Vanguard is a juggernaut. The firm manages more than $5 trillion in assets, and spent most of 2017 gathering more than $1 billion a day in net new flows. It’s one of the most successful financial services companies in the world, beloved by its customers and its employees alike.
On Jan. 1, however, a big change happened: Mortimer “Tim” Buckley took over as just the 4th CEO in Vanguard’s 42-year history. He’ll give his first public speech as CEO on Jan. 21 at the 2018 Inside ETFs conference. In anticipation of that speech, he spoke with Inside ETFs CEO Matt Hougan about everything from active ETFs to the size of indexing, Personal Advisor and the future at Vanguard.
Matt Hougan: It's Jan. 1. You've just become the 4th CEO of Vanguard, which is pulling in hundreds of billions of dollars a year. What are you going to do? What's your focus for the first 100 days?
Mortimer “Tim” Buckley: We’re long-term investors, and we approach managing our business the same way. As such, it’s about the next 10 years, not the first 100 days.
Our core purpose is giving investors the best chance of investment success. We’ll always aim to deliver superior investment results, while innovating with new products to meet investor needs both here and abroad. Vanguard has been built on taking advantage of innovations, from the index fund to ETFs to target-date funds.
The next area of rapid change is advice. As such, we’ll invest heavily in advice in the years ahead, whether that’s partnering with our broker-dealer and RIA clients, or improving our own advice offerings to our retail clients and retirement plan participants.
Of course, we’ll also continue to focus on lowering cost, while delivering a better experience for our clients.
Hougan: Is indexing too big?
Buckley: The short answer is no, not by a long shot. There are misleading but headline-grabbing statistics quoted in the media all the time, but the reality is that indexing represents about 15% of the value of all global equities and less than 5% of global fixed-income assets. Much of the anti-indexing rhetoric comes from varied sources who’ve felt their revenue decline with indexing’s rise.
I strongly disagree with the assertions on indexing size and undue influence on the financial markets and in boardrooms. Our research shows that index funds make up less than 5% of daily trading volume. As such, there’s considerable price discovery and liquidity provided by active strategies.
There are also unfounded assertions that index fund managers stifle competition and conspire to keep prices high. Vanguard and other index providers are active and engaged on the corporate governance front, and promote good stewardship practices and healthy competition among portfolio companies.
Hougan: Is Vanguard too big?
Buckley: I might argue we aren’t big enough—$5 trillion is a big number, but that’s our clients’ money, not ours. Our revenue is $5 billion. We’re hardly Amazon.
We believe there’s so much more we can do to help investors achieve investment success in the U.S. and abroad. That said, we don’t put a high value on growth. We see it more as an outcome of delivering on our fundamental value proposition of providing superior performance and high-quality service experience at a low cost.
We see our size and scale as an advantage, enabling us to continue to lower the cost of investing and reinvesting in the business to improve client experience and outcomes.
Hougan: Is Vanguard Personal Advisor competing with advisors?
Buckley: Our goal with the introduction of Personal Advisor was to meet the advice needs of our clients. Specifically, we sought to lower the cost and complexity of investing for Vanguard investors by offering a single, comprehensive advice service that combines sophisticated technology, a personalized web experience and an ongoing, but virtual, relationship with an advisor.
We strongly believe in the value of advice and in the value of the advisor. As you may know, we’ve done significant research on quantifying the value of an advisor, and found that cogent wealth management can add 3% in net returns for investors. We’ve made a considerable investment in our advisor business, and we’ll continue to partner with our advisor clients to help them better serve their own clients.
We know how to leverage technology and scale our advice practice. I’m optimistic about the advice industry as a whole, and see continued success for advisors who employ technology, adapt to new business models and clearly articulate their value propositions.
Hougan: Is there room for smart beta in the Vanguard portfolio?
Buckley: In November, we announced a suite of actively managed factor ETFs, our first such offering. But please don’t call them smart beta. While we’re in the quiet period and I cannot discuss specifics, the ETF suite comprises five factor exposures: minimum volatility, value, momentum, liquidity, and quality. A sixth fund and ETF will offer a multifactor approach. Our internal quant team, which has more than 30 years of experience, will employ a rules-based approach.
We believe factor-based investing is just another form of active management, and roughly 25% of our assets under management are in active funds. And we’ve long believed in active—low cost, long-term and disciplined active.
One aspect of factor investing we try to communicate to investors is that the strategies aren’t for the faint of heart. Performance is highly cyclical and typically inconsistent across different economic and market conditions. Investors must be able to endure potentially extended periods of underperformance relative to the broad market.
Hougan: Why is Vanguard launching active ETFs now, and why has it taken so long?
Buckley: Vanguard has always taken a careful, deliberate approach to new product development. The funds we’ve elected to introduce are only those that met the Vanguard standard of exhaustive analysis and evaluation of their ability to benefit investment portfolios. We don’t experiment with our clients’ money. The other extenuating factor was getting SEC approval of an actively managed ETF.
We have experience managing factor funds, introducing a minimum-volatility fund in the U.S. in 2013. We also introduced factor products in Canada and the U.K. within the past two years. We’ve developed these new products for advisors and institutional investors, who we believe understand the risks and have the best opportunity to add value to their portfolios by employing these tools.
Hougan: Do your active managers worry about front-running in an ETF structure?
Buckley: Not for our factor funds. Vanguard’s position on portfolio holdings disclosures hasn’t changed. We still believe daily portfolio holdings disclosure for index and traditional active funds is generally not in a shareholder’s best interest.
However, the SEC has made it clear they view transparency as important to any actively managed ETF application. In fact, they’ve yet to approve an actively managed ETF that doesn’t disclose its portfolio holdings on a daily basis.
That’s why we’re only considering active ETFs that follow certain strategies—generally, high-capacity, model-driven strategies with trading flexibility—that can accommodate daily portfolio holdings disclosures.
Hougan: What do you worry about?
Buckley: Cybersecurity is of the utmost importance to me—even more so in my new role. It’s a topic that’s always top of mind for us.
Understandably, many Americans have concerns about the safety and security of their assets and personal information. More and more, we’re all reading horror stories in the news and bracing for the next data breach. It can be a scary time for many of us. I was Vanguard’s chief information officer when the subject of cybersecurity really started to take off more than a decade ago. It’s stunning how it’s advanced and how the threat has increased.
We are making a high investment in securing our clients’ data and assets. We follow industry best practices, employing state-of-the-art technology and rigorous online security standards. We also provide clients additional layers of protection through a number of secondary safeguards. An organization should never believe they’re immune to an attack. Constant review and preparation should be of supreme importance for all companies.
Hougan: What does Vanguard look like five years from now?
Buckley: I would say that, five years from now, investors should feel continued comfort in knowing that core beliefs and practices remain intact. Our mutual structure, our investment principles, our client-focused culture, and our commitment to our crew will never change. Our fundamental mission of giving our investors the best chance for investment success will not change.
But, how we do it and where we do it will change. If you work at Vanguard, you understand that there’s no place for complacency in our DNA. We’re driven to improve the value we offer. For us, it’s more exciting to think of the potential of tomorrow than to celebrate the success of today.