Vanguard CEO Bill McNabb: Masters in Business (Audio)

Everybody knows who Vanguard is. They are essentially the father of indexing UM and have have really just made a tremendous dent on the world of investing. Uh. Bill was really generous with his time. He spoke to hung out for almost two hours and we talked about everything from what Vanguard was like in the old days too, who influenced him, and where van Art is going in the future.

I thought this was a master class in exactly what is happening in the world of investing today and what is the right approach to either being an investor or being an investment management firm. UM. He is incredibly accomplished. He joins Vanguard thirty years ago. Next month is his thirty year anniversary. He became CEO just before the financial crisis blew up. A month before Lehman and A I

G and City and everybody else blew up. He was named UH CEO and really talk about having a front seat on the past thirty years of changes in the financial world. For those of you who are either investors or work in the world of investing, this is a absolute master class. We spoke for so long I think you may want to listen to this in two halfs. All of it is absolutely fascinating. He's really an incredibly insightful,

accomplished guy, and um, I think you're in for a treat. So, without any further ado, here is my interview with Vanguard CEO Bill McNabb. This is Masters in Business with Barry Ridholds on Bloomberg Radio. My special guest today and I say special guest every week, but this is really a special guest is Bill McNabb. He is the CEO and chairman of the Vanguard Group, which manages a little over three point one trillion dollars. Bill, Welcome to the show.

Thanks Berry. It's a privilege to be here. So let's give a quick I don't want to spend too much time on your cv UM. But a quick background. You've been with Vanguard since June. That means you're thirty year anniversary coming up next month. That's that's amazing, it's been. It was really a remarkable turn of good luck. I was working for a firm here which is now JP Morgan Chase, and UH got a call to go to Vanguard and Vangard was this little tiny mutual fund firm

in n and I went down, loved it. And you know, sometimes better to be lucky than smart. That that's certainly for sure. Today you are the third CEO in Vanguard history, following Jack Brennan, who was actually a prior guest on the show, and some guy named John Bogel, some some guy who's sort of legendary out there, to say the

least legendary. I would love to bring him. In fact, he may be one of the few people I'm willing to travel to him with a recorder and interview him, because he is truly one of the giants, the legends in finance. Absolutely, um, you know, founder of the firm. What was it like to work with Bogel? That had

to be mind blowing. Well, I think the great thing Jack did was at the beginning of the firm, and I was there, you know, a few years after the founding was he created this corporate structure which is very different than anything else. As you know, we're owned by our funds and therefore our investors, in other words, people by Vanguard mutual funds essentially are the owners of Vanguard Group.

That's right, And we have a saying that Jack promoted a lot in the early days that strategy follows structure, so everything we do had to be had to reflect that structure, which basically means just put the investor first and everything you do. And that culture really permeated the organization right from the get go. And the other thing Jack did a really good job of was the internal culture, which was, for lack of a better phrase, lived by the Golden rule. And so they're really not a lot

of hierarchy at Vanguard. I'm certainly you know, we pay our you know, best performing portfolio managers higher than those who aren't. And you know, you have all kinds of different compensation arrangements, but at the end of the day, everybody treats each other um peer to peer, and it doesn't matter what your role is and you know, it makes it very different than most firms where there's often

an all star kind of cast to it. And uh, it makes it coming to work every day up last because of the people's side that that must be um, a crazy fantastic environment. So let's talk a little bit about your background. Undergraduate government major at Dartmouth and then you end up getting an NBA from Wharton. How did you find your way to finance? What did you do in between? So there was a little bit of a

side tour there. Um. After I graduated from Dartmouth, I think, much to my mom's chagrin, instead of coming to work in New York, I ended up going to teach first year of Latin at a boys school. First year Latin? Are you fluent in Latin? Not anymore? I think back in the day I was reasonably good at it. But I think the real thing was it was a private school. I could coach three sports, so I was looked at as a very cheap asset. You know. I could do a lot of things for not a lot of money.

It was a recession when I graduated, and I remember, you know, so any any any, any kind of work was good work as far as I was concerned, but those couple of years of teaching actually were really um in some ways, very instrumental in terms of shaping the way I think about the world. I then went to Wharton, UM, you know, got a great education there. I spent a couple of years at what's now JP Morgan Chase, and

then found my way back to Vanguard. So was it kind of surprised to get a phone call from a Vanguard How how many years have you been with JP Morgan? So I've been with I've been I've been at the bank for three years and I was working basically in a group that was undoing bad leverage buyouts and UM we were sort of the precursor to what became the private equity desk farther down the road, and it was

really fascinating work. I I love the work. I actually liked the team I was on, but it was a little dissatisfied with the bank's overall strategy and some of the cultural aspects. And I my wife was from Philly. I had gone to grad school there, so we thought about UM going back and I get this call from this upstart firm, UM, they were looking to hire a

G I c product manager. I had no idea what that was before the internet, and it's guaranteed investment contracts, which were early on the biggest asset class in four oh one K plans. Really, so this is before a number of tax changes that kinda yeah they that go away, yeah, and and and really you know what happened when when as interest rates came down, g I sees were a

great deal. You could basically when i UH was investing in them, you could get an eight or nine percent yield and you could keep a constant dollar price because it was an insurance contract. So you know, basically investors were getting three year bonds with a money market price. And so for the four oh one K investor, it was a godsend. And you know, it's these plans were just you know, beginning, Um, this was really a very popular asset class. I didn't know anything about it though.

In the last minute we have left in this segment there there are a number of new products will talk about a little later in the conversation. But aside from Bogel, who were your early mentors, so, um, a couple um, you know Jack Brennan who was my predecessor. He and I struck up a pretty good friendship early on, and you know, he ended up being a little bit of a mentor before I went to work for him directly.

There was another fellow, Jim Gately, who um one of our great leaders at Vanguard, who I would tell you I learned a ton from him. He he was a guy who had been at Prudential Asset Management and had bought a lot of boutiques, and he brought with him a worldliness that I had never experienced before and really taught me what it was like to be a professional. I'm are Ridholts. You're listening to Masters in Business on

Bloomberg Radio. My guest today is Bill McNabb. He is the chairman and chief executive officer of a little shop called the Vanguard Group. They manage about three trillion, that's trillion, with the t three trillion dollars. Let's talk a little bit about what took place over the past five years. Vanguard garnered somewhere around six hundred and fifty billion dollars in inflows and net cash flows. That's more than the

next six companies combined. And and there are some estimates that say about a billion dollars per day flow into Vanguard. What is that about? Well, I think you know, our focus on cost and doing the right thing for investors has resonated at a level that even we are surprised by. And uh, it's been very gratifying um to say the least. But we think we're we think we're again all humility aside.

We think we're winning for the right re sasons. You know, we're not out there trying to promote something that we're not. So let's I'm gonna skip ahead to another question about cost. Why is it that managing costs is so effective UM

for investors? So when you look at all the work that's been done, and you know, Morning started a pretty seminal piece to three years ago where they broke off funds into quartiles and the highest expense quartile had the worst performance and the lowest expense quartile had the best performance.

And the performance was very consistent and persistent. And so it just reinforced a notion that we've had cost is the one thing you can control and it's not like other consumer goods where you know, you pay more, you in theory get more UM and investing that has not been the case. Right, So a BMW and a Volkswagen. The BMW may costs more and maybe you get a little more, but it's the opposite in investing. So let's talk about what some people have called the vanguard effect.

Well again this was dubbed um. As we enter new markets, you immediately see prices fall. In fact, I think what's happening here is our competitors are getting a little bit smarter. Rather than waiting for us to take a lot of market share, they're actually trying to meet us more quickly. A couple of my colleagues at Vangardive said, you know, are you worried about it? And I said, not really, because at the end of the day, first of all, we're built to do this every day um, and we're

built to get better and better. But second of all, it's great for investors. So if investors have more choice, low costs, then we've got to get smarter and more innovative and quicker as to how we compete on that at that level, Who asked you if if you're worried about it, clearly a billion a day. Hey, you guys are doing this wrong. You're only getting a billion a day and new inflows. You gotta mix it all up. It seems like you guys have cracked the code. You know.

I think it's again. We we feel great about what's been going on. But um, Indy Grove is one of my favorite executives and he has this phrase, only the paranoid survive, and uh, I really believe that. So the minute minute any complacency starts to show itself at Vanguard, we get very skittish. So let's go back to your original principles. There are four principles which I really like, and this will give people a sense of how you

approach the world. Have a goal, maintain a balanced and diversified portfolio, pay attention to costs, and focus on the long term. How did these four principles come about? So I would say these four principles have been present since our founding and and we had talked about him in different ways. But about four or five years ago, as we were kind of rethinking our message to the world, it became clear to us that we needed needed to distill it in even simpler English for people and really

make it stark. And I think these do that and people look at it and they say, boy, it's not complicated and I say, yeah, but how many people don't follow this? And you know, for me, especially the goal setting, this is the place where I see most investors miss. They don't have very clear, well defined goals, and you need to know that if you're gonna, you know, construct

an appropriate portfolio. One of the comments that I often hear from people who have already accumulated a lot of wealth is all right, what am I going to need to do to beat the benchmarks over the next couple of years? And the response is always why do you feel you've already won? You've got enough money, you can never spend it all. Why do you feel the need

to keep competing? You have to that pivot from wealth accumulation to okay, now we have to preserve this and eventually distribute it, whether it's philanthropy or what have you. People have a hard time wrapping their heads around that. I could agree more. You know, at the end of the day, it's it's define what you're trying to do, and then we want to be able to help you get there. So let's talk about something that's really quite fascinating.

You're probably best known for indexing, although we'll get to some of the active funds, which is about a third UM. But the story of indexing is really quite fascinating. It came out of Wells Fargo, which had created it for institutional clients. How did you guys end up taking over the Wells Fargo index product and turning it around and offering it to retail investors. So when when Vanguard was founded formally in nive Um, Jack Bogel and the team

I think correctly identified that cost was a differentiator. So even before indexing, we were talking about costs, and we weren't particularly low cost at that point, but we were aspiring to be. So um this idea about indexing seemed to be the perfect manifestation of a low cost, very efficient way to invest. And you had the Wells phenomenon in the pension side. You had you know, Burt mal Kill's Random Walk Down Wall Street, which was written around

the same time. You had Charlie ellis Is Winning The Loser's Game, which was written, you know, around the same time. Charlie also on your board of directors and he was a guest here. What a tremendous gentleman, tremendous, tremendous person, And I think the genius was to say, if this idea is good enough for a sophisticated institution, why isn't it good enough for the average small investor? And so we took the indexing concept and turned it into a

mutual fund, which no one had done. So in the last minute we have left, Let's talk about what percentage of the investable universe is now indexed? Um, how big is too big for indexes? I've I've read some things by people I don't agree with it, that say, hey, at a certain point, you know, indexing is just too big and you need to be more active. Yeah, So, first of all, I don't agree with the premise, but even if you did, indexing is still a very small

per centage of the world's market cap. So in the US, the you know, the big change in mutual funds has been indexing has now risen to be about US mutual funds. But mutual funds on the equity side only represent about of the equity market, and in the institutional side it's it's a much smaller percentage. So indexing is still less than twenty overall in the US, and if you go abroad, it's a couple of percentage points. So there's a huge

opportunity for it to become much more significant. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Bill McNabb, who took over as CEO of the Vanguard Group. How's this for timing? August two thousand and eight, and in case you forgot, that was about a month before the world's really blew up. What was it like running an asset management shop in the middle of that turmoil? In a word, it was frightening,

to be very honest. It was at the same time, probably will be one of the defining parts of my career in that the team that I worked with we got a chance to experience things I hope no one else ever gets to experience, and we got a chance to i think, influence events a little bit um and hopefully move things in a good direction for our clients. But it was it was amazing to to watch it all unfold. So what were the some of the specific

challenges both you personally as a new CEO. I mean, you had been with Vanguard since six but you're taking over running the shop. What challenges did you face and what sort of challenges did the staff have to deal with in the midst of that. So there were sort of three levels of challenges. So the first was pretty

tactical but big. The whole money fund industry was under UM you know, fire, and what were we going to do with UM the money market funds that we were managing, and how was the Treasury's rules and and and the intervention that was occurring, So you know, that was a big topic. The second that that was the whole breaking the buck situation Reserve fund broke the dollar, and the question was would anybody else? You know, we believe very

strongly that our funds were incredibly well positioned. UM our Prime Fund, which you know is supposed to be in commercial paper CDs and so forth. We were sixty percent government treasury at that point, so it was super safe. We had been very worried about what was going on in the housing market, but they were still you were watching the rest of the industry UM struggle with it.

You know. The second thing was we were watching our investors behavior and and listening to them call and ask us, you know, what's happening, and you know, what should we do? That was the biggest question, what should we do? And then the third thing, we actually had our staff saying what's this mean to all of us? Because, as you may recall, it was arm again in financial services and people were laying um, thousands of workers off. And so

we we did, you know, three really important things. One we you know, on the money fund side, we knew we were we were in really good shape, um, and we got engaged with the SEC in terms of beginning to move the reforms forward right from the get go. Second, in terms of our investors, UM, most of our competitors actually stopped talking, you know, to the press, and stopped going out and meeting with clients. At least that's what

we heard. We were very vocal and very visible, and we were very clear that we didn't know how this was going to all unfold, but that you had to step back and again sort of go back to basic investment principles here. And what we saw was it had a real calming influence on our investors. And I did a webcast um probably October of oh nine or oh eight, and I think it was downloaded a hundred thousand times in twenty four hours. It was it was a remarkable number.

People were hungry for information right they wanted, and not just hand waving people running around screaming. But you come across as a if I may say this personally, rather calm collected individual, You're not one of these people that are gonna be running around with your quote unquote hair on fire. I think it was really important to project that because you know, there were certainly lots of commentary out there that the world was ending as we knew it.

We didn't see it that way, but we knew it was going to be rough. And then the third thing we did um which again will seem tactical, but it was really important. We said to our people, don't worry about your jobs. You all have jobs and you're you're here to serve the client, and stop worrying about nobody's gonna lose their job over this. We want you focused on being here for the client, and boy, that set

a tone inside. I also think it really helped with the client interactions because people had confidence when they were talking to clients. I was gonna say that really has to come across in all sorts of subliminal ways. If you can tell when you're on the phone with someone who's worried about their job I've never heard or read that before. Has that been publicly disclosed? Now, I haven't really talked much about it, but in the midst of the crisis, you said, so, how many people work at

Vanguard back then? Back then it was about twelve thousand, five hundred. So you said, nobody's getting fired, there are no layoffs. We're good, We're going to make it through this five And I think what it allowed us to do was to be really well positioned as the markets began to turn and you know, activity began to pick up. We were firing on all cylinders and we were ready to serve clients. We were We actually kept our investment

in the business going during this period. So in our last minute or so in this in the segment, the one data point that really stunned me, would really surprised me, transaction levels during the Great Financial Crisis at Vanguard were actually much lower than normal. What does that say about the firm and what does that say about your investors? Well, I think it says a couple of things. One um our our investors were listening to um all of the things we've been trying to put forth over the years

that you have to think long term to UM. We have a lot of four oh n K investors and UM, they were saving for retirements long term. So don't react. I'm Barry Rehults. You're listening to Masters in Business on Bloomberg Radio. My guest today Bill McNabb. He is the chairman and CEO of the Vanguard Group, which manages three point one trillion. Is that right? That's right, three point one trillion. That's trillion with a T. I have to

keep emphasizing that. And let's talk a little bit about the future of investing in the way things have been developing changing. You had you had a comment not too long ago about some of the worst products that Wall Street has thought of. I have a few of them. I want to bounce them off off. You see what you think. I assume you're not a big fan of

the liquid alts. What do you think of those? So again, everything in theory can have its place, But in general, what we're seeing in the liquid all spaces UM not all that attractive from an investor perspective. It's really expensive and I'm not sure it's providing any kind of real value add and not especially liquid, not especially liquid, and maybe not as much of a diverse fire as you would hope. It doesn't mean it can't be done, okay,

unconstrained bond funds. So predicting which way interest rates are going to go and currencies are going to go really difficult to do. I haven't seen more than a couple of human beings do it, and it's a question whether they're lucky or whether they're actually doing it well. So we're big fans of define what you're trying to do

in the bond market and stick to it. Hedge funds with a mutual fund wrapper, in other words, allowing individuals to buy what we've called muppet funds, buying hedge funds through a mutual funds. It's a compensation scheme as far as I'm concerned. You know, people are just figuring out how to get paid a lot for I'm not adding a lot of value. How about structured derivatives. Structured derivatives,

it's so again, in general, I think not a good idea. Um, these are instruments that derivatives in general are incredibly helpful in de risking portfolios and managing um subtle changes to a portfolio. But what you see in a lot of these is a lot of leverage or a lot of implicit leverage, and not clear to be um that the investors really understand the risk they're taking, not not a whole lot of d risking in these instruments. So, but

old technology isn't bad. And very recently you guys launched what some people have derisively called a robo advisor, but essentially a software algorithm driven online advisor which immediately leapt over all the other advisors and at the time of the announcement or shortly thereafter, it had eight billion in it um. What what do you call that? And let's talk a little bit about We call it Personal Advisor Services.

And the idea here was we had been running an advisory service for clients with a million dollars and we'd actually dropped the minimum to half a million. But you know, it's a big number for a lot of people, and so the challenge we put out to our team was, can we take the same quality that we're providing our millionaire clients, can we take it all the way down to a fifty client. And so we invested tens of

millions of dollars in the technology. We trained an awful lot of people because what we're doing is really a combination of technology with a personal touch and the and the the stark objective was to get this to a price where all in so advice fee plus the underlying product would be roughly in the half a percentage point range and it would be really high quality. And so we're very excited about this. I think it's going to redefine for certain type of client how advice is provided.

And you know, it's not going to supplant um the whole advisor world, um, but it gives small investors in particular, a really professional choice which they don't have today. I spoke to some of the group in your office who actually put that together. They had some questions for us, and I made them a bet that you guys would have that at a hundred billion dollars within a year or two. And they kind of this was just as it was launching, and they kind of laughed. Um, but

you launched with eight billion in the first week. What is this up to already? So you know, we had some existing client business move over, so it's up to about seventeen or eighteen billion, So it's a pretty big thing already. Not not so I'm really not out there on a limb. This is a hundred billion dollar business for you guys relatively soon. The team gets very nervous when I talk about it as well, because I've been

a real promoter of the concept. In fact, they're they're really happy that they're officially launched, since I've pre announced to launch about three different times by accidents. So so that that's pretty fascinating. And clearly you're looking at at that technology and using software as a future product. That's that's gonna just do nothing but grow in terms of asset management. So let's talk about some of the other products that are out there. Some people use the UM

phrase fundamental indexing. Other people call it smart beta. Smart beta has almost become a buzzword. You guys really don't play in that sandbox, but I have a feeling that one day you're eventually going to end up there. Yes, so, UM, very fair point. And in implicit question there so a couple of things. UM. You know, we had growth and value index funds a long time, which you could argue were sort of a version of UM. Some of these

factor based funds is the way I think about them. So, look, I don't have a problem with the concept UM as long as you understand what you're investing in UM smart bata is one of the great marketing terms of all time. You know, it implies that it's a better way of indexing. To me, all it is is you're taking an active bet, and you're betting on either a single factor or a series of factors, and you're betting that those factors are going to outperform the broad market over some particular period

of time. And you know, right now, you know, MidCap, you know, MidCap value over the last fifteen year has been a really good place to be. But all of the value oriented investors were scratching their head saying is value investing dead? Because large cap growth was dominating. And so you go through these market cycles where different factors seem to work, and they work for you know, fairly long periods of time, and then they don't. So to me,

it's a bet. And as long as the investor knows that they're taking a bet they're either overexposed to value, they're overexposed to growth, or some combination UM, then I think it can be a legitimate, low cost way for

somebody to make that investment bet. And you know, in a sense, if you're if instead of investing in a traditional act of growth manager, if you're buying if you're buying a factor based fund that's growth oriented, you're hopefully doing it at a much lower cost and you're getting the same factor exposure that you would from that traditional growth manager. So you guys don't offer anything that's fundamentally index. There have been pretty I thought significant criticisms about market

cap waiting an index. Um, any chance we're going to see a factor based vanguard fund anytime in the next few years. So two things there so on on the market cap index. The reason we're so passionate about that is it's just math at the end of the day. And you know, if you add up everybody in the world, all investors, let's just use the US for now to keep it simple, you add up to the market and

it that is a market capped market. If you take all your active managers and put them in a box, and then you take all your passive managers and put them in a box. Um, there's really no third category right there. There's it used to be individuals were a big group, but today that's di minimous. All your active managers by definition have to add up to the market,

and so it's a market minus costs. Indexers by definition add up to the market minus cost and so it's a zero sum game at the end of the day. And that's why indexing works. It's just lower costs. It's not that markets are more efficient or whatever. Um. When you're doing factor based stuff, you are making a bet against that broad market, and for every winner, there's a loser because in the end it all adds up to

the market. And so to us, if you're going to truly index, you want to take advantage of the cost side, and that's why market cap makes sense. Now, if you want to make an active bet, you have a view that you know value is is cheap today versus growth, then you could argue that a factor based fund can

be a really efficient way of doing that. And as we think that through, I think that is gonna perhaps influence our product development in the future because it could very well be a good way for a manager to make you know, an advisor in particular like yourself, make that kind of um bad if that's something that you

wanted to do. You know, we've had rob are not of a research affiliates on And the argument that he's made is, hey, towards the end of the cycle, when things get a little crazy, and you could think of as a perfect example, all of the cap weighted items just went berserk and then got crushed on the other

side of the cycle. A index that was weighted on earnings or sales or some proportionate measure to the impact they have on the economy may not quite go quite as high, but it also won't go quite as low. And over the long haul, reducing a little bit of volatility might add some performance. Um. And he's got you know, a number of papers on it, and you, of all the people who actually offer that sort of fundamental based index,

you're the notable emission. And why why I kind of think, hey, that's a huge, potentially huge marketplace and if anyone could do it inexpensively, it would be you guys. And that's a very fair point, I would say. Um. And again, we have a lot of respect for what Rob and his team have done. And look, you know, you when you look at the data, it's so time dependent. Um. And you may get a little reduction and volatility depending when you start your period and when you end it.

I'm not convinced that over very long market cycles that really matters. And you know, to me, then it becomes the cost get the lowest cost index fund you can and that's really what's going to drive performance. So in the last minute we have in this segment, let's talk a little bit about high frequency trading UM. Your predecessor Jack Brennan said, you know, I've been somewhat critical of h f T s running Grandma's mutual fund, but Jack tells me and told me it helps bring costs down.

What what's your perspective? So you know, net net it has brought costs down. And the way you can look at this is you can you can look at the history of our index funds and our traders have actually done this, and we can see that the costum of trading has been reduced dramatically, and you see that in terms of our tracking error and so forth. UM and you know, again the data are actually overwhelming over the

last fifteen years. It doesn't mean that there aren't practices within the high frequency trading community that we don't UM. You know that we're not critical of. But one of the things during sort of the flash crash aftermath there was a lot of let's just ban high frequency trading, and what we were very afraid of is if you pull that thread, not quite clear what would be left. UM,

because the high frequency trading actually does knit together. That's very you know, this very granular, disparate market that we have. So again we'd like to see I'd like to see some guardrails put in place to protect people from the front running. UM. You know, again, I've never been a fan that, you know, latency should give you an advantage versus somebody who's a mile further away. It doesn't really

make any logical sense. I don't think it's making markets better, but I do think conceptually, UM, you've got to be careful around um being too critical or you know, undoing everything, or the markets aren't going to be knit together the way they need to be knitted together. I mean, I'm not sure anybody would design the markets with a blank

sheet of paper the way they are. But since we've had UM, you know, really since the late nineties, UM, when we've seen this tremendous expansion of pools of trading, you know, we've really seen a pre it's a very different market than when I started out to say the least. Bill, Thank you so much for spending so much time. You can hang around a little bit. We'll continue this conversation. Be sure and check out daily column on Bloomberg View dot com, follow me on Twitter at rid Holts, and

check out the rest of our conversation. You could see that at Bloomberg dot com or on Apple iTunes. I'm Barry Ridholtz. You've been listening to Masters in Business on Bloomberg Radio. Welcome back to the podcast portion of our interview, where I basically take the mic out of my ear and not worry about radio segments and loosen my tie. I'm literally literally doing that. Goes my subway card bill. Thank you so much for doing this. I'll tell you I was really looking forward to this. You guys know

I'm a huge Vanguard fan. I'm a big Jack Brennan fan. I'm somewhat of a Bogel fan, although I do have uh I have a little bit of a beef with with Mr Bogel. And by the way, I think I know where that one's going. If you, if you ever wanna have like a miserable couple of days, write something really negative about Apple. Not that I do that. I've been a Mac fanboy forever, and the emails light up. I wrote what I thought was a very measured, very

circumspect I don't even want to call it critique. Just hey. You know, Jack Bogel is a legend, and he created one one of the most successful investing companies in the world. But he's kind of anti e t f s. He thinks people potentially overtrade them, and he's not a big fan of international. And you and I both you you really have expanded the whole international business. So so let's talk a little bit about um Mr Bogel, who, by

the way, I would love to interview. I would love to sit and talk to him because I think he's a fascinating guy. I'm sure he would love to do it. Okay, well we'll set that up. But what about this E t F thing and what about international? So you know, E t f S we look at E t S is just another product structure for frankly, and what it's allowed us to do is to take the indexing story, the low cost story, to a much broader group of investors.

And because of the way e t f S work for many advisors from especially if you're on a brokerage platform, it's just a lot easier to implement than traditional funds. It does not mean that we endorse day trading or you know, minute by minute trading of ETFs. In fact, just the opposite. We believe very strongly that, you know, long term investing is the way to really accumulate wealth.

There there was an article in the wool Street Journal that I remember reading and just falling off my jail laughing about somebody wants to park forty million dollars in short term bonds and there's a cost to move in and out of that, and you guys said no thanks, and the person lost their minds. So if you're focused on long term and someone says, here's forty million dollars from for six months or ninety days, your answer was no, Well that all that call comes on the investors, and

that's wrong to do, comes on the current investors. And in that particular case, we were in a declining yield environment, so it was gonna also diminish the yield of the portfolio pretty dramatically. So our portfolio manager appropriately said no, we're not going to accept the money. Actually did end

up on the front page of the Wall Street Journal. Um. The guy went to the sec um, He went to every major news publication and it it turned out to be actually one of the best things that we couldn't have asked for a better story because it really underscored. But we believe, which is take care of the existing investor, and the next investor will find you if you if you have a reputation for doing that. I think one of your competitors had come out and said, they're absolutely right.

Why would you put your existing investors cost structure at risk? So someone hey, there were there were mecha, their tools. You want to put in a money market fund, you want to put it somewhere. There's a place to put it, just not short term in that fund, right that I always that was pretty amazing because everybody else is so desperately chasing assets to turn around and say forty million dollars is a chank of money, but no, thanks that

that just always stayed with me. Well, in that particular time, we were a lot littler firm than we are today and it was a pretty significant purchase. But again, you know, it sounds really simplistic, but if you do the right thing, usually in the end, it's a good strategy, not not a bad um business mantra um. So I have so

many questions. I don't even know where to begin. So let me let me ask you the question that when I was describing this upcoming interview to somebody, someone said to me, Hey, you know those guys only fly coach. Is this true? So we only book coach and I have flown so many miles that I do get upgraded every now and then. By the way, for radio listeners, you're six two three? How told you? Six five? Okay, I'm I'm giving you permission to book a little more

leg room. Don't have to book coach. I fortunately have enough miles on a couple of airlines that it's almost automatic. But I you know, we do. Look, it's the shareholders money at the end of the day, and you know, we're not trying to um be holier than now, but you have to always put yourself in the shareholders shoots, and you know, basically, is this a good investment or

is this time well spent for the shareholder? That it's a refreshing thing to hear that that is not standard standard operating procedure at a lot of places and I think the proof is in the pudding. It's pretty clear that whatever you guys are doing, it seems to be working. And if if it's a matter of putting shareholders first, how come everybody isn't doing it? Well? Um, I'd like to think that we're hopefully influencing the marketplace so that

people are are focusing more on it. But look, I think in most organizations, to be very fair, there's a natural conflict. You know, we're owned by our funds and therefore our investors. So for us, when we say we're putting shareholders first, we're putting both the shareholders of the company, if you will, as well as our clients first. They're

the same most organizations. They're either privately held or they're publicly traded, and so they have their public shareholders that they have to earn a return for and then they have their clients. By definition, that's a conflict. And how you balance that, you know, I'm unfortunately I'm not that smart, so I need the simplicity. Well, the simplicity works, um, So I mentioned I'm just thrilled you're doing this interview. But you guys, really under normal circumstances, aren't out there

in the media. There's not a lot of talking heads. There's not a lot of blah blah blah. By definition, you're not gonna be here's my favorite stock, here's where we think the market is going to be in a year. That's an mathematic to you. Why so so little media generally, and what motivated you to say, hey, this is all a financial crisis. Let's say a few words. Well, I think you know, we we do get it's interesting our

media coverage sort of waxes and ways. We get a lot of nice things written about us and said about us. Um but in terms of you know, doing the in person stuff, we find we're in demand when there's a crisis. When things are really a brilliant people think we're boring because we're not going to give them the hot stock tip or whatever. But is an investing is supposed to

be bored? I think it is, and I think it's three yards in a cloud of dust, you know, And if you can just repeat that over and over, you'll be successful. You know. During the crisis, though we were we tried to be more front and center. We we felt that there was a real need to um stressed

to people. We did not think the world was going to end, and as a result, they needed despite all the emotional trauma that was going on due to the market, they needed to be able to see through that and if we could help that in any way, you know, we really felt it was our responsibility to do that. And so you guys ventured out and did a little more media than usual, and we did a lot more

media than usual. Um you know, either our own private webcasts or you know, um I, our chief investment officer at the time, Gus Souder and I probably did half a dozen television shows within a month, which would be typically more than we would do in a couple of years. So let's talk a little bit about Gus. So do we. We briefly hinted at at it earlier. UM he's kind of a legendary guy, isn't he. Yeah. I love Gus and UM I was very blessed. Um I joined Vanguard

ninety six. Gus joined in nine seven and moved in two doors down if you will, from my office, and we became really good friends right from the get go.

And one of the things that really was remarkable about Gus is um the the investment guys would all talk about, UM, what how great he was with computer science and he could sort of translate investment ideas into code, and the computer guys were all talking about how Grady was on the investment side and math and how he could explain all that to them, and he just had this ability

to get stuff done. He also was a great spokesman for us because he got out there and he could take really complicated ideas and boil them down to UM, you know, sort of their their real basic, most simple concepts. So who fills that role today? So UM Fortunately for

us UM. One of the things gusted was he developed an incredibly deep team and we then moved one of our key leaders, UM, Tim Buckley, who had run our retail business over and some people saw it as a non traditional move because Tim hadn't grown up in the investment portion of the business, but he had spent his whole career getting deep on on the investment side. And Gus told me something really interesting right before he retired.

He said, look, when you're looking for my replacement, you're not going to get somebody who came up the way I did. You know he started out He traded stocks, He he wrote the original code for optimizing our index funds. You know, he was very hands on. The group had gotten to be very low. Are you know our investment

team now several hundred people. Um, you know we run two plus trillion in Malvern and so um he said, you're gonna need somebody who's a great leader of people and developer of talent, and you're gonna need somebody who can really sort of think, um about the intersection of technology and investing going forward. And Tim met both those criteria really well. And he's just done a fabulous job. So who else has what other investors have influenced your

thought process? And it's really a two part question. Part one is about investing and thinking about managing all the people's money. But the second part is about running an investment business, which I don't know if people realize, is

a very unique animal compared to other businesses. So outside of Vanguard, because I've had a ton of influences inside the company, um, you know, from just a pure investment perspective, two of my Actually I run a risk here because I have a lot of people I really enjoy talking to. But um, there's the original Winsor team John Neff, who was the legendary value investor, watching him Um talk about stocks and the way he thought about the markets. UM is a young UM person in Vanguard. You know, it

was like a free education. It was unbelievable. It was like getting your master's PhD and Advanced PhD all at once. Because he just was so insightful. He knew more about the companies he was investing in the their own management stay UM. I also had the great privilege of watching Prime Cap evolved as a firm. We hired prime Cap very early, and prime Cap was a group that spun out of Capital Research and the founder was Gonna named Howe Scow and the original team UM again, they were

just so talented. They were and they were very different than the Windsor team. They weren't nearly, they weren't deep value. They were kind of growthy, but growth at a reasonable price. But it was more just we're gonna find really good companies, invest in them and watch. And what was interesting is UM. You know, so we're from NAP, I learned being a contrarians never a bad thing. And from Prime Gap I

learned about patients. UM. They have very low portfolio turnover, one of the lowest turnovers of any active manager and they would make very concentrated bets as well, which if you're going to invest in active, if you can get low cost and some concentration, I think it gives you your best chance about performing. That's exactly right. So those two UM people had huge influence early in my career, you know, in terms of running the business UM Uh.

Charlie Ellis and Bert Malkiel, who you know we're both on our board, certainly were very influential, and more at a philosophical level. And again it was all about the client coming first, and and and and it was so around taking a very rigorous academic approach, if you will. One of the things we've tried to do advant gardis take really complicated ideas and then bring them to the masses. So indexing certainly fit that bill. But even the way we run active you know, we sub we use subadvisors

from all around the world. That was very much the way pension funds and foundations and endowments worked. Early on in the mutual fund business, everybody's active teams were all in house, so we were really the only guys doing this. And again that the Charlie's and the Berths were very influential and helping us think that through. How do you go about finding these outside teams to manage a chankamany

So we have UM. We have a really deep team who've grown up doing this and they have a very rigorous process and they actually today travel the world looking for talent. And so we've got firms all around the world. UM, I think thirty plus firms now managing about seventy five man dates for us. So let me UM shift gears a little bit of on you. You recently had an op ed in the Wall Street Journal that I thought was very interesting and there were really two parts that

leapt out. The first was the city issue that's systemically important financial institutions. Do we really think mutual fund companies are going to end up being citfies? I mean, fifty billion dollars is a the minimus cut off. That is not a lot of money these days. So UM, the short answer is, you would not think it would be logical UM because funds are first of all, it's an

agency based business model, not a proprietary based business model. UM. Second, because of the UM prohibitions against leverage, there's no leverage and funds so so, how can this be so systemically important if you're not leveraged up, you're not trading derivatives, you're not You would think it would be of all the pushback against Dodd Frank, you would think this is the easiest thing in the universe to carve out an

exception for no leverage, no heavy derivative usage. No. I mean, there was an article in The Times the other day about how many mutual funds are loading up on these pre public companies, and there's a risk because so many of those go. But if those go belly yup, there's no subsequent domino effect. It's not like subprime house and it's not Again, there's idiosyncratic risk there, which you shouldn't be trying to prevent because without risk, there's no return.

But it's not systemic. Um. The reason I wrote the op ed in the timing of it was Um. The FSB in in the in Europe, in the UK has issued its second consultation and there was a huge emphasis that big is bad and if funds are big, or fun families are big, then they should be deemed systemically important. And the consequences of being systemically important is I is

I pointed out in the editorial, are very asymmetric. If you're a shareholder of a fund that's designated as a city, you're gonna not gonna get any benefit from that, but you potentially could be charged higher fees. You could be providing capital to bail out too big to fail firms. If one of the competitors of yours uses leverage, engages in risks and collapses somehow, it's Vanguard investors responsibility to Let's let's make it even simpler. Um we already have

um City Group. I don't want to pick on City, but Citi is a systemically important institution. If City Group, for whatever reason failed for the fourth time, fifth time, how many times have they been insolvent? But I could say that you can't. But if let's look at the history of city If if City fails under this underdog frank,

all cities will be required to help out. So if if you're in the forget it's Vanguard, any large fund that's been designated systemically important, you're potentially on the hook for that. That does not seem right to us, because if your fund goes down, we're certainly not going to get a capital injection from the banking system to get up, because that's the risk you're bearing in the fund. So

it just it it seems completely irrational to us. So what we think, and again I think is you know Advangard, you know, um, I did get a couple of I've got a lot of fan mail on this. I've gotten a few people saying, you know, this is not Vanguard. You guys are never anti regulation, and I'm like, we're not anti regulation, actually, wet well, we're we want effective regulation. And where the concentration should be are what activities, what practices are in play that actually could lead to a

systemic issue. And so those are the sorts of things that we'd like to see f stock focused on. So you you mentioned earlier, you know companies, you know, funds that are buying a lot of liquid securities. All right, I think it's perfectly legitimate for f stock to look at that and say is that activity going to create systemic risk? Now we could have a debate about that,

but it's a it's a very fair question. And if the answer is yes, then okay, then you've got to you either you give them the oportunity to de risk or designate them. But if the answer is no, then you move on. But it's certainly a good line of question. But just because the funds big doesn't mean it should be automatically systemically important. You get the sense they don't

understand what different companies do in different roles. Now, if you guys suddenly set up, all right, here's our new structured products division, and here's our new leverage derivatives division, and here's our liquid alts division, that's a different story. But and if we were doing proprietary trading for our own behalf, absolutely there would be a completely different story. And now the other half of that, which I'm not sure exactly where you fall on, is the money market funds.

And I always scratch my head and wondered, why does the taxpayer have to backstop money market funds? These are risk instruments. Hey, if you want to buy something that's risk free, there are lots of short term notes you can do, but this is going to generate a yield that's above risk free return. Therefore you're assuming some risk. So look, the way I look at money funds is

money funds were essentially a convenience. If you look at um a very short term, very short duration portfolio, the price fluctuates, you know, point to one point oh one, and you know, under lots of different circumstances. And so the idea of keeping a constant NAV was a convenience

that allowed people to use it for transactional purposes. Now, what happened over time, and and this is this is a very fair criticism of the fund industry, is that simple product evolved into something different, especially on the institutional side. It became much more of a cash management vehicle. And what you saw were you know, multiple na vs being struct during the day and so forth, and and lots of interesting things being done where it really was away

from the original spirit of the product. So UM, the way the sec forms ended up, we were actually we actually thought it was a pretty balanced approach. There were, you know, first of all, lots of tightening of UM, you know, in potential, you know, what can be in in a portfolio and so forth, and durations and whatnot.

But very importantly, UM institutional funds, institutional prime funds are actually no longer constant NAV because of their because of their nature the words for for people who may not be familiar with money market funds, this used to always report as one dollar, right, even if it was worth a little over a little less. So there was never any concerns. So when you wrote a check, you didn't have a taxable event was you know, from a convenient standpoint.

That's what it was all about. Now, during the crisis, UM, the Reserve Fund which broke the buck had a pretty big concentration of institutional investors, and the other funds that were under duress UM were all institutionally oriented. Now you mentioned the taxpayer element. You know, when the Treasury came

in and put the guarantee on. To be fair, nobody asked for that, and actually it was just sort of imposed and you didn't really have a lot of choice, but there was a deep sigh of relief after they did that. So it was but everybody kind of unclenched a little bit. Book. I went out and talked to hundreds of clients afterwards, and they did. And you know, for us UM, you know, I kind of always knew this would circle back though, because UM our prime fund

at that point was government and treasury. So unless the US government defaulted, that prime fund could have withstood anything. So shouldn't you guys have been more rewarded by client flows and the people who were more reckless or less astute is really the right word. Should shouldn't the marketplace have been allowed to separate winners or losers? Or was this systemically important? I think it was really you know, it's one of those will never really know. Um. You know,

I'm a market space person. I like to let the market shake out. Look the short term, the short term markets were in turmoil, um, and you know, certainly the breaking of the buck by the Reserve Fund contributed to that. But um, you remember Triple A companies were having a hard time rolling over their commercial paper. There was so much uncertainty as to what was going to be allowed

and what wasn't not going to be allowed. It's it's really tough to go back and say, well, you know, this would have happened if only these things have been done, or this would have happened if only these things have been done. I'm not sure we'll ever really know. Um. I think I think the regulators did the best they could with the information that they had at the time.

We need to run a series of controlled experiments. In one universe, we allow city group to go under, and in another universe we save Leaman and then we run these simulations and see what happens. Unfortunately we didn't get a chance to do that. Let's let's stick with regulation a little bit. I have two related questions. First, what what should the SEC be doing better? What does good financial regulation look like? Yeah, so I think the SEC um has been moving in a in a very constructive

UM direction. I think Mary Joe White has put some real um, you know, clear markers in the sand around what her priorities are. And I think she's done a pretty good job. Um. You know, she's tough. I mean she's that's a reputation, and she's long time she's very tough. But I think she's very fair. She's you know, incredibly um open to getting feedback, and she you know, she

really processes it very quickly. I think what the SEC is trying to do in terms of gathering UM, doing a better job gathering data UM so that they really have a better view into what's happening into markets is a really good thing. And a lot of it. You know, the fund industry, UM, we're the most transparent. There's all this money outside the fund industry that they need to get their handle hands around what's actually happening, and I think they're actually trying to move in that direction. So

to me, that's a top priority. When you say outside the fund industry, private equity, hed hedge funds, private equity, um, but separate accounts, I mean, you know, there's there's more money and separate, separately managed accounts on the institutional side than there is in mutual funds. And that's a big number. It's a huge number. And so, um, they're trying to get their handle on all of that so that they can really appropriately assess, you know, what, where are their

risks and so forth. I think, um, they need to Uh, there's still some opportunity for harmonization with the other agencies. I mean, it's it's pretty complicated to figure out who's in charge of what you know, between the CFTC, the SEC, now the d o L and on certain issues, let's talk about the d o L because that's a fast

and in conversation. Um. So, after the financial crisis, part of Dodd Frank more or less directed the SEC to review some of the issues that involved brokers, advisors, are as, etcetera. And I think it was the SEC comes out with the report that said, we think the fiduciary standard, which is quote unquote whatever is in the client's best interest, is really the appropriate standard for everybody, and let's enforced this uniformly. And it never made it out of committee.

At three to two it lost, But then the Department of Labor kind of said, okay, we'll pick this up backdoor and pretty much mandated that four oh one K management and my wife has a four oh three B which is PS mostly Vanguard m essentially said this new fiduciary or not so new fiduciary standard is now the new standard for anybody was advising on these retirement accounts, which are really under the pur of view of salary, not outside investing. And that's why it's our per of view,

not the SEC. So that's a long winded wind up for a question. But where is Vanguard on the issue of fiduciary versus suitability? So at the highest level, we're actually comfortable with the raising the fiduciary standard. I think, as with all new regulation, the devil's going to be in the details. And you know when the d o L actually tried to do this a couple of years ago, as you may recall, and ran into a sort of a hornet's nest because under a RISSA there's some really

technical in the weeds UM issues around prohibited transactions. And basically, if you were a four oh one K provider, you would have been prohibited from doing certain really basic things for your investors, such as, UM, potentially you know, giving guidance around rebalancing a portfolio. UM. And I don't think that was the intent. And so what would you do. You'd have to bring in a third party to to you know, be independent and more cost layer another layer exactly.

So so it was it was actually counter to what the original intent. So they you know, they stepped back. The new rule is out, UM. You know, the proposal is out and people are studying its four hundred pages. So we're sort of working our way through it as we speak actually right now. So I can't give you a definitive do they have it right? I'm pretty sure they've thought about the prohibited transaction elements UM in in

in the in the rules. As we go forward, hopefully they've got that right, because that's going to be important for us. That's really important. UM at the highest level, you know, you know, higher fiduciary standards for people handling money makes a lot of sense. You would think there was some issues that the target date funds somebody had suggested, essentially came about as a solution to some of the

four oh one k rules. You guys are pretty substantial footprint and target date funds we haven't really gotten to that. Let's let's talk a little bit about that. Who is that appropriate for? What's the thinking behind these? I've read some criticisms of target date funds, about half of which the criticism is on costs, so I know who I'm speaking with, and the other half is they have a

tendency to be a little too conservative given modern lifespans. Yeah, so a couple of things the target date funds really came about, Um, you have. When the Pension Protection Act was passed in two thousand seven, one of the things that allowed it made very clear that you could have a default option that was a more balanced approach. UM. So it sort of gave regulatory permission for something a lot of for forward thinking companies had already been doing.

You you guys also, and it may even be closed. Didn't you have just a basic sixty forty portfolio? We do? And one one fun balance index um. People still use it. Is it closed close the name of it balance index funds, And that's perfectly fine. It's it's a perfectly good default. The you know, in the early days of target date funds, what was really fascinating is people said, it's too simplistic. You know, you're only looking at age. And you know, you and I are. You're younger than I am, but

we're in the same band. So you may have a much different risk tolerance than I do. And does that mean we should be in different portfolios? And in the short answer that is, of course it does. But when you think about target daid funds were designed for people who did not want to make a decision, nor often they weren't making a decision, so their money was going into a money market fund where they were earning almost nothing,

certainly no real return. And so the idea was, you know, could you put together a professionally managed balanced fund that would rebalance periodically that was age appropriate. Um, given somebody's you know, a traditional lifespan, and um, you know what we've done is we've got pretty sophisticated global asset allocation

portfolio for people, very low cost periodically rebalances UM. And you know, if somebody wants to talk about their risk tolerance and wants to get into more subtleties, we've got a million different options that we can give them, and

we can we can help them with that. But for the person who's like, I don't know what to do, tell me, you're tell me when you want to retire, put your money in that fund and you and and I'll tell you, verry, if you look at the performance of these things over a long period of time, it's it's it's really solid, very difficult um actually for you know, any active managers to beat. And it's a it's one of those things you will always be happy that you

put an investor there. So that that's kind of interesting and it's very global by the way, that that was one of the questions that seems to come out of the fiduciary discussion because somehow, I don't know if I'm I'm getting this right. There was an issue of well, if you impose this fiduciary obligation on brokers or other advisors, they won't be able to do this. And I didn't really under the arguments against the fiduciary standard, none of

them have been and full disclosure were fiduciaries. We we play in that sandbox. So I'm I'm completely biased. I'm not pretending to be objective, but every time I see an argument against it, it they just seemed to be really working hard to you know, it's zero inches in a cloud of dust. It doesn't seem like they're very persuasive.

I think the fear, especially in some of the smaller planned market and where which are sold through many of which are sold through advisors, and for smaller investors, that this will UM, you'll move away from any kind of transaction based and you know, fee based for real little investors can be more expensive sometimes than transaction based. I think, you know, there's a way, you know, people need to think about their costs anyway. So, but that's the argument

that you hear some people that works. UM. I love this quote of yours. I want to talk about a little bit. Looking at investments in less than a five to ten year window is time wasted. I know I'm changing gears on you, but let's talk about that concept of this is for the long term. Yeah, I look, I you know, I really I really believe that UM. Actually one of the things I enjoy reading the most of yours is your commentary around short term predictions. And I think you and I are aligned on this that

very much. You read. You read these predictions for the year, and you might as well just throw darts. And unfortunately, people do pay attention to them, and they actually occasionally invest, at least on the margin, based on them, and I

think they're making a huge mistake. And so we really want people thinking out you know, I say five to ten, but ten, you know, people should be thinking in ten year increments um around their portfolios because it's really difficult to have any sense in the short run what's going to happen, you know, pretty random. I mean, if you believe Burton Burton Malkiel has a clue what he's talking about,

it's a fairly random walk, isn't it. You probably remember the article, but I think it was maybe a decade or more ago. The New York Times ran a piece where they looked at twenty year returns and they compared treasury you know, treasury bonds to equities, and I think if I have the stat right, if you took the ten best days out of a twenty year period, your equity returned dropped from roughly ten percent down to the

level of a Treasury bond. And so that whole risk premium, if you will, that you were being paid was earned in ten days, not you. And I know it's not quite that simple, but I think the message was are you that good that you're gonna you're gonna be in those ten days? And my view is nobody's that good. And if you look at the distribution those ten days, they tend to come near some of the worst days, right, So if you're stepping aside to miss those worst days,

you're also missing some of the best. That's actually a great point in what I hadn't even thought of. But you're absolutely right when I think about that, what what what the periods are? And so again our view is, you know, really be be very long term oriented in what you're doing, and that's actually what gives the ability for you know, and obviously this sounds like I'm talking you know, Vanguard's book, if you will, But you know, low cost the low cost advantage, it's it's that compounding

effect over a decade that really shows up. You know that, you know, when you look at say active versus passive as the extreme examples of low cost investing. UM you know, a year to year can be you know, half of your active funds. Some some years will beat your passive funds. But when you look over ten year period, it's consistently you know less than and that's that compounding cost differential

over you know, a long period of time. You guys have a research piece which um I mentioned Jay had had fo to j Tenny is the person for Vanguard who I shouldn't say covers us. We just know him personally and he's a great guy. But he sent this research piece and showed the difference between low fee and high fee over thirty years. And if I'm doing the math right at the end of the period, especially thirty if you're looking at three decades, the return difference is

an order of magnitude. It's just a tremendous impact. And think about what one percent compounded for thirty years is going to do to uh any sort of PORTFOLI I'll give you an example. So I just did this for somebody where we looked at sort of a high cost versus low cost sort of total cost of investing, if you will. UM so looking at a place where they

were getting ice and whatnot. The um the difference in the ending balances UM translated into a difference in an So you know, basically, imagine your your standard of living up or down based on on this effect. That that's a meaningful that's a meaningful swing. Um. Let's talk about valuation. So you guys, if you're thinking long term, I keep hearing from people and reading stocks are high, bonds are high, everything's high. Expect low returns going forward, which is sort

of a prediction. Some people say it's really just basic math, but to me, it looks like a prediction that the economy isn't going to accelerate, that earnings aren't going to normalize, that we're not going to eventually come out of this de leveraging period, of which we're still you know, I think the US population is deleveraged about of their excess pre crisis debt, so we could still only be halfway through the healing process. What what's your perspective evaluation and

what does it mean to forward expected return? So I'll give you, I'll give you all the appropriate caveats. So one, you know, we're living in a period like none we've ever lived. We've never seen the FED do what it's done in the last six years. And if you put the pre crisis easy money period on top of that, you know we've lived in a decade of a decade

of very easy money. I don't know how to think about that, to be perfectly honest, I've killed myself thinking about it all the time, and I don't know when it ends and how it ends. UM, So let me I'll send you an email afterwards explain it all, to which I'm I'm ill. That would be good because nobody knows. This is clearly you're you're nailing it. It worries me a lot. This is clearly uncharted territory. I know you

could people have made the argument. You know, you look from nineteen thirty to nineteen fifty rates were low, but you can't say they were. It's zero for six years and and there wasn't QUEI back then. Clearly this is uncharted me if you think, I mean again, I'm going to oversimplify it. But if you think about it UM short term, you know money fund should be yielding about

two That's what inflation is. Historically, the money markets UM produce roughly inflation UM no real return and so we've gone through a period of distortion in the markets for this prolonged period of time where essentially the short end we're producing negative real returns. UM. We've never lived through that. And typically, um, when you study history, the longer something is distorted, the less predictable and the and the harsher the outcome is. So that's my big, long winded caveat UM.

Not much of a caveat that. We we we look at So we look at um. You know, if you look at let's say ten years, if you look at yield to maturity on a bond, it's your best predictor of your returns um. You know, plus or minus fifty basis points. Typically, so yield to maturity on corporate bonds is less than three right now or right around let's say three, just around the numbers. So that's our best guess is to what bonds are going to return over the next decade. I can dream up a scenario where

it's worse. I can dream up a scenario where it's better. Not many that it's better. Um, But if you do sort of we do a we sort of a distribution and returns the in the square, you know, the bulk of the distribution, if you will, is in around that three percent number for a corporate bond. If you look at equities, you know, we're at a pretty high valuation place UM, probably top decile historically. And again when we run we so we run a capital markets model which

you know basically runs and Monte Carlos simulation UM. And when historically, when markets have been valued this way, the central tendency would be to be a couple hundred basis points below long term average, and so that would typically you know, and again it's a much flattered distribution with much longer tails, but the central tendency is in the

six to eight range. And so we've actually been It's not horrible, No, it's not um and considering what we've lived through all things, if that's the future returns, there's certainly worse scenarios. So yeah, you and I could both dream up a lot of worse ones, and we can certainly what could lead to them, and you can you can dream up a few better. Um. You know, you

mentioned some things that could accelerate earnings and whatnot. But if you look at if you look at that, what it says is a sixty portfolio is probably going to be in the five so three fifty reel let's say, just for um estimates, that's on the low end of you you know, but it's not crazy. And so what we've been doing is we've been pretty vocal about this because again, to me, it's an asymmetric risk for an investor.

If we're wrong, if we're wrong on the if we're too high, then it's going to be a really rough ride. If we're too low, then great, you know, everybody will be happy at the end, although there'll be some inflation. There'll be some inflation. What um. The real messages, especially for people who are in the bulk of their their earning years and in their savings years, is don't expect the markets to bail you out over the next decade. You need to be saving at a higher rate than

you are. And you know, well that's always one of the inputs whenever we whenever our cfps run a scenario with people, it's you have to either plan on spending less when you retire, or working longer or saving more. Those are the three which which is your first choice and there and there're no there're no other levers and so what you've got to do what you have to do. You know, I think it's a very much incumbent on

us as professionals to make that case to people. UM. And it's hard, it's not sexy, it's not necessarily a fun message. But the flip side is, um, it's the responsible thing to do. And Charlie Ellis's most recent book, right UM, which is on my it's literally sitting on my night table. That's the next book I'm reviewing, basically describes, Hey, here's the situation and we have a potential problem down the road if we don't take steps immediately to fix it.

You just summarize the book perfectly in your three times only I'm only three chapters and you got the levers. That's I mean, that's the book I had that. You know, Charlie was kind enough to send me the book early and I had a chance to review it, and it's exactly his message. And look it's there, it is what it is. And you know it's up to us, I think, to really make that case. You know, look, um, I'll say something, it'll sound sacrilegious and it's not meant to.

But you know, if I go back to UM and do I have any regrets, And one of them is, um, you know, we didn't have the sophistication around our capital market model. We you know, we weren't doing all these Monte Carlo simulations and predicting future returns and so forth. But you knew in nine that the next decade couldn't be great. I mean you just knew. I mean when stock when p s were where they were earning. You know,

however you want to measure valuation. And I wish we as an industry had done a better job telling people that. And you know, there were people out there who were saying it, but it wasn't the strong voice. And um, you know, to me, I certainly don't want to go through that again. I don't think we're in that territory, by the way. But on the other hand, um, we

we're farther along. Let me also point out then, and so I began as a trader in the nineties, and there was no frame of reference for anybody who was buying stocks, actively trading playing the dot com game. Think about it, you you had even you know, people kind of have blanched. I'm guilty of it. Also, when Ronald Reagan came out and said, hey, this is just a correction.

People snickered. He turned out to be right. It was just everyone forgets eighty seven finished the year up one so that I don't want to call it a flash crash, that major structural plumbing snaffoo. There was no frame of reference for what would happen in two thousand, maybe seventy three, seventy four. But ham I know that because I'm be calm, I've made myself a student of market history after all these years. But back then I had no idea what night.

So you're absolutely right in seventy seventy four is the closest. And you know you asked it an earlier question. You know who were some of my people who influenced me, Well, they all lived through that, so I got to hear their stories. And so even though I was a teenager and somebody I remember sitting in gas lines for my dad too, I got to I got to use the car if I sat in the line, even or not. You know, it was today even but um so I

was vaguely aware how bad it was out there. But you know, we didn't live through it as professionals, and so, but some of my early mentors did, and so you you look at that and you say, Okay, what can I learn from them? And yeah, So now I think going forward, I'm hoping we're going to do a much better job with this. So so let me ask a somewhat related question, um, because I've asked similar questions to people who did live through the early part of the

eighties and as as professionals. So here we are with six years into this bullmarket. We're up two hundred plus percent, and there's still an awful lot of skepticism the fact that we're talking about, hey, let's lower expectation for future returns. You know, I tell some of the younger guys who weren't on trading or or managing money in housing, you think this is euphoric. There's no euphori now compared to then. It's for every bull, there's a bear and sometimes too.

So the question is, six years into this bull market plus two, which is a heck of return, why know you for you yet? Is it still post financial crisis? Uh? Trauma? I think you know, if you think about the last fifteen years, we've had two really bad markets, right, you have the dot com crash and then you have the GFC, and then on top of that you have the housing

collapse right in the middle, right in the middle. So you know, to me, I I think the I do think the GFC it certainly didn't have the impact that the depression had on my parents. My parents were born right in the middle of the depression, and you know, have great stories to tell about growing up then. But this is pretty close, you know, in terms of I

think a psychic impact on people. It was you know, for people who had been saving their whole life, it was a pretty scary moment and you've certainly seen, you know, some change in behavior as a result. So, um, I think that partly explains the lack of euphoria. UM. But look, you know, I think despite the fact that I don't think the next ten years the markets are going to be as robust is certainly they've been the last five, by almost definition, they can't be. It's still really important

to keep investing. It's still really important to have that diversified portfolio. And so I think, actually that's gonna be one of our challenges is to keep people. You know, you're you're putting out this message that's not all that you know, Um, optimistic, but at the same time, don't try to time it, don't try to avoid it, try to keep investing on a regular basis. If anything, try

to save a little bit more. The interesting thing is some of the folks we've had through here, like Jeff's out of Raymond James and Laslow Berrini and um Ralph Akumpora, who were all act of money managers or strategists in the early eighties, have made the case that the first five years of this bull market, we're not unlike eighty two to eighty seven, when there was a tremendous amount

of skepticism. You had the eighty seven crash and everybody came out and said told you so, and the markets sort of gathered themselves up in the next decade wasn't too shabby. So so we theoretically, I wonder if we're potentially in that sort of secular market, if that's what's developing here. So you know, look, we'd all love it

if that were the case. Um, I guess I don't quite yet see the um what's going to accelerate earnings to the level that you would need to see earnings accelerate to sort of make the valuations make sense, which you saw me in the beginning of that period, you certainly saw earnings growing at tremendous rates, and then obviously evaluations got you know, kind of crazy towards the end. But if even if you back out the last a couple of years, companies, you know, companies have done an

awful lot to improve margins over the last decade. They you know, they've they've been very conservative and in fact, one could argue in some cases they may have even under invested in in in the future. But what we don't UM, top line growth is getting tougher to come by, and ultimately you need top line growth. And so I'm

again I'm not optimistic or pessimistic. I just don't know on that score whether we'll see sort of a revitalization of top line growth that leads to, you know, really sustained earnings growth over the next five six years, which would make the case that you described come true. So let's talk a little bit about UM investors today. What are they doing right? What are they doing wrong? So, look, I think UM at the highest level, we're seeing better

behavior UM in in two things. One, they're paying a lot more attention to cost and again I know that sounds self serving, but you know the results of actually boring it out um from a return standpoint, So UM,

there's certainly been much more attention to that too. Again, during the crisis, we didn't see, um, you know, a big uptick in transaction vol In fact, we actually saw a decline in transaction volume and people actually stayed the course, which is amazing because most shops did not experience that. So you know, we were we were pleased to see that, and again I think as a result, people benefited from that. You know, you're the the advent of target date funds,

which we talked about a little bit earlier. Um, it's amazing how much money is going into those in the four oh one case system. Really now, is that because they've become a default if somebody doesn't select a different portfolio. The default certainly explains some of it, but we've seen people make wholesale changes to really encourage their their folks

to go into it. Um as much as fifty percent of a cash flow going into our four oh one case system, and we have four million people on our record keeping system, so we get to watch this closely. Is going into target a funds and so yeah, and we feel great about that because it's highly diversified, you know, very global, very balanced, and you know, you can argue on the margins, but it's a really good UM solution for most people. So I think actually investors are more

well diversified, probably even more than they know in some cases. UM. And that's going to really stand them in good stead over the next decade. So what aren't they doing is well, UM, I think the savings rates I've already mentioned. You know, if you look at the average in the four oh one case system is a proxy. Um, they're not where they need to be. UM. I think the average large plan it's about the number needs to be more like

twelve or fifteen. So that's one. Two. I do think people still on the margin pay too much attention to macroeconomic factor. Well, it makes for fascinating conversation and it is, and you know, it's one of the things that we found as a provider is we need to put more macro economic information out on our website and arm our reps with that and so forth. But at the same time we're telling people, despite all this really interesting stuff,

don't act on it. Well, we we call those folks macro tourists, the hedge funds that suddenly all right, Now I'm an expert expert on the Ukraine, and I'm sure at X y Z and those funds have all gotten show laughed over the past couple of years. Very difficult to do, as you know. And and again I'm not gonna there are firms out there who have made a you know, they this is all they do. But for the average investor it's really tough. But I'll give you an interesting um just this is an anecdote. About a

year and a half ago. I did a day on Facebook and Twitter for Vangard, you know, the Vanguard accounts, and I got more macro questions than anything else. And that was very different than what I used to experience, answering phones and so forth. You wait, you answer phones that, Yeah, we we all do a day. Yeah, where you want it. So you want to hear what investors are saying and what they're thinking, and um see what our people are going through as well. Have you ever done to read it?

Asked me anything? Um well, basically on the Twitter and Facebook it was and I got to ask all kinds of stuff, you know, from you should you should tag read it because that's a unique community. It's a little it's a little different than Twitter or Facebook because there are these sub communities and they're investing. Group is absolutely robust and articulate and informed, and they'll give you questions that I'm lobbying you softball SMPAD what they're going to

throw now, that'd be that would be great. Actually we like doing that. But you know what was interesting is we got so many macro questions that you know, we went back and said, gee, we're not putting enough information out there. Yeah, but people are hearing a lot of it. And look, let's be honest. The newspapers and magazine ends, the television stations, they've got a lot of commentes and a lot of time to fill. I have this argument all the time with people, Hey, how did the sequester

affect your your portfolio? No impact? What's the GDP of Ukraine? It's about a year's GDP of Ukraine is about two days a day and a half of US GDP. And every time, oh what's going on with the Israelis and the Syrian every time one of these things come up, not to be Look, there's real human tragedy involved in all these stories. And I'm not I'm not downgrading or annoying that, but from a portfolio manager's perspective, the question is always what is this gonna do to global economic activity?

How is this going to impact revenues? Right? So I so, first of all, I couldn't agree with you more and and I actually think that's the education that has to take place. So when I said we were getting more inquiries around it, um, what we've tried to do with it is put out the information with a and here's what it means, and here's what it doesn't mean. And generally it's don't let it change your portfolio allocation at all, which is, you know, sort of your basic message. You know.

Art cash And tells this delightful story. He's been on the floor of the New York Exchange for fifty years, and he tells the story about back then, supposedly the specialists all got the inside dope, they got the real story, and and a rumor circulated that the Russians had hit the button the Soviets and that the nukes were on the way and we all had eight minutes to live. So Art runs around and tries to get a short off to sail into the nuclear armageddon, and he go

couldn't get it execute. And he comes to his boss and says, I tried to short the market, and in light of the rumor, I couldn't get it done. And the boys says, art, when we find out the nukes are coming, you want to take the other side of that trade. You want to get long. Why do I want to get long? Because if the new kids, who cares? But if the rumor turns out not to be true, we're long and the market comes snapping back. And that's just goes to show how ridiculous those macro trades are.

You know, how is anybody going to trade on any of this stuff? You know, it's been a somebody puts this out. I can't remember who it is. I'll dig it up and send it to you where they have this chart of the past fifty years and every year there's a balloon as to what the macro disaster of that year is going to be. And every year the market kind of shrugs it off and keeps going. It's

almost like just an annoying distraction with no impact on portfolios. Yeah, we've actually there's a great research paper out on our website that looks at macro economic data and essentially GDP growth and market returns, as you know are there's almost no correlation in the short run, certainly not in real time. You're not gonna see it over the long haul. Growing markets should be growing if a GDP stops growing, like

we've seen in some kind. But you know, one of the one of the great, one of the one of the great statistics that it's out there. If you if you went back to UM late eighteen hundreds, so eight nineties, so what was the number one economy? Was the UK and US close on its heels, And then subsequent hundred years, obviously the US economy grew at I think twice the rate of the UK economy. And so the trick question is what were the returns in the equity markets. I

think they're almost identical. They're very similar within a tent within a tenth of a percentage point. So much for g d P. Well, and you sort of you sort of peel the onion one level and it's like, well, really smart UK companies made their money in the US of course, became global and that makes a lot of sense. So let's talk a little bit about active management, because

that's an active management question. So everybody knows Vanguard for indexing, but we mentioned a third of your funds are active, and the key question is not only active, but very successful track records. So a why has Vanguard active funds been so successful? And I think I know what your ranch is gonna be. But so what makes what makes you're active better than the average active? So I think there are um two big factors. One is we run our active funds at a lower cost than everybody. That's

a huge, huge advantage. You're eliminating that drag from from active. Second, um, we didn't think we could attract all the best active talent to Malvern, Pennsylvania, as bucolic and beautiful as it is, And so for all of our active equity funds, we actually travel the world and look for the best subadvisor, so much like a foundation or an endowment would do. If you're looking for a large cap growth manager, who's

the best large cap growth manager you can find? So we go and we we have a team that does nothing than but that. So, so how do you set these guys up? It's it's there in London or they're in Hong Kong, or they're in Los Angeles or San Francisco. When you basically say you're gonna run your fund out of the Vanguard San Francisco office, No, so you're gonna run your fund, We're gonna we're gonna do all the

back office, all the administration. You're gonna just manage money and um, you know, they'll transmit um data to the custodian and so forth, you know, or you know, they'll do their own trading and so forth, but it'll be a Vanguard fund and will be the distributor. And basically our premise is if you do a really good job over the long run, our clients are really smart, they'll probably invest more with you. And so, you know, the outside managers love it because they don't have to do

any service. They don't have to do any marketing, any sales. All they do is run money or like they most of them tell us we're their best institutional account. That's really fascinating. And so what's the team like that goes out looking for these people? So it's it's an experience group. UM typically, um all you know, mostly all c f A s at this point, UM A number of them

have actually worked before they came to Vanger. They might have been working for a consultant, so you know an NSCNUP for example, or some any like that who is you know, really good at manager selection. A lot of them have been homegrown though, but UM really highly trained and UM we just put a lot of time and energy. And again this may surprise you, but so we have

thirty one firms. They run about seventy five mandates for us UM and there's a small group of UM our executive team, a subset of my executive team, but this includes me along with the senior members of this portfolio review department that I just described. We'll do a hundred

manager meetings on campus a year at a minimum. So these firms will come and spend an hour with me and my team and then half a day with the broader portfolio review group, and we'll put them through their paces, and of course we'll do things in their office as well, but we bring them in formally every year, and then of course they're in front of our board on a rotating basis as well. So there's a ton of rigor that goes on and it's very senior management. A lot

of senior management time. And I've I've even had a couple of my directors say to me, gosh, you guys spend an awful lot of time, and I said, this is what we do. I mean, this is the most important thing we do on the active side is select managers. And so we're not selecting emerging managers so to speak.

These are fairly seasoned people. Yeah, although you know, we've we've we have found a few firms um in early in their in their existence, but they generally were seasoned people who spun out of bigger firms, and you know, some of our most well known managers actually started that way. Do you find active is better in less efficient markets?

And what I mean by less efficient emerging markets distressed small cap where there there's not a lot of coverage and there's opportunity there or is there something else going on and you're active? So Um, the short answers, we don't see, you know, we don't see in those quote

unquoteless efficient markets. Um. And I think the reason for that is the costs are so much higher there that you know, even trading costs, it's such a drag, you know, when you look at index results versus UM small cap active for example, it's it's it's not quite the same extreme as in the large cap, but it's close. UM. But we UM. The things that we see are they're they're more soft. There's there's one quantitative thing that we see, which is for the most part, they're they're much lower

turnover than their counterparts. They they tend to be, you know, very focused on that. But then the UM the other things are they have great, great talent retention, they have great process for UM, they're very consistent in what they do, and they're really good at developing the next generation UM. You know, in our business, so many firms have employed it, going from first to second to third generation. And so what we've seen over time is that people side is

really important and that that is a qualitative thing. But when you you know, we've got a group of people have been doing this for a long time. You know, I've been part of this um UH process for almost twenty five years now, so I've seen a lot. It doesn't I'm going to make my share mistakes, but I've seen a lot, and many of my peers have been involved for you know, fifteen twenty years. So hopefully that experience allows you to assess the people side a little

bit better. So so you're looking at low turnover, good employee retention because that tells you a lot, and as a succession planning that seems to be well thought out. None of those things really speak directly too, so the investing So so on the investing side, what we're really

looking for is an explainable process that's very consistent. And again I'll give you I'll oversimplify, but if if someone says I'm a bottom up stock picker, and you know, we don't think about sector allocation, we don't think about um, the benchmarket all etcetera, etcetera. When you do a portfolio attribution analysis and let's say they've outperformed the outperformed abroad market by two basis points, and you see when you do the attribution analysis, there's no nothing from stock selection,

and it's all from sector selection. It's all because of what sectors they were in. Well, you may you may be happy that you have two d basis points about performance, but you have it for the wrong reason. So you're that's something that actually would raise a flag with us. Is that's not what you say you do on the other hand, if you have a manager who, um, you know, maybe their performance is only average because they've had some

factor headwinds or whatever. But if they say bottom up stock selection is really what's driving it, and you look at the portfolio attribution and you see stock selections actually added value, well then you know that begins to reinforce what they're saying is what they're doing. And then you know, we really do roll up our sleeves and you know, we meet with the analyst teams and we get into you know, how does a good idea get into the portfolio? How does an idea get out of the portfolio? What?

You know, what, what are you looking at next? Etcetera, etcetera. So we actually get into a lot of the weeds around the portfolio. But we what at the end of the day, what we really want to see is a consistency between what they say and what actually happens. So it makes sense, It makes a whole lot of sense. Um, So who are the buyers of the active side. If everybody knows you as the index are in chief, who

are the ideal investor buying a vanguard active funds? So we see a lot of um, We see a lot of investors on our retail direct side, UM, you know, the do it yourself investors who do a combination of they'll build a core portfolio around an index strategy, and then they may add one or two or three of our active funds, almost like a course satellite kind of approach. UM. That's become pretty prevalent, and that's most prevalent in the

retail side. Before one case side, UM used to follow that trend as well, but certainly the last five years, the advent of target date funds has changed some of that, so we see a little less interest there. You know, on the advisor side, you know, our financial advisors with whom we work UM, many of them employ that kind of strategy where they mix indexing and active, but historically I think they've looked to us more for our indexing

prowess than our active prowess. Well, it makes sense because if you're looking for low costs and that's what you wanna, that's what you want to focus on, that that's where you're gonna go. So let's talk a little bit about I know I only have you for so many times, so many minutes left, and I want to get to a few of my favorite questions, So since you've joined Vanguard, what has changed at Vanguard? And since you've become CEO

what changes have you implemented? So you know, UM, I joined in eighty six and UM, you know, obviously the biggest changes have been UM. You know that just the growth and scope of the scale that's has to be immense To have had a front row I mean, that's hard to imagine having a front row seat. So when you joined, how big was Vigor was under a thousand crew members people and um less just about twenty billion under management. So you've been there from twenty billion to

three point one billion trillion. That's that's unfathomable of a growth. So the breath and scale of what we do is certainly huge. UM. The change in technology has been breathtaking, I mean breath taking. You know, it's the biggest technological innovation when I joined was the eight hundred toll free number. And you know, now all transactions are conducted on the web. UM, and then and and and you see people doing all this stuff with smartphones and tablets and it's just incredible

to see. So that's that's been a huge change. You know, the change has been actually the adoption of indexing. So you say, wait a minute, you invented the first index one in seventy six, but we only had one index fund when I joined. We were in the process of rolling out our second one, and no one had really come to the party at that point. Um. You know, we were still primarily an active shop. And to see the adoption of indexing is a major force in the

mutual fund space. Um. You know, we always believe it would take hold, but I'm not sure even we saw it taking hold to the level that it's that it's gone, so that that's had a pretty profound change. And then um, probably the last thing, um, and then we'll get the second part of the question is, um, the globalization. And

you know we've globalized our investment thinking. Um, so we you know, we we were very heartily recommending people, you know, check their home bias at the door and really diversify globally. And if we if we look at Europe and we look at them markets somewhat less expensive than US markets, yeah, I mean yeah, much even after the most recent run ups, still cheaper than it's Again, it's a great case for why you want to be globally diverse UM in your portfolio,

and UM our client base is increasingly becoming global. UM. You know, we've got pretty significant footprint in Australia, Hong Kong, the UK, Canada. UM. You know, we serve Europe from the UK. So we're seeing, you know, our ability to take our story to many disparate markets. UM, and that's been pretty exciting to watch, and that's really happened in the last five years. So you mentioned UM, almost of your transactions are digital. What are you guys doing with

all that data? I would imagine that the ability to take the reams of quantitative metrics that are developed in house just from your own client transactions, and look at it geographically in the US, look at the globally, look at how people are using that UM interacting with Vanguard. Have you guys come up with some interesting ways to slicensese that well. So I would tell you we're probably not as far along in that as you would think,

and hope in some ways. UM. You know, one, you've got all the privacy issues, so you want to make sure you have your structures to protect privacy. But I think the big data concept that a lot of people are talking about is probably the next going to be a really important thing going forward. You know, we we we certainly look at all the transactional activity and and um we it gives us a very good sense of

what investors are thinking and doing. And we can watch what people do on the web, so we know where they're spending time and where they're not and that actually gives us some insights as to how investors are thinking. But um, we probably are in you know, the second inning of that game, if you really Yeah, so I think there's just an immense amount more that can be done. So aside from big data, what do you want to accomplish as CEO of Vanguard for the next five years?

And I understand if there are a company secrets you you don't want to share, but you have to have a fairly public set of goals. Yeah, so let me let me just step back to you know, coming out of the crisis, just the context. So you know, we we did a lot of work coming out of the crisis about things that we thought were going to really matter. So you know, one of them was, you know, we thought et f s were gonna be a bigger part of our future, so we put a lot of emphasis there.

We thought target date funds in the four oh one K market would be a bigger part of our future. We put a lot of emphasis there. We thought global would be a really much bigger part of what we're going to do um and so we put a lot of emphasis there. There were a lot of internal things that we worked on in terms of developing the next generational leaders and so forth. And what you've seen in you know, the last half dozen years is you know, obviously the E t F side has you know, it's

played out pretty much the way we saw it. We weren't in the we we didn't serve people like you financial advisors a decade ago. It's a trillion dollar business today for trillion dollars one trillion dollars um. From a startup. You know, we were late in the target date fund. We're now the largest provider. We we actually are the largest four oh one K manager today, you know, three quarters of a trillion dollars in in four oh one

K assets. So and then our global business has gone from you know, I don't know, seventy or eighty billion to two fifty billion in that time frames. So all those sort of strategic pushes UM have paid off to date UM, and then we did a lot of internal things. As I said, so going forward, UM, I think the E t F phenomenon is not done. So I think ETFs UM are not only gonna be front and center in the US. I think they're going to be more

prevalent around the world. We're seeing are they not especially prevalent overseas like there and you look at as you look at Europe, are people not in pockets of Europe? They are, but they haven't really taken hold of the way they have here. So we think that's coming. And we think the indexing story broadly is coming around the world because it's still a it's less than five percent of all assets under management outside the US, so I think that's a huge opportunity UM, so the whole global

so E t F s global. UM. I think this UM intersection of robo and personal advice that we're calling our personal advisor service is going to be a really big thing for US UM the next five years. And then I think, UM, maybe it may not sound as big. There's a lot to be done on the technology front to make US even easier to deal with, and so

some of that will be more evolutionary than revolutionary. But so much of what we did over the last decade was focused on making the PC experience better on our websites, really robust. As you know, we gotta we have to have smartphone and tablet technology that's equally robust. We're I think we're sort of leading in that, but I don't think it's anywhere near where it needs to get, so, um, you should expect a lot there. And then the last thing I would say is, um, we're not done on

the cost side. So you think you can extract more costs make things cheaper, I do so more vanguard effect. You're going to raise the bar and make everybody else we come to you. We we we we we think we need to keep raising the bar on that because again, um, it's certainly a institutional in your d N, a part of part of the corporate culture. But you guys have an enormous advantage. You're so far ahead of just about everybody in that space. Why not press that further? Well?

And you know the other as I mentioned any Grove earlier in this, you know, um, the idea about the parent only the paranoid surrive. You can't get complacent. Um. You know, there's a lot of tough competitors out there. They're not going to just roll over and say, oh, Vanguard's won the game, it's over. I wish they would. Um, I'd be happy if if market. That's not the way markets work. And that's what I love about you know. I mean, so you have to suit up every day.

You you don't sound like a guy. Hey we have three trillion dollars. I'm just gonna kick back and uh, you know we our team goes to bed every night nervous about what tomorrow is gonna bring. And I think it's a really healthy, um, healthy thing for us. So you know you can't um. Jack Brennan, who I know you you you spent some time on this very doing the same thing. Jack had his favorite saying, I think um was complacencies the seven deadly sins all rolled into one,

which I think is a justice brand. Ice I think was the originator of it. And Jack used to preach that to us, and you know, I think it's part of our d n A at this point. So in the last few minutes we have before because I know, um, your associate is gonna be jumping up and down a second. Let me let me give you my final three or four questions that I ask everybody. And I know this

is gonna be, um, really interesting. First, what sort of advice would you give to a millennial or someone just starting out their career, whether it's in the investment business or just more broadly, so more broadly, um, you know, it's to me, it's all about save early. You know. Actually, let me back it up. Live below your means, you know, whatever you think you can afford, just notch it down a little bit, save more than you you think you're gonna need to be very aggressive early and then get

exposure um to you know, a highly diversified portfolio. If you're young, if you're a young millennial, you should be mostly equities, um volatilities your friend, it's not your enemy at this point. Be very global and and and then you know, obviously we're gonna say, pay a lot of attention to cost, but I would I would really start early and try to save as much as you can early. It makes a huge difference, you know. We just have

this conversation the other day. I think back about my cars that I had when I was I'm a car guy. Early in my career and in hindsight, who really cares what you're driving when you're just starting out. You're supposed to be broke and and and it's just you know, if you do it on the front end, the compounding effect is just amazing. You know, for somebody coming into our business. UM, I would say, really important to develop a global perspective. UM, I still see it. It's it's

getting better and home country biases everywhere. It's it's not just here. And in the US it's not as bad because the US is about half of the global markets, so it doesn't grow as much. But if you're in the UK, where you're six or seven percent of the global markets and of your equity exposure is local, that's a problem. So if you're going to be if you're going to be in our business, you've got to develop a global mindset to UM, you've gotta work really hard.

UM I think it's you know, I think it's gonna get even harder. And you know, whether you're on the business side or the investment side, hard work really really separates people. UM. And then three, UM, you know, line yourself up with organizations that really put integrity above all else. Our business. Um, you know a lot of really good people, a lot of really good firms, but you know there are some stuff on the margin that you just is not good. And I think if you're young, pay a

lot of attention to that early on. UM, and you know, try to find the firm who's got a value system that really matches up with your own. So my my second to last question, I kind of asked you already, so I'm gonna change it up. I was gonna say what has changed for better or worse since you've joined the industry. But we've really talked about that a lot, So let me mix it up a little bit and say what changes would you lie to see take place

going forward in the industry. So look, I think the industry, uh again, it's not gonna shock you the cost side, um. And and it's it's not just about price, by the way, it's about value. The industry really needs to think about what value are we providing? And um, there's there's an immediate reaction when you say low costs to you know, um, people people flinch. I think the value you know, you have to understand your value proposition, and I don't think

everybody does that. As well as they should. Um. You know, you don't have to be the low price guy all the time if you're really adding something, um that's valuable to a client at the end of the day. So I think people need to really understand the value of the side of their equations better. I'd also like to see um uh, the industry a little bit more focused

on the long term. Um. You know, a lot of firms, despite the fact that they talk long term from an investment perspective, they run themselves very short term with a very short term orientation. You know. One of the things we really pride ourselves on is trying to run ourselves the same way we tell people to invest, which was you know, don't think in terms of quarters or even years, think in terms of you know, five, ten, twenty year blocks.

And I think the industry is still too short term oriented, and you see that in some of the discussions around regulation and things like that. You know, I think the third thing, um, you know, for the industry um to really to really focus on is the people's side. Um. And this is going to sound a little bit um uh paternalistic perhaps, but you know, when I talked to a lot of young professionals in the business, and it's a wide distribution of experiences in terms of whether they

really feel satisfied or not. And I think it's really important that, um, for you know, you know, you know, in your own work, having a purpose that matters really makes coming to work every day better. I think more firms need to think about what's our real purpose? Why why do we exist? And why does somebody want to work here? Not just for the paycheck. As the paycheck is important, but it's not it's not actually what you're

going to remember, you know after thirty five years. Um, you know, what I'll remember in Vanguard are the people and the clients and the culture and you know, the compensation and all that will be nice, but that that's what I'm going to remember. One of the things we've talked about, and when we sit around and have a couple of glasses of wine or beer, is how things have changed. And and so I'm the oldest guy in my office. I'm a couple of years younger than you,

but mostly young younger folks. And the conversation is, when I was coming up, it was very much a mentorship philosophy that was very widespread and maybe this is someone anecdotal, but I don't see as much of that around today as I used to. And it was a very very big thing to have someone taking onto the kid Camille. Let me let me you're doing it wrong. Let me let me show you the ropes. And I know there's

still some of them around. But I'm not sure if the people who are twenty five or so, we're thirty arguing able to answer the same question in twenty five years who your influences, who your mentors, who really affected the way you think? And I think that's a great loss these days. Yeah, you know, and and and some of that you know, you you earlier you talked a little bit about the change in the industry composition. I mean, you know, there's a lot of more money with you know,

a handful of bigger firms. And what you hope is the big firms don't lose that. I think some of them do. And you know, investment management for some firms, it's just a little piece of a bigger set of financial services they're providing. And we've definitely seen that. Um when we hire people from some of those firms, you know they're they're after they've been with us for a

year to tack aground. This is really different and I think maybe it's getting to what you're describing, and I think again it's the human element side of this business is really important if you're going to really add value. You know, one of the ways you add values through your people, and you need to put a lot of time and energy into that. And you can't treat people just as another asset on the books. Um, who you know that happens to walk out at night. You gotta

really treat it specially. And finally we get to our last question. I asked this of all of my guests, what do you know today about investing that you wish you knew thirty years ago when you started your career? Global is good. That's the big change from thirty years ago. So are you saying thirty years you were domestic focused and you weren't thinking globally. Yeah. I would not have thirty years ago. It just would not have occurred to me to be thinking nearly as globally. And that's the

big change for me. It's been. Um, you know, uh, I'd like to think thirty years ago, you know, I believed in low costs because I joined Vanguard. I believed in indexing because we are a pioneer, um, you know, getting acid allocation right with something we preach right from the get go. But I was not nearly as global in my thinking as I needed to be. And and that's really a fascinating change. Hey, Listen, when we look around the world, the US is more than a developed economy,

it's a mature economy. The same thing with Japan and Europe. When you look globally, the developing markets and the emerging markets are where all the global growth is likely to come from. So, uh, you're you're I'm drinking from the same cup that you are. There's little doubt that that's what the future has been. Bill I. I can't thank you enough for being so generous with your time. This has really been absolutely fascinating. UM. I just want to review.

People want to find your your research and your work. It's at Vanguard Vanguard dot com. UM. I meant to ask you about the no whole theme? Is it true? Everything is everything? So the galley we have a galley, or we don't have a gym. We have ship shape. We don't have employees, we have crew members. You hinted at that in the last answer. That's what checking it off. It's it's it's very nautical, but it builds a strong culture to say the very least. Well, this has been

absolutely delightful. Thank you so much for spending so much time with us. You've been listening to my interview with Bill McNabb. He's the chairman and CEO of Vanguard Group. If you'd like more information, you know what, you can check it out. Be sure and listen to all our other podcasts and by this point, if you're still with us, just look an inch or two above or below on iTunes and you can see all the rest. I'm Barry Ridhults. You've been listening to Masters in Business on Bloomberg Radio.