by Barry Ritholtz
(Bloomberg View) --Earlier this month, Vanguard Group Inc. said that William McNabb, chief executive officer and chairman, would step down as CEO at the start of 2018. McNabb, who will remain chairman and focus on international growth for the world’s second-largest asset manager, will be succeeded by Tim Buckley.
I was curious who about Tim Buckley, who will be just the fourth person to serve as Vanguard’s CEO, and thought you might be as well. So I sent him questions via email, covering everything from exchange-traded funds, technology, active management, price discovery, costs, robo-advisers, the investment outlook, and even humility. What follows are his lightly edited answers.
Barry Ritholtz: You have some pretty big shoes to fill: John Bogle, Jack Brennan and Bill McNabb. How are you approaching this responsibility?
Tim Buckley: I’ve had the distinct opportunity to work with all three of Vanguard’s CEOs and have learned so much about our company, the investment management business, the financial markets and leadership. There could be no better training ground than spending my entire 26-year career at Vanguard and the last 16 years on the senior leadership team. I am fortunate that Bill will remain as chairman for the foreseeable future, and I will benefit from a transition period, spending the next five months shadowing him and immersing myself in the new role. I will also benefit from a great team -- colleagues who grew up with me at the firm and several new members of the team that bring outside experience and perspective. I can’t wait to get started.
BR: You led both the Information Technology division as chief information officer as well as the Investment Management group as chief investment officer. That’s a fairly unique combination; what does this mean to how you will approach the job?
TB: To leverage technology effectively, you need to understand the core of the business issue you are trying to solve and the potential of the technology to provide the answer. Certainly, big data has the potential to dramatically improve investment decision-making. Machine learning could lower trading costs. Robotics could raise client-service levels. However, companies fail with such opportunities when they blindly pursue the hype of these technologies, never truly vetting the hypothesis they are trying to test. We fight this potential pitfall with a tight integration of our business and technology folks. Business and investment leaders are expected to know technology and our IT crew knows how we manage money and serve our clients. We go as far as to rotate crews between divisions. My background follows that same pattern.
BR: Now that the former chief technologist at Vanguard is going to be the CEO, should we expect a big increase in fintech spending in the entire industry?
TB: You’ve already seen massive spending in fintech, and it will continue. The digital transformation occurring across all industries -- transportation, medicine, energy, etc. -- is exciting. Consumer expectations are now being set by the likes of Amazon, Apple and Google; keeping pace with those kinds of firms requires focus, speed and continual investment. Arguably, we have one of the most successful fintech offerings in the advice space with the 2015 launch of our Personal Advisor Services (PAS), our hybrid advice offering that now manages $80 billion.
BR: There have been concerns expressed that ETFs in general and specifically passive indexing in particular are distorting price discovery. Do you share those concerns?
TB: No. Fundamentally, index funds are price takers. All the information that is currently known about a company goes into its price. As you know, that price discovery is done by buyers and sellers meeting in the marketplace. Roughly 95 percent of that daily trading is done by active managers. They are setting the price that an index buys at. ETFs are typically index funds and that rule would apply to them. That said, there are occasions when an ETF trades away from the underlying value of its securities. In most cases, that discount or premium is actually improving price discovery, incorporating additional information such as liquidity of that market into the price.
Of course, ETFs are not above reproach. We’ve seen a proliferation of new products, not all of which are based on sound and enduring strategies. Niche or esoteric products in ETF form probably don’t belong in investors’ long-term portfolios.
BR: One of the early lessons in my career is that the financial markets will humble you. How did Mr. Market humble you? What did you learn from that?
TB: The market takes no prisoners -- it’s ruthless, unemotional and almost impossible to predict. I think the biggest lesson learned is just that no matter how smart someone may be, no matter how significant the resources they bring to bear in their work, the market is fickle, especially in the short term, and it must be respected. It’s why Vanguard is constantly imploring investors to control what they can, because the market is certainly one of the things you can’t.
I gave up trying to time the markets years ago! I won’t claim that I saw the depths of the market collapse coming in 2008, nor did I know that the recovery would occur so quickly. But our disciplined diversified approach prepared clients, including me, for both.
BR: You wrote that with “asset classes fully priced, we should also be prepared for a lower return environment.” What should investors do in anticipation of lower-expected returns?
TB: Well, investing is not alchemy -- you can’t create returns where there are none. You have to accept what the market gives you. Given current valuations and our expectations for muted returns, we would encourage investors to save more and spend less. It sounds basic, but living below your means is a powerful strategy. One that takes on more importance in a low-return environment.
BR: Almost a third of Vanguard’s assets are actively traded. What can you (or anyone else) do to provide innovation in the active space?
TB: Active management doesn’t suffer from a lack of innovation. It’s a fiercely competitive space with highly capable and creative people. However, what active management does suffer from are high costs. Many active managers beat the market, but their clients never benefit from their skill because the fees charged often offset the available alpha. So, the spoils frequently go to the manager and not to the end investor. At Vanguard, we employ those very same highly capable managers, but at low enough fees that our clients can benefit from their skill.
BR: You have said that “our mutual structure, our investment principles, our client-focused culture, and our commitment to our crew” will not change. What else might?
TB: Our fundamental mission of giving our investors the best chance for investment success will not change. But how we do it and where we do it will change. We abhor complacency and are driven to improve the value we offer. For us it is more exciting to think of the potential of tomorrow than to celebrate the successes of today. Take the evolution of advice at Vanguard over 20 years. It went from a typical 50-page financial plan delivered through the mail to the dynamic digital experience with a certified financial planner that it is today in Personal Advisor Services.
BR: You’ve said, “Our clients should not only expect change, but demand change.” Please explain.
TB: They are not just our clients, but they are our owners too. Just like any other owner, they should expect us to become higher quality, lower cost and more competitive every day. As my former boss Jack Brennan used to say, “Yesterday will be the worst we will ever be.” Jack implored us to live in a state of perpetual dissatisfaction so that our clients might be perennially satisfied.
BR: Vanguard has had an enormous run the past decade, going from less than $1 trillion in assets under management to more than $4.4 trillion. Any concerns that you’re coming in at a top?
TB: I don’t view it as coming in at the top. We’re just getting started! Vanguard has fabulous momentum in the marketplace, but we can do so much more. The costs of investing are still too high in the U.S. and elsewhere. Complexity and misaligned incentives still interfere with investor outcomes. Technology could be better leveraged to advise clients. I couldn’t imagine a better time to be at Vanguard!
BR: How can you maintain or even accelerate this growth?
TB: It really isn’t about growth for us. We’re focused on making Vanguard the best place to invest for our clients. Growth is simply an affirmation of the value we are delivering and the trust our clients put in us. Certainly, we’ve experienced extraordinary growth. But we’ve grown responsibly and organically. No acquisitions. No expensive marketing campaigns. No hot products that serve to gather assets but do little to help investors. We have grown by gaining the trust of our investors one by one.
BR: The so-called Vanguard Effect has been well documented, pressuring competitors to drop fees. How much lower can Vanguard drive fees?
TB: Vanguard is built to lower cost. It has been an important way that we have helped investors, and to be sure, we’ll continue to lower costs. But, it’s not the only way to help investors. The next basis point in cost savings is important, but maybe not as impactful as, say, getting a client to save more. The next basis point in cost savings will result in higher returns, but so will investing further in our active capabilities to find new sources of alpha. There is more than one trick up our sleeve to improve client returns.
BR: What are you telling investors they should expect over the next few years?
TB: Our economic outlook is for continued slow and steady growth in the U.S. We have believed for some time that rates would rise slower than people expected, and that equity valuations are approaching the upper end of their historical range. Figuring out what that means for short-term returns can be a fool’s errand. Over the next five to 10 years, clients should be ready for equity returns in the 5 percent to 7 percent range and bond returns of 2 percent to 3 percent.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
To contact the author of this story: Barry Ritholtz at [email protected] To contact the editor responsible for this story: James Greiff at [email protected]
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