Bogleheads® on Investing Podcast Episode 038 – Ted Aronson, host Rick Ferri (audio only)
Chapters
0:01:49 Ted Aronson
8:27 David Swenson
9:16 The Curse of the Yale Model
11:53 Alternatives
45:57 Investment Philosophy
00:00:00.000 | Welcome, everyone, to Mogul Heads on Investing, podcast number 38.
00:00:14.080 | Today, our special guest is Ted Aronson.
00:00:16.760 | Ted was the founder of AJO, an institutional U.S. equity value manager, who at their peak
00:00:22.960 | was managing 31 billion in assets.
00:00:25.000 | Today, we're going to be discussing David Swenson, the Yale model, Vanguard's forte
00:00:30.200 | into private equity, and Vanguard's shift towards active management or their personal
00:00:36.080 | advisor services clients.
00:00:40.920 | Hi, everyone.
00:00:47.920 | My name is Rick Ferry, and I'm the host of Mogul Heads on Investing.
00:00:51.440 | This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial
00:00:56.560 | Literacy, a 501(c)(3) nonprofit organization.
00:01:01.320 | You can find us at boglecenter.net, and your tax-deductible contributions are greatly appreciated.
00:01:07.920 | Today, our special guest is Ted Aronson.
00:01:11.360 | Ted has been in the institutional active management industry for more than 45 years.
00:01:17.960 | He has a deep admiration for Jack Bogle, and was a personal friend for most of his career.
00:01:24.080 | I believe Ted is in an ideal position to have a high-level conversation on Vanguard's forte
00:01:31.480 | into private equity investment for the masses, and a shift in the investment strategy of
00:01:37.720 | Vanguard's personal advisor services, commonly known as PAS, towards new actively managed
00:01:44.640 | funds.
00:01:45.640 | So, with no further ado, let me introduce our special guest, Ted Aronson.
00:01:51.520 | Welcome to the Bogle Heads on Investing podcast, Ted.
00:01:55.800 | Thank you, Rick.
00:01:56.800 | Delighted to be here.
00:01:58.620 | Before we get into this discussion today about whether investors should look at private equity
00:02:04.640 | in their portfolio, or actively managed funds as they look for return, can you tell us a
00:02:11.280 | little bit about your history, your background, and go as far back as you like?
00:02:15.480 | I'd love to.
00:02:16.480 | The beginning may be apocryphal, but my parents told me that they had pictures of me, I've
00:02:22.720 | never found them, of me looking at the stock page while I'm still wearing diapers.
00:02:27.680 | I don't think that's true, but it still makes a good opening tale.
00:02:31.200 | I was always a nut when it came to the stock market.
00:02:34.920 | In those days, I just couldn't believe all these numbers changed every day.
00:02:39.040 | And as an undergrad, I studied business, and then I went further in grad school, attending
00:02:43.840 | both undergrad and grad school at the Wharton School.
00:02:47.480 | And I studied investment management at a time when I graduated in the early '70s, when no
00:02:53.240 | one cared about investment management.
00:02:56.040 | Everybody wanted to be an investment banker, or a consultant, or some sexy high-paying
00:03:01.320 | job.
00:03:02.320 | Well, little did I know that I would join Drexel Burnham Lombaire, and indeed start
00:03:08.080 | their quantitative equities group, when I was still in grad school.
00:03:12.000 | So in 1974, I had my first job, which was a summer internship at Drexel, and that led
00:03:19.160 | to my opening career.
00:03:22.360 | I was always interested in quantitative investing.
00:03:25.800 | It was the beginning of what was called Modern Portfolio Theory, MPT.
00:03:31.440 | And I was very proud at that quantitative equities group at Drexel to be hired to run
00:03:36.680 | the first equity mutual fund registered with the SEC to use this newfangled theory known
00:03:44.520 | as MPT.
00:03:45.520 | So that's where it all started.
00:03:48.600 | And in the first years when I was at Drexel, I met Jack Vogel, who even back in the mid-70s
00:03:56.800 | was a force to contend with.
00:03:58.480 | So I love to look back on my career and paraphrase Mark Twain, "I've been a CFA charter holder
00:04:06.200 | for 33 years, I've owned my own investment firm for 37 years, I've been an FOJ, a friend
00:04:14.120 | of Jack, for 45 years, and I've been a horse's ass for 69 years.
00:04:20.400 | So I come to you, Rick, as all of the above."
00:04:24.000 | Well, your firm, AJL, made an announcement last year that it was closing, and it was
00:04:33.000 | a kind of a sad announcement.
00:04:34.400 | I mean, I want to get into similarities between that and Jack Vogel and Julian Robertson back
00:04:43.160 | in 2000.
00:04:44.480 | And here we are in 2020, and Ted Aronson is now closing his firm.
00:04:51.760 | And it all had to do with bad timing, if you will, or not bad timing, just the cycles between
00:04:58.640 | value and growth.
00:05:00.600 | And Jack, of course, back in the late '60s, when he was running Wellington Management,
00:05:06.480 | hired go-go managers to come in and take over almost Wellington.
00:05:11.520 | And that collapsed on him and caused him to lose his job, and that was sort of the opposite.
00:05:15.440 | He went with growth, and then growth collapsed, and value started to outperform, and the whole
00:05:21.520 | thing fell apart on him, and that's how Vanguard got started.
00:05:24.000 | So it was a good thing.
00:05:26.240 | Then in 2000, at the peak of the peak of the peak-- I mean, March of 2000, the peak of
00:05:32.600 | the tech bubble, Julian Robertson closed Tiger Funds.
00:05:36.760 | He decided to shut the door.
00:05:38.000 | It was a value shop, deep value shop, and he closed.
00:05:41.240 | So then along comes Ted in 2020, after this incredible run-up in basically large-cap growth,
00:05:50.840 | big stocks, which is not how you invest, and you make a decision to make a change.
00:05:56.680 | Tell me about that.
00:05:57.680 | Wow.
00:05:58.680 | I'll leave it to you, Rick.
00:06:00.720 | I must admit, I'll take a comparison to Jack Bogle, even if it's a painful one like that,
00:06:07.560 | for both of us.
00:06:08.560 | Indeed, you're absolutely true.
00:06:10.880 | We did pull the plug on AJO a little less than a year ago, and it coincided with the
00:06:19.120 | longest and deepest run against value.
00:06:25.800 | Painful decision, but we decided it was the best decision for our clients and for us.
00:06:32.040 | As I joke with my value brethren, and I have many friends that are value managers, I was
00:06:37.800 | glad to take one for the team, because soon thereafter, that trend broke, or it seems
00:06:42.960 | to have broke, and at least small-cap value did very, very well.
00:06:47.800 | AJO was a legacy firm that had been around for 37 years, and we were knee-deep in U.S.
00:06:57.920 | domestic large-cap value stocks.
00:07:02.840 | After a 25-year run of solid, good performance, the prior five years had dragged our record
00:07:10.840 | down considerably, and that's where we thought the better part of valor was to give the money
00:07:16.320 | back to our clients, shudder, and go off and do other things.
00:07:23.800 | Indeed, we did.
00:07:25.840 | My partner Gina Moore and I are about to unveil, with a number of colleagues in Boston, a new
00:07:33.000 | firm called AJO Vista, which will not be as deep a value firm, but of course, value will
00:07:40.600 | come into play, because value makes sense in a lot of settings.
00:07:44.480 | So, AJO will still exist, however, we did return the capital, it was about $11 billion
00:07:51.520 | at the time, and we're also delighted to be continuing with a new venture that will call
00:07:56.880 | upon any wisdom we've accumulated over all those many years, as I look back at my career.
00:08:03.840 | So that's to come very, very soon.
00:08:07.040 | Well, that's great to hear that you're not out, because ...
00:08:10.920 | Oh, thank you.
00:08:13.000 | First of all, the difference between value and growth, as far as valuations now, and
00:08:17.600 | what's going on, it's really amazing.
00:08:20.040 | Amazing.
00:08:21.040 | And we're going to talk a little bit more about value later on in the show.
00:08:25.760 | But first, we're going to talk about David Swenson.
00:08:29.520 | And of course, David was a heavyweight in the investment industry.
00:08:34.040 | He was a pioneer who basically put his career on hold to go to work for Yale as the chief
00:08:42.300 | investment officer there, and he created what was called the Yale model.
00:08:47.960 | It's also called the endowment model, if I'm not mistaken, but most people call it the
00:08:51.680 | Yale model, who know David Swenson, where he began to use a lot more private equity,
00:08:59.460 | venture capital, private real estate investing, as opposed to going into public markets.
00:09:07.280 | That was very successful for Yale.
00:09:10.800 | Not so successful for other endowments, who tried to copy or imitate the Yale model.
00:09:15.640 | In fact, I wrote an article, called it the curse of the Yale model, which was, after
00:09:20.920 | he wrote his book, Pioneering Portfolio Management, which laid out for institutional investors
00:09:26.720 | how to do this, a lot of people tried.
00:09:30.280 | But the problem was, they just weren't as skilled as the people who were working over
00:09:34.440 | at Yale.
00:09:35.440 | Which brings us to the point of, what's good for Yale is good for Yale, but it may not
00:09:38.680 | be good for other endowments.
00:09:41.160 | It also may not be good for individual investors.
00:09:44.220 | David Swenson was very adamant about the fact that most individual investors shouldn't be
00:09:48.760 | trying to do this.
00:09:49.760 | They just don't have the resources to do it, they don't have the ability to go in.
00:09:55.200 | First of all, talk about your experiences with David, and talk about the Yale model,
00:10:02.200 | and what do you think about it all?
00:10:04.200 | I'll be glad to.
00:10:06.600 | Swenson was one of a kind.
00:10:08.720 | Not only was he a brilliant investor, I think we all know about his results as the CIO over
00:10:14.720 | decades for Yale, and their superb performance, but he was a great mentor.
00:10:19.960 | He was a great teacher.
00:10:21.740 | He was soft spoken, but he spoke his mind, but it was always a pleasure to be around
00:10:27.080 | him, and I loved hearing his opinion, even if I disagreed with it.
00:10:32.520 | He made the point, and this was amplified by Jason Zweig, in an obit he wrote for David.
00:10:39.520 | He said, "Play your own game.
00:10:41.760 | Do what you're good at.
00:10:43.480 | Don't just copy people.
00:10:45.280 | Don't just say, 'Yale and Harvard did something, so I'm going to do the same thing.'"
00:10:50.800 | Not due diligence, that's copying.
00:10:55.160 | He was dead set against it, and I think he was correct.
00:10:58.920 | I always think that his advice was akin to Warren Buffett, who announced a portfolio
00:11:05.480 | of Vanguard S&P 500 index fund, and T-bills would be just fine in many cases.
00:11:12.340 | David knew his strengths.
00:11:13.820 | He was not modest about his strengths, but it was quite an endeavor.
00:11:19.040 | He had a seriously intelligent investment staff at Yale.
00:11:25.040 | He had serious leverage with managers, by which I mean he could get superior fees, and
00:11:32.320 | he was not against funding new ideas and new managers.
00:11:38.360 | That just described quite a few activities that I suspect 99% and 44% of most investors
00:11:45.160 | can't do.
00:11:47.240 | Those that can should, and there are a handful of them, but most of us shouldn't.
00:11:53.280 | Alternatives, and you've mentioned, Rick, a number of them.
00:11:58.320 | Private equity comes to mind because you may have noticed they're now advertising on TV
00:12:04.040 | how good the private equity industry is.
00:12:06.520 | Oh boy, didn't Jack Bogle say, "Run for the hills," when he started advertising on national
00:12:11.840 | TV?
00:12:12.840 | I think he was right on that, as well as other things.
00:12:16.240 | There is absolutely nothing wrong with private equity.
00:12:21.600 | Indeed, there's a lot in favor of it.
00:12:25.240 | I got to '74 when I graduated from the Wharton School.
00:12:30.360 | Clearly, money management is sexier.
00:12:34.840 | It's more interesting today.
00:12:36.600 | Clearly, the best graduates from Wharton, Chicago, Stanford, Harvard, they are going
00:12:43.520 | to enter the private equity field.
00:12:46.040 | I really feel that.
00:12:47.040 | I think marketable securities may have suffered a little because of that brain drain.
00:12:52.840 | Private equity attracts the best and the brightest.
00:12:56.200 | They have the resources.
00:12:58.300 | They have the research departments.
00:13:00.320 | They have the means to perhaps make superior investments.
00:13:05.160 | I now pregnantly pause, but they also charge too much.
00:13:11.720 | In my opinion, any advantage they garner is offset by higher fees, so the success of private
00:13:20.760 | equity in the main and broadly, of course, generalizing here to make a point, accrues
00:13:26.980 | to the private equity managers, not to the private equity owners.
00:13:32.800 | I feel that very strongly.
00:13:35.280 | Was there a time in the '70s where this was available to David Swenson and others?
00:13:41.240 | Yes.
00:13:42.240 | Were their returns more attractive than they are now?
00:13:45.080 | Yes.
00:13:46.080 | Were the fees lower?
00:13:47.520 | No.
00:13:48.520 | They were higher then too, but there were more returns to support them.
00:13:53.400 | I feel very strongly that that is not the case today and that the fundamental factors
00:14:00.520 | of supply and demand, meaning dough chasing deals, has become so distorted that I suspect
00:14:09.080 | the next 10 years may be sorry times for private equity investors versus what they think they're
00:14:16.840 | going to get based on the past.
00:14:19.200 | Well, that's important because Vanguard wants to take individual investors into the realm
00:14:27.120 | of private equity, not just large institutional investors or high net worth investors.
00:14:34.680 | In an interview that Barry Ritzel from Bloomberg did with Fran Kinnery last month in August,
00:14:43.960 | Fran is now the global head of private investments at Vanguard.
00:14:49.320 | He's had several jobs.
00:14:50.320 | I've met Fran several times.
00:14:52.800 | They want to take target date funds into the realm of private equity and to a fairly large
00:14:59.120 | extent.
00:15:00.120 | He's talking along the lines of 30% of equity in a portfolio should be allocated to private
00:15:08.160 | equity.
00:15:11.880 | That's shocking to me that it would, number one, be that high, but also, number two, that
00:15:18.160 | Vanguard making this move into private equity with really no experience at all, not that
00:15:25.560 | they're not smart people because I know they are and they're very good people and their
00:15:29.080 | heart is in it and so forth, but I question whether they're at the caliber of a Yale endowment
00:15:33.720 | fund who can go out and pick the best private equity managers.
00:15:37.800 | I guess we'll have to wait and see.
00:15:39.440 | Let me circle back to David Swenson for a second because David Swenson wouldn't agree
00:15:45.560 | with Vanguard.
00:15:47.680 | David talked about this in his book, Pioneering Portfolio Management, the second edition.
00:15:53.800 | He also wrote another book called Unconventional Success, which was for individual investors
00:15:58.760 | and he writes about it there, too.
00:16:01.120 | Basically, he writes that no middle ground exists.
00:16:06.080 | Low-cost passive strategies, as outlined in Unconventional Success, suit the overwhelming
00:16:11.160 | number of individual and institutional investors without the time, resources, and ability to
00:16:17.720 | make high-quality active management decisions.
00:16:21.520 | The framework outlined in Pioneering Portfolio Management applies to only a small number
00:16:26.840 | of investors with the resources and the temperament to pursue the grail of risk-adjusted returns.
00:16:33.120 | This was in 2009 and in 2012, at a conference for John Bogle, it was the John Bogle Legacy
00:16:42.960 | Forum, which both you and I were at, interesting, and there was a book about it by Newt Rothschild,
00:16:48.920 | The Man in the Arena, which talked about this conference and a lot of other things, where
00:16:53.480 | he quoted Swenson in here and he was even more adamant there, where he said that, "I
00:17:00.920 | think the only sensible way to structure an active management program is to have a group
00:17:06.800 | of incredibly highly qualified professionals who devote their entire careers to trying
00:17:14.820 | to find managers or investment strategies that can beat the market."
00:17:18.800 | So he's even stronger than what he wrote about in his book.
00:17:22.520 | All right.
00:17:23.520 | So now we have Vanguard come along saying, "Target date retirement fund should have private
00:17:29.520 | equity in it."
00:17:30.520 | Now, granted, it isn't going to be the individual who's going to be trying to pick the private
00:17:36.320 | equity manager.
00:17:37.320 | Vanguard has already done that.
00:17:38.840 | They've gone out and picked a company called HarborVest.
00:17:42.440 | It's a global manager.
00:17:43.440 | I mean, they have a global footprint and it looks like they're managing about $80 billion
00:17:47.800 | in assets.
00:17:50.080 | What do you think about Vanguard's forte into private equity and what do you think about
00:17:54.200 | adding it to the accounts that they manage, which would be institutional accounts, target
00:18:01.040 | date funds, and also the personal advisor service, PAS?
00:18:07.440 | Oh, boy.
00:18:10.360 | Multiple questions.
00:18:11.360 | Let me try to hit all of them.
00:18:16.760 | First and foremost, I think Jack is spinning in his grave, that is, if he's still there,
00:18:21.600 | if he hasn't gone somewhere else.
00:18:26.040 | And you summarized it well.
00:18:27.480 | I don't know HarborVest, except what I've read, the news of Vanguard, nor am I privy
00:18:33.840 | to the details because this is a personal investment.
00:18:37.360 | It's not the public markets with Vanguard's great disclosure and transparency.
00:18:43.560 | I think if we had a crystal ball and we could look forward and we looked back, the private
00:18:49.240 | equity Vanguard will introduce, with their good points you mentioned about them, they're
00:18:54.320 | thoughtful, smart people.
00:18:56.200 | The returns will probably be competitive after fees with the returns from the public markets.
00:19:07.640 | Even though I think the public markets are relatively high now, just as private equity
00:19:11.440 | deals are high, so both those numbers may be in the low single digits.
00:19:18.440 | I understand from a business point of view why Vanguard is pursuing this.
00:19:24.080 | They have their trillions of assets, and they want to provide all they can to their clients,
00:19:30.840 | and they don't want assets disappearing to some other operation, organization that will
00:19:36.000 | be offering private equity.
00:19:38.000 | I get it.
00:19:39.960 | However, I wonder ... I don't have a lot of first-hand experience with private equity,
00:19:46.400 | but I have a lot of second-hand experience with private equity.
00:19:50.200 | One in particular, Spelman College, I'll outline in a second.
00:19:56.240 | I think they will do a good job of providing private equity.
00:20:00.160 | However, when their fees, they'll have to add on top of the costs of HarborVest and
00:20:08.200 | all the other related charges.
00:20:11.200 | I don't think they'll have anything that's particularly competitive, certainly not as
00:20:15.440 | competitive as their rock-bottom fees, an area that they really pioneered for all intents
00:20:22.560 | and purposes.
00:20:23.560 | Lots of competition now, but we all know Jack started this in the '70s, and he was successful
00:20:31.640 | even beyond his expectations.
00:20:36.080 | Businesses can subcontract with the talent you mentioned, Rick.
00:20:39.960 | They can hire really smart consultants, and there are a number of them.
00:20:43.560 | I've dealt with them all my career.
00:20:46.240 | They can, in a sense, get the investment thinking they need.
00:20:51.600 | Those consulting firms that are worth their salt really do a great job.
00:20:56.880 | However, and by the way, I'm sorry, one other thing, institutions can negotiate in many
00:21:03.320 | cases, like Swenson and I mentioned earlier, negotiate some favorable fees.
00:21:09.440 | However, the aggregate fees are so large compared to what Vanguard provides in its meat and
00:21:17.480 | potatoes work that there's really no comparison.
00:21:22.000 | I fear that investors will get involved with the Vanguard offering, expecting it to be
00:21:29.400 | more outstanding, to be unique in the area of fees, just as their passive index products
00:21:37.440 | are.
00:21:38.440 | I think that will be a major misunderstanding, which will cause problems.
00:21:44.520 | Vanguard is good at communicating.
00:21:46.320 | They're good at getting the word out there.
00:21:49.760 | I think many of their clientele, much of their clientele, may just go along with the startlingly
00:21:57.480 | large private equity allocations you mentioned a moment ago.
00:22:02.560 | They surprised me as well.
00:22:06.040 | Let me circle back to the interview that Barry Ritzold, Bloomberg Opinion columnist, had
00:22:11.560 | with Fran Kennery, and this is on Masters in Business podcast, but there's a few things
00:22:16.760 | that struck me.
00:22:18.720 | Number one, the firm that they chose, HarberVest, has 75 billion or so under management and
00:22:26.160 | commitments to 80.
00:22:29.160 | Vanguard is roughly an $8 trillion company, and Vanguard is managing maybe $4.5 trillion
00:22:37.880 | of equity in total.
00:22:40.120 | They were talking about taking ... The numbers don't make sense, but up to some percentage
00:22:46.520 | of that, moving it over slowly to private equity.
00:22:49.840 | The reason I say it doesn't make sense is because HarberVest is only managing, like
00:22:54.080 | I said, 75 billion, and I mean, just a little bit of movement by Vanguard and shareholders
00:23:01.160 | over to this fund is going to flood HarberVest.
00:23:05.600 | I don't think it will happen because I don't think that Vanguard and HarberVest will allow
00:23:08.880 | this flood to occur, so we're really talking about a small amount of money from Vanguard
00:23:15.080 | investors actually going into this product, but if they democratize this, because France
00:23:20.880 | says right in the interview, and I'm just taking this right off of Barry's website because
00:23:25.520 | they have a printout, "It took us 35 years to do this in indexing, 20 years to do it
00:23:30.800 | in active, so maybe 20 years from now, private equity and access to world-class managers
00:23:36.960 | for the average investor will look very much like indexing did over the course of 1975
00:23:43.240 | to 1995."
00:23:44.240 | In other words, you're trying to democratize private equity and make it accessible to
00:23:52.800 | everybody at somewhat relatively lower fees, but how can you do that?
00:23:58.480 | I mean, how can you pour so much money into private equity and make it kind of index-like
00:24:03.720 | and expect to get the same return?
00:24:05.440 | Rick, you really can't.
00:24:07.480 | Let me take your democratic image back.
00:24:10.880 | In 1974, when I'm a young Turk running money at an old established firm in Philadelphia,
00:24:19.000 | the market wasn't available.
00:24:20.840 | You had to hire a money manager to get the market, to get a diversified portfolio, to
00:24:25.840 | essentially get what now is called beta, exposure to capital markets.
00:24:31.000 | What Jack did in his democratization program was democratized capital market returns.
00:24:39.280 | They are out there from the entire economy, which in capitalism has companies which make
00:24:46.360 | money and pay out dividends and retain earnings and grow, blah, blah, blah.
00:24:51.120 | We all know the story, and that's a wonderful, wonderful thing.
00:24:54.840 | And Jack deserves credit for that.
00:24:58.800 | You really can't make the leap to a specialized, alpha-seeking operation like all the private
00:25:08.120 | equity and make the same comparison.
00:25:12.000 | You have a limited number of deals being chased by an infinite amount of money, and it just
00:25:16.480 | doesn't compute.
00:25:18.200 | It can't be.
00:25:19.600 | So I think that's the bullishness coming out.
00:25:23.500 | Despite the growth goals of Vanguard's private investments, it's an impossibility.
00:25:30.000 | It just can't be done.
00:25:31.320 | I think in all the private equity, they found something like a trillion dollars of dry powder
00:25:37.160 | of committed capital, something like that.
00:25:40.880 | And those are the biggest numbers that have ever been seen.
00:25:43.200 | So can you imagine throwing in a couple other trillion on top of that, chasing the same
00:25:48.000 | deals?
00:25:49.000 | I don't think so.
00:25:50.000 | And you have at least one right now, they've picked one private equity manager, HarborVest,
00:25:55.920 | just one company.
00:25:56.920 | Exactly.
00:25:57.920 | And so you're only going to get the deals that they are in.
00:25:59.800 | Now, HarborVest will then go out and sub-advise or hire sub-advisors, according to their website.
00:26:06.360 | They'll hire sub-advisors in various areas and get in other advisors' deals, if you will,
00:26:13.200 | so that they can get broader exposure.
00:26:15.320 | Because one thing that Fran Kennery said in the interview with Barry was that you're looking
00:26:20.240 | at maybe 600 to 800 operating companies in the fund that Vanguard investors will be in.
00:26:30.520 | And the only way that could happen-- and again, I went to the HarborVest website, and I heard
00:26:36.320 | or read-- is that they're going to go out and they're going to hire other managers.
00:26:39.960 | So they're going to be just taking deals of other private equity and venture capital.
00:26:45.280 | But let me quote what the expectation of return is.
00:26:48.800 | And here's where I almost kind of fell over in the chair, if you will.
00:26:51.720 | OK, please.
00:26:52.720 | OK.
00:26:53.720 | So first, Fran was talking about HarborVest has been getting 700 to 800 basis points over
00:27:00.840 | the public markets.
00:27:01.840 | That's what they've been saying.
00:27:03.240 | But would Vanguard's forward-looking estimates to our investors-- and this is just quoting
00:27:11.440 | him-- get between 300 to 400 basis points, or 3% to 4% more than public equity?
00:27:19.880 | Wow.
00:27:20.880 | Really?
00:27:21.880 | I mean, everybody's going to get that?
00:27:24.160 | Seriously?
00:27:25.160 | Yep.
00:27:26.160 | It's going to be just that easy?
00:27:27.160 | I don't know.
00:27:28.440 | Tell me.
00:27:29.440 | Well, my first reaction to what you said, Rick, is bingo.
00:27:33.640 | Because, of course, no one's going to get it.
00:27:35.960 | It's silly.
00:27:36.960 | Could they do 300 or 400 over the next couple of years before fees?
00:27:44.400 | Maybe.
00:27:45.400 | Fees will reduce it to maybe 100 basis points.
00:27:50.160 | So now we're talking about public markets plus a little alpha, if you will, thrown in.
00:27:54.920 | Let's call it alpha, because that's what active managers are all about.
00:27:59.000 | 300 or 400 is silly.
00:28:01.840 | 700 or 800 may be true, but that was when HarborVest was small.
00:28:08.400 | And that's when there were a limited number of deals.
00:28:10.680 | I'm not saying there aren't smart enough people to get returns like that.
00:28:14.600 | I would love to run out and hire them when they're young and they're new.
00:28:19.400 | But because they're young and they're new, nobody knows about them, or very few people
00:28:23.880 | do.
00:28:24.880 | So the return expectations are, in my opinion, scary and silly, as you note.
00:28:31.960 | Private equity returns are very close to lower cap value returns, at least historically.
00:28:40.320 | And that's absolutely true with one addition, and that's leverage.
00:28:46.500 | Private equity deals usually entail leverage, not always wild amounts of leverage, but some
00:28:52.320 | leverage.
00:28:53.320 | And if you do that to things like mid-cap value returns, you get private equity returns.
00:29:02.760 | I want to circle back to a portfolio that I put together.
00:29:06.360 | I called it the total economy portfolio.
00:29:09.160 | And let's say I want my portfolio to look more like the economy than the stock market.
00:29:15.400 | So what do I need to add to this portfolio to make it look more like GDP or national
00:29:20.160 | earnings rather than stock market earnings?
00:29:23.720 | And so the first thing that pops out is real estate.
00:29:26.880 | You need to have a bigger real estate component, because so little of real estate is actually
00:29:30.280 | securitized in the stock market.
00:29:32.920 | So you add to your total stock market US and total international fund, you add a real estate
00:29:39.880 | fund.
00:29:40.880 | And I'm not going to get into international real estate.
00:29:41.880 | It makes it too complicated.
00:29:43.160 | Let's just add 10% to the Vanguard real estate or an actual REIT fund, because the Vanguard
00:29:50.480 | fund is no longer just a pure REIT fund anymore.
00:29:53.560 | Second thing, how do you emulate all the private equity?
00:29:56.800 | Something like half-- let's call it half of all of the national earnings are from companies
00:30:01.400 | that are privately owned, and the other half-- and this is very general-- is from publicly
00:30:05.160 | traded companies.
00:30:06.160 | So how do you emulate the other half?
00:30:07.400 | And the answer is, as we touched on, is to use small cap value.
00:30:12.560 | Small cap value emulates, to some extent-- and I know if you leverage it, it emulates
00:30:18.360 | it more-- the performance of private equity.
00:30:23.080 | So in my total economy portfolio, which I created I don't know how many years ago--
00:30:26.800 | and I have it on a website called core4.com, this total economy portfolio concept.
00:30:33.640 | And it is closer to what the total economy is and less of what the stock market is.
00:30:40.160 | Now, circling back to what you brought up, if you want to do private equity and you don't
00:30:45.520 | have small cap value in your portfolio, why not just add that first?
00:30:51.120 | And that's a question to you.
00:30:52.120 | I'm just shaking my head.
00:30:53.120 | Bingo.
00:30:54.120 | Yeah, why wouldn't you?
00:30:55.120 | I'm with you.
00:30:56.120 | But go back.
00:30:57.120 | Tell me that website again you have.
00:30:58.120 | I don't-- I'm not familiar with it.
00:30:59.120 | The website is core, C-O-R-E-4.
00:31:00.120 | Gotcha.
00:31:01.120 | C-O-R-E-4.
00:31:02.120 | Now, what that website is-- and I don't want to belabor this, but they're just simple portfolios.
00:31:13.320 | In other words, if you need income, use these four funds.
00:31:15.600 | If you're looking for the total market type strategy, use these funds.
00:31:20.680 | And if you want to have the portfolio look more like the economy than the stock market,
00:31:25.480 | then use these funds.
00:31:26.480 | My whole view was, like, you can do anything you want with four funds.
00:31:29.600 | You don't need more than four funds, because there's so much product out there right now
00:31:33.400 | that you can create whatever you want, any strategy you want, with four very low-cost
00:31:36.920 | index funds.
00:31:37.920 | So that was the whole concept.
00:31:38.920 | Even ESG.
00:31:39.920 | I have that as part of it as well.
00:31:40.920 | So that's what that is.
00:31:42.080 | And that's where this total economy portfolio is.
00:31:44.600 | It's a free website.
00:31:45.600 | You can go there.
00:31:46.600 | It just goes on its own.
00:31:47.600 | I don't even know how many people visit it, but it's there.
00:31:50.040 | So that's where I have this total economy portfolio.
00:31:52.100 | But I also wrote an article for it about-- about it for Forbes back in, I don't know,
00:31:57.160 | 2007 and 2008.
00:31:58.160 | And I talked about this.
00:31:59.880 | And it kind of gave people a backdoor way to get into small-cap value who maybe ordinarily
00:32:04.680 | wouldn't have gotten into small-cap value.
00:32:06.480 | Yep.
00:32:07.480 | I understand.
00:32:08.480 | And--
00:32:09.480 | I think it's absolutely brilliant.
00:32:10.480 | And again--
00:32:11.480 | Oh, well, thank you.
00:32:12.480 | I should just end the podcast right here.
00:32:13.480 | Yeah, end the podcast and go into that business and get out of this crazy stuff.
00:32:19.160 | And yes, it was a Harvard professor-- I remember him well-- a couple of years ago, Randy Cohen,
00:32:25.560 | who convinced me that he used mid-cap value.
00:32:29.160 | He said, simply leverage mid-cap value stocks at 60%, set it up in a vehicle that you could
00:32:36.400 | value it on a lagged three-month basis, make the liquidity not instantaneous, not totally
00:32:43.520 | liquid, and you get private equity or you get more than private equity.
00:32:47.360 | I buy it.
00:32:48.360 | I agree with it.
00:32:49.360 | Yeah.
00:32:50.360 | Think of what private equity firms do, except for the Heinzes of the world and those sort
00:32:54.500 | of takeovers, they're after value-oriented companies in the small and mid-cap range who
00:33:01.760 | can have value exploited.
00:33:03.720 | Duh.
00:33:04.720 | I mean, that's what they're doing.
00:33:07.040 | And throw in that use of leverage, which scares most investors, and you have the return stream
00:33:13.120 | that mimics it.
00:33:14.560 | I agree.
00:33:16.480 | But Rick, you also know so much on Wall Street is sold, not bought.
00:33:22.480 | I'm involved with an unnamed state investment portfolio as an advisor, and they have public
00:33:29.200 | meetings on a monthly basis, and it used to be in person.
00:33:33.440 | It hasn't been for quite a while.
00:33:35.720 | And I'm telling you from the dais where I sit, you can pick out the private equity sales
00:33:43.540 | people.
00:33:44.540 | Why?
00:33:45.540 | Because they're the best looking and the best dressed.
00:33:49.080 | It's obvious.
00:33:50.200 | It's so obvious that, you know, after a couple of beers, it's a really funny game of picking
00:33:56.040 | them out.
00:33:57.040 | And I'm telling you, they're all good looking.
00:33:59.360 | The men are good looking, the women are good looking, they're like, you know, the quarterback
00:34:04.160 | and the prom queen, and they're dressed to the nines.
00:34:08.320 | It's hilarious.
00:34:09.520 | So you nailed it, and you get it, and that's what's going on.
00:34:13.960 | Because this is not logic.
00:34:16.720 | This is sales.
00:34:17.720 | This is what Wall Street is so good at.
00:34:21.400 | They are expert at separating clients from their money, and they continue to do so.
00:34:27.640 | And unfortunately, to some extent, to a small extent, Vanguard has become part of the problem.
00:34:35.220 | I'm sorry to say.
00:34:36.220 | Yeah.
00:34:37.220 | Well, I mean, if Vanguard's getting into this, of course, Fidelity will get into it and others
00:34:40.760 | will.
00:34:41.760 | Oh, my God.
00:34:42.760 | Of course.
00:34:43.760 | Of course.
00:34:44.760 | Of course.
00:34:45.760 | But if people do decide to go down this road.
00:34:46.760 | You know, instead of leveraged mid cap, just look at deep, small cap value.
00:34:52.360 | Yeah.
00:34:53.360 | And I can give you some fun names, Avantis small cap value, or the DFA targeted value,
00:35:01.240 | or Invesco pure S&P 600 small value, RZV, and full disclosure, I own RZV.
00:35:10.440 | This is just simply saying, look, I want to have something other than beta in my portfolio,
00:35:16.160 | because I think that it might help improve the performance in the long term.
00:35:21.440 | I'm not going to get access to good private equity without paying an arm and a leg.
00:35:27.560 | Yep.
00:35:28.560 | Just do a small cap value fund instead.
00:35:29.560 | Do a small REIT fund, do the total economy portfolio, which is what I do.
00:35:33.440 | That's my strategy in my own account, and be happy, and do it for 20 years at least.
00:35:38.720 | Yeah, absolutely.
00:35:39.720 | That's a given.
00:35:40.720 | I think that Vanguard has been going down the path lately, not just with this announcement,
00:35:46.880 | which actually is a kind of an old announcement, it came out last year, but more recently adding
00:35:52.760 | new actively managed funds to their personal advisor service.
00:35:58.080 | They've added three new actively managed funds for people who want them.
00:36:01.480 | So Tim Buckley, who is the CEO of Vanguard, seems to be pivoting towards active management
00:36:09.840 | and towards the idea that somehow Vanguard has the secret sauce and can pick active managers
00:36:18.200 | that will add alpha.
00:36:21.440 | Have you noticed that?
00:36:22.440 | Because that's certainly what I've been picking up.
00:36:25.440 | I have been picking up.
00:36:28.960 | And listen, I'm an active manager, I still have faith against all odds that I can add
00:36:35.560 | value.
00:36:36.560 | Most of my brethren are the same.
00:36:38.280 | If Tim thinks that way, okay, again, they're smart guys and they've got a lot of resources,
00:36:43.680 | their fees may be low, but when you multiply a basis point times $4.5 trillion, you're
00:36:49.480 | talking about real money.
00:36:51.840 | Maybe they can, but I've always found Vanguard to be realistic in their expectations.
00:36:58.520 | They're solidly conservative with their capital market projections.
00:37:02.720 | I applaud that.
00:37:04.440 | So if they were to pursue active managers, I think they would hope for alpha in the 50
00:37:12.360 | basis points to 150 basis point range, something reasonable that may be achievable for a limited
00:37:19.840 | amount of their assets.
00:37:21.860 | But is Vanguard successful at picking active managers?
00:37:25.800 | And is this meandering down the road towards active managers, stock funds and private equity,
00:37:33.520 | are they the Yale team, so to speak?
00:37:36.240 | And I question that because we have data on Vanguard's active managers and what Vanguard
00:37:43.900 | likes to put out is data, the last thing I read was the data on 10 years, and again,
00:37:50.840 | this came from Fran, 30 of 37 Vanguard stock funds outperformed their Lipper Peer Group
00:37:59.920 | averages.
00:38:00.920 | Notice they didn't say outperformed the market, okay, they outperformed it over a 10-year
00:38:07.080 | period of time.
00:38:08.400 | However, they didn't talk about the funds that closed, and over a 10-year period of
00:38:14.920 | time, they actually closed nine funds, and most of that was from not performing well.
00:38:23.140 | The latest casualty was the Vanguard US value, but over that 10-year period of time, they
00:38:28.520 | had closed nine actively managed funds, mostly because the performance wasn't.
00:38:33.000 | And so, yes, I know the narrative is that, look at the funds that we currently still
00:38:38.520 | have, survivorship, three-quarters of them outperformed the average fund in their category,
00:38:45.920 | therefore we must be good.
00:38:47.980 | Maybe they are.
00:38:48.980 | And granted, I've done a lot of work on fees.
00:38:51.000 | If you have lower fees, if you're able to negotiate lower fees with active managers,
00:38:56.920 | you will get closer to the market return on average.
00:39:01.520 | You won't outperform the market from what I've seen, but you can get closer to the average
00:39:04.680 | market return because your fees are lower.
00:39:08.200 | To me, it's mostly a random event.
00:39:09.680 | I mean, you're going to go out and hire some good managers, but whether they continue to
00:39:12.760 | outperform or not, it gets to be a random event.
00:39:14.800 | If you look at SPIVA data and you look at other data, you know, the ones who did outperform
00:39:19.600 | the top quartile, some of them stay in the top quartile.
00:39:23.080 | So if your fees are low enough, maybe you're going to be in that upper-lipper category
00:39:27.880 | just because of that.
00:39:29.280 | But when you start looking at your performance by taking away the survivorship bias, it just
00:39:34.080 | doesn't look so good.
00:39:36.360 | And we've had no experience-- and maybe I'm wrong on this, because he did say that they
00:39:39.960 | had Vanguard managers all in very large institutional portfolios, and there they do go out and try
00:39:47.040 | to select private equity managers.
00:39:48.940 | So they have some experience doing that, but not on this scale, right?
00:39:53.780 | So now, you know, Fran, who is in charge of all this, going out on a very large scale
00:40:00.980 | to try to find one private equity manager who's going to be it, I just see that they're
00:40:06.900 | probably going to have to add more managers as they move along here, right?
00:40:10.940 | Absolutely.
00:40:11.940 | I do have to tell you, my love of Jack Bogle-- and I really did, he was a professional friend.
00:40:17.540 | I adored him.
00:40:18.640 | My love of him lets me forgive the marketing comments that you so eloquently just hit upon.
00:40:26.140 | Yes, it hit me when I read that statistic of 30 out of 37, that what happened to the
00:40:33.220 | ones that didn't survive?
00:40:34.220 | I mean, that's the oldest game in the book.
00:40:37.340 | I'm not sure if Bogle would have let that pass him on his watch, but OK, all of Wall
00:40:43.140 | Street seems to do this in Vanguards, just being typical.
00:40:47.460 | You hit upon it, Rick.
00:40:49.300 | Vanguard is changing its complexion a little.
00:40:53.020 | We hope not a lot, or at least I would not be in their phones if I thought a lot.
00:40:59.380 | And I forgive them some of their sins, because they just want to get involved more and more.
00:41:04.580 | So I get what they're doing, but you would expect it more from other shops.
00:41:10.540 | Vanguard is clearly changing to some extent, no doubt about it.
00:41:14.380 | So I can't disagree with all of your observation.
00:41:17.580 | Well, interesting, when they announced three new actively managed funds for the personal
00:41:24.180 | advisor service, PAS program, they put in their press release that these funds will
00:41:29.780 | complement diversified and low-cost index core portfolio holdings in PAS accounts.
00:41:39.780 | Vanguard believes the funds concentrated higher alpha strategies are an ideal fit for PAS
00:41:47.300 | clients with sufficient risk tolerance and patience for active exposure, as they can
00:41:52.700 | materially impact portfolio performance even at a relatively small allocation.
00:41:58.780 | That's not something Jack Bogle would say, and it's not something--
00:42:01.980 | I hadn't gotten.
00:42:02.980 | No.
00:42:03.980 | And David Swensen wouldn't say it either.
00:42:04.980 | But circling back to David Swensen, we're kind of pounding this thing home.
00:42:10.580 | He says, look, if you believe that you have the ability to outperform the market, if you
00:42:14.100 | believe they have the ability to pick active managers who can outperform, why would you
00:42:17.340 | index anything?
00:42:18.340 | You go out and you buy all active managers.
00:42:21.540 | I mean, what about-- why doing this core and satellite thing?
00:42:25.340 | Why bother?
00:42:26.340 | Why, touche.
00:42:27.340 | In the funds that you're referring to, the active funds, do they publish the names of
00:42:32.820 | them, or do they just hold this out as a generic category?
00:42:36.260 | The new funds that they've announced are the Vanguard Advice Select Dividend Growth Fund,
00:42:44.380 | the Vanguard Advice Select Global Value Fund, and the Vanguard Advice Select International
00:42:51.420 | Growth Fund.
00:42:53.300 | Those three actively managed mutual funds-- they're not ETFs, they're mutual funds-- will
00:42:57.620 | be available to PAS, or Personal Advisor Service, clients going forward.
00:43:03.960 | Now, I have my own theories on why they're doing this, and it has nothing to do with
00:43:06.820 | active management.
00:43:07.820 | It has to do with complexity is job security, OK?
00:43:10.900 | In other words, so my comment, tongue in cheek, is that complexity is job security.
00:43:15.980 | And the reason I say that is because I've been an advisor for 33 years.
00:43:19.500 | Oh, please, I'm with you.
00:43:22.160 | If you just put four funds in a portfolio, the total stock market, the total international,
00:43:27.580 | the total bond, and the total international bond, which is the four funds that Vanguard
00:43:31.980 | puts in every PAS client's portfolio, if they go there in cash, they're going to get these
00:43:36.800 | four funds.
00:43:37.800 | Yep.
00:43:38.800 | I, as an advisor-- and now I'm just doing an hourly model, so I'm not managing money
00:43:42.980 | anymore.
00:43:43.980 | So people come to me and say, what do you think?
00:43:44.980 | I say, well, you know, it's pretty easy for you to just manage those funds yourself.
00:43:47.900 | I mean, why would you pay 0.3%, right?
00:43:50.820 | Yeah.
00:43:51.820 | And oh, by the way, the life strategy funds have the exact same four funds in it, that
00:43:55.940 | you could just buy one fund and get the same thing for a lower price.
00:43:58.860 | So why would you do it?
00:44:00.900 | Of course.
00:44:01.900 | And by the way, a lot of clients, a lot of the clients had already terminated Vanguard
00:44:06.220 | and were terminating them, or did make a decision whether to go to Vanguard or not.
00:44:10.180 | Now, I think that PAS program is great if you need to have somebody else manage the
00:44:14.100 | portfolio for you.
00:44:15.500 | And especially if you have this estate planning thing, where if something happens to you and
00:44:19.740 | you're the one who's doing all the money thing at home, and you're afraid of your spouse
00:44:24.340 | or your family not being able to manage the money, great, PAS is wonderful.
00:44:27.380 | I think they're wonderful.
00:44:29.020 | But there's no return incentive there.
00:44:32.460 | Well, this now creates a return incentive.
00:44:34.940 | And why would you do that?
00:44:36.500 | Well, maybe because they're losing assets from people who say, I can do this on my own.
00:44:41.340 | And make it a little bit more complicated, you know, make it a little bit more scary
00:44:45.820 | in a way.
00:44:47.820 | Maybe retain more assets.
00:44:49.500 | That's my biased opinion from being an advisor for 33 years.
00:44:53.660 | Well, wow.
00:44:54.660 | You're something.
00:44:55.660 | You are something else.
00:44:56.660 | But your reputation preceded you, so I was aware of it.
00:44:59.380 | I agree.
00:45:00.380 | I agree.
00:45:01.380 | And oh, do I agree.
00:45:03.140 | Now, new paragraph, I think their low-cost consulting services, the 30 basis points for
00:45:09.740 | this personal advice service, make sense in ways that you can appreciate as an advisor,
00:45:15.300 | that I can appreciate as an institutional money manager.
00:45:18.800 | People do need hand-holding.
00:45:19.800 | They do need advice.
00:45:21.300 | They do need help.
00:45:22.860 | It's just funny to me.
00:45:24.340 | It used to be Vanguard had a single focus, a crystal clear focus.
00:45:30.500 | Well, they don't anymore.
00:45:32.820 | And they're getting into some of the same nonsense that plagues Wall Street.
00:45:37.340 | Not going to swear of consulting services, although I'm not a consultant.
00:45:41.260 | I think there can be value.
00:45:43.500 | But I think all the reasons you just said are absolutely true as well.
00:45:46.660 | So I can't really defend it strongly.
00:45:49.500 | New paragraph, because I was preparing for this call just kind of daydreaming, thinking.
00:45:55.660 | I realized that the Ted Aaronson investment philosophy for the ages, which of course was
00:46:01.740 | stolen from Jack Bogle and everybody else I respected, boils down to three things.
00:46:07.460 | One is keep costs down, and costs are not just fees, they're taxes and all that other
00:46:11.900 | crap.
00:46:12.900 | So keep costs down, two, diversify, arguably the only free lunch in capital market theory,
00:46:19.460 | and three, the one that's a surprise, take risk.
00:46:23.580 | And take risk would fall under your small value, okay?
00:46:28.620 | That's riskier than the S&P 500 without a doubt.
00:46:31.820 | Could it be for David Swensen, private equity and venture capital?
00:46:35.980 | Absolutely.
00:46:37.100 | But he kept the cost down and he diversified even those bets.
00:46:41.260 | So that triumvirate has served me well when you think about it.
00:46:45.620 | And you can fit a lot of, cram a lot of stuff into those three categories.
00:46:49.540 | So if someone wants to sleep well, they want to be tucked into a handful of Vanguard index
00:46:55.380 | funds, fine, and be done with it and leave it alone.
00:46:59.000 | You want to have some fun and take some risk and maybe make more money, do it intelligently,
00:47:04.100 | diversify and get it as inexpensively as possible.
00:47:07.340 | It's really that simple.
00:47:09.260 | And you eat your own cooking, because if I recall over the years, you've been very vocal
00:47:13.380 | about how you invest your family money.
00:47:16.940 | Yes.
00:47:17.940 | I have.
00:47:18.940 | And you use a lazy portfolio.
00:47:20.380 | Could you just talk about that for a second?
00:47:22.300 | Sure.
00:47:23.300 | Yeah.
00:47:24.300 | All the lazy portfolio, and it was kind of a fun, silly exercise with a reporter named
00:47:28.340 | Paul Farrell many years ago, where he said, and he asked David Swensen the same thing.
00:47:32.900 | He was in the same sort of survey.
00:47:35.180 | What would you recommend a portfolio for someone that has a day job?
00:47:39.500 | So assume you do your regular institutional big shot money management practice, Ted, but
00:47:45.780 | what do you do with your own money on the side?
00:47:48.160 | And that's where I said, and indeed it's true, a handful of Vanguard mutual funds and never
00:47:54.900 | change them.
00:47:56.380 | Now people went crazy and they said, how dare you give advice?
00:47:59.740 | I published something about 60 or 70% equity and 20% fixed and 10% cash.
00:48:05.900 | And they said, how dare you give that advice too, because everybody's unique.
00:48:09.500 | I said, please, all I was saying was, of course you should reflect your risk profile and the
00:48:15.260 | needs of a particular family or individual.
00:48:18.580 | But in general, I was reflecting what I had learned since the seventies, which was the
00:48:24.780 | Yale model, the endowment model.
00:48:28.100 | In equity bias, invest in inefficient markets.
00:48:33.660 | Don't worry about liquidity.
00:48:34.660 | Leave it there.
00:48:35.660 | Leave it alone and diversify.
00:48:38.860 | And so the sense behind an endowment model wasn't like, you know, the 10 commandments
00:48:44.580 | from on high.
00:48:46.260 | It was tried and true investment principles that were reflected.
00:48:51.700 | And David was smart enough to say, be careful how you manifest these, unless you're set
00:48:58.700 | up to do so.
00:49:00.060 | This is your point break about full time staff, competence, blah, blah, blah, those sort of
00:49:05.740 | things.
00:49:06.740 | So David had no allusion to why Yale did so well.
00:49:10.420 | Yes, he was a long-term investor.
00:49:12.380 | Yes, he took advantages of big dips like '09 dip, but the other principles were things
00:49:19.580 | that have served investors well forever.
00:49:22.340 | They really have.
00:49:24.260 | So Ted, it's been really great having you here.
00:49:26.380 | In closing, is there any special memory that you have about Jack?
00:49:31.260 | I do, Rick.
00:49:32.260 | A year before Jack died, the CFA Institute, which I'm a proud member of, held its annual
00:49:39.180 | conference, a couple of thousand people here in Philadelphia, obviously before the pandemic.
00:49:43.700 | And Jack, being the local hero in the Philadelphia area, agreed to participate on one condition.
00:49:51.960 | And that condition was that it'd be a question and answer, and that I am the moderator.
00:49:56.780 | Now you say, wow, Ted, I think you're an interesting guy, but I didn't think you were that interesting.
00:50:03.940 | Why would Jack want you as moderator?
00:50:07.180 | And the reason is the following.
00:50:08.780 | And we did this Mutton Jeff Act dozens of times.
00:50:13.620 | He would get up, and then he would announce, why would I, the king of indexing, he never
00:50:19.820 | said that, but the indexer, have a 40-year friendship, this is a couple of years ago,
00:50:25.940 | with an active manager, Ted Aaronson.
00:50:28.780 | And there's a pregnant pause.
00:50:30.220 | And then he would say, because Ted and his partners at AJO put their money where their
00:50:37.420 | mouths are.
00:50:38.860 | They're active managers which charge fees according to their performance-based principles.
00:50:45.860 | And when we don't deliver the outperformance we say we can out-deliver, our fee is zero.
00:50:52.300 | Zero.
00:50:53.380 | And that was the perfect segue into all the stuff that Jack said so eloquently.
00:50:59.620 | True story, there are 2,000 people in the audience.
00:51:03.020 | And I, of course, was embarrassed, and it also made my career, because I loved being
00:51:07.740 | that foil.
00:51:08.740 | I loved playing that role.
00:51:10.140 | To Jack Vogel, oh my God, how flattering was that?
00:51:13.820 | So that's my tale.
00:51:14.820 | Well, thank you, Ted, and we so much thank you for being on Vogel Heads on Investing
00:51:19.340 | today and providing your insights over the years.
00:51:23.060 | Thank you for everything that you've done and everything you've written, and how honest
00:51:26.360 | you've been out there, by the way, about a lot of these things.
00:51:28.980 | Oh, Rick, it's my pleasure.
00:51:31.460 | Good luck with your new venture.
00:51:33.020 | Thank you, Rick.
00:51:34.020 | Appreciate it.
00:51:35.020 | This concludes Vogel Heads on Investing, episode number 38.
00:51:38.860 | Join us each month as we have a new guest and talk about a new topic.
00:51:42.940 | In the meantime, visit VogelHeads.org and the Vogel Head Wiki.
00:51:47.380 | Check out the Vogel Heads new YouTube channel, Vogel Heads Twitter, Vogel Heads Facebook,
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00:51:58.780 | Thanks for listening.
00:52:05.780 | (upbeat music)
00:52:08.360 | you