We had to edit last week’s interview with Vanguard’s Tim Buckley (I went on too long). Here is the complete and unedited interview:
Q&A with Tim Buckley, Vanguard Group’s incoming Chief Executive Officer
Earlier this month, we learned that William McNabb, Vanguard Group’s current Chief Executive Officer and Chairman, will step down as CEO, effective January 1, 2018. McNabb will stay on as Chairman of Vanguard, focusing on international growth for the world’s second largest asset manager. He will also continue as Chairman of the Investment Company Institute (ICI).
McNabb, Vanguard’s third CEO, will use the rest of the year to help transition the firm’s leadership to Tim Buckley, Vanguard’s former soon to be Vanguard’s fourth ever Chief Executive Officer.
We were curious who Tim Buckley is, and thought you might be also. So we sent him questions via email, covering everything from ETFs to technology, active management, price discovery, costs, robo-advisors, even humility. What follows are his unedited answers:
Ritholtz: Congratulations! How does it feel to know that come January 2018, you will be (only) the fourth CEO in Vanguard’s history?
Buckley: It is an awesome responsibility. We hold in our hands millions of investors’ nest eggs, the college dreams that parents have for their kids, and the financial piece of mind of retirees. Vanguard has an important responsibility to protect, grow, and steward our clients’ assets.
Ritholtz: You have some pretty big shoes to fill: John Bogle, Jack Brennan and (literally in the case of current CEO) Bill McNabb. How are you approaching this responsibility?
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 to the team that bring outside experience and perspective. I can’t wait to get started.
Question: You were “CIO2 Squared” – 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?
Answer: 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 significantly. 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 know how we manage money and serve our clients. We go as far as to rotate crew between divisions. My background follows that same pattern.
Question: Now that the former chief technologist at Vanguard is going to be their CEO — should we expect a massive uptick in FinTech spending across the entire industry?
Answer: 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.
Question: There have been concerns expressed that ETFs in general and specifically passive indexing in particular are “distorting price discovery” – do you share those concerns?
Answer: 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% 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.
Q: “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?
A: The market takes no prisoners—it’s ruthless, unemotional, and almost impossible to predict. I think the biggest lesson learned is just that—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.
Q: 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?
A: 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 going forward, 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.
Q: Almost a third of Vanguard’s assets are actively traded. What can you (or anyone else) do to provide innovation in the active space?
A: Listen, 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.
Q: You have said “Our mutual structure, our investment principles, our client-focused culture, and our commitment to our crew” will not change. What else might?
A: 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 PAS. Already we are thinking about how we can improve on what we have learned from PAS to deliver advice services in new channels and to different geographies.
Q: Sayeth Tim Buckley: “Our clients should not only expect change, but demand change.” Please explain.
A: 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.
Q: You began as an assistant to the legendary John Bogle. What was it like working with him?
A: Where to start? It was an exceptional opportunity to start my career working for Jack Bogle. By his side, I learned the value of hard work, the importance of putting the client first, the power of consistency and constancy of message, and, of course, from an investment standpoint, that costs matter!
Q: Vanguard has had an enormous run the past decade, going from under a trillion dollars to over $4.4 trillion. Any concerns you afraid that you’re coming in at a top? It’s a bit like Tim Cook taking over for Steve Jobs.
A: 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 US 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!
Q: How can you maintain or even accelerate this growth? The numbers have been phenomenal.
A: 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.
Q: The “Vanguard Effect” has been well documented – any space you push into sees competitors forced to drop fees, sometimes, radically. How much lower can Vanguard drive fees?
A: 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 costs 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.
Q: This was a stealthy announcement, with no leaks. How did you keep this so quiet
A: Bill orchestrated it masterfully with our Board and communications team. We wanted to ensure that our crew and clients heard the news from us first. The circle of people in the know was small and absolutely on a need to know basis to nail the communication. Mission accomplished.
The announcement, of course, was just the first step in communication. Since then, Bill and I have held an “all hands” meeting with internal crew and a meeting with the senior leaders of Vanguard. Over the next five months, I will dive into each division of Vanguard and meet with the leadership teams, crew, and several clients in those groups.
Q: What are you telling investors they should expect over the next few years?
A: Our economic outlook is for continued slow and steady growth in the US. 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 5-10 years, clients should be ready for equity returns in the 5-7% range and bond returns of 2-3%.
Q: What’s your year-end targets for U.S. 10-year Treasury and Federal Funds Rate? Just kidding.
Thanks Tim, much appreciated…