(silence) - This is a very sad day for me and for the Bogleheads. At this point in the conference, I'd normally be introducing Jack Bogle, who would then proceed to impart his words of wisdom on those of us in attendance. Today represents the first time in our event's 18 year history that we know in advance that Jack won't be joining us.

However, I think that Jack is looking down on us and saying, "Keep the conference going. "I'm with you in spirit." Years ago in Las Vegas, Jack asked me if he could have an informal, non-scripted chat with Bill Bernstein. And we all know that what Jack wants, he gets. So that was the start of what I dubbed the Farside Chat with Jack and Bill.

And it's continued as part of the conference agenda ever since then. Today, we're going to have a very special guest sit in for Jack and continue the Farside Chat. Bill McNabb is the former CEO and chairman of Vanguard, leading the firm for a decade until he stepped down as chairman at the end of last year.

He assumed the role of CEO in 2008, just two weeks before the collapse of Lehman Brothers, which marked the beginning of the global financial crisis. Bill's consistent focus on doing the right thing for clients helped Vanguard, its crew, and its clients navigate one of the most economically tumultuous periods in the nation's history.

During his tenure as CEO, Vanguard grew to serve more than 20 million investors around the world. And assets quadrupled from $1 trillion in 2008 to more than 5 trillion at the end of 2018. He always attributed this success to putting clients' interests first and working hard to earn and maintain investors' trust.

Today, Bill serves as chairman on the board of the Philadelphia Zoo and is a member of the board of directors of United Health Group and IBM. He's an active alumnus of Dartmouth College and the Wharton School of the University of Pennsylvania and was awarded an honorary doctorate from St.

Joseph University. He continues to be an active member in the investment management industry, championing good governance practices among public companies. Please welcome Bill McDabb. (audience applauding) - Thank you. - And Bill McDabb's companion for this Fireside Chat is a retired neurologist who helped co-found Efficient Frontier Advisors. He's written a number of bestselling titles on both finance and economic history.

He holds both a PhD in chemistry and an MD. Please welcome one of the brightest guys I know, Dr. Bill Bernstein. (audience applauding) - And how about it, guys? Everything is fair game except politics. (audience laughing) - Of course. Yeah, well, you know, we got three, four hours every year of the public Jack Bogle and it was quite an education.

It was quite a personal and emotional experience. So we saw a lot of what I suspect was the public Jack, even in front of this group. What I'd like you to speak to, Bill, is what you saw as the private Jack, not only him personally, but what I'm really more interested in is what he told you about the capital markets and retirement investing and just investing in general for small investors that he might not have said in public.

- Whoa. (audience laughing) We might be a couple of days here. First of all, Mel, thank you and thank all of you for being here. This is a very emotional time. I think we held a service for Jack in March on the campus and the entire company was tuned in and we actually were able to have all of Jack's successors, Jack Brennan, Tim Buckley, myself, as well as Jack's son, John, speak to the entire company.

So you think about it, four generations of leadership represented. I can't think of another company in America where that could happen. And again, you've got to give Jack Bogle so much credit for sort of creating that legacy. So again, I know he is looking down. He would greatly appreciate seeing all of you here.

Bill, I thought what I might do is I might start with just a couple of quick Bogle stories because I think they actually will give you a sense of the man, what it was like to work for him. And I tell this because the day we heard about Jack's passing, I happened to be on campus and I was walking, just walking around, just crisscrossing building to building.

And I had so many different crew members come up and say something. And people I knew, I've worked at Vanguard for 33 years, so I know a lot of our crew, but there were also some folks I don't know and new people. And the most common question was, what are your favorite memories?

What are your favorite memories? And there's a lot, but there were three that I sort of told on a repeated basis. So I thought I'd start with that and then we can delve into some of the more deeper questions about the markets and so forth. So I had the privilege of, I came to Philadelphia right after college to teach, I was teaching at a boys' school and coaching through sports.

Sort of stumbled my way to Penn and sort of worked my way through Wharton. Went up to New York for a couple of years and was, frankly, pretty dissatisfied where I was working. I love the work, actually. I was an analyst working for what's now JPMorgan Chase, but I didn't like the culture.

I didn't like a lot of the, I call it strategic direction. So I began to get itchy. My wife is from Philly. I love my time here. So we began thinking about coming back. Her family's all from here. And I got a call from a friend of mine from business school who had gone into executive search.

He goes, "I've got sort of good news and bad news." And I said, "Well, give me the good news." And he said, "I've just been hired "by this little company you've probably never heard of, "Vanguard, to do a search and I think you'd be perfect." I'm like, "Well, what could the bad news be?" And he says, "It's not exactly the kind of role "you would envision yourself doing." And I said, "What do you mean?" He says, "Well, you know, you're doing leverage buyouts "and M&A transactions, all this fancy stuff "on Wall Street." He goes, "They're looking for a GIC product manager." (audience laughing) Now I'm gonna ask this audience.

This audience is pretty, how many of you know what a GIC is? Yeah, all right, so almost a third. Guaranteed investment contract. It was kind of like a certificate of deposit, if you will, issued by an insurance company to a qualified plan. So it was the most popular option along with company stock in the early 401(k) days.

And we were just getting into 401(k) business and we had just begun work there. And so Jack and others within Vanguard decided we needed to sort of beef up our efforts there if we were gonna be successful. I didn't know what it was. You know, it's before the internet.

So I'm running around, going to libraries, looking it up. (audience laughing) Trying to find out stories. Anyway, I had to come down. And one thing that has not changed at Vanguard is we're very rigorous in our interview process. So I think I came three different times. Probably went through 20 some odd interviews.

And remember, we were a few hundred people. And at that point, about 20 billion under management. And finally, the last interview, they're like, "We want you to meet the founder." And again, this is a pretty junior level role within the company. So I was surprised. But if you made more than, I think, 15 or $20,000 in those days, Jack had to interview you and had to sign off.

You know, the attention to detail was pretty great. So anyway, I come in to do the interview and Jack kind of picks up my resume and he looks at it and he goes, "You know, I bet you're an ambitious "young fella." (audience laughing) "I don't know why you'd come here." And that was literally.

And I'm, "Well, Mr. Bubble, you asked me to interview you." And then for the next hour and a half, Jack proceeded to tell me why I should be there. And you know, he held court. He was lying on his couch. He had just come back from a heart incident, as he called it.

And the doctors were making him put his feet up. And so we went through this about an hour and a half. I think I got two words in edgewise. So I go home and my wife says, "Well, how'd it go?" 'Cause she was really, by this time, she was ready to come back to Philly.

And I said, "I have no idea. "I didn't say anything." (audience laughing) And she goes, "Well, what are you gonna do?" I said, "Well, if I'm offered the job, I'm going." I said it was compelling. 'Cause you could feel the passion. You could feel the energy. You could feel there was something different.

You know, there was something obviously different about Jack. You all know that. But there was something different about the mission of the company. And it really appealed to me. So I accepted. I was fortunate. I got the job. I really wasn't qualified for it. But I'm forever grateful that somebody took a bet.

And then I was here only about a week. And I got a call from Jack saying, "Hey, let's have lunch." And so we go and we have lunch. This is really the second part of the story. And we go to our galley. As you know, everything's nautical. Even in those early days.

We had two buildings back then. And we're going through the line. And Jack is negotiating with the chef over an order of French fries. And the chef is saying, "Mr. Bobo, "you can't have French fries. "They're not good for your heart." And he's like, "Well, how about a half an order?" And they're going back and forth.

And again, I had just left J.P. Morgan Chase. You know, I'd been privileged, quote unquote, to have lunch with the vice chair of the bank who would push a button under the table and like six waiters would come running in. So I'm watching this going, like I think my eyes are popping out of my head.

And he turns to me and he goes, "What are you staring at?" (audience laughing) I said, "I've never seen anything like this." And he says, "Well," he goes, "let me make a point really clear." He goes, "Everybody's job here matters. "And it doesn't matter whether you're a chef "in the cafeteria or you're an executive "or you're a portfolio manager.

"Everybody matters." And he goes, "The only thing "that's gonna really get me upset "is if I see a big shot kicking a little shot, "I'm gonna kick the big shot out of the company." And it was one of those object lessons, right? You know, I was 29 years old, trying to figure out what I wanted to do with my life.

And you get this sort of wisdom imparted to you. And I never forgot that conversation. And then the third story, and then we will get serious. But again, I just wanna give you the flavor for what it was like to work with Jack. So many of you know, he was a very avid squash player.

And despite all the heart issues, he would find a doctor who would sign off and let him play squash. You know, he would just sort of rotate from, I'm looking at his daughters and they're like, "Yeah, yeah, they knew the story." So 1994, late '94, I was privileged to be asked to join the executive team.

Jack was still CEO. And so I was gonna join what we call senior staff and run the 401k business and the other institutional businesses. And Jack's health had begun to turn, but he was still feisty as ever. And he's like, "Let's go play squash." Now, I'm not much of a squash player, just to be very clear.

But you know, I had 30 years on Jack and I was an ex-rower. So I had a fair amount of fitness so I could run around the court. So we go and he goes, "Hey," he goes, "I hate to do this, "but I don't think he hated to do it at all." He goes, "He taught me to work the defibrillator." (audience laughing) So you wanna talk about intimidation, right?

(audience laughing) You got the founder and the lifeblood of the company and he's teaching you how to work the defibrillator. He goes, "I don't think we'll need it, but just in case." (audience laughing) So forget my strategy of just running around. I'm like one shot and I'm done. Like go for the winner all the time.

So we played in the first two games, Jack won. Next two games, I won. And then he sort of slumped, "Oh my God, here it comes." And he said, "You know, I don't think I," he goes, "You know me, I never quit." But he goes, "I just don't think I can finish." I'm like, "Thank you, thank you, thank you.

"We're gonna get out of here. "He's gonna be alive. "I don't have to work the defibrillator." So we left and then Jack's health deteriorated further and he was in and out of the company a lot. And he ended up going to the hospital and waiting for the transplant. So about nine months after the transplant, I get a call and it's not, "Hey Bill, how you doing?" It's not, it's, "We have unfinished business." (audience laughing) And it's Jack and his son, John, had given him a new squash racket.

And so we had to go play squash. I had not looked at a squash racket since then. Jack had been playing nonstop. But it was, and trust me, this was one of those, you've heard of boss's golf. There was boss's squash. There was no way I was gonna win this match.

So, but we, but you know, it was just classic Jack. And, you know, you mentioned that he would always, you know, encourage people to keep going. You know, his phrase was, "Press on regardless," as you know, and it was a great, great lesson about press on regardless. And, you know, again, these are things that are imprinted on you.

And, you know, as you're joining the executive team to see that kind of fire and that kind of passion was really important. So those are, you know, a couple of fun stories, if you will, to give you a sense of what it was like to work for him. You know, in terms of the business stuff, I think the most important lesson he imparted, and it's interesting, I'm not sure he would say this, so I say it with, you know, all respect.

He had this phrase that he loved to use in a lot of his speeches around creative destruction. And Joseph Schumpeter, the great Austrian economist, had really, you know, written extensively about this, and Jack just loved it. And I think Jack looked at himself as the creative destroyer, and, you know, somebody who would upend the markets, upend the way business was done.

And so he took Schumpeter's words very, very much to heart. And we talked a lot about that in my early days as CEO, and, you know, what was interesting is it gave you confidence as a leader. It also provoked you to think about how do you actually disrupt yourself?

And if you think about Vanguard, and many of you have lived through multiple generations of the organization, we have changed quite a bit with the times, you know, from a little startup where, you know, the virtual relationship was through the post office box, and a huge technological revolution was the 800 phone number, to, you know, the creation of Vanguard.com, to now all the virtual advice, and, you know, things you can do in that space.

And, you know, it was Jack's philosophy about creative destruction, which was way ahead of all the other writers who talked about disruption. And, you know, whether it was Andy Grove, "Only the Paranoid Survive," or, you know, some of the other, Clay Christensen, who, you know, has written extensively about this, Jack was really ahead of them, and actually viewed his life's work, if you will, as being a disruptor.

That wisdom, more than all the market stuff, believe it or not, was actually the most valuable lesson that he imparted, at least for me, because what it challenged us to do as a leadership team is to think about how would you beat Vanguard? How would you do a better job serving our clients than we can do?

And then, what do you have to do to respond to that as an organization? And we certainly don't always get it right, but that's what we've tried to do. That's been, you know, that's been at the heart of, the heart and soul of who we are. And if you think about it, you know, Jack's initial revolutions, if you will, were all around our structure, and then around low cost, and then indexing being the, you know, purest expression of the low cost.

But so many of the other things that we've done since are really built upon the foundation of creative destruction and finding ways to disrupt yourselves before somebody else does it to you. So, again, when I think back, when I think back to all the different lessons Jack imparted, that probably was the single most important, Bill.

Now, there are lots of things we could talk about in terms of capital markets and structure and whatnot, and I'm happy to go there, but it was that notion, at least for me, and, you know, again, some of it may have been timing, coming into my role in the middle, you know, at the beginning of the crisis, that actually was very liberating.

And Jack and I did have a lot of conversations in those early days, and it was very, very good advice, you know, sort of, I'll call it a lesson imparted. - Well, that brings up a second question then, which is, you know, we all know about his 1951 senior thesis at Princeton, which, you know, the heart of which was the disruption of the industry.

So, obviously, you know, the desire to do that and that drive arose, you know, when he was a very young man. And do you have any sense of where that came from? - Yeah, I think so. So, you know, his, I think it's, you know, most of you have heard Jack's family story, and, you know, he ended up, his family had been very successful and fairly well-to-do, and then, during the Great Depression, lost everything, essentially, and had to start over.

And Jack actually was a scholarship student at Blair Academy. Again, I had the privilege of being at Blair a couple months ago, doing a memorial for Jack, and it was extraordinary to see his impact on Blair Academy. I actually think some of it started there, Bill. You know, he had the weight tables, he was, you know, he was very aware he was on scholarship, and, you know, there were a lot of other very well-to-do students there.

And I think that created a restlessness in him that made him question things a little bit more deeply than others might have done at the same age, or with the same sets of experiences. And it was that restlessness and questioning about how things could be better, I think that was fundamental to who he was.

You know, interestingly, when he came out of Princeton, the two choices he had were to go work for Philadelphia National Bank, which was kind of the thing you should have done, or go work for this little mutual fund company that he, you know, he'd written about the industry. And I think he actually wrestled with that decision, but then, you know, decided to go with Walter Morgan, as you all know.

And again, I think the, you know, what was exposed in the 1951 thesis got reinforced by being with Mr. Morgan. Again, I had the privilege of interacting with Walter Morgan for a number of years before he passed away. And 'cause he would come to board meetings, and he would come to events, and so forth.

And he took great pride, obviously, in what Jack had accomplished. Again, he was kind of a revolutionary in his day, in that the Wellington Fund was a balanced fund, focused on high-quality companies, and high dividends, and, you know, really high-quality bonds, during a period where it was leverage, and really aggressive growth, if you will, were the mantras of the day.

So I think he found a kindred spirit, which sort of reinforced some of those notions. But I think a lot of it came from the way, you know, came from Blair, and came from the restlessness that was created there. And, you know, this, I don't know how you teach this, because I'm not sure it can be, I think it's just something that is sparked in an individual, but his creativity was one of his great strengths.

And, you know, when you would be in meetings with him, the questions that would come from Jack were different than the questions that would come from 98 out of 100 other people. And, you know, I don't know exactly where that comes from, except, you know, the background certainly had something to do with it, and the restlessness.

But he was never satisfied with just sort of conventional thinking. And I think that lack of satisfaction, and that embracing of, I'll call it disruptive ways of doing things, started at a young age, and became just part of his mantras as time went on. - Yeah, Mel Turner last night reminded me of one of my favorite passages from Fred Schwed's "Where Are the Customers' Yachts?" which was, you know, when brokers were explaining to the younger brokers how the business worked, they explained that they would throw all the money at the ceiling, and what stuck to the ceiling was the clients.

And so it was obvious that that was the world back then, that Jack wanted to disrupt. What made Jack unhappy about the capital markets in the last decade or two? What did he see now that he wanted to disrupt? - Yeah, so, and this is where Jack and I sometimes had, I will say, spirited discussions.

(audience laughing) You know, Jack worried about ETFs initially. He thought that they were a trading vehicle. I think as many of you have read, and Jack didn't speak about it a lot, but he did talk about it, especially later in life, you know, we'd actually had the opportunity to launch the first ETF, you know, what became the Spider, you know, State Street did, and then the, you know, the Quadruple Q, or whatever it is, you know, on NASDAQ.

He passed on that because he felt they were just trading vehicles. And in the early days, that's actually what they were. They were essentially a derivative substitute. And so he really was not very aligned with the whole creation of that. And, you know, he continued to worry about it even as, you know, we got more into that business.

And, you know, I think the point, you know, I tried to make to him, I know Gus Sautter, our CIO at the time who, you know, invented our class structure for ETFs. You know, we made the point that you don't have to use these as a trading vehicle. You know, the beauty is they can actually serve that purpose, but they can also be a buy and hold strategy and be incredibly effective as well, especially for an advisor putting a portfolio together in a very low cost way for someone.

And you may have seen Jack soften on that a little bit over time, and he would talk about that. He would talk about the difference. But, you know, Bill, I do think he really worried about the product proliferation there. He worried about some of the, you know, crazy structures that were coming out.

He worried about leverage in ETFs, implicit leverage in particular. So I think that was a fairly big concern. But, you know, for me, what was interesting was it was actually the same set of concerns that Jack had always had about the mutual fund industry. It was a very parallel set of concerns, because again, I sat through all the meetings during the late '80s and early '90s with him on product development stuff, where he worried that there was a new fund coming out every hour, you know, different flavor or something.

And he just thought it was all being done just for salesmanship as opposed for really good investment principles. And, you know, one of the things he charged us with as a result was any time we brought a new fund out, we really had to be asking the fundamental question about, is this a needed and useful solution for people?

And, you know, it was a really good test for us. But I think he continued right up to his last days to worry about the product proliferation, in particular on the ETF side. You know, I think on the capital market side, the other concern he had, and one which I share pretty deeply, was the rise of algorithmic trading and what's happening in that world.

And he spoke about that several times. You know, it's a really, really complex topic, as some of you know, because, in a sense, without some of this trading now, I'm not sure markets would actually work as well as they work. And that has more to do with the structure of the U.S.

markets than anything else. But a lot of the knitting, if you will, that's there is, you know, these algorithmic traders actually provide an incredible amount of liquidity. You know, the problem is they don't necessarily provide the liquidity when you most need it, because they're not regulated in that way.

And I think there's, you know, Jack was always sort of pushing the SEC to think about that, and I think the SEC actually is looking at that. Many of the rule changes that have occurred to sort of reign some of that in, they may have had their origins in some of Jack's speeches, and then certainly some of our policy advocacy to tighten things up there.

And I would say we're in a better place than we were as a result. - Yeah, a couple of thoughts about that. You know, whenever I hear a hedge fund manager talk about benefits of hedge funds to society, that they in particular provide liquidity, whenever I hear the words we provide liquidity, I hold onto my wallet.

(audience laughing) Vanguard, like all large corporations, you know, faces challenges from within and without. And I'd like you to address each of those, and I'll direct you to start with the easy one, which is what do you see as the external challenges to Vanguard, then we'll get to the internal ones.

- Yeah, so, you know, on the external side, there's no shortage of challenges right now. I mean, there are many competitors who are actually trying to come at us on the price side, being very selective about how they do that. And, you know, the interesting thing is the market's actually been pretty discerning about that.

So when, you know, some people come out with, you know, really low-cost funds or ETFs, they look at the other prices of the other product suite that gets sort of blended together. And, you know, again, a lot of analysts have actually called our competitors on that, and it actually hasn't reversed that much.

But the fact is, low-cost is no longer our domain alone. And I actually think this is a good thing. And, you know, the competitor in me hates it, but the societal person in me loves it because investors are better off. And at the end of the day, you know, Jack's dream of changing the industry is actually happening.

People are actually paying attention to cost. So from a competitive standpoint, that's certainly an issue for us. But the second one is we're big, and we're increasingly the largest shareholder in most companies. And so that puts you under the microscope, both from a regulatory and government standpoint, as well as from a just outside pundit standpoint.

And we certainly hear a lot about those issues. You know, there have been a couple of papers written about, you know, Vanguard's too big. It needs to be broken up because it's gonna exert too much control on corporate America and so forth. And, you know, there's even a conspiracy theory out there that somehow Larry Fink and I were working together to raise airline prices because we both are the most significant owners in airlines, and that would be, you know, a really good thing for us.

Which, this is a great example of somebody mixing correlation and causation and not really understanding the difference between the two. But I say it, you know, partly tongue-in-cheek, but seriously as well. I mean, we actually have to spend time on this stuff. You know, we have to spend a lot of time educating people.

So I look at the, from the external standpoint, just the scrutiny that goes on because of the success of the firm. And it's a privilege to have that scrutiny, in a sense. But it's also, you know, it takes a lot of time for our leadership team, and time that you'd rather, frankly, devote to the clients and just being focused on the business.

You know, internally, I think the biggest risk we have is our success. And it is becoming complacent. And I know Tim Buckley shares this with me. Again, you do not grow up in the house of Ogle with a notion that complacency is a good thing. I just say that.

You know, it was so imparted, so frequently imparted to us that the minute complacency seeps in, you're dead. And one of the really interesting things, probably two months into Tim taking over as CEO, he put a book on all of his leader's table, leader's desk, called "The Founder's Mentality." And it was sort of getting back to the urgency of a brand-new company and having to, you know, earn your way each and every day.

You know, again, no disrespect to the past, but just saying, have we maintained our sense of urgency? So I had a couple people come running into my office and go, you know, their hair's on fire. "Can you believe Tim's doing this?" I'm like, "Yeah, I think the board actually made "a great choice in the next generation "because that's exactly what he should be doing." And so, Bill, that's the thing that I think worries us.

I think we've got the right leadership team to combat it, but it's a never-ending battle. The more successful you are, in some ways, the less willing you are to take risks and in creating new ways of doing things and thinking outside the box, which has, again, been our hallmark.

I grew up in Rochester, New York, so I watched this up close and personal. Eastman Kodak, many of you probably know the story. Eastman Kodak actually invented digital photography. But Eastman Kodak did not, you know, this got to sort of the definition of what Eastman Kodak. Eastman Kodak considered itself a film company and that if you read their mission statement and so forth, that's what it was all about.

And they missed this unbelievable revolution that was going on. If Eastman Kodak had considered itself its main mission in life, to be the preserver of memories, they would have approached it completely differently. So one of the things that we did, you know, as we were getting bigger and more successful, we actually restated our mission.

And, you know, we went back. I actually, I reread everyone in Jack's speeches, looked at a lot of Jack Brennan's writings on this and so forth. And the team came up with, you know, our current purpose, if you will, which is to take a stand for all investors, treat them fairly, give them the best chance for investment success.

And you might notice in there, there's nothing about being the low-cost provider of mutual funds or, you know, anything that's really limiting. That, and again, we're not going away from low-cost mutual funds, trust me. But the idea that our job is to give investors the best chance for success and to take a stand for them, it was so deeply embedded in the founding of this company, we felt it very important to make the statement.

And, you know, Bill, for me, that's how you try to combat, you know, the thing I worry about. But look, I'd be, I would be less than honest if I didn't tell you I go to bed every night worried that success goes to our head. And again, I have great faith in the leadership team that's in place, but that will be a never-ending battle for us.

- Yeah, there's something that I think about a lot, which is not just the differentiation between what the public sector does, what the government does and what the private sector does, but there's a third sector, which we don't think enough about, which is the non-profit sector. Almost all education in this country is done through non-profits.

And, you know, the for-profit sector in education, for that matter, in prisons, hasn't exactly covered itself in glory. Healthcare, you know, most of us are going to wind up going to hospitals that are run by non-profits. So the question I have for you is, does Vanguard view itself as a non-profit corporation?

- Short answer is no. We actually view ourselves as a very profit-oriented organization, but we define it differently than others do. We don't define it in the traditional P&L. We actually define it in what's the net return to our investors. At the end of the day, that's what matters.

So, you know, our maniacal focus on cost over the years is to make sure that more of what an investor earns in the marketplace stays with the investor. That's actually how we measure profitability. Because if you think about it, being owned by the funds, and therefore the clients of the funds, at the end of the day, they're like, if you do the analogy to a shareholder, you know, creating earnings for your shareholders, which is what a public company does, is we're trying to create earnings for our shareholders, which are our fund holders.

We try to do that in the most efficient, cost-effective way. And frankly, when we look at success of the firm, you know, there were four metrics that we focused on. Three external, one internal. And the metrics were externally, how are our funds performing versus our competitors. So how do we measure up?

Because you all have a choice. Be it a Vanguard fund, or you can be in an ABC fund. And there's thousands of funds, as we know. There are more funds than there are securities now. So it's sort of an interesting factoid. And so we were maniacal about that. The second thing that we actually measure up, we sometimes survey people to death, and we hear that, I apologize for it, but we wanna know what our clients think.

So we client loyalty, and we can measure this both mathematically as well as through survey data. The mathematical measure is the redemption ratio in a fund. So how long do people stay in a particular fund? And one of the things we're really proud of is our fund shareholders tend to stay with us three times as long as the average shareholder in the industry.

I'm very loyal client base. And then we will use survey data to reinforce that message. The third metric was the expense ratio. Because we know the one thing we could control, we couldn't control the absolute return in market. We could control our expenses, and so we could have a real say on what the net return was.

And so we were, that goes back to 1974 to 1975 when we launched. And so those three metrics, fund performance, client loyalty, and expense ratio, were how we thought about the external side. And in a sense, fund performance and the expense ratio, if you sort of look at them together, that is in a sense a P&L for how you're doing for your investors.

By the way, you might be interested, the fourth metric was our employee engagement, crew member engagement. So we wanted people to think this was a great place to work. And despite what the Philadelphia Inquirer says occasionally, we actually are a great place to work. Our turnover is extraordinarily low, and we have a great group of people who are just dedicated to the client.

They love the mission, they love being here. I can't tell you how many 25, 30 year celebrations I've been to in the last few years. People who've been here since the beginning or near the beginning. So that metric was actually really important to us as well, because we thought without great people, none of the other stuff is gonna happen.

- Okay, well, I'd like to shift gears now a little bit, and talk about some more general macro issues. And the way I want to segue into that, talking about ESG investing. I know you're an enthusiast about that. You think a lot about it. And I'm wondering if you think about those three components differently.

People tend to put them all together. I don't think they're the same thing. I think they have different sets of returns and considerations, and I'm wondering if you'd address that. - Yeah, so ESG is quite the buzz word, or buzz phrase, if you will, in the industry. In Europe and parts of the Pacific, it's actually required to be stricter on some of these issues.

- I should interrupt you for a second. Just to say for the audience, you have E means environmentally conscious, S means socially conscious, and then G refers to corporate governance. I just should have made that clear up front, I'm sorry. - Yeah, so let me start with G, because I think that's the easiest one to get your hands around for governance.

And this is the one we think we can affect the most, to be blunt. How well are companies governed? And this gets into board composition, how boards compensate their management teams, how boards oversee strategy, risk, and so forth. And we think that there's a lot of influence that big investors can have here.

And what's interesting is, just sort of a side note, people always are like, "Well, you know, if you're an index shareholder, "what do you care? "You should have your own stocks. "Why do you care about governance?" And then we'll hear the follow-on is, "You don't care, you guys don't pay "a lot of attention to this." And before we wrote our first letter, Jack Brenner wrote a letter in 2005, I think Jack Bogle gave a speech on this in maybe 2001.

So before that speech, before Jack Brenner wrote the letter, no active manager in the US, except the activists, we're actually talking about governance. Like, it was not a topic. And so, our view is it's a really important role for a shareholder, because when we first started this journey, board members had frankly lost their way a little bit.

If you would ask a board, like I gave a speech on this in 2008 or 9, I said, you know, "Boards should engage with their big shareholders. "They should be willing to hear what the shareholder "thinks about the company and so forth, "about the board composition." And I almost got run out of the room.

The board members said, "Why would we do that?" I'm like, "Who do you think you represent?" And there was like this stunned silence, and, "Oh yeah, the shareholder, yeah, "you guys elect us." So, and I say that a little bit tongue-in-cheek, but it's a really important concept. So the G is something we think we can influence.

Now, Bill, I mean, you've done more mathematical research on factors and all kinds of things, so you probably know this better than I do. There is no evidence yet that, quote-unquote, better-governed companies perform better. This is one of the holy grails, is to figure out if any of these factors actually drive return.

And there's lots of debate in the industry about this, and you'll see different interpretations of data. And, you know, it's hard to actually define what is good governance. We have, our notion is good governance is that the highest level of the board is doing an effective job overseeing talent, strategy, and risk.

And I say overseeing the processes, making sure management is doing the right things, not actually doing a board's job is to govern, not to manage. And they're putting the shareholder interests, you know, right there at the top. Doesn't mean other stakeholders don't matter. We'll get to that in a minute, because there's been a lot written about that, but the shareholder really has to be in the room.

And, you know, look, I think over time, we will see that better-governed companies, as we define them, and we find ways to sort of look at that mathematically a little bit more effectively, I think we will see that it does lead to better performance generally, but it won't be no guarantee.

It will be no guarantee. So we're spending a lot of time on that. When you get into the other two factors, societal and environmental, you know, everybody's definition is very different. And as you know, many ESG products that are out there today are, they're what I call exclusionary. They screen certain names out based on certain criteria.

So, you know, you might have a carbon footprint fund. So companies with high carbon footprint, you're not going to invest in, you're only gonna invest in companies with low carbon footprint. Now, there's two theories on this that are out there. You know, there's the, there's one that's, I would say, the real story, which is some people just want that and they're willing to give up potential return for it.

That's fine. Actually, I think that's something that's an individual's choice. And then there are people who will say, we know that these, you know, funds will outperform in the long run. I don't think we know that. You know, again, all math we've seen does not necessarily suggest that. So it doesn't mean that the fund has no reason to exist, but the promise that a factor like that is going to lead to outperformance, I think is misleading at best.

And so we're actually spending quite a bit of time on the topic. I think the, from a product standpoint, if you will, creating indices and so forth, anything that you do there, you've got to be very clear with investors about the trade-offs that they potentially are making. Okay, so as long as you're clear on that, then I think it's fine to have these kinds of vehicles.

But I think it's incredibly misleading to tell people that you think they're going to outperform. You know, socially responsible investing was a big thing in the late '90s. And the way the screens worked is you had an overweight to tech. So 1998, 1999, you were socially responsible and you were outperforming the product market by 1,000 basis points a year, so everybody thought you were a hero.

Then the tech wreck happened. And guess what, those products disappeared. People were so disappointed because they didn't understand actually the factors that they were exposed to. So that's the exclusionary side. So the more complex side is how do you engage with companies around these issues? And again, I'm going to bring you back to sort of our fundamental belief on governance, which is boards.

Boards, you know, if you look historically, you would do a survey 20 years ago and say, "What's your primary job?" They would say, "Pick the CEO. "Pick the right CEO and all good things will happen." I think it's much more complex today. I think boards have a really important role to play in the oversight of not just the CEO selection, which is still important, but talent overall in the company.

Does the company got sufficient talent for the evolving marketplace? Strategy, oversight, and risk. And many of these environmental and societal, social issues, if you will, fall in the risk category. So from a governance standpoint, we actually want to know how companies are thinking about these issues without necessarily saying one interpretation of, and let's use climate change as an example, we're less interested in somebody saying we believe the science or we don't believe the science.

We're much more interested in a board saying, "Here's how we view it from a risk perspective "in terms of how consumers view our business, "how our supply chain works, "all of those sorts of things, "and here's how we're thinking about that." Because if there's greater clarity around how you interpret different types of risk, theoretically you have a more accurate stock price, if you will.

And that kind of transparency we think is really necessary. So that's where we've been spending quite a bit of our time on the engagement side is really trying to understand how companies view these factors from a risk perspective. And can you learn something that actually makes the market, the pricing mechanisms work even more effectively?

It's by no means an exact science at this point. And one of the things I think we're going to see as time goes on is there's a lot of pressure for shareholders to act on some of these issues because the government's not. And so you've got a lot of stakeholders out there who are frustrated with the lack of action in certain categories of these topics.

And so they push really hard for other constituents to try to have an effect. And I think it's a very, very difficult thing for a shareholder to do because again, everybody's interpretation is really different. I'll give you just one practical example. So I have a great family friend. She's a very, very, very devout Quaker.

Those of you familiar with Quaker beliefs, one of the fundamental beliefs is war cannot be tolerated. Just through military, therefore anything military related is bad. And so she asked me, she's young, very idealistic. She's like, "So what can I invest in?" And she started running through companies. And she started with some of the cool tech companies.

And I'm like, you know, she starts with Google. And I'm like, "I don't think you can do that "if you're anti-military. "I mean, what do you think is doing all the satellite stuff "that drones are based on?" So she's horrified by that. "Well, what about Apple? "They make really cool stuff." Well, you know, look at Apple's military business.

So by the time we worked our way through, I think we were down to about five companies out of the S&P 500 that she could invest in. I mean, it was really, you know, and I tell the story because I actually really felt maybe she wanted to express her beliefs in the way she invested.

And she was willing to sacrifice return. But the problem was her definition of socially responsible was so broad that literally, I mean, Treasury Box would be the last thing she could own. So, you know, she couldn't invest. So, you know, to me, that's at the heart of all this discussion around ESG is everyone has a very different interpretation.

What is environmentally sound to you may be very different than that. And how we as a provider actually get our hands around that is actually pretty complicated. - Yeah, I mean, I tend to look at it from a somewhat different angle. And I tend to separate them out. When I look at GE Governance, I see that as a positive return factor.

I think there's pretty good data. There are pretty good data in the back of that. If you look, for example, at companies where the executives are spending all their time in private jets, flying around for personal purposes, they're spending $20 million for a house. You can actually isolate that as a negative return factor.

You have a very big one. And that goes all the way back hundreds of years. You know, John Blunt with the South Sea Company. George Hudson with the English Railways. More recently, Adam Neufeld is a classic example, or is a classic example of that. These are bad actors that are pretty easy to identify.

And so that's one, I think, negative selector. There's some more subtle things you can get out as well. S&G, I look at as a negative, strong negative return factors. For example, you look going back 80, 90 years. Alcohol, tobacco, firearms, okay? You know, there should be a government agency that deals with this, right?

(audience laughs) All have held the market by 2% to 4% over an 80 or a 90 year period. And the reason is very simple. People avoid those companies. The prices will fall, their expected returns will rise. And so the idea that you can impact social policy by disinvesting in those companies makes no sense at all.

I mean, it's more likely that those companies will get out of private and will escape public scrutiny. I've never understood it as a tool for advocacy. You know, and then as far as governance goes, I'm looking at more general concerns from Anne Bargh's point of view in terms of societal, you know, just societal, society and the health of the capitalist system where we've now evolved a compensation system that relies heavily on stock options, which really incentivizes companies to manipulate their short-term earnings reports and not to think of long-term.

They don't embrace the Warren Buffett's theory of long-term readings. - Yeah, you know, so a couple of, just to add to that. So I couldn't agree with you more on the, you know, your observations around the E and the S, at least historically. So no question that those, you know, the companies in the industry as you listed have outperformed.

And again, this is part of why when we talk to people about doing some of these exclusionary screens, we really try to remind them that you are likely giving up return and just understand that as an investor. So 100% agreement there. You know, on the governance side, one of the really important things we think is the emergence of Vanguard and, you know, other index providers is actually changing some of the dynamic.

And it's actually, I think, positive change. I think it's still very early innings. Again, this is something Jack Bowman and I spoke quite a bit about during the last couple of years because it was, this is a real sea change. And here's the heart of the issue. So we talk, everybody talks about long-termism.

So, you know, you look at a lot of your traditional funds and traditional managers, look at the portfolio turnover. It belies the idea that they're long-term. Most active funds, on average, active fund turnover is about 80%. Even if you factor, if you say, okay, let's just do name turnover.

Name turnover is over 50%. So that means the holding period is less than two years. So when somebody who says I'm really long-term oriented, they're not, okay? And that's where a lot of the pressure has come from. So I agree with your observation there on the short-termism. Here's the difference.

For our index holdings, we can't sell a stock if we don't like what's going on in the company. We are a permanent shareholder. And what's interesting is we're now having those discussions with companies. And it's a very different set of discussions than what they're used to. Because we can't just, if we don't like what we hear, we just can't go home and say let's just get out of this and go pick another company in the sector and be happy.

So active engagement with boards and independent directors has become a big thing. We'll probably do 1,100 engagements this year, and that number's just gonna keep growing. And most of it is around this notion of what's it mean to be a permanent shareholder, and how can you, as an organization, better align yourself with a permanent sense of capital.

And it doesn't mean that short-term actors have no place in this universe, but they shouldn't have an outside voice. They should not have an outside voice. If somebody owns 1% of a company and wants them to spin this division, merge this thing and do this and do this to jack up the stock price for the quarter, if that's detrimental to our long-term, the long-term value of the company, we're actually gonna stand against that from a government standpoint.

And we're beginning to have a much, I would say there's a much more, there's a much larger voice. Now it's really, the challenge, of course, is as you can well imagine, everybody wants to politicize that voice as quickly as they can and push social agenda and political issues as opposed to economic issues.

And so the way we deal with that is when somebody, let's say somebody on the S, an activist, a social activist, comes to us with an idea, our first question is, show us the link to long-term value creation, and we'll have a discussion. So if you're writing a proposal to a board to be considered for the shareholders, we wanna see the link to long-term value creation and if there's a link, we're gonna listen.

We may disagree, but we're at least gonna listen. If there's no link, we're not gonna really spend a lot of time on it. So that's kind of how we're trying to handle this, Bill, and again, it's very new territory. You can imagine these are tricky issues to deal with.

The fundamental underlying principle, though, is what's in the interest of our long-term investors, because again, as I started by saying, we have investors who tend to stay with us for a very long period of time, and therefore, and then in our index funds in particular, but also many of our active funds have very low turnover relative to their peers.

We are, by definition, a long-term shareholder, if not a permanent shareholder, and we need to reflect that and we need to reflect those values. - Do you or can you even speak to how well you coordinate with BlackRock? - So we don't coordinate with BlackRock. To be blunt, we can't.

We deal with all kinds of antitrust issues, and frankly, I shouldn't say this, but I will, 'cause you guys are friends. (audience laughs) What BlackRock says and what BlackRock does are sometimes very different. We try to do what we actually say. (audience laughs) And again, I pay a lot of attention to what they say, because they actually say some important things, and they're very influential.

But I think how you, if you look at, for example, how we compensate active managers. So I've spent most of the time talking on index. I think all of you know, 'cause we get notes from you all the time, that all of our active managers are under incentive contracts where it's longer-term performance that's rewarded, not short-term performance.

And by the way, it's perfectly symmetrical. If they underperform, they get paid less. If they outperform, they get paid more. And what that does is it sets them to think longer-term. Most of them are on a three-year, I would like to see it go to five. We have a couple, I think, we've managed to do that.

That's very different than anybody else in the industry. So people will talk about long-term, long-term, long-term, and then you look at how they incentivize portfolio managers, and you look at how they act, how they actually act, it's quite different. So for me, so we don't coordinate with them. We certainly pay attention to what they say.

We pay attention to what State Street says. We pay attention to what Tia Krupp says. All of these organizations have intelligent, thoughtful, constructive things to say on this topic. So you've gotta be a student of what they say. But we're trying to carve our own way here. Frankly, again, with all humility, the guy who runs this for us, Glenn Warren, is considered by most people in the industry to be the best.

So frankly, people pay a lot of attention to what Glenn says and what he does. And I think we're actually able to effect change a little bit more greatly than even our direct influence because of Glenn's thoughtfulness here. - On a lighter note, did you happen to see Michael Burry's interview with Bloomberg?

Okay, just as a, Michael Burry was the hero of The Big Short. This autistic ex-neurologist who called the financial crisis by, was he, he loved reading corporate bond offering statements. And he went on record as saying that markets have grown terribly inefficient because of indexing and he thought that there was an outsized play and undervalued small value stocks and Japanese stocks and these hundred dollar bills lying in the ground and he was gonna be describing how he was gonna be picking them up.

I wonder how you responded to that. - With a chuckle, you know, look, he's, you know, I think he's becoming an active manager. So, you know, it's a story. So I would say two things. One, you know, so let's like look at the practical part. Is indexing the bubble?

I don't think so at all. You know, the difference between the financial crisis that he, you know, didn't talk quite eloquently about in his own way was, you know, one of the most important elements of that was massive, massive, massive amounts of leverage, right? So the leverage was a critical component there.

There's no leverage in investing, right? In what we do at the index side where we're purely agents. So the fact that there's no leverage actually removes a lot of risk. And frankly, if you think about it, because we're not a proprietary investor, we're an agency, you're the ones who bear all risk.

Like, you know, index goes up, you do well. Index goes down, you don't do as well. That's very different than what was going on during the financial crisis where proprietary positions were really what was driving so much of what went on. So I think the analogy is very weak.

Now, to his observations that value stocks may be actually really valuable today, I'm much more agnostic about, you know, I think there has been a massive premium put on growth. You know, we are at the longest period in history of value underperformance. And, you know, if you look at sort of value versus growth, you see these tremendous waves over time where one outperforms usually for much longer than one expects, but they usually cross.

This is the longest period where we've seen growth outperform. I would argue, and again, I'd be really interested because you've written a lot about factors and you've thought about this probably more deeply than I have, but I think when you look at macroeconomic policy and its impact on the capital markets, it's actually really reinforced the importance of growth.

And so I think growth stocks have been bid up as a result because, you know, we've lived in this very low growth economic time. So investors have put a huge premium on finding growth, you know, some level of growth. And what that's done is it's really driven the price of growth stocks to a level, or the gap between growth stocks and value stocks to a level we've not seen.

Usually those sorts of things do eventually reverse themselves. So that's where, you know, again, I look at what Barry's saying on that front and it's somewhat interesting when and how that all happens. I don't know, you know, we are in unprecedented territory in terms of central bank intervention and that shows no signs of abatement.

And I think that's actually distorted the markets to a large degree. This is a personal opinion, not necessarily a Baker opinion, but I think what's gone on both at the Fed and in central banks in terms of monetary policies is so unprecedented, we've not gotten back to normal. And, you know, there is a sense among the central banks that they can make economies more recession proof than their predecessors could.

I'm not even sure that's a good thing, by the way, 'cause I think recessions are actually important, go back to Schumpeter. But we're living in a period that we've never seen this kind of intervention and it is definitely having distortion effects on the capital markets, no question in my mind.

- Yeah, I mean, with regard to future value premiums, my late mother used to say, "From your lips to God's ears." You know, and I do see the same thing that you're seeing in terms of the overvaluation of the growth stocks, simply as being a function of low inflation and low interest rates, which gets to my, I think it's going to be my last question, yeah, my last question, which is, you know, do you see the equity risk premium and the risk-free rate, the two components of returns, risk-free rate for fixed income and the sum of that and the equity risk premium as historically shifted to lower values over the past 20 or 30 years?

You know, until, you know, 30 or 35 years ago, those existed within fairly narrow bounds and we seem to have jumped the shark in terms of lowering both of those values. Now, how many of you think that's permanent or not? (mimics explosion) Sorry, two of you. - Yeah. (audience laughs) So, look, the short answer is I don't know because, again, you know, the policy changes are so profound, it's hard to see it reversing anytime soon, the low risk-free rate feels to me like a even longer term thing that we're going to live with.

I think the equity risk premium, that one I'm not sure about. You know, I think there's a possibility that we'll see a return to norms there, but I don't know when, it's certainly a long ways out. But, you know, that question Bill does bring up, I think a really, really important notion.

And, you know, again, you're going to have people far, far smarter than I am to talk about this, but I know if Jack were here, he'd want to remind people of his little formula for predicting future returns, which happens to correlate very closely with our own multivariable capital markets model, which has got like quantum computing going on or whatever.

We actually, on an absolute basis, are expecting lower equity returns over the next decade. Nothing is ever a sure thing, but it's close to a sure thing in my view, just where valuations are today. And it's not going to be a straight line. So the combination of lower equity returns and perhaps even normal volatility, that's not a good combination for investors.

Normally when we see real volatility, at least people are like, well, you know, hope that they're rewarded for that in the long run. I'm not convinced of that right now. Again, Bill, I don't know what your own work suggests there, but we think, you know, even if you took the equity risk premium as sort of what it's been historically, and you look at where the risk-free rate is today, you put those together, you get a much lower return than what we've seen historically.

If it stays a little bit compressed, as you suggest, that's just the worst news, if you will. And again, I hate to be Debbie Downer on that, but I think as investors, we all have to be thinking about, from a portfolio allocation standpoint, what the implications of tenure returns are in terms of how we draw down when we're in retirement, how much we need to save when we're in the accumulation phase and so forth.

I think it's actually a really, really important point. - Yeah, I mean, you know, it certainly feels as if the risk-free rate, the rate on fixed income assets in general, it's gonna be low from now out to the horizon and come up with any number of narratives of why that should be.

But I've learned over the years not to trust narratives, and I also can remember 35 years ago, 40 years ago, when it seemed like we were going to be in an inflationary environment forever, and it was never going to end. So. - Yeah, I think, you know, I think just to-- - It's hard to tell.

- Yeah, I couldn't agree with you more. We all grew up in that inflationary period, and again, I remember that it was never gonna change. I think a lot of what, you know, I talked about, I sounded pretty critical of central banks, and look, I get what they're doing in the sense that the thing that they fear the most is deflation, because as bad as inflation can be, deflation, once you get into a deflationary spiral, it is just the death of the economy.

And I think they've been obsessed with that. And when you look at the demographic factors in particular, you can see why people are pushing against doing everything possible to prevent deflation from setting in broadly. And again, I'm not enough of a demographer, but as you sort of look at what the data suggests, there's gonna be a lot of downward pressure because of the aging of the population and so forth globally.

This is not a US phenomenon, it is a global phenomenon. And I do think that you're right, Bill, that that could shape the narrative for a long time now. - Thank you. - Bill and Bill, thank you so much. (audience applauds) At this time, we're gonna take a 20-minute break, thank you so much.

(audience applauds) (upbeat music)