Bogleheads® 2022 Conference – A Vanguard Deep Dive with Morningstar’s Ben Johnson and Alec Lucas
00:00:00.000 | (audience applauding)
00:00:03.160 | This session, a moderator to my left,
00:00:09.020 | the esteemed John Luskin, host of Twitter Live,
00:00:14.020 | also runs our Bogleheads Facebook page
00:00:19.660 | and Bogleheads Twitter.
00:00:21.200 | He is a fee-only, advice-only certified financial planner
00:00:25.860 | from sunny San Diego, California.
00:00:28.820 | He helps a lot of do-it-yourself investors.
00:00:31.580 | He is a prolific writer with articles published
00:00:35.060 | in peer-reviewed journals and magazines.
00:00:38.560 | He's been published in the Journal of Financial Planning
00:00:40.700 | and others.
00:00:42.140 | He did his master's thesis on university endowment funds
00:00:47.140 | where he showed that university endowment funds
00:00:51.220 | would do a much better job managing their endowments
00:00:53.700 | if all they used was a portfolio of passive index funds.
00:00:58.740 | Which those very smart people don't really wanna hear.
00:01:02.060 | But anyway.
00:01:03.200 | So he is recognized as one of the leading financial planners
00:01:08.640 | in the industry by Investment News Magazine.
00:01:13.280 | He's been featured in the New York Times,
00:01:14.780 | Wall Street Journals, and other publications.
00:01:16.480 | So I give you your moderator, John Luskin.
00:01:20.240 | (audience applauding)
00:01:23.400 | (audience cheering)
00:01:26.400 | - Folks, welcome to Vanguard Deep Dive.
00:01:33.080 | As you know, I'm your host, John Luskin.
00:01:35.360 | And I'm joined by Alec Lucas and Ben Johnson, CFA.
00:01:39.380 | Alex is a strategist within manager research
00:01:42.320 | for Morningstar Research Services.
00:01:44.560 | Ben is head of client solutions
00:01:46.520 | at Morningstar Asset Management.
00:01:49.040 | Today, we're talking about Vanguard.
00:01:51.320 | I'll start by reviewing Vanguard's past, present,
00:01:54.040 | and future before opening up to audience questions.
00:01:58.000 | Let's start with the past.
00:02:00.640 | Alex, can you start us off by giving the audience
00:02:02.720 | a little bit of a refresher on the history of Vanguard,
00:02:05.640 | how it came to be, and the motivation behind it?
00:02:08.740 | - Well, thank you for having me.
00:02:11.600 | I guess we'll use the mic.
00:02:14.360 | It's probably a little easier to hear.
00:02:16.200 | Thanks for having me.
00:02:17.040 | Very excited to be at a Bogleheads conference.
00:02:19.920 | I expected to see Bobblehead dolls on the tables, but.
00:02:24.100 | - They're very expensive.
00:02:25.840 | - Yeah, they're very expensive.
00:02:28.160 | Inflation, inflation, there you go.
00:02:31.160 | There we go.
00:02:33.140 | In terms of Vanguard, I think that one of the themes
00:02:36.660 | I've noticed, so I started covering Vanguard in the,
00:02:39.220 | I started investing in Vanguard in the late '90s,
00:02:43.560 | but joined Morningstar in 2013,
00:02:45.680 | and then have been what's called the Vanguard parent lead
00:02:48.800 | since the first half of 2018.
00:02:51.440 | And I think one challenge that Vanguard sometimes faces
00:02:54.680 | is that there's a tendency to compare the new Vanguard
00:02:57.220 | with the old Vanguard, and I actually wrote a piece on this.
00:03:00.340 | And I think sometimes there is a tendency to gloss over
00:03:04.840 | some of the details about what happened early on
00:03:07.400 | in Vanguard's history.
00:03:09.200 | So as is probably well-known among this group,
00:03:13.680 | but perhaps not as well-known as it should be,
00:03:16.380 | is that there's a very close relationship
00:03:18.800 | between Vanguard and Wellington that persists to this day.
00:03:22.540 | But what became the Vanguard effect of lowering fees
00:03:27.480 | and promoting indexing, it arose in the midst
00:03:32.480 | of a very fierce battle that Jack Bogle had
00:03:34.760 | with four Boston-based rivals.
00:03:36.440 | And remember that Vanguard is based in Philadelphia,
00:03:38.840 | so there's probably some regional differences there.
00:03:42.000 | And initially when Vanguard,
00:03:43.740 | Vanguard was founded in September of 1974,
00:03:47.460 | its first day of operating was May 1st, 1975.
00:03:52.020 | And after seven months of negotiation
00:03:55.060 | with his Boston-based rivals,
00:03:58.980 | Bogle said that he got 1/3 of what he called the fund loaf.
00:04:03.220 | Now, what did he mean by that?
00:04:04.460 | If you think about what a mutual fund does,
00:04:07.280 | it does fund administration, it does investment management,
00:04:11.260 | and it does distribution.
00:04:13.500 | So Vanguard, at its inception,
00:04:16.820 | only had a right to fund administration.
00:04:20.820 | But Bogle being in some respects the perfect example
00:04:24.220 | of Adam Smith's invisible hand,
00:04:25.940 | his competitive zeal leading to the good
00:04:28.020 | for a lot of people,
00:04:29.880 | because what he essentially did is back then,
00:04:34.860 | you had a commission-based distribution system,
00:04:37.420 | so he went no load.
00:04:40.280 | And then because Wellington
00:04:42.120 | retained investment management rights,
00:04:45.300 | he launched the first retail index fund
00:04:47.380 | because he argued it was unmanaged,
00:04:51.260 | because it merely tracked an index.
00:04:53.340 | And so initially, this incredible innovation,
00:04:58.340 | the democratization of what we call now beta
00:05:01.900 | for your average retail investor,
00:05:04.300 | it was his only play to launch a new fund.
00:05:08.540 | And so there's this wonderful thread,
00:05:10.900 | if you kind of go throughout Vanguard's history,
00:05:13.040 | that a lot of these innovations were born
00:05:16.560 | in the midst of this career-defining conflict
00:05:19.780 | that led to Vanguard's founding.
00:05:21.920 | And there's other things we can go to,
00:05:24.100 | but I think that it's important
00:05:25.320 | to really understand the history
00:05:26.800 | that what became Vanguard
00:05:28.220 | in this playbook of low fees and indexing
00:05:31.240 | really emerged in the midst of that conflict.
00:05:37.580 | - Fantastic.
00:05:38.540 | All right, let's bring it to Vanguard today.
00:05:42.940 | Now, Vanguard is moving into new spaces
00:05:45.540 | where it wasn't involved before.
00:05:48.080 | Advice with Vanguard's personal advisor services,
00:05:50.660 | including private equity and direct indexing.
00:05:53.540 | Ben, what should Vogleheads make
00:05:55.060 | of Vanguard moving into these new areas?
00:05:57.980 | - Well, I think to pick up where Alec left off,
00:06:00.860 | like the Vanguard effect is pervasive now, right?
00:06:04.860 | We see it everywhere.
00:06:06.940 | You know, we see it emblematic,
00:06:08.580 | like in the fact that like market exposure,
00:06:11.220 | beta is free just about anywhere you can go.
00:06:14.420 | The entry point in many cases is as low as a single dollar.
00:06:17.580 | If you show up at Vanguard, if you show up at Schwab,
00:06:20.700 | if you show up at Fidelity with a dollar,
00:06:22.600 | you can get a zero fee total stock market index fund today.
00:06:27.020 | So I think that is absolutely to be allotted,
00:06:29.700 | but what that creates is basically
00:06:32.000 | like a flat competitive space.
00:06:34.300 | So I always use the analogy of like competition
00:06:37.780 | between two corner gas stations, right?
00:06:40.580 | So what are they selling?
00:06:41.920 | They're selling something that's gonna make you go
00:06:44.520 | at the end of the day.
00:06:45.360 | Market beta is gonna make your portfolio go full stop.
00:06:48.980 | So you need that beta to lift your assets over time,
00:06:52.060 | ideally at a rate that outstrips inflation.
00:06:55.020 | Well, when that becomes a commodity,
00:06:57.860 | I paid nothing or effectively nothing
00:07:00.460 | for total stock market exposure,
00:07:02.000 | total bond market exposure.
00:07:03.780 | My three front portfolio can be had for literally nothing.
00:07:08.780 | How do I differentiate?
00:07:10.780 | Well, we arrived here because one corner gas station
00:07:15.540 | was taking a penny off of the gallon of gas.
00:07:17.500 | The other one was, the other one was.
00:07:19.380 | It's free now.
00:07:20.420 | So what do we do?
00:07:21.260 | Oh, we've got these fancy new detergents in our gas
00:07:24.580 | that will extend your engine life.
00:07:26.300 | We call it smart beta.
00:07:27.820 | Cool.
00:07:28.660 | Is that really gonna work?
00:07:29.860 | Maybe it does, maybe it doesn't.
00:07:31.460 | But for the time being,
00:07:32.300 | it's a way for us to differentiate our gasoline
00:07:34.900 | from the person kiddie corner from us.
00:07:37.820 | Well, that's not really working.
00:07:39.300 | So what do we do now?
00:07:40.300 | Well, if you fill up here,
00:07:42.940 | I'll give you a car wash for 399.
00:07:45.860 | Okay, that's a differentiator.
00:07:47.740 | Well, if you fill up here,
00:07:48.580 | I'll give you a car wash and a pizza.
00:07:50.420 | So what you see, not just at Vanguard,
00:07:53.240 | but really across like the like tier one
00:07:56.060 | asset management industry is an expansion
00:07:59.860 | of the breadth of their offering,
00:08:02.460 | because they have to,
00:08:03.300 | because their core offering at the end of the day
00:08:05.180 | has become what's effectively a public utility.
00:08:07.820 | It's just market exposure, like awesome.
00:08:11.620 | Like I can't underscore how awesome that is,
00:08:14.260 | that that is free,
00:08:15.100 | that that is investable to anyone
00:08:17.340 | at like a minimum investment of a few bucks.
00:08:21.940 | Fantastic, let's celebrate that.
00:08:23.980 | But now we've got to move on and say,
00:08:25.260 | okay, well, how are we gonna differentiate?
00:08:27.460 | We're gonna differentiate along the axis
00:08:29.980 | of how do we package different investment strategies?
00:08:34.100 | And what are the different types
00:08:35.220 | of investment strategies that we offer?
00:08:37.620 | So in the packaging, what we've seen is,
00:08:40.040 | ETFs have become the choice of a new generation.
00:08:43.420 | The investment vehicle that literally the founder refused
00:08:47.940 | has really become the cornerstone now of this organization.
00:08:50.900 | You see differentiation along the lines of strategies.
00:08:55.900 | So you've got at the core, low cost beta humming along,
00:09:00.300 | you've seen an effort that's had not so much success
00:09:04.280 | in factors, you see concentrated discretionary
00:09:08.180 | active portfolios coming to play.
00:09:10.700 | And that is all to compete,
00:09:13.000 | that is all to ultimately serve different needs
00:09:15.980 | across a massive client base, right?
00:09:17.900 | There are some 30 million different investors
00:09:20.860 | that Vanguard's serving around the world today
00:09:23.740 | that don't necessarily just want a tank of gas,
00:09:26.320 | but might want to carwash a pizza,
00:09:29.820 | a different detergent in their gas
00:09:31.620 | that's gonna extend their engine life.
00:09:33.980 | And that's, I think, just part of a natural evolution.
00:09:37.700 | And to the extent that they've done it
00:09:39.180 | in a way that resonates with their past,
00:09:42.220 | focus on the investor,
00:09:43.700 | focus on bringing down costs in these space.
00:09:46.460 | And you see that in the advice offering.
00:09:50.380 | I think that resonates, right?
00:09:51.700 | That's true to their legacy.
00:09:54.820 | But that's not to say that there might not be missteps
00:09:57.420 | at some point along the way.
00:09:59.160 | And for those who aren't investment nerds,
00:10:02.520 | beta just means we're investing in the Vanguard total
00:10:05.260 | or other low cost total stock market index fund.
00:10:08.560 | - Yeah, I would add to the differentiator point
00:10:12.460 | that I think Ben is exactly right on.
00:10:14.580 | There is also, I think, an altruistic element to it.
00:10:19.340 | Vanguard does see itself
00:10:20.620 | as trying to democratize asset classes.
00:10:23.540 | And so I think that the private equity efforts
00:10:25.820 | can be seen in that light as well,
00:10:27.740 | even as it is to also serve institutional clients.
00:10:31.500 | And I think it's something that's perhaps unrecognized,
00:10:33.700 | but if you think about indexing
00:10:35.340 | when Vanguard launched the first index fund,
00:10:38.120 | at the time it was an institutional strategy.
00:10:41.120 | It actually wasn't working too well.
00:10:43.660 | So it's quite fascinating that Bogle launched
00:10:46.660 | what became the Vanguard 500 as early as he did.
00:10:49.860 | The first effort at indexing,
00:10:51.860 | if you've read Robin Wigglesworth's book,
00:10:54.900 | and it's also covered in Peter Bernstein's "Capital Ideas,"
00:10:57.560 | the first effort at indexing
00:10:59.340 | occurred with the Samsonite Pension Fund,
00:11:01.260 | I believe it was 1971.
00:11:03.440 | And they tried to equal weight the New York Stock Exchange.
00:11:07.060 | It was a disaster.
00:11:08.700 | 1973, there was a sampling approach to the S&P 500.
00:11:15.340 | Those were institutional portfolios.
00:11:18.380 | Bogle in '76 launches the first retail index fund.
00:11:22.740 | Think about computing power back at that point.
00:11:26.300 | It's much less robust.
00:11:27.820 | So if you have an institutional accounts,
00:11:30.300 | the money flows are much more predictable
00:11:34.420 | and they're bigger.
00:11:35.460 | And so that's why sort of understanding
00:11:39.740 | the origin of Vanguard and what it did,
00:11:41.940 | it's this tremendous revolution
00:11:43.740 | that at the time had no guarantee of success
00:11:45.900 | and was slow going in the early days.
00:11:48.380 | And so I think there's a lot of insight to be gleaned
00:11:50.640 | from understanding Vanguard's present in light of its past.
00:11:54.320 | - Ben, I know you have a lot of expertise
00:11:59.940 | in index fund investing and ETFs.
00:12:02.300 | Tell us your thoughts on Vanguard
00:12:03.900 | moving into direct indexing.
00:12:05.340 | - Yeah, direct indexing I think fits within
00:12:09.060 | this idea of expanding choice for the end client
00:12:14.060 | along the dimension of sort of delivery.
00:12:16.940 | So direct indexing, I don't know if anybody remembers
00:12:20.660 | the old Mike Myers skit where he played Linda Richmond
00:12:23.900 | in Coffee Talk on Saturday Night Live.
00:12:26.860 | Direct indexing is neither direct nor indexing,
00:12:29.420 | so let's discuss that.
00:12:31.540 | So what direct indexing is really is a way to optimize
00:12:38.060 | first and foremost for tax considerations.
00:12:41.660 | So people who are in high tax brackets
00:12:43.340 | who have a lot of money, oftentimes who are bringing
00:12:45.660 | like a concentrated stock position to bear,
00:12:48.540 | look at direct indexing as a way to build a portfolio
00:12:52.180 | around that concentrated stock position
00:12:55.340 | that brings in diversification that keeps the tax man at bay
00:12:59.260 | as long as humanly possible.
00:13:01.660 | Pretty cut and dry to make sense in those use cases,
00:13:05.220 | but that's not everyone, that's not me.
00:13:06.900 | I don't have that problem, and I would argue
00:13:09.180 | most investors don't have that problem.
00:13:10.780 | But for those investors that are looking to achieve
00:13:14.140 | something very specific, it is a very good tool
00:13:17.820 | to do exactly that.
00:13:19.460 | And it's also something where Vanguard's got an offering,
00:13:22.340 | BlackRock's got an offering, JP Morgan's got an offering.
00:13:25.260 | So it's emblematic of the level of competition right now
00:13:30.260 | among the large asset managers for your money.
00:13:34.460 | They want your money because that's how they make money,
00:13:37.700 | and if they don't have the shiny new toy
00:13:41.140 | that their friend across the street has,
00:13:43.820 | they're at risk of either losing your money
00:13:46.140 | or getting tough questions from you like,
00:13:49.020 | hey, BlackRock has appareo, what do you have to offer me?
00:13:53.660 | So it's, I think, important to understand a lot of this
00:13:56.420 | in the context of competition
00:14:00.220 | among these large asset management firms,
00:14:02.480 | and Vanguard is one of the three now 900-pound gorillas
00:14:07.480 | in this space operating not just here in the U.S.,
00:14:12.420 | but globally against chiefly BlackRock and State Street.
00:14:16.320 | - Earlier beforehand, we were rehearsing for our talk today,
00:14:21.060 | and I mentioned Vanguard has higher fee active funds
00:14:25.620 | in their personal advisor service offering,
00:14:27.580 | and then, Alec, you mentioned relatively, yes,
00:14:32.300 | but compared to some of the other funds that are out there,
00:14:35.140 | compared to other funds, it's still relatively low cost.
00:14:37.580 | Can you tell us more about your thoughts
00:14:38.940 | on Vanguard making this move?
00:14:41.300 | - Yeah, so as a number of you probably know,
00:14:45.060 | Vanguard launched some advice select funds
00:14:47.300 | in 2019, late 2019, and so they're only
00:14:51.820 | for personal advisor services clients,
00:14:54.940 | and this was a subject of considerable discussion
00:14:58.580 | at Morningstar, especially between John Rankinthaler
00:15:00.620 | and myself, it reminded, it certainly reminds some people
00:15:05.620 | of kind of the old wire house approach
00:15:07.780 | where you sort of have this proprietary product
00:15:10.660 | and you're trying to get it to investors,
00:15:13.220 | but if you think about the simple fact
00:15:15.760 | of sort of democratizing investing
00:15:18.620 | and the playbook that Vanguard has followed very well
00:15:22.500 | is in indexing, if you had a very simple model of indexing,
00:15:28.540 | you invest in the index fund, you get the market average,
00:15:32.340 | and then you beat most people
00:15:33.740 | because you have lower fees, right?
00:15:36.380 | Well, there's always going to be a right side
00:15:38.420 | to the distribution where you have
00:15:40.720 | some superior active management that is going to occur,
00:15:45.580 | but it's hard, and so what Vanguard did
00:15:48.380 | is it launched these high conviction active strategies
00:15:51.180 | and it's priced them pretty competitively
00:15:53.420 | for actively managed funds, but even if you include
00:15:56.380 | the 30 basis point charge for personal advisor services,
00:16:00.060 | it still falls below the active median,
00:16:03.100 | and there are clones of those strategies.
00:16:05.240 | Don Kilbride has run one.
00:16:06.900 | He manages Vanguard Dividend Growth,
00:16:09.380 | which is a fund that's done very well.
00:16:11.980 | The more concentrated version of the fund,
00:16:15.100 | he's run as a separate account since 2008,
00:16:17.940 | and it has actually beaten, even if you add in the fees,
00:16:21.900 | it's outperformed the slightly more diversified
00:16:25.820 | Vanguard Dividend Growth fund,
00:16:27.740 | but I think it's important that they're offering things
00:16:30.340 | at a price point that is competitive and it is selective,
00:16:34.580 | but not everyone can outperform.
00:16:37.340 | Is it Lake Wobegon where everybody's above average?
00:16:42.060 | Yeah, that's not gonna happen, right?
00:16:45.020 | But everyone can be average through indexing.
00:16:47.260 | - Let's bring it to a topic that's come up
00:16:51.860 | quite a few times already just today, ESG investing.
00:16:55.820 | So earlier on the panel, I got quotes from the panel
00:16:59.980 | on that subject, and these are shortened
00:17:02.300 | 'cause I put on Twitter, and as you guys may know,
00:17:04.440 | there's some pretty limited character counts there.
00:17:06.820 | So here's from Dr. Jim Dolly on ESG investing.
00:17:09.900 | There are better ways to make a difference.
00:17:12.140 | Jason Zweig, you should be skeptical.
00:17:15.300 | Dr. Bill Bernstein, and again, this is cut
00:17:18.300 | from a much longer quote, ESG is a scam.
00:17:21.960 | (audience laughing)
00:17:24.420 | And then lastly, if you want to make a difference,
00:17:26.820 | you want to own the stock, and that's from Rick Ferry.
00:17:29.580 | So naturally, Vanguard's moved into ESG investing as well.
00:17:33.420 | Ben, I'd be curious to hear your thoughts on that.
00:17:35.660 | - Yeah, so I planted a tree in my backyard a few weeks ago,
00:17:40.060 | and that tree, over the past two weeks,
00:17:42.060 | has already sequestered more carbon
00:17:45.900 | than every ESG fund under the sun ever will.
00:17:48.480 | (audience laughing)
00:17:49.860 | So it's, you have to understand like,
00:17:54.860 | what is the transmission mechanism
00:17:57.340 | between your investment capital
00:17:59.620 | and the cause that you believe in?
00:18:03.100 | And in the case of public markets,
00:18:05.620 | like as a public equity investor,
00:18:08.060 | unless you're like participating in new share issuance,
00:18:11.680 | like there's no direct connectivity.
00:18:14.060 | You're passing shares back and forth to one another,
00:18:16.580 | and if anything, by virtue of not owning the shares,
00:18:19.860 | and I think this probably came up too earlier.
00:18:22.260 | I saw your tweet.
00:18:24.620 | You forfeit the only connectivity you have,
00:18:27.180 | which is either directly or indirectly to like vote proxy
00:18:31.200 | to try to effect change at the level of that corporation.
00:18:34.540 | So the link there is tenuous at best.
00:18:39.540 | That said, it's a real choice.
00:18:42.580 | It's a real preference, and I don't think
00:18:44.580 | you can discount that.
00:18:46.400 | I think you've seen, again, Vanguard
00:18:48.540 | and all of its competitors position themselves
00:18:51.520 | to expand, again, along this axis of choice
00:18:55.240 | that is the investment strategy.
00:18:57.260 | Does it incorporate ESG criteria or does it not?
00:19:01.020 | More choice for people who want that choice, that's great,
00:19:03.900 | but to do that at scale is exceedingly difficult
00:19:07.380 | because ESG considerations are inherently personal.
00:19:11.240 | We heard Burt Malkiel talk about the disagreement
00:19:14.980 | even among ESG ratings providers,
00:19:17.800 | and it's going to differ if we go around the room here.
00:19:20.900 | My ESG omits the stock of the guy who,
00:19:25.060 | the company who has a CEO that stuffed me
00:19:27.940 | in a garbage can in high school.
00:19:30.260 | That's my ESG criteria.
00:19:32.540 | That's gonna be different if I ask somebody else
00:19:34.340 | in the audience.
00:19:35.460 | - That would be G for governance.
00:19:36.500 | - It's difficult to do for scale.
00:19:38.460 | It is, in theory, a potential use case
00:19:41.960 | for something like direct indexing,
00:19:43.800 | which we were talking about before,
00:19:45.000 | that allows people to go up and down,
00:19:47.880 | starting from an index portfolio,
00:19:50.160 | and apply those sliders that say,
00:19:52.080 | I want to not own companies
00:19:55.300 | that don't take into consideration animal welfare,
00:19:58.280 | like whatever the case might be.
00:19:59.960 | But it's, at the end of the day, exceedingly difficult,
00:20:06.000 | and what we've seen is more and more asset managers
00:20:09.360 | have tried to compete on this vector
00:20:11.140 | and get into this old school,
00:20:14.700 | like Mr. Olympia, ESG, green muscles flex-off,
00:20:19.180 | kind of hulking out on ESG,
00:20:21.060 | is that there's been blowback,
00:20:22.800 | and there's been blowback for all the reasons
00:20:25.420 | that I've just described,
00:20:26.420 | because there's fundamental disagreement
00:20:28.900 | on what is ESG good, what is ESG bad,
00:20:31.580 | and we could both take very different sides
00:20:34.180 | of the exact same coin.
00:20:36.600 | So I think it's going to continue to be out there.
00:20:40.600 | I think investors continue to need true direction
00:20:45.600 | in terms of who is actually walking the talk,
00:20:50.120 | but it's, again, a dimension of preference.
00:20:54.440 | It's a strategy type.
00:20:55.800 | People are gonna be into ESG
00:20:57.720 | the same way that there's diehard quants out there
00:21:00.920 | that are still hodling small cap value stocks
00:21:05.040 | through multi-decade drought.
00:21:07.680 | There's a saying in Spanish.
00:21:12.000 | This is my first ever panel response
00:21:15.220 | where I will try my hand at speaking in Spanish,
00:21:17.720 | but Senor Marth, my sophomore high school Spanish teacher,
00:21:21.860 | was always fond of saying (speaking in foreign language)
00:21:25.880 | So everyone has their own different colors,
00:21:28.680 | their different flavors.
00:21:30.800 | ESG is one of those flavors.
00:21:32.420 | - Wonderful.
00:21:35.380 | All right, let's bring it to growing pains.
00:21:39.700 | Alec, looking at Vanguard, they're not in Melbourne anymore.
00:21:42.860 | What does Vanguard's geographic expansion mean
00:21:45.300 | for their investor elements?
00:21:46.940 | - Well, I think Vanguard opened up its first global office
00:21:53.020 | and it was in Melbourne in 1996,
00:21:57.780 | so they have a history of being overseas,
00:22:00.020 | but growth has been slow.
00:22:02.160 | I just talked to a Melbourne-based reporter.
00:22:04.900 | They're trying to revivify an attempt
00:22:08.660 | at launching a platform for Australia's superannuation,
00:22:13.660 | retirement funds, basically.
00:22:16.620 | Apparently, they had done that in years past
00:22:18.580 | and it had not worked,
00:22:19.420 | so it's been pretty slow going, I think.
00:22:21.460 | They've been in Canada, for example, since December 2011,
00:22:26.460 | and only in May of 2018 launched their first active funds.
00:22:30.780 | So what is Vanguard's playbook overseas?
00:22:35.260 | What you find when you talk to Vanguard,
00:22:37.340 | and I'm not an entire expert
00:22:38.720 | on Vanguard's entire non-US operations,
00:22:41.260 | but my understanding is that in a lot of these countries,
00:22:45.620 | it's an oligopoly in terms of distribution
00:22:48.320 | and it's been hard to break in.
00:22:50.200 | So 95% of Vanguard's overseas assets
00:22:53.740 | are in passive strategies
00:22:55.460 | and they've been trying to basically grow their business
00:22:57.900 | through exchange-traded funds
00:22:59.620 | and more recently through advice.
00:23:02.460 | And in its early days,
00:23:03.460 | I think they did use US investor assets
00:23:05.580 | to subsidize their expansion efforts overseas.
00:23:08.900 | They would argue that that's also helped their investing
00:23:11.800 | to have more of a global firm, but it's been slow going.
00:23:16.540 | The last number I heard, this was in 2020,
00:23:20.840 | so it's quite dated,
00:23:21.680 | but I think they had 550 billion overseas.
00:23:24.480 | By contrast, until the market downturn,
00:23:28.620 | I think they had about 8 trillion in assets globally.
00:23:31.660 | So at that point,
00:23:33.660 | probably under a trillion of that is overseas.
00:23:37.000 | But taking a measured approach
00:23:39.260 | and I think trying to grow overseas,
00:23:41.620 | and I think Vanguard does hearken back
00:23:43.700 | to how long it took, for example, indexing to take off.
00:23:46.680 | If you look at Vanguard's assets
00:23:48.780 | and you look at the division of active and passive,
00:23:52.120 | it is not until in the aftermath
00:23:54.740 | of the global financial crisis
00:23:56.380 | that AUM indexed assets take off
00:24:00.780 | relative to active and Vanguard.
00:24:03.260 | So if you think about Vanguard,
00:24:04.300 | what built Vanguard is actually the Wellington Fund,
00:24:06.900 | is what subsidized a lot of its early efforts at indexing.
00:24:11.080 | - Yeah, indexing is like the overnight success
00:24:16.340 | that's been decades in the making, right?
00:24:18.660 | And internationally what you see,
00:24:22.540 | I think which is most interesting
00:24:24.140 | is we talked about like the Vanguard effect before.
00:24:27.080 | The Vanguard effect almost on fast forward
00:24:29.980 | in certain markets and notably,
00:24:31.960 | when they first listed their FTSE 100 ETF in the UK,
00:24:37.980 | this was years ago.
00:24:39.740 | BlackRock was already present there,
00:24:41.460 | had a multibillion dollar competitive offering,
00:24:44.140 | tracking the exact same underlying index and said,
00:24:47.560 | you know, we're holding the line on fees
00:24:49.060 | even though the Vanguard ETF was charging a tiny fraction
00:24:52.620 | of what the iShares ETF was charging.
00:24:55.260 | We have superior liquidity,
00:24:56.620 | our clients worry about ETF liquidity, not fees.
00:25:00.660 | They held out for I think it was all of like 18 to 24 months
00:25:04.760 | before finally they cried uncle
00:25:07.020 | and had to cut their fee to,
00:25:09.120 | I don't remember if they matched or undercut
00:25:12.140 | the Vanguard ETF because they were losing share
00:25:14.900 | because people saw Vanguard coming
00:25:17.160 | and knew exactly what the Vanguard playbook was
00:25:19.980 | and quickly their competition had to respond.
00:25:23.820 | You've seen that happen in Canada too
00:25:25.820 | where they've launched single ticket
00:25:28.460 | like ETF allocation portfolios.
00:25:31.340 | And it's a market that's very difficult
00:25:34.400 | for outsiders to penetrate
00:25:36.180 | because so much of asset management product
00:25:38.860 | is distributed through bank branches in Canada.
00:25:41.240 | So I show up to a BMO branch in Canada.
00:25:44.700 | When I'm 16, I opened my checking account.
00:25:47.300 | You know, I do all my business with them
00:25:49.220 | until the day I die, my heirs come
00:25:51.340 | and walk away with my assets after I've expired.
00:25:54.740 | Well, Vanguard has forced competitors in there
00:25:57.560 | to launch nearly identical product
00:26:00.180 | at nearly identical or lower fees
00:26:02.480 | just by virtue of their presence in some cases.
00:26:05.080 | So, you know, the Vanguard effect is the real deal
00:26:09.860 | and it's replicating itself in all these new markets
00:26:12.540 | where they show up and build a presence.
00:26:15.940 | And even at 550 billion or so overseas,
00:26:19.020 | like that's like a top 25 asset manager in the U.S.
00:26:23.420 | So it's a significant footprint.
00:26:25.220 | You know, as much as we talk about like Vanguard
00:26:27.660 | as being this indexing behemoth,
00:26:29.620 | they're also one of the largest active managers in the world.
00:26:33.340 | And even what is a relatively small in Vanguard terms,
00:26:38.340 | you know, foot side the U.S.
00:26:40.940 | is, you know, would be a pretty big U.S. based asset manager.
00:26:46.160 | - So beforehand, we asked for questions
00:26:49.440 | on the various BogleHeads communities,
00:26:50.840 | including the BogleHeads forums.
00:26:52.320 | And one topic came up multiple times
00:26:55.060 | and I'm sure a lot of folks
00:26:56.440 | are gonna be able to guess what this is.
00:26:57.960 | And that is going to be growing pains and customer service.
00:27:01.760 | So here is one question from Meg File
00:27:05.220 | from the BogleHeads forums who writes,
00:27:07.160 | it'll be interesting to hear from the Morningstar analysts,
00:27:09.440 | whether they think Vanguard's current cost structure
00:27:11.860 | and ultra low expense ratios would even allow
00:27:15.200 | for Vanguard to return to a higher level of service.
00:27:18.820 | - Okay, I'm prepared for this question.
00:27:22.120 | I have a prop.
00:27:22.960 | I feel like as a rite of passage,
00:27:29.320 | if you're gonna be in BogleHeads,
00:27:30.520 | you need to read "Character Counts" by John Bogle
00:27:33.640 | or his thesis.
00:27:35.960 | I've read both.
00:27:36.920 | I've read both.
00:27:39.880 | I think I would not say the thesis is a page turner.
00:27:43.260 | So this is a compilation of his speeches.
00:27:49.700 | It is not indexed.
00:27:51.140 | I came from academia.
00:27:52.540 | I am used to indexes.
00:27:54.300 | I made my own.
00:27:55.800 | The right-hand column,
00:28:01.680 | because early on in my Vanguard lead days at Morningstar,
00:28:06.080 | guess what topic kept coming up?
00:28:08.180 | Customer service.
00:28:10.820 | So I have a personal index of every reference
00:28:14.700 | to customer service problems throughout his speeches.
00:28:18.740 | Let me give you a small selection.
00:28:21.740 | Service quality not uniformly high, that's page 69.
00:28:25.740 | Processing traumas, page 73.
00:28:29.980 | Service problems, 107.
00:28:33.620 | Learning from service setbacks, processing overload,
00:28:37.900 | shareholder complaint letters,
00:28:39.560 | and perfection as a goal, and so forth.
00:28:42.580 | So I think that the way to think about Vanguard
00:28:45.680 | is it has a frugal culture
00:28:48.200 | and high-touch customer service
00:28:52.420 | is probably never going to be its strength.
00:28:56.800 | Anecdotally, we have heard that investors
00:29:00.000 | who pay the 30 basis point charge
00:29:02.120 | for personal advisor services are, for the most part,
00:29:06.400 | fairly satisfied with the services.
00:29:08.200 | But I, myself, have experienced long hold-wait times
00:29:12.480 | and some of my own disasters
00:29:15.040 | from a customer service standpoint,
00:29:16.780 | including when we changed over our money market account.
00:29:20.880 | I rarely wrote checks for my money market account,
00:29:24.360 | so I wrote earnest money for our housing down payment.
00:29:27.280 | It was a short sale 'cause I lost a bunch of money
00:29:30.480 | on a condo that I bought in 2005,
00:29:32.680 | so I was like, we're gonna make it up
00:29:34.460 | by buying a short sale.
00:29:35.880 | So you can imagine, you want the earnest money check
00:29:39.320 | to cash, right, on a basic level.
00:29:43.720 | I happened to also, out of the same money market account,
00:29:46.840 | write a check to the home inspector.
00:29:49.200 | It bounced, and the home inspector got back to me,
00:29:53.340 | luckily, in time to wire money
00:29:57.120 | and replace what then subsequently bounced
00:29:59.880 | as the money market account.
00:30:00.920 | Well, what happened, they changed the brokerage platform
00:30:04.440 | circa 2016 and didn't let me know,
00:30:08.200 | or at least didn't make it clear enough
00:30:09.660 | that you needed to re-register for check-writing privileges
00:30:14.600 | and all your old checks wouldn't work.
00:30:18.400 | And I got Vanguard to pay me back the money
00:30:22.820 | I got charged for bouncing that check, and they did.
00:30:27.420 | But I think that a theme throughout Vanguard's history
00:30:30.020 | is if you sort of think of the field of dreams,
00:30:33.220 | quote, if we build it, they will come.
00:30:36.700 | Well, indexing really did take off,
00:30:39.540 | especially in the aftermath of the financial crisis,
00:30:42.460 | and Vanguard's growth has been phenomenal,
00:30:44.540 | and there are challenges.
00:30:46.060 | I will say anecdotally, we get lots of complaints
00:30:49.620 | from customers, and I have duly passed those on
00:30:52.260 | to Vanguard myself and said, I'd like to talk
00:30:54.500 | to Tim Buckley about how they're handling this,
00:30:56.840 | because my impression is you have a lot of the people
00:30:59.600 | that helped make Vanguard what it is today
00:31:02.220 | whose financial needs have gotten more complicated
00:31:04.980 | and are subjected to very long wait times on the telephone.
00:31:08.060 | And I think it's unfortunate,
00:31:09.100 | and I think they could do a better job with it,
00:31:11.940 | to be quite blunt about it.
00:31:13.420 | So those are my initial thoughts on customer service,
00:31:17.940 | but a point Ben has often made is if you think
00:31:20.860 | about having 30 million investors,
00:31:22.980 | you could satisfy the lion's share of them,
00:31:26.600 | but still, just on an absolute basis,
00:31:28.540 | have quite a few missteps.
00:31:30.220 | And anecdotally, there is a Morningstar analyst
00:31:32.540 | who had a family member pass away
00:31:34.700 | and had to deal with all these accounts,
00:31:37.060 | and said the people that ended up
00:31:38.420 | being the most helpful were Vanguard.
00:31:41.260 | We don't get written to about that, right?
00:31:44.820 | So I do think you have to keep in mind
00:31:47.860 | how many customers it is they serve,
00:31:49.740 | as well as the challenge of keeping up
00:31:51.980 | with the growth they've experienced.
00:31:56.280 | - I would just add that despite that, it's interesting,
00:31:59.840 | like if everybody gets real quiet,
00:32:02.160 | you can actually hear money headed to Malvern right now.
00:32:06.480 | So through the end of September,
00:32:09.720 | I just did the map based on our flows data,
00:32:13.520 | something like $300 million a day
00:32:16.640 | flowing into Vanguard funds.
00:32:19.840 | So at the end of the day, everyone here,
00:32:23.800 | Vanguard investors are gonna vote with their wallets,
00:32:26.900 | and they're continuing to vote for Vanguard.
00:32:29.740 | And as Vanguard clients, or otherwise consuming
00:32:33.860 | Vanguard product through other platforms, right?
00:32:36.740 | You can be a Schwab client
00:32:38.740 | and buy Vanguard asset management products.
00:32:41.300 | I am a Schwab client that buys
00:32:43.740 | Vanguard asset management products.
00:32:45.860 | The other thing you have to look at too,
00:32:47.500 | and you mentioned Thrift, Alec,
00:32:49.240 | I just looked back at the envelope.
00:32:52.780 | The number of employees per investor served,
00:32:56.700 | this is just based on the public data out there,
00:32:59.340 | Fidelity has nearly three times
00:33:01.940 | as many employees per investor as Vanguard does.
00:33:06.700 | And they have three times as many employees
00:33:10.900 | per investor as Vanguard does
00:33:12.940 | because they're monetizing their investors
00:33:14.660 | in different ways that Vanguard hasn't historically
00:33:17.300 | tried to monetize their investors,
00:33:19.380 | be it through earning interest spreads
00:33:21.780 | on cash sweep accounts, any number of different ways.
00:33:24.740 | So foundationally, I think I can credit David Booth
00:33:29.740 | with saying this, that the product of the asset management
00:33:33.340 | in wealth industries, at the end of the day,
00:33:35.620 | boils down to trust.
00:33:37.460 | And I don't think there's any more trusted brand
00:33:40.480 | in this industry, probably, than Vanguard
00:33:42.680 | that shows up in survey work that's been done.
00:33:45.500 | But as a result, they're under the microscope.
00:33:50.300 | And this is, I think, something that's not going away,
00:33:53.620 | barring probably more significant investment
00:33:56.940 | in something we've talked about with them for years,
00:34:01.040 | and obviously something that shows up
00:34:04.500 | in the Bogleheads Forum.
00:34:07.060 | In addition to which composite fiberboard
00:34:11.300 | you can build your deck out of
00:34:13.200 | that is least likely to burn your feet in the summer.
00:34:15.740 | So credit to the Bogleheads Forum, I love this place,
00:34:19.940 | that I could look up anything from tax location
00:34:23.180 | to what should I build my deck out of
00:34:25.360 | so it won't hurt my feet.
00:34:27.460 | That's amazing.
00:34:28.300 | It's like the ultimate hitchhiker's guide to the universe.
00:34:30.860 | (audience laughing)
00:34:33.860 | - Before bringing it to the audience,
00:34:35.820 | let's talk about the future.
00:34:37.820 | Eric Bolchunis, keynote speaker for this year's conference,
00:34:40.260 | takes a stab at dispelling many of the myths
00:34:42.580 | of index fund investing and how it could distort markets
00:34:46.500 | in his book, "The Bogle Effect."
00:34:48.440 | Yet with massive fund flows,
00:34:50.540 | Vanguard receives daily 300 million.
00:34:53.040 | How big is too big for Vanguard?
00:34:56.420 | - When I came here and registered,
00:35:03.740 | I saw that they were offering,
00:35:05.980 | I don't know if it was, I have it and have read it,
00:35:08.120 | the last book that Bogle wrote, 2019, "Stay the Course."
00:35:13.120 | Towards the end of that book,
00:35:16.100 | he does mention this question of size.
00:35:19.560 | And if you think about especially Vanguard
00:35:22.400 | in relation to BlackRock and then State Street
00:35:26.240 | and the growth of passive assets,
00:35:27.920 | there's real questions about size
00:35:30.840 | that they take very seriously.
00:35:31.800 | I actually was visiting with BlackRock
00:35:33.840 | in New York the other week.
00:35:36.200 | And to bring it back to the topic of ESG,
00:35:39.000 | they were talking about how they're trying to,
00:35:41.880 | and Vanguard's doing the same thing,
00:35:43.000 | they're trying to take a very serious approach
00:35:44.640 | to voting proxies.
00:35:46.300 | And so sometimes you will get very silly proposals
00:35:50.060 | from, say, an overly zealous environmental group
00:35:55.120 | that will, say, try and put a proposal
00:35:58.120 | for a natural, for an oil company or a gas company.
00:36:02.440 | I'll stop drilling.
00:36:05.340 | This is an exaggeration, but it's not far off.
00:36:08.360 | We'll stop drilling entirely and plant trees.
00:36:12.180 | And they will not support the proposal.
00:36:15.160 | And then they will, the next year,
00:36:17.080 | reward the proposal to say something like,
00:36:20.440 | we would like you to stop drilling
00:36:22.040 | and consider planting trees.
00:36:23.900 | And so they were just complaining about all these proposals
00:36:26.520 | that aren't that helpful.
00:36:27.360 | And I said, well, have you ever talked to Vanguard
00:36:30.560 | to try and band together and get it
00:36:34.560 | so that there aren't so many silly proposals
00:36:36.480 | that you're essentially having to vet and vote against?
00:36:39.180 | And the answer, essentially, was there would be real concern
00:36:44.180 | about the perception of collaborating
00:36:47.120 | given the amount of stock owned in public companies
00:36:51.880 | between just those two firms.
00:36:54.140 | So I don't, the basic answer to the question
00:36:56.640 | is I don't know how big is too big,
00:36:59.240 | but it is a real issue going forward
00:37:01.280 | and one that I think Bovo was rightly concerned about.
00:37:08.000 | - And that issue has a few different facets.
00:37:11.420 | So one of those is the growth of indexing
00:37:15.980 | and what does that mean for market efficiency,
00:37:18.500 | like price discovery, you name it.
00:37:20.660 | If there's just 380 billion plus,
00:37:25.660 | you know, 380 million, sorry,
00:37:27.220 | going towards Malvern, going into index funds incessantly,
00:37:31.300 | like what does that mean for finding two sides
00:37:35.380 | to agree on what the price of Apple stock is?
00:37:38.880 | At the end of the day, these concerns are as old as time.
00:37:43.200 | I don't know if anybody ever read, what is it?
00:37:46.440 | I'm gonna get his name wrong.
00:37:48.220 | John Brooks' Business Adventures is the book anyway.
00:37:51.140 | So if you go back to the go-go years of the '60s,
00:37:55.180 | people were worried about the quote-unquote
00:37:56.900 | mutual fund situation.
00:37:58.820 | So retail mutual funds were just becoming
00:38:01.620 | truly a thing being made widely available.
00:38:04.300 | Incumbents were worried that once the you-know-what
00:38:07.500 | hit the fan, that all these new mutual fund investors
00:38:10.460 | would go flocking towards the exits at the same time
00:38:13.080 | and markets would be upended,
00:38:15.220 | cats and dogs would live together, whatever.
00:38:17.540 | Like that didn't pan out.
00:38:18.960 | So like these are just like,
00:38:20.640 | it just feels like the same fears keep getting recycled
00:38:23.540 | in like new clothing.
00:38:25.880 | I would apply that to the growth of indexing.
00:38:28.940 | You know, where it becomes potentially more concerning
00:38:31.060 | I think is around common ownership.
00:38:33.220 | So Vanguard, BlackRock, State Street owed an ever larger
00:38:37.260 | amount of an ever larger number of companies,
00:38:39.500 | not just in the US, but globally.
00:38:41.620 | Like what are the implications for corporate governance?
00:38:43.980 | And it's something that Bogle wrote about
00:38:46.020 | in his last op-ed in the Wall Street Journal.
00:38:49.440 | You're already seeing the industry
00:38:51.380 | like try to move to cut that off at the pass.
00:38:53.740 | BlackRock announced earlier this year
00:38:56.020 | that it is handing over the ability to vote proxies
00:38:59.320 | like based on certain policies
00:39:01.700 | to some of its institutional investors.
00:39:03.960 | Just this morning, Charles Schwab announced
00:39:05.860 | that it's going to pilot for three of its index portfolios,
00:39:09.060 | two ETFs and an index mutual fund,
00:39:12.580 | a survey of investors in those funds
00:39:15.740 | based on like their preferences
00:39:17.360 | as to how they might vote the proxies
00:39:19.780 | for the firms that are owned in those portfolios.
00:39:23.500 | At the end of the day, it's the investor's asset, right?
00:39:25.820 | That vote.
00:39:27.060 | So it's incumbent upon the asset manager
00:39:29.500 | as a fiduciary obligation to vote those proxies
00:39:32.820 | in a way that's sensible.
00:39:34.340 | I think that proxy voting is going to come ever closer
00:39:37.900 | to the end investor now.
00:39:40.060 | Are most investors gonna know what to do with it
00:39:42.400 | or care to do anything with it?
00:39:44.700 | Probably not.
00:39:47.260 | I mean, raise your hand if you're like a regular proxy voter
00:39:50.680 | I know we've got super, super duper sample bias here too
00:39:55.340 | because these are like some of the keenest investors
00:39:57.760 | in the planet.
00:39:58.600 | (indistinct)
00:40:00.040 | Yeah, but absolutely.
00:40:01.520 | And Jim's point up front is
00:40:02.960 | if there were an easier way to engage,
00:40:05.000 | there'd probably be more uptake.
00:40:07.320 | I don't disagree with that.
00:40:08.440 | And engage in a way that says like broad spectrum,
00:40:11.720 | these are the things I believe in or believe against,
00:40:15.440 | you know, apply that across a thousand stocks
00:40:17.400 | and the Schwab 1000 ETF go.
00:40:21.120 | But I think that's where it becomes
00:40:22.920 | potentially more concerning.
00:40:24.440 | And you start to bump up against
00:40:25.980 | even just ownership constraints
00:40:28.300 | that are real and regulatory.
00:40:29.960 | You know, and anytime you put that question across
00:40:32.980 | to the asset managers,
00:40:34.640 | mom's the word because you know,
00:40:36.740 | this represents at some level of growth,
00:40:39.060 | like real enterprise risk and the potential of
00:40:41.980 | like even bringing up like antitrust conversations.
00:40:46.060 | - Just to add one other thing.
00:40:48.260 | I think it was in 2018 that Vanguard changed it
00:40:51.860 | so that the sub advisors, the external sub advisors
00:40:55.900 | hires to manage this equity assets can vote proxies.
00:41:00.900 | So previously Vanguard voted those proxies.
00:41:03.580 | They did that more to help the managers in that case,
00:41:08.020 | you know, influence the companies they were investing in,
00:41:10.740 | but it also has the effect of decentralizing the voting.
00:41:14.940 | And I think Ben's right on it.
00:41:16.660 | It is the proxy voting and the ability to vote proxies
00:41:20.420 | that I think is the biggest concern about size.
00:41:23.780 | - Folks, if you want to ask your question to the panelists,
00:41:28.780 | go ahead and step up front or raise a hand.
00:41:31.060 | And okay, great.
00:41:31.900 | I'm gonna hand you the mic.
00:41:32.780 | Wonderful.
00:41:34.100 | - Hi there.
00:41:34.940 | A question on your Vanguard inflows,
00:41:38.020 | data you're in support of the customer service.
00:41:40.020 | Does your data, I just don't understand
00:41:42.740 | a little bit of clarification.
00:41:44.420 | When you do your fund inflow data,
00:41:46.500 | are you measuring fund flows into the funds themselves,
00:41:50.380 | regardless of where the trade was executed?
00:41:52.980 | 'Cause I think that's what the issue is,
00:41:57.420 | is Vanguard the company as my trading platform
00:42:00.780 | and customer service versus Fidelity or Schwab
00:42:03.060 | is my trading platform.
00:42:04.300 | So 'cause I own Vanguard funds at Fidelity.
00:42:08.140 | So that's what I'm trying to clarify
00:42:11.460 | 'cause the customer support is a company
00:42:14.940 | versus the Vanguard branded fund,
00:42:17.180 | which can be traded anywhere.
00:42:18.620 | - Yeah, so that is a measure like irrespective
00:42:22.140 | of the origin of that money.
00:42:24.140 | So irrespective of whether it came from a Fidelity client
00:42:27.340 | or a Schwab client or an advisor, an individual,
00:42:30.620 | that's just, we know that that money has wound up in Malvern.
00:42:34.820 | We don't know how it got there.
00:42:36.540 | We just know it's being managed there today.
00:42:38.340 | So that's a good question.
00:42:40.740 | You know, I think part of it too is like,
00:42:42.820 | I'm very fond of like the Bogle-ism,
00:42:46.220 | like you get what you don't pay for.
00:42:48.900 | Yes, in investing, but I think even Jack,
00:42:52.060 | maybe this was when he had heart surgery
00:42:55.460 | and like, you know, relented and said,
00:42:57.740 | well, sometimes you do get what you pay for.
00:42:59.700 | And when it comes to like, you know,
00:43:01.740 | someone operating on you, like that's the case.
00:43:04.300 | I would say when it comes to service offerings in general,
00:43:08.380 | like that's also the case.
00:43:09.820 | So, you know, you can't show up to McDonald's
00:43:12.420 | and expect like white tablecloths and a major D.
00:43:16.420 | So, you know, I think you've got to take the good
00:43:18.740 | with the bad at the end of the day.
00:43:21.700 | - So probably similar to this,
00:43:25.340 | could you explain Vanguard now moving accounts
00:43:28.780 | from mutual fund accounts to brokerage accounts?
00:43:33.020 | And why is that such a complicated thing
00:43:35.900 | and why do they have to do it?
00:43:37.900 | - I'm not sure I can answer that in every respect,
00:43:42.700 | but I know they started that initiative in 2016.
00:43:45.820 | And as I explained earlier,
00:43:47.060 | I experienced my own hiccup with that.
00:43:50.220 | I think that it was much more about expanding
00:43:53.020 | the brokerage platform and just the technology of it
00:43:56.420 | is my basic understanding.
00:43:57.820 | And I know that I believe it was this year,
00:44:01.340 | they sent a notice to legacy investors
00:44:05.500 | on their old platform that it was time to move.
00:44:08.540 | So I think it's just about updating technology.
00:44:12.380 | And if you think about it,
00:44:13.860 | if you just think about where the asset management industry
00:44:17.340 | is today, I have a two and a half year old,
00:44:19.940 | her grandparents and great grandparents
00:44:24.340 | give her more money than she needs
00:44:27.660 | as a two and a half year old.
00:44:29.060 | So I take that money and she now has
00:44:32.980 | a globally diversified portfolio.
00:44:35.820 | And also because I will say that
00:44:40.220 | my children love McDonald's,
00:44:41.660 | I do not love McDonald's myself,
00:44:43.180 | but they each own one share of McDonald's.
00:44:46.700 | And so the point being that,
00:44:48.860 | if you think about where investors are,
00:44:50.980 | you can open a brokerage account
00:44:52.500 | and get a diversified global portfolio in 20 minutes.
00:44:55.460 | Well, that takes a certain amount of technology.
00:44:57.580 | And so I think it was about transferring their investors
00:45:01.620 | to more technology enabled platform.
00:45:04.140 | And that did take years for them to do that.
00:45:07.620 | - I would just add in a related vein,
00:45:10.580 | you've seen a similar shift.
00:45:12.620 | Sometimes there's a carrot,
00:45:13.900 | sometimes there's a stick away
00:45:15.060 | from legacy mutual fund share classes
00:45:17.460 | into the ETF share class,
00:45:18.860 | where the ETF share classes has been appended
00:45:21.700 | to the mutual fund.
00:45:22.980 | And part of that is just trying to address the issue
00:45:25.980 | of like individual shareholder record keeping,
00:45:29.220 | which exists and can be costly in the case of,
00:45:31.940 | say the Admiral share,
00:45:33.540 | but exists, does not exist in the case of the ETF
00:45:36.900 | where shareholder record keeping takes place
00:45:39.220 | at like an omnibus account level.
00:45:40.740 | So you've seen that even just in the way
00:45:42.820 | that the ETF share class in many instances was repriced
00:45:47.180 | to be a basis point lower than the Admiral share.
00:45:50.060 | And yeah, that repricing is reflective
00:45:52.100 | of the cost savings on Vanguard's end.
00:45:55.580 | You have servicing a client that's an investor
00:45:57.380 | in the Admiral share versus the ETF share.
00:45:59.860 | So I think it's similar.
00:46:02.780 | - I'd like to hear your thoughts on the debacle
00:46:08.260 | with the target retirement funds,
00:46:10.020 | capital gains distribution.
00:46:11.980 | Does anybody at Vanguard care?
00:46:14.420 | What do they think about these lawsuits
00:46:16.780 | that are now being launched because of this issue?
00:46:19.260 | Is this sort of thing gonna happen again?
00:46:22.780 | What are your thoughts on that debacle?
00:46:24.940 | - Yeah, so that was a subject of considerable discussion.
00:46:29.780 | For those of you that don't know,
00:46:32.380 | Vanguard opened up a cheaper version
00:46:35.100 | of a target date fund and investors,
00:46:39.180 | instead of lowering the cost of the current fund
00:46:42.580 | and institutional money sort of flocked to the new fund
00:46:46.700 | and caused a huge capital gains distribution.
00:46:49.460 | Now, if you're investing in say 401k or Roth IRA,
00:46:54.460 | if your money's through that route,
00:46:57.980 | the capital gains distribution does not matter for you.
00:47:01.100 | But if you took, and in some cases
00:47:03.740 | there was some criticism Morningstar as well
00:47:05.740 | for not making it clear that, you know,
00:47:08.100 | investing in a target date fund in the glide path
00:47:10.380 | can be an inefficient thing to do if it's taxable money.
00:47:14.740 | So I think that that was a reminder to Vanguard
00:47:19.740 | that, you know, sometimes I think
00:47:22.060 | this is the disadvantage of their size.
00:47:24.100 | You know, the vast, vast, vast majority
00:47:27.180 | of their target date assets are in retirement accounts.
00:47:30.540 | So it didn't matter.
00:47:31.980 | However, you know, when you're talking
00:47:36.500 | the huge asset bases that are in some of those funds,
00:47:39.780 | even if it's a few basis points,
00:47:42.820 | it's still a lot of money
00:47:44.060 | and it's a big deal to a lot of people.
00:47:46.100 | I actually had an hour long call
00:47:47.540 | with somebody based in Pittsburgh to talk about that
00:47:50.980 | because he was so frustrated,
00:47:53.300 | both at Vanguard and at Morningstar
00:47:55.380 | because he felt like we could have done a better job
00:47:58.500 | of warning investors about that potential.
00:48:01.320 | And I think he was right.
00:48:04.180 | You know, it's something to be aware of
00:48:06.300 | and it's something that we need to be as thoughtful
00:48:08.420 | as we can be about the, you know, the positives
00:48:11.860 | as well as the potential negatives for investing money,
00:48:14.780 | especially when you segment it
00:48:16.260 | into tax advantaged and taxable accounts.
00:48:19.680 | So I do think that Vanguard got the point,
00:48:21.780 | but it is an illustration of some of the collateral.
00:48:27.460 | The way that I phrased it when I wrote about it
00:48:29.460 | is this is a collateral effect of the fee war.
00:48:32.420 | You know, Vanguard basically
00:48:34.100 | is the reason we have fee compression
00:48:36.340 | in the asset management industry
00:48:38.360 | and some of their biggest rivals.
00:48:40.060 | And so there's been, you know,
00:48:42.200 | I think it's especially between Vanguard and Fidelity
00:48:44.340 | in lowering their target date fees.
00:48:46.580 | One will lower and then the other will lower
00:48:48.260 | and then the other will lower.
00:48:50.260 | So I think their competitive zeal got the best of them.
00:48:53.380 | - We've talked about ESG investing
00:48:59.660 | and Ben, you mentioned how with the traditional approach
00:49:03.620 | to ESG investing, you are giving up
00:49:06.180 | one means of influencing those companies.
00:49:09.160 | And then we've also kind of tangentially talked
00:49:11.180 | about proxy voting.
00:49:12.680 | What do you think about the other newer approach
00:49:15.220 | to ESG investing, like engine number one's vote ETF?
00:49:18.220 | - Yeah, so there's engine number one
00:49:21.500 | and now there's even like anti-engine number one.
00:49:24.820 | So there's another firm out there
00:49:27.300 | that is like trying to vote contra
00:49:31.060 | the way engine number one might vote.
00:49:33.080 | You know, I think it's interesting,
00:49:36.500 | but again, it's difficult to scale
00:49:38.180 | because it assumes alignment
00:49:39.940 | at the level of the end investor.
00:49:41.340 | Like certainly there's a market for that.
00:49:43.340 | We see that there's hundreds of millions of dollars
00:49:46.760 | in VOTs, the ticker of the engine number one fund,
00:49:51.580 | but there's also, you know,
00:49:52.940 | tens of millions of dollars in the contra fund.
00:49:56.380 | I think at the end of the day,
00:49:58.100 | like the scalable solve is, as I mentioned before,
00:50:01.220 | to like get more of the vote
00:50:02.980 | as close to the end investor as possible
00:50:05.300 | in a way that isn't overly burdensome,
00:50:08.600 | you know, and doesn't make things
00:50:10.420 | incrementally more complicated.
00:50:12.260 | That's ultimately my take as it pertains to proxy voting.
00:50:18.720 | The other element that we didn't touch on
00:50:20.500 | is like, you know, more impact oriented,
00:50:22.780 | like thematic, you know, portfolios
00:50:25.580 | that look to invest in companies
00:50:27.700 | that are gonna capitalize on like the energy transition
00:50:30.340 | or even, you know, certain fixed income managers,
00:50:33.380 | for example, PIMCO does like direct placement.
00:50:36.660 | So like they will have like a firm
00:50:39.340 | that is doing a green project,
00:50:41.260 | issue them a bond,
00:50:42.260 | they will own that bond in their portfolios.
00:50:44.660 | Like that linkage, as I described it before,
00:50:47.820 | between capital and cause is immediate.
00:50:50.260 | It's direct there, you know,
00:50:52.500 | whether that green project winds up being not green,
00:50:55.940 | like ex post, like at some point in time,
00:50:58.500 | somebody thought asbestos
00:51:00.260 | was a great green building material, right?
00:51:02.420 | Like, wow, was that wrong?
00:51:04.260 | So, you know, there's still gonna be a bit of uncertainty.
00:51:07.900 | Did that get to your question?
00:51:10.260 | Hopefully, okay, thank you.
00:51:11.660 | - And I would just add on the impact front,
00:51:14.740 | Vanguard co-opted essentially
00:51:17.460 | a Bailey Gifford positive impact fund.
00:51:20.320 | I think it was last year, I don't think it was this year.
00:51:24.340 | I think maybe it actually changed,
00:51:26.140 | it got rebranded as a Vanguard fund this year.
00:51:28.820 | So they have that as part of their offering.
00:51:31.460 | And I would say one thing to think about Vanguard
00:51:33.820 | with respect to ESG is an important development
00:51:38.820 | is a guy named Dan Newhall,
00:51:40.620 | who for many years oversaw Vanguard's
00:51:42.940 | manager search and oversight committee,
00:51:44.660 | which evaluates all the sub advisors they hire,
00:51:48.240 | both internal and external.
00:51:49.980 | So if you put your money in actively managed assets,
00:51:53.460 | that group is the one that picks those sub advisors.
00:51:57.420 | And it will also be, it will also, you know,
00:52:00.460 | Vanguard's own in-house investment capabilities
00:52:04.100 | have to compete with those external managers.
00:52:06.380 | And so a big question we've had is what is the role of ESG
00:52:10.100 | when they evaluate those managers?
00:52:11.660 | Well, a guy named Matt Pirro took over
00:52:14.220 | as head of that group.
00:52:15.540 | And he had recently been appointed head
00:52:17.600 | of their global ESG product lineup.
00:52:20.520 | So I think that there's going to be a bit more
00:52:22.800 | of a consistent vetting of managers
00:52:25.420 | from the standpoint of ESG on a go forward basis.
00:52:28.660 | But I think Vanguard will always make room
00:52:31.080 | for a firm like PrimeCap.
00:52:33.060 | PrimeCap is one of their longest sub advisors,
00:52:35.980 | as you may know.
00:52:37.380 | And they came out with a statement a couple years ago
00:52:40.580 | on their approach to ESG.
00:52:42.380 | And it's, they said it took them forever to come up with it.
00:52:45.500 | And it's maybe four or five sentences.
00:52:48.400 | And the key line is they struggle with the idea
00:52:51.180 | that definitive objective rationales exist
00:52:54.580 | by which you can vet these companies.
00:52:56.700 | That said, PrimeCap's next analyst they hired
00:52:59.780 | is somebody with tremendous ESG experience.
00:53:02.060 | So there is something to be said for active managers
00:53:05.740 | paying attention to risks from the lens of ESG.
00:53:09.980 | But I think Vanguard will always leave room for managers
00:53:13.060 | that are not necessarily leading with ESG,
00:53:16.260 | but see it as one Wellington manager,
00:53:19.800 | one Wellington management manager put it,
00:53:22.300 | part of the mosaic.
00:53:23.480 | - My question is more about Morningstar than about Vanguard.
00:53:29.980 | I'm wondering what's going on with your accounts.
00:53:32.420 | I've always, for a while I was a paying customer
00:53:34.900 | and then I learned that I could use what I really want
00:53:37.220 | and use a lot as the watch list.
00:53:40.180 | And now I've discovered all of a sudden
00:53:43.380 | I've been lured into being a subscriber again
00:53:47.460 | to Morningstar.
00:53:48.540 | It arose out of a frustration that I've had
00:53:50.840 | with Vanguard's reporting.
00:53:52.460 | If I try to list all my funds on one page,
00:53:56.540 | okay, so it's more than four.
00:53:58.380 | The easiest way I found to do that
00:54:01.780 | was using a watch list that I would keep
00:54:04.820 | from month to month and update.
00:54:07.620 | - I think that's a great question for Ben to answer.
00:54:11.260 | (audience laughing)
00:54:13.380 | - I was actually looking down at Christine.
00:54:15.980 | (audience laughing)
00:54:19.300 | - Oh, sorry, we got two minutes.
00:54:20.460 | So is your question as it pertains to that
00:54:23.340 | like watch list function, where it exists?
00:54:26.460 | 'Cause I know we've had some changes to our--
00:54:28.740 | - And it seems to be changing with relation
00:54:33.340 | to the free accounts versus the paid subscription
00:54:36.540 | of about $200 a year.
00:54:38.500 | - We're gonna meet once I get off stage
00:54:40.780 | and we will figure this out for you.
00:54:43.460 | - Great, thank you.
00:54:44.620 | - I can't on the fly, I'm sorry.
00:54:46.260 | - I have a simple question, won't take very long.
00:54:52.380 | Every time that I call Vanguard and I get a rep
00:54:56.740 | who doesn't really seem to understand the simplest question
00:54:59.460 | or every time they bounce one of my checks,
00:55:02.100 | I wonder about the opacity of the compensation structure
00:55:05.660 | of the executives at Vanguard.
00:55:08.100 | And I'm wondering if anyone in your shop
00:55:11.660 | has discussed that.
00:55:13.460 | - Yeah, I've asked Tim Buckley that directly.
00:55:15.820 | As you may know, some of you may be familiar
00:55:19.980 | with Dan Wiener who runs the Vanguard Independent
00:55:24.060 | and as I'm blanking on the exact terminology,
00:55:26.260 | but he famously reconstructed Bogle's salary
00:55:29.460 | and published it, which made Bogle quite angry.
00:55:33.020 | I think though that Vanguard,
00:55:35.780 | there's certain things Vanguard could improve in
00:55:37.740 | and I think transparency is one of them in certain respects.
00:55:42.940 | And one of them would be compensation for executives.
00:55:45.900 | They have said to me, basically,
00:55:48.980 | they don't wanna disclose it
00:55:50.140 | because of competitive pressures.
00:55:52.220 | But if you think about your average,
00:55:54.300 | well, every publicly traded company,
00:55:56.380 | you wanna find out what the CEO makes, you can.
00:56:00.260 | Bogle has made much out of you can't serve two masters
00:56:04.860 | and being very critical of publicly traded asset managers,
00:56:07.940 | but that's one respect in which publicly traded
00:56:10.900 | asset managers have a leg up and it's been raised
00:56:15.500 | is what I can say and I'd like to see him do it.
00:56:18.540 | - Folks, that is gonna be it for our time today.
00:56:25.780 | Thank you for Ben Johnson and Alec Lucas
00:56:27.660 | for joining us today.
00:56:28.700 | (audience applauding)
00:56:31.860 | We will see everyone at 6.30 down in the banquet hall
00:56:39.300 | downstairs, same spot as last night.
00:56:41.740 | Until then, enjoy your break.
00:56:43.300 | (dog barking)
00:56:45.820 | [BLANK_AUDIO]