, maybe this is harder

than I think. Am I overstating this? Absolutely? And I and I follow all the behavioral literature and all the behavioral finance stuff, and sometimes I think it's quite critical on investors. But I actually reframed that. I actually think, how would you How would any other intellectual person decide to put their money in the worst performing asset class? And that's what rebalancing is. Mathematicians maybe, but every who

understand mean reversion, but everybody else are horrified. Yeah, And so I think, you know, outside of your own personal health, verry, think about what's the most important you have health, you know, your family, and then your wealth, right, and so you know, wealth destruction or wealth in the moment, it's not just on the downside. Look at all the mistakes people made in in the internet technic. You know, we you know

we we talked about how changing cash flow. Never in the history of the markets that we have five years in a row with twenty percent returns. It was it was just and we had negative bond flows. All the money was going into stocks. So you know, I think which by the way, you were about halfway through a multi decade bond bull market that for big periods of time significantly outperformed equities. Yeah. So, and so I do believe that the vast majority of clients would benefit from advice.

The good news is, you know, the the access to advice. Um, you know, ten years ago, fifteen years ago, access to high quality advice was pretty limited, right, You needed maybe a million or two to get access to world class advisors such as yourself. But you know, as technology has come around, I know, your firm is you know, offering different solutions. It doesn't have to be high touch, it could be more tech automated advice. So advice is now

becoming much more tech enabled. And so the ability to get advice for a fifty thou dollar or ten thousand dollar investor is here, and the cost have calmed down on that. So I think, you know, given that change, you know, a huge opportunity for self directed investors to

use advice. So one of the things that you mentioned earlier, I wanna just address when we talk about things like generational wealth transfer, or state planning or more complicated tax planning, or or even a sale of a business, you're paying for that when you're paying an advisor. I'll use the one percent fee because that's pretty standard these days. But if you're a hundred thousand or even half a million dollar UM portfolio and you don't need all those extra services,

why pay the one percent or more? You're better off in if you can work with the CFP will help you do the planning, but automade as much of that technology and the fee is half or less. Why wouldn't you do that? Why should you pay for you know, advice on setting up a philanthropic trust if you're not going to do that. People sort of forget that that this can be a little ala carte and you don't need to pay for everything if you're not going to

use it. Totally agree, and that's why I think, you know, this is really the golden opportunity for investors because you know, we talked about access in the past. It was really a reserved space for clients of the ultra high net worth and the institutional marketplace, and they had a very high touch and the and they probably advisors added a lot of value from some of the things you mentioned of succession planning, making sure your will and your state

is in good order, all of those things. But now for the average individual that doesn't have all those needs, you know, advices here for the masses, and I think it's a very good value for those who want to, you know, employee an advisor, whether it be tech enabled or a hybrid. So one of the questions, speaking of technology, I didn't ask you about UM. One of the new technologies that have been rising is direct indexing, where instead of owning an et F for a mutual funds UM,

you own the entire index, but in individual stocks. And this seems to come up when someone has a concentrated risk in a given space or a given uh. So, hypothetically, you're an employee of Apple and of your net worth is an Apple stock, do you really need more Apple in in your index? With a direct index, you could tune down Apple or any of the other tech names similar to that. Have you has Vanguard looked at this and what are the thoughts about this? Yeah, I mean

we've looked at it a lot. There's other reasons too. You mentioned the single stock risk like Apple, there's been some people believe that it's more tax efficient other people that may. Um, you want to think about excluding certain sectors of the the s G side, the socially responsible side. You can be a little more granular, and you can with broad indexes. Right, Um, you know a couple of things I would say, One is what is the costs you know, if you know, if if you can get

an index a broadly base. So let's take the Apple example of you know, I'm employee of Apple, Apple my portfolio. Do I really want more Apple? Well, if I were to just buy the total Vanguard US stock market my position and Apple is only adding another two and a half three or three and alp percent, And do I want more of it? No? But that's like a pretty small amount. And I guess it would really be what is the cost differential to do self directed indexing? And

then how do I keep that rebalanced through time? Right? Because the grain news about an in an open index fund is we can use other investors cash flow in and out to keep that portfolio rebalanced. The minute you're now creating a separately managed direct index, the markets moving all over, you may have cash coming and going. It's it becomes much more complicated, and that's where you lose

all some of the tax. This idea that's more tax efficient, you know, we've done some work on that, actually is it would actually be a little less tax efficient because you get locked up in your basis and the market moves away from you. So indexing has been extremely tax efficient. Tfs have been extremely tax efficient. So a lot of the direct indexing, you know, things we hear out there

are very niche or actually they're actually not correct. Uh. And since you're talking about tax efficiency, I have to talk about one of my favorite stories of this year because it's just so um wild and unexpected, and that's the Vanguard patent on making mutual funds almost as tax efficient as e t f s. And a little background for people who may not follow this sort of art caning tax stuff. The huge advantage of ETFs is that there incredibly tax efficient. If other people buy or sell

holdings within e t F, it doesn't matter. It's only when the investor sells that e t F that there's a potential tax event. But you can own a forty Act fund, you can own a mutual funds and if within that fund there are takeovers or cells or whatever else happens where there's a capital gain that passes straight

through to the investor. Vanguard I want to say this was early two thousand's we just heard about it recently or mid two thousands came up with an idea that allowed e t fs to effectively be a different class share clash of mutual funds and are able to share that tax efficiency between e t f s and mutual fund Am I am I doing that justice? Or if

I mangled that compared? I mean, you know a couple of things on that is um So why indexing in general is very tax efficient doesn't really necessarily have to do with its structure or our patent because others you know, any e TF so I think what the you know what happens with an index fund is that you know adds and first off, it's broad indexing, right because there's not a lot of ads in deletes, and when you are getting deleted, you're almost getting delisted unless there's a

merger or and that's usually what you see some capital and that's where you see some capital gains. But so those are more of the rare instances. You know, where you see more inefficiencies would be you know, the the niche sector E t F s or t know, so there you have graduations and that's why active sometimes meaning they go from small kept to MidCap on midcapt to

lunch growth of value and stuff like that. And that's where even active has some tax inefficiencies relative index because if I no longer like stock A, I don't necessarily care what my cap gain is because I've also have tax exempt I've tax exempt clients. I'm really just trying to add excess returns, not necessarily thinking about a taxable entity that they don't. Most active funds are not really

focused on tax efficient exactly. And so why indexing is so tax efficient in general is because they own a market and the ads and deletes are quite small only do to this merger. So that's where indexing an e t fs, whether they're in mutual fund form or in e t F have been very tax efficient over the last patents specifically, so no matter what company you buy an ETF funds, you're an e t F from You're not going to generate an unintentional UH tax consequence merely

by owning it. It's only when you sell it. But mutual funds have that. Your unique patent allows mutual fund holders in taxable accounts to effectively reduce their tax basis dramatically. Right, it's a share class of the funds, so they you know, they would end up sharing in you know in that because it's a the e t F is a share class off of the mutual fund. So so because of that, somehow the tax savings from within the e t F managed to work backwards to the mutual fund. Is that fair?

And vice and vice versa. Right, So the mutual fund. When an e t F starts with no assets, the mutual fund, you know, so it's it's it's so you immediately get a track record, you immediately get some real assets. So you're not launching any t F, which seems to be a problem with the t F. You're not launching it with no track record and no assets. So right away Van guard ETFs. And this is a fairly unique structure, making e t f s not a standalone but a

share class of a core portfolio or a model portfolio. Um, but it's the tax efficiency that reverts back to the mutual fund that's really somewhat unique. Also it is and uh that patent expires this year next year soon yeah soon yea. So should we expect to see more tax efficient sees at other mutual funds or other companies um, either looking to do this themselves or license it from you. Yeah.

I think back to our early conversation. I think the reason why indexing and e t s are so tax efficient is back to the original structure of owning everything without a lot of ads and deletes. What you're talking about is is a very very very small advantage. So I don't I don't see it changing much. The landscape of helping or hurting either complex, you know, the industry.

And I just thought it was so fascinating such a and that came from um, you're now retired c I O, right, and and that was really very I thought it was a very clever uh idea. UM, what about alternatives to assets under management fees a u M fees, things like flat fees or hourly fees. How do you guys look at that trend within the advisor space. Yeah, I mean we always hear a lot of talk about at fee or hourly fee. Um, we haven't seen it grow much.

It's hard to scale. It's it's hard to scale. And I also think that advisors earned their you know, money episodically. And what I mean, here's what here's here's an example of oh nine. Right. That's why I show this in the advisor's alpha paper that if you were you know, sixty forty and you were unable to keep your investor, you know, I called you up. I was a client of Redhole, hypothetically, and I'm sixty forty and I call you up and I'm like, you know, Barry, I just

can't take it anymore. I just lost and you weren't able to influence and convince me to stay. And I went to money market. I went all out, and a lot of clients did that. We saw, you know, money markets reach about fifty percent on household balance sheets in February oh nine, that's across the entire all investors in forty act funds. So and then if I just had

stayed in that position. Now this is a hypothetical situation, but if it did happen, you know, the returns differential between doing that you keeping me sixty's it's it's a it's about a hundred percent. You would have earned a hundred years versus your one percent fee in one phone call. So I do believe that the fee, you know, or is it? Let's say, if you have a million dollars with one percent, that's ten thousand dollars a year. Are

you earning ten thousand dollars every single year? You know? Maybe? Maybe not. Depends on what you do. It's episodic and it comes in huge waves. You know. It's funny. I was getting emails in eleven by started to trickle down, but it was I've been reading you forever. I followed you out on the market and oh eight, But when you jump back into O nine, I thought you were crazy. And now I'm paralyzed. I don't know what to do and I've missed fifty six gains. What do I do?

And you can't. Even though the math is just put the whole thing in as a lump sum, people can't do that emotionally. Hey, break it up into four quarters, scale your wing in over a year, and then just continue contributions after that. It's the only advice I found that works for people, because there's still suffering from PTSD post financial crisis. What did you guys see after the crisis from people? Yeah, I mean the good news is

at Vanguard. You know a lot of investors read our education and back to the role of an educator or the role of advice. So our behavior at at at Vanguard was certainly not We weren't We weren't seeing huge flows into equities and out of balands, but it was much more balanced, much more muted relative that we saw

in the industry. Let let me interrupt you right here because I have to share a story from your former CEO and chairman, Bill McNab who word got back to him that employees were nervous about getting fired and that nervousness was being communicated to clients and send out a missive nobody's getting fired. Everybody's job is safe. Your job is now is when you earn your money. Your job is to keep clients informed and have be and let

them know this tool will pass. And that turned out to be a key turning point in Vanguard attracting a ton of assets. Yeah, I think we've always kind of had that, you know, you know, stewardship, you know, is the word of you know, we've been through many cycles at Vanguard, you know UM, and so I think you know,

every cycle is different. But again, if if you like stocks and O seven, it was hard not to like stocks and O nine and so you know, the theme of staying the course and rebalance I think was a very very good advice for investors who followed that. And and before we get to my speed round questions, Uh, the last question I have to ask you. You mentioned UM technology sort of implying about robo advisors. What is

it that human advisors can do that computers can't. Yeah, I still think this debate on robo versus hybrid versus high end service UM gets again. Maybe i'll context. I'm a believer of you know, what does the client want? Right? And I used my son and my brother already in in this story. My son has a cell phone, but

he never talks on it. He's he's all into the apps, and he might, you know, be more comfortable in a robo automated digital advice than actually coming in and sitting down with you or Josh, right, my brother, who's you know, our age. You know, he's used to probably wanting to sit face to face and have a coach help him through things on a couch or in a conference room and talk through that. So, you know, I think it really gets back to what is the investor's experience? What

do they want? Do they want a digital offer meaning all robo. Do they want to work with a CFP or a c f A or do they want to have a very high touch engagement? And so I think the great news is is now investors have choice and there's not that one is better or or it's really what does the client want and how do they want to engage in your services? As the key point, do

you think it's segmented? You're implying it's segmented almost generationally, if you're over sixty, you want one experience, If you're forty to sixty, it's something else. And then there's a very different group of investors under forty. Is that a fair way to break that up? And do they really want very different things? Ultimately it's probably a stereotype, but it probably does you know, you know, holds to some extent.

If you didn't grow up with technology, or you didn't grow up with you know, taking advice from you know, an app, then maybe you're less inclined that if you actually grew up in that environment. So I think it's a it's it's an over generalization. So will there be a demographic that is in retirement in their seventies and eighties that are very comfortable using digital Absolutely? And are there millennials, um who would real more than want to

sit down face to face and work with a human. Absolutely. But on average, I think it's kind of what you're used to and what you grew up with that will probably have a big pull. Who will select what quite quite fascinating. I know I don't have you forever, So let me get to some of my favorite questions that I asked all of my guests. Tell us the first car you ever owned? Year making model my first car, and it wasn't a classic yet it was? It was.

It was a nineteen sixty seven Mustang Um. But you know at the time that was you know, I bought it for under a thousand dollars with my landscaping money, and yeah, it was you know, had I known what would eventually come to be. It wasn't a GT. Three fifty or a five hundred. It was just a standard,

just a straight fastback fast back. Those are still handsome cars, and you can now get them with seven hundred horsepower if you want, um and a live rear axle as opposed to those old truck Your car had effectively a solid truck axle on the back. Yes it did, so that was a but it was a very handsome car. I know you've seen the movie Bullet right solutely repeatedly that was That was effectively your car. Um. What's the most important thing that people at Vanguard don't know about you?

I think the most important thing that people may not know is being a Vanguard and and and really working very I mean, I think I'm the luckiest person a Vanguard is. I got to work really closely with all four CEOs, so I got started with both. I started with Bogel and we had a friendship up until his passing away. We would have lunch. Jack Brennan and I worked with father very very closely. You know a lot

of people don't really understand that. You know, Jack bog will start a Vanguard, but Jack Brennan a lot of the things that are driving Vanguard to an outcomes for clients today. Jack Brennan started target retirement funds, ETFs advice. Uh So Jack Brennan, you know and I were you know, extremely close. Uh you know, you know, a mentor in some respects Bill and Tim. I worked very closely with Tim long before he was CEO. Uh So I've worked you know, so I feel I'm one of the luckiest things.

And being close with Vanguard. I think a lot of people think that, you know, Fran is an index guy, of which I am, but I actually started out inactive and I'm a big believer in active. We already talked about zero sum game. So I think it gets back to talent and costs. And so I started out as a you know, a bottom up stock picker at a deep value firm. And so that's kind of my roots in my training is you know, how do you tear a company apart and find out what it's intrinsic value is?

So coming from Vanguard, who's known for indexing, I think most people don't know that my training, my formal training was an active management. And I don't want to digress too much to Tim Buckley, but he's got a fascinating career path at Vanguard started as uh Jack Bogel's intern. Is that a fair way to Jack Bogel's assistant, right, and then worked his way through both technology and CEE I.

Oh that's a really interesting career path to CEO. Well yeah, so, um, you know, so Tim and I worked together very closely, so Jack Bogel's assistant. Then he was in the I T and then became the chief and CEE I O Chief Investment officer. Uh. Then actually ran our whole retail and as it really has a big hand in our advice. You know, you know, you know, Tim's hand and our advice offer. His hands are all over that and his vision to see advice. Then became the c i O. Um,

and now he's the CEO. One of the smartest you know him, Jack Brennan and Tim are probably to the smartest people I've ever been blessed to be around. You mentioned Brennan, you mentioned Buckley, any other men mentors you want to bring up? So my my career, Uh, well, first, my parents, you know, my parents say, I think, you know, really gave my brother and I an unbelievable head start and and that we came from pretty modest means, but they really stressed education. Um, and so I would be

remissed without talking about them, Um, my kids. I've learned as much from my five kids is probably pretty much anybody, just the good nature and humility of them. And then maybe my first boss. My first boss coming out of business school was Terry Gabrielle. He's the individual who ran the billion dollar Are I a firm? Uh? There was? Executive Investment Advisors was the name of our firm? What about investors who influenced your approach to analyzing companies and

thinking about portfolio construction. Yes, on the valuation side, Um, certainly Graham, DoD You've read all the work on Graham and Dodd, Mario Gabelly, you know it, you know so again being a you know deep value uh, Monger, Buffett. So I think of them really on the valuation side of the house. But then on the behavioral side, you know, Conoman Diversky fail or uh, just huge you know readers and consumers of all the work that they've done. Quite

quite interesting. Let's talk about books. What are some of the books you enjoy reading? Finance, nonfinance, fiction, nonfiction? What what do you like to read? Yeah, I would say Fooled by Randomness by talib probably for sure, probably my most favorite Uh. But then back to you know Tversky, so you know, Judgment under Uncertainty. They're one of the very early least books twos when they wrote that book. Uh, Annie Duke, Um, thinking and thinking in bets um, you know,

just an incredible way to think about resulting. You know, I'm a big believer, you know before she actually framed it in that way of thinking about what is your process and does your process seems sound? And then you know, not necessarily resulting or always thinking about you know, was your decision right and changing your process. If your process is right, you're gonna get your results that you know. It's not a probabis probabilistic approach, and that means sometimes

you're gonna do the right thing and lose exactly. So those would be you know, what I've read, you know consistently. You know, I'm a consumer of reading books over and over again. So those are books I probably have read, you know, multiple multiple times. Quite interesting, tell us about the time you've failed and what you learned from the experience. Yeah. So, Um, I'm a huge music buff um. I love going to live events and as a teenager, I I so wanted

to have a career in music. So I took guitar lessons. You know, I was the one who didn't fail, you know, easily. I failed a lot, but not easily, And so I kept trying and kept trying for years. I just did not have the music gene. I think I have the music ear so I I I can identify maybe talent early. But I just as hard as I tried. So the idea of grit and persistence. Uh you know, I I really tried my hardest, but I just missed the musical gene.

The um you mentioned you and I have something in common. You go to a lot of shows. What have you seen recently? I go to a ton of live music events. I have a very eclectic so most you may not even know of. Uh so camp okay, hop along? So now you're way out there. Yeah. So I mean I'm next country or no, it's a progressive. So I'm a mix of indie rock progressive. But I I see, you know, I've been to fifty cent eminem to seeing Adele's opening act,

so I saw. I was lucky enough to see Adele before anyone knew who she was and a small arena two thousand people. Um, so I probably go to twenty live concert events. And I'm also a big live sporting event person. Uh, you know, mostly Philadelphia fan, but so I love live events. The I just the Sunday before we recorded this, I just saw The Who as part of their their farewell tour. But it's nice being in or near a big city because everybody eventually passes through Philadelphia,

everybody eventually passes through New York. You could go to a different show every single night and not see the same band twice. Absolutely, and then more close to New York too. I'm only an hour train ride, so I get into New York quite often as well. What do you what do you do for fun? You mentioned you go to live shows? What else do you do? Ye? So live shows and then five kids? My my, my five kids are you know? And and to me it is a hobby, you know, going to all their sporting

events and their extracurricular events. I'm also a big workout person, so you know, I've always been into you know, weight training and running and anything outdoors. Uh, you know, to me, that's my hobbies. What do you most optimistic and pessimistic about within our industry? I'm very optimistic about the continued democratization uh for investors. And what I mean by that is, you know, ten twenty years ago we talked a lot

about access. You really needed to be a large institution or a very high net worth to get world class investments and world class advice, and so I'm very optimistic for end investors to get world class outcomes. And so you know, whether it's you've seen, you know, pricing go from bitass spreads of halves and quarters to decimals, Commissions go down, product go down, advice minimums go down, so you know, to me, it's all about the end investor.

I always wanted to do investments, and I also wanted to be helping my clients, and so I am very optimistic about the continued democratization of giving investors a fairer and fairer shake to get world class outcomes. So if a recent college graduate came to you and said they were interested in a career in asset management, what sort

of advice would you give them? Yeah, I would say, you know, it's hard not to see what technology and machine learning and AI are doing to asset management, and so maybe getting a little bit out or less in the stem or I Q and more into the EQ side because I think that, you know, what is going to be left standing is behavioral coaching and relating to clients and working with clients, which is a different skill set than sitting at a terminal and trying to figure out that I buy stock X or Y or z.

So I think there's gonna be, you know, somewhat of a shift from I Q to EQ UH in the space so viral millennial or talking to my son who's trying to enter the space, I was talking about making sure these world class and relationship management on the EQ persuasion and influence side as much as he is on the math and analytical and technology side. Quite quite interesting. UM and our final question, what do you know about the world of investing today that you wish you knew

thirty years ago when you were first getting started. Yeah, I would say that the market does not know or care what my valuation. If a fair value is um, you know, I remember my first job, would say the fair value of this company. It's selling below book value,

it's selling below cash value. And it's kind of Kansas quote that you know, the the market can stay irrational or longer than you can stay solvent and there's never a truer quote than that, right, So, you know, the market doesn't know care what my valuation or my assumption is. The market is gonna do what it's gonna do. And I think, you know, having that sense of humility, um, I think it would. You know, I probably wasn't as humble and human. You have it as much humility in

my earlier days and I have today. You know, it's funny you say that I used to hear early in my career a variation on that, which is the mark. It doesn't care what you paid for that stock really, so valuation or even what you paid, it's not relevant. It's gonna do what it's gonna do. Your little purchase is not reliant. Yeah, the market doesn't know your right exactly. Hey, fran this has been absolutely fascinating. Thank you for being

so generous with your time. We have been speaking with fran Can I re H, head of Global Portfolio Construction for Vanguard Group in Malvern, Pennsylvania, which manages a small five trillion dollars. If you enjoyed this conversation, well, look up an intro down an inch on Apple iTunes and you could see any of the other two hundred and fifty eight or so previous conversations we've had. We love your comments, feedback and suggestions right to us at m

IB podcast at Bloomberg dot net. Give us a review on Apple iTunes. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Michael bat Nick is my head of research. Attica val Brunn is our project manager. Michael Boyle is my producer. I'm Barry Retolts. You've been listening to Masters in Business from Bloomberg Radio