This is Master's in Business with Barry rid Holds on Bloomberg Radio.

This is Master's in Business with Barry rid Holds on Bloomberg Radio.

This week on the podcast, I have an extra special guest, Greg Davis, chief investment officer at a little shop called the Vanguard Group, which manages eight trillion dollars. He's only responsible for seven point three trillion of it, so kind of a slacker. I found this conversation to be absolutely a masterclass in how to think about investing risk, how to think about where your returns come from, what sort of behavioral problems lead to bad outcomes, and all of the usual things that we've learned over the years from the success of Vanguard. Few people are in a position to see what's going on in the world of investing, whether it's institutional or retail, better than Vanguard's CIO, and Greg Day just does an amazing job. I thought this was a really fascinating conversation. I think you will also with no further ado, my interview with Vanguard CIO Greg Davis. Greg Davis, Welcome to Bloomberg.

This week on the podcast, I have an extra special guest, Greg Davis, chief investment officer at a little shop called the Vanguard Group, which manages eight trillion dollars. He's only responsible for seven point three trillion of it, so kind of a slacker. I found this conversation to be absolutely a masterclass in how to think about investing risk, how to think about where your returns come from, what sort of behavioral problems lead to bad outcomes, and all of the usual things that we've learned over the years from the success of Vanguard. Few people are in a position to see what's going on in the world of investing, whether it's institutional or retail, better than Vanguard's CIO, and Greg Day just does an amazing job. I thought this was a really fascinating conversation. I think you will also with no further ado, my interview with Vanguard CIO Greg Davis. Greg Davis, Welcome to Bloomberg.

Thanks very great to be here with you.

Thanks very great to be here with you.

Great to have you. So let's talk a little bit about your background, which is kind of interesting. Undergraduate you get a BSN insurance from Penn State. What led to an interest in insurance.

Great to have you. So let's talk a little bit about your background, which is kind of interesting. Undergraduate you get a BSN insurance from Penn State. What led to an interest in insurance.

It's a long story, but originally I went to school for engineering. Got to school, realized that I wasn't very good at mechanical drawing, which is a big part of aerospace engineering curriculum. So I started to look at other opportunities and primarily in a business space, so start examining opportunities in finance, real estate, and insurance. Penn State was one of the few schools that actually had an insurance major, and you know, with the goal of actually getting becoming gainfully employed. When I graduated college, I thought, hey, having a a somewhat unique background would be helpful and it worked out. And had multiple job offers coming out of school from a number of different insurance companies and had an opportunity to be an underwriter for a few years before I decided to go back to school to get the NBA.

It's a long story, but originally I went to school for engineering. Got to school, realized that I wasn't very good at mechanical drawing, which is a big part of aerospace engineering curriculum. So I started to look at other opportunities and primarily in a business space, so start examining opportunities in finance, real estate, and insurance. Penn State was one of the few schools that actually had an insurance major, and you know, with the goal of actually getting becoming gainfully employed. When I graduated college, I thought, hey, having a a somewhat unique background would be helpful and it worked out. And had multiple job offers coming out of school from a number of different insurance companies and had an opportunity to be an underwriter for a few years before I decided to go back to school to get the NBA.

How'd you end up at Merrill Lynch in the nineteen nineties, So I ended up going through the Wharton program.

How'd you end up at Merrill Lynch in the nineteen nineties, So I ended up going through the Wharton program.

I did an internship in the summer at City Bank Securities and fixing come sales and trading, got a couple different job offers across the Street. But the reason I went to Meryl was because they had this unique global debt rotation program that allowed you to rotate through a couple of different business units in fixingcome sales, and trading, and I knew I wanted to do trading.

I did an internship in the summer at City Bank Securities and fixing come sales and trading, got a couple different job offers across the Street. But the reason I went to Meryl was because they had this unique global debt rotation program that allowed you to rotate through a couple of different business units in fixingcome sales, and trading, and I knew I wanted to do trading.

Were you at the Downtown the World Final Financial by the way, that could be the most amazing trading desk. I've been there a couple of times, and in the nineteen nineties, when you walked onto the equity floor, you were just hit with a wall of sound and energy. I've never seen or experienced anything like that anywhere else.

Were you at the Downtown the World Final Financial by the way, that could be the most amazing trading desk. I've been there a couple of times, and in the nineteen nineties, when you walked onto the equity floor, you were just hit with a wall of sound and energy. I've never seen or experienced anything like that anywhere else.

And the fixed income floor was equally sized, just on a different floor, but also a similar type environment. But it was a very interesting place to start a career after grad school. But that experience got cut short because right around that time when my class started, it was the tail end of the Asian financial crisis, the.

And the fixed income floor was equally sized, just on a different floor, but also a similar type environment. But it was a very interesting place to start a career after grad school. But that experience got cut short because right around that time when my class started, it was the tail end of the Asian financial crisis, the.

Russian roue seven or ninety eight.

Russian roue seven or ninety eight.

I started in the beginning of I started in September of ninety eight, and that happened in ninety seven, but you had the Asian financial crisis, the Russian ruble devaluation, and then you had long term capital management blowing up. So there was a lot of changes that was happening across the street in terms of you know, layoffs happening, and our program got cut short, ended up getting placed in a non trading role, and you know, decided to look at other opportunities outside and came across this great opportunity to pursue trading at Vanguard, you know, twenty four years ago.

I started in the beginning of I started in September of ninety eight, and that happened in ninety seven, but you had the Asian financial crisis, the Russian ruble devaluation, and then you had long term capital management blowing up. So there was a lot of changes that was happening across the street in terms of you know, layoffs happening, and our program got cut short, ended up getting placed in a non trading role, and you know, decided to look at other opportunities outside and came across this great opportunity to pursue trading at Vanguard, you know, twenty four years ago.

So let's talk about that, and your bio explains how you were recruited to Van Guard. I thought that was a really interesting story. Tell us a little bit about what brought you to Vanguard.

So let's talk about that, and your bio explains how you were recruited to Van Guard. I thought that was a really interesting story. Tell us a little bit about what brought you to Vanguard.

So it was interesting because I was pretty pretty keen on staying in New York. I had a number of relationships that I built up and had another job lined up in New York City. But one of my best friends that I grew up with actually worked in the HR department at Vanguard, and she was like, you should come down and talk to some people at Vanguard, And at first I kind of blew it off, but she was pretty persistent. So I came down, met with our head of the portfolio review department, which oversees our external managers, met with our head of brokerage, and then met with the head of Bond Indexing, who was Ken Volpert at the time, and me and him had an instant connection, and so Ken was the main reason I came to Vanguard. Vanguard had a great reputation already we were much smaller at the time, but Ken had a track record of bringing new people onto his team, developing them and seeing them move into bigger jobs over time. And as somebody who was relatively new to the industry, that's the kind of mentor and boss I was looking for. So, you know, Ken ended up being, you know, one of the best bosses I've ever had in my career.

So it was interesting because I was pretty pretty keen on staying in New York. I had a number of relationships that I built up and had another job lined up in New York City. But one of my best friends that I grew up with actually worked in the HR department at Vanguard, and she was like, you should come down and talk to some people at Vanguard, And at first I kind of blew it off, but she was pretty persistent. So I came down, met with our head of the portfolio review department, which oversees our external managers, met with our head of brokerage, and then met with the head of Bond Indexing, who was Ken Volpert at the time, and me and him had an instant connection, and so Ken was the main reason I came to Vanguard. Vanguard had a great reputation already we were much smaller at the time, but Ken had a track record of bringing new people onto his team, developing them and seeing them move into bigger jobs over time. And as somebody who was relatively new to the industry, that's the kind of mentor and boss I was looking for. So, you know, Ken ended up being, you know, one of the best bosses I've ever had in my career.

We'll talk a little bit about leadership and crew development a little later. It's really a fascinating subject. But you eventually serve as director of Vanguard Australia and Asia Pacific and CIO of the region. Tell us a little bit about that experience in the two thousands, I mean, the nineties was its own unique animal, but the two thousands certainly weren't boring.

We'll talk a little bit about leadership and crew development a little later. It's really a fascinating subject. But you eventually serve as director of Vanguard Australia and Asia Pacific and CIO of the region. Tell us a little bit about that experience in the two thousands, I mean, the nineties was its own unique animal, but the two thousands certainly weren't boring.

Now, So my family and I we moved to Melbourne, Australia where offices. It was a just a fabulous experience, both professionally and personally. Just having an opportunity to work, you know, in a different country, embracing the Australian culture, but being part of the Asia pac region because at the time we had an office in Hong Kong as well, where we were starting up our ETF business. But it was a tremendous experience because I had started off in bond trading, worked my way into portfolio management and running the bond the nexting team for a number of years, and then it got asked to take this responsibility which was much broader. So I was a mile deep on a subject matter of bond indexing, but now I had the opportunity to lead an equity indexing group, the entire fixed income team, our investment strategy team that does research for our clients around portfolio construction, those types of things. But the other big part of it was having an opportunity to be on the Australian executive team that actually ran the business. So from a broadening standpoint, I'm an investment guy, but that was an opportunity to actually learn about the business, how Vanguard Australia operates in the ecosystem, how we're trying to market our products and services, how we're engaging with regulators, the media, the whole nine yards, and then also being part of the board of directors down there. So from a broadening standpoint, that experience was unbelievable, so valued every minute that I was down there. And unfortunately or fortunately depending on how you look at it, you know, the three to four year assignment ended up being thirteen months, but I got a great opportunity to come back to run the fixed income group as you had As you had mentioned, but the time in Australia was fabulous for both myself, my wife and the kids.

Now, So my family and I we moved to Melbourne, Australia where offices. It was a just a fabulous experience, both professionally and personally. Just having an opportunity to work, you know, in a different country, embracing the Australian culture, but being part of the Asia pac region because at the time we had an office in Hong Kong as well, where we were starting up our ETF business. But it was a tremendous experience because I had started off in bond trading, worked my way into portfolio management and running the bond the nexting team for a number of years, and then it got asked to take this responsibility which was much broader. So I was a mile deep on a subject matter of bond indexing, but now I had the opportunity to lead an equity indexing group, the entire fixed income team, our investment strategy team that does research for our clients around portfolio construction, those types of things. But the other big part of it was having an opportunity to be on the Australian executive team that actually ran the business. So from a broadening standpoint, I'm an investment guy, but that was an opportunity to actually learn about the business, how Vanguard Australia operates in the ecosystem, how we're trying to market our products and services, how we're engaging with regulators, the media, the whole nine yards, and then also being part of the board of directors down there. So from a broadening standpoint, that experience was unbelievable, so valued every minute that I was down there. And unfortunately or fortunately depending on how you look at it, you know, the three to four year assignment ended up being thirteen months, but I got a great opportunity to come back to run the fixed income group as you had As you had mentioned, but the time in Australia was fabulous for both myself, my wife and the kids.

Yeah. You know, what's really interesting is everybody tends to think of Wall Street and investing in finance in terms of the investing side, but the business side is really intriguing. There are a lot endless variety of business models and seeing how people operate that it's really an education one that I think a lot of people coming out of school don't think about goes. You think about the sexy things. Hey, I want to do venture capital, I want to do this, I want to do that. The business side is really quite fascinating and somewhat overlooked.

Yeah. You know, what's really interesting is everybody tends to think of Wall Street and investing in finance in terms of the investing side, but the business side is really intriguing. There are a lot endless variety of business models and seeing how people operate that it's really an education one that I think a lot of people coming out of school don't think about goes. You think about the sexy things. Hey, I want to do venture capital, I want to do this, I want to do that. The business side is really quite fascinating and somewhat overlooked.

That's very, very true, but it's also one of those things that you don't necessarily appreciate it until you've been doing a certain job for a while. So if you would have said to me, you know, when I first came out of grad school and you said to me, hey, I want you to go to the business side, you know I would have said, no, thank you, I really want to do trading and portfolio management. But you get to a point in your career where you feel like, hey, you've you've learned a lot, You've developed a team, and you're looking for new challenges and a chance to stretch yourself and grow and learn.

That's very, very true, but it's also one of those things that you don't necessarily appreciate it until you've been doing a certain job for a while. So if you would have said to me, you know, when I first came out of grad school and you said to me, hey, I want you to go to the business side, you know I would have said, no, thank you, I really want to do trading and portfolio management. But you get to a point in your career where you feel like, hey, you've you've learned a lot, You've developed a team, and you're looking for new challenges and a chance to stretch yourself and grow and learn.

And that's exactly what that opportunity provided.

And that's exactly what that opportunity provided.

So now you eventually get you go to fixed in and then you're elevated to chief investment officer of all a vangroup. Take us through a day in the life or or a week in the life of Vanguard CIO.

So now you eventually get you go to fixed in and then you're elevated to chief investment officer of all a vangroup. Take us through a day in the life or or a week in the life of Vanguard CIO.

Well, it's a lot.

Well, it's a lot.

I mean, there's a there's a tremendous amount of meetings and the way I would the way I would describe it, Barry, it's a mix. It's you know, client related, it's media like we're doing today. It's also being part of the senior team that runs Vanguard, the business of Vanguard right from a client strategy marketing standpoint, and then you know, overseeing, overseeing the the the investment team, So a variety of risk meetings, a variety of economic meetings. So it's a any given day could be slightly different, but it typically will capture those categories over time. And so you know, it's uh, there's there's always plenty of stuff going on in the marketplace and then the business that that that keeps us very busy.

I mean, there's a there's a tremendous amount of meetings and the way I would the way I would describe it, Barry, it's a mix. It's you know, client related, it's media like we're doing today. It's also being part of the senior team that runs Vanguard, the business of Vanguard right from a client strategy marketing standpoint, and then you know, overseeing, overseeing the the the investment team, So a variety of risk meetings, a variety of economic meetings. So it's a any given day could be slightly different, but it typically will capture those categories over time. And so you know, it's uh, there's there's always plenty of stuff going on in the marketplace and then the business that that that keeps us very busy.

And you've now been with Vanguard for almost twenty five years.

And you've now been with Vanguard for almost twenty five years.

You have to be twenty four in November.

You have to be twenty four in November.

So you're you're year away from a big milestone. That period very much encompasses Vanguard going from and admittedly successful but not enormous entity till you know, I think the two thousands, especially the financial crisis, changed how people thought about managed assets, indexing advisory versus transactional and Vanguard along with black Rock, have been two of the biggest beneficiaries of this. Tell us a little bit about what you've experienced over the arc of those twenty four years that you were really there as the company ramped up and then went they found a whole other gear and just exploded.

So you're you're year away from a big milestone. That period very much encompasses Vanguard going from and admittedly successful but not enormous entity till you know, I think the two thousands, especially the financial crisis, changed how people thought about managed assets, indexing advisory versus transactional and Vanguard along with black Rock, have been two of the biggest beneficiaries of this. Tell us a little bit about what you've experienced over the arc of those twenty four years that you were really there as the company ramped up and then went they found a whole other gear and just exploded.

Yeah, it's absolutely right, Barry I mean, it's been a lot in terms of, you know, just the changing perception in the marketplace of how investors invest right. And you're right, So you think back thirty years, you know, there are so many people who are focused on individual security selection, picking individual stocks and the reality is that you know, we know that's very difficult to do and outperforming a broader market. So does a big push for folks to get the appropriate level of asset allocation in a highly diversified, low cost way. And you know, the ETF the ETF rapper, you know, allowed people to get that exposure inexpensively holding it in a brokerage account. So it really provided a nice tailwind to folks in the indexing space who provided those products. In Vanguard, is you know, one of the big beneficiaries of that that migration away from individual stock selection to to broad based index exposure to.

Yeah, it's absolutely right, Barry I mean, it's been a lot in terms of, you know, just the changing perception in the marketplace of how investors invest right. And you're right, So you think back thirty years, you know, there are so many people who are focused on individual security selection, picking individual stocks and the reality is that you know, we know that's very difficult to do and outperforming a broader market. So does a big push for folks to get the appropriate level of asset allocation in a highly diversified, low cost way. And you know, the ETF the ETF rapper, you know, allowed people to get that exposure inexpensively holding it in a brokerage account. So it really provided a nice tailwind to folks in the indexing space who provided those products. In Vanguard, is you know, one of the big beneficiaries of that that migration away from individual stock selection to to broad based index exposure to.

Say the very least. So let's discuss leadership and what you do to develop crew members and to identify and foster other people's leadership skills.

Say the very least. So let's discuss leadership and what you do to develop crew members and to identify and foster other people's leadership skills.

Yeah, so it's a great question.

Yeah, so it's a great question.

You know, one of the things that we try to focus on is you know, as part of our interview process, you know, always trying to assess and gauge the the willingness and the interest for folks to develop the leadership competencies in addition to the technical competencies. So you know, when we think about our investment professionals, clearly they have to be technically sharp, they have to learn those skills to do their jobs day to day. But if they also want to be the head of a trading desk and lead a major function within our group or within broader vanguard, they also have to be really good at identifying talent, developing talent, maintaining really strong relationships, you know, being strategic thinkers and things of that nature. And so, you know, these are the types of things that we have a number of programs that we run to help us assess how people are progressing through that leadership journey.

You know, one of the things that we try to focus on is you know, as part of our interview process, you know, always trying to assess and gauge the the willingness and the interest for folks to develop the leadership competencies in addition to the technical competencies. So you know, when we think about our investment professionals, clearly they have to be technically sharp, they have to learn those skills to do their jobs day to day. But if they also want to be the head of a trading desk and lead a major function within our group or within broader vanguard, they also have to be really good at identifying talent, developing talent, maintaining really strong relationships, you know, being strategic thinkers and things of that nature. And so, you know, these are the types of things that we have a number of programs that we run to help us assess how people are progressing through that leadership journey.

We help develop people on that leadership journey along the way.

We help develop people on that leadership journey along the way.

But the assessment process also allows us to figure out, you know, where people might have gaps and need an opportunity to go back and do a bit of a refresher. So you know, we've been very actively involved in that whole process for our investment professionals, and you know, it's paid off. It's paid spades in terms of you know, it helps us make sure that we're recruiting the right people. It helps us in terms of retaining folks because when you work for a great boss, you're motivated to stay at that firm because we know, you know, it's difficult to make a strong connection with the boss at times. And to the extent that Vanguard has great leaders in the seats and we feel like, hey, we have some of the coolest jobs that are available to people. You couple that with great leadership. I mean, it's a win win formula for long term success for our organization.

But the assessment process also allows us to figure out, you know, where people might have gaps and need an opportunity to go back and do a bit of a refresher. So you know, we've been very actively involved in that whole process for our investment professionals, and you know, it's paid off. It's paid spades in terms of you know, it helps us make sure that we're recruiting the right people. It helps us in terms of retaining folks because when you work for a great boss, you're motivated to stay at that firm because we know, you know, it's difficult to make a strong connection with the boss at times. And to the extent that Vanguard has great leaders in the seats and we feel like, hey, we have some of the coolest jobs that are available to people. You couple that with great leadership. I mean, it's a win win formula for long term success for our organization.

That's really interesting. A lot of people in finance have been saying it's difficult to find people in this environment. What is Vanguard doing to keep the seats filled and make sure you have an ongoing source of talent coming to Pennsylvania.

That's really interesting. A lot of people in finance have been saying it's difficult to find people in this environment. What is Vanguard doing to keep the seats filled and make sure you have an ongoing source of talent coming to Pennsylvania.

Yeah, so we are very heavily involved. We have you in our group.

Yeah, so we are very heavily involved. We have you in our group.

Specifically, we have the Investment Management Development Program where every year we have a cadre of summer interns as well as full time folks who just finished their undergraduate studies who come to us in a rotational program that gives them exposure to equities various points in fixed income and risk and our portfolio reviewed department as a nice entry point for people to explore and see what they really want to do. And so we just had a cadre that launched to their final placement earlier this week, and so there were seven individuals that span the range from risk to high yield trading to investment grade research. And you know, it's a nice talent pipeline. And the great thing is the talent that we're seeing today is so much greater than the talent that we were able to attract twenty years ago. And so, you know, just the level of awareness, understanding of markets, the technical skills from an IT and data science standpoint that these folks are bringing to the table today is pretty amazing. And so that's really the pipeline for us. And then you know, we will supplement that with experienced senior hires, you know, as we you know, if there's turnover and we don't have somebody on a bench ready to go to move into a bigger seat as well, or if we're trying to build that new capabilities like we've done in the.

Specifically, we have the Investment Management Development Program where every year we have a cadre of summer interns as well as full time folks who just finished their undergraduate studies who come to us in a rotational program that gives them exposure to equities various points in fixed income and risk and our portfolio reviewed department as a nice entry point for people to explore and see what they really want to do. And so we just had a cadre that launched to their final placement earlier this week, and so there were seven individuals that span the range from risk to high yield trading to investment grade research. And you know, it's a nice talent pipeline. And the great thing is the talent that we're seeing today is so much greater than the talent that we were able to attract twenty years ago. And so, you know, just the level of awareness, understanding of markets, the technical skills from an IT and data science standpoint that these folks are bringing to the table today is pretty amazing. And so that's really the pipeline for us. And then you know, we will supplement that with experienced senior hires, you know, as we you know, if there's turnover and we don't have somebody on a bench ready to go to move into a bigger seat as well, or if we're trying to build that new capabilities like we've done in the.

Past, huh, really impressive. Let's talk a little bit about the Vanguard total market index that's become the largest fund in the world. What goes into managing a fund of that size and that importance to Vanguard.

Past, huh, really impressive. Let's talk a little bit about the Vanguard total market index that's become the largest fund in the world. What goes into managing a fund of that size and that importance to Vanguard.

I mean, it really starts, It really starts with the people, you know, just making sure that we have humble, really talented professionals who you know are truly dedicated to managing these uh these index funds on a day to day basis. And you know, the way the way we think about it are our pms also service traders, and so they're working very closely day by day making sure that Total Stock Market Index fund and all of our other equity index funds are you know, minimizing the tracking here, also trying to make sure that we're minimizing transaction costs as we're transacting in the marketplace, also being cognizant of the tax implications of trading activity, and then also looking to add value at the margin through opportunistic ideas and you know, through rebalancing corporate actions, new issues and things that nature to try to eat into the expense ratio at the margin, but again in a highly highly riskcontrolled way. And the great thing is we have, you know a team of folks who have been doing this for decades, and you know, they're unmatched in the industry because they're dedicated to doing indexing. A lot of firms you find folks who start with indexing and move on to something else. At Vanguard, this is a career destination for a lot of these folks and they love every minute of what they do.

I mean, it really starts, It really starts with the people, you know, just making sure that we have humble, really talented professionals who you know are truly dedicated to managing these uh these index funds on a day to day basis. And you know, the way the way we think about it are our pms also service traders, and so they're working very closely day by day making sure that Total Stock Market Index fund and all of our other equity index funds are you know, minimizing the tracking here, also trying to make sure that we're minimizing transaction costs as we're transacting in the marketplace, also being cognizant of the tax implications of trading activity, and then also looking to add value at the margin through opportunistic ideas and you know, through rebalancing corporate actions, new issues and things that nature to try to eat into the expense ratio at the margin, but again in a highly highly riskcontrolled way. And the great thing is we have, you know a team of folks who have been doing this for decades, and you know, they're unmatched in the industry because they're dedicated to doing indexing. A lot of firms you find folks who start with indexing and move on to something else. At Vanguard, this is a career destination for a lot of these folks and they love every minute of what they do.

So a lot of indexers will track somebody else's index. The Vanguard Total Market Index is something that Vanguard itself creates. There's a separate index group and there's a whole bunch of technical ways that's set up. What goes into making changes in stock memberships tell us a little bit about what that process is like.

So a lot of indexers will track somebody else's index. The Vanguard Total Market Index is something that Vanguard itself creates. There's a separate index group and there's a whole bunch of technical ways that's set up. What goes into making changes in stock memberships tell us a little bit about what that process is like.

So so for total stock market, the Total Stock Market Index fund that is a CRIPS fund that is you know, run by the University Chicago. They create the benchmark. We help them in terms of identifying and creating the parameters around how.

So so for total stock market, the Total Stock Market Index fund that is a CRIPS fund that is you know, run by the University Chicago. They create the benchmark. We help them in terms of identifying and creating the parameters around how.

That that that index should be constructed.

That that that index should be constructed.

The biggest things are you know, primarily when there's corporate actions, there's there's I pos. Those are the things that typically drive changes because again this represents the total market. So you have small cap, small cap, MidCap, large cap, you have growth value and blend in there. So the turnover is primarily driven by corporate actions and I pos and then you know, the team spends a lot of time just making sure they handle those you know, really really well to minimize costs, make sure that tracking are remains relatively tight, and the other thing the team does. And we have a securities lending team that that also spends a lot of time making sure that we're getting value for the securities that are in demand, and that that those earnings from the securities lending revenue, net of the cost to run that group, goes right back to the fund. So our shareholders benefit whenever there's a lot of demand for certain securities that we own. So that's a that's another contributing factor to performance in those funds as well.

The biggest things are you know, primarily when there's corporate actions, there's there's I pos. Those are the things that typically drive changes because again this represents the total market. So you have small cap, small cap, MidCap, large cap, you have growth value and blend in there. So the turnover is primarily driven by corporate actions and I pos and then you know, the team spends a lot of time just making sure they handle those you know, really really well to minimize costs, make sure that tracking are remains relatively tight, and the other thing the team does. And we have a securities lending team that that also spends a lot of time making sure that we're getting value for the securities that are in demand, and that that those earnings from the securities lending revenue, net of the cost to run that group, goes right back to the fund. So our shareholders benefit whenever there's a lot of demand for certain securities that we own. So that's a that's another contributing factor to performance in those funds as well.

That's a performance enhancer that ultimately leads to the ability to lower costs to that fund.

That's a performance enhancer that ultimately leads to the ability to lower costs to that fund.

Well, it lowers the ultimate drag that you would have from transaction costs exactly.

Well, it lowers the ultimate drag that you would have from transaction costs exactly.

Yeah.

Yeah.

So so how often does Vanguard create a new index? So what's that process?

So so how often does Vanguard create a new index? So what's that process?

Like, we tend not to create the index. You know, that's an outsourced process.

Like, we tend not to create the index. You know, that's an outsourced process.

So you know it's really function of you know, do we have gaps in our lineup, and so you know, we get we get input from, you know, the various business divisions, whether or not it's our retail group or institutional group, our financial advisor services group. You know, are there gaps where we feel like, hey, we don't have a relevant offering that's that's needed by our clients. And then we find out we do research. The portfolio review department does the research to figure out who would be the best and most well equipped you know, index provider for that type of mandate, and then our team works very closely with them in terms of the due diligence process and making sure that that index is constructed in a way that we're comfortable and the right levels of controls are in place. And then you know, once that's set up, the team is ready to go to start managing against that newly defined index.

So you know it's really function of you know, do we have gaps in our lineup, and so you know, we get we get input from, you know, the various business divisions, whether or not it's our retail group or institutional group, our financial advisor services group. You know, are there gaps where we feel like, hey, we don't have a relevant offering that's that's needed by our clients. And then we find out we do research. The portfolio review department does the research to figure out who would be the best and most well equipped you know, index provider for that type of mandate, and then our team works very closely with them in terms of the due diligence process and making sure that that index is constructed in a way that we're comfortable and the right levels of controls are in place. And then you know, once that's set up, the team is ready to go to start managing against that newly defined index.

And when you say there are gaps in your lineup, you're not talking about trendy things like hey we don't have a metaverse index. Oh look, we don't have an AI index. It's always much broader and more permanent if that's the right word, or long lasting on.

And when you say there are gaps in your lineup, you're not talking about trendy things like hey we don't have a metaverse index. Oh look, we don't have an AI index. It's always much broader and more permanent if that's the right word, or long lasting on.

That yeah, yeah, you know, again, these need to have enduring, long term investment merit. That's one of the key defining principles before we launch a fund, is it is there real value long term for this type of investment strategy. And you're absolutely right, Vanguard is not the type of firm that, you know, we'll launch thematic products that you know are focused on when not it's AI water whatever, That's just not what Vanguard does. We're looking for long term, enduring, you know, investment solutions and products that will be you know, we'll provide our investors with you know, long term opportunity that will serve them really well.

That yeah, yeah, you know, again, these need to have enduring, long term investment merit. That's one of the key defining principles before we launch a fund, is it is there real value long term for this type of investment strategy. And you're absolutely right, Vanguard is not the type of firm that, you know, we'll launch thematic products that you know are focused on when not it's AI water whatever, That's just not what Vanguard does. We're looking for long term, enduring, you know, investment solutions and products that will be you know, we'll provide our investors with you know, long term opportunity that will serve them really well.

So a couple of years ago I wrote a column about this shocking little aspect of Vanguard that I think nobody understood, which is the patents that Vanguard had on the way you manage taxes for mutual funds, which made your mutual funds behave more like atfs and that there was no tax pass through typically. It kind of made me think of a question. When you're the size of Vanguard, how do you balance discipline on the one hand with the need for creativity and occasionally thinking out of the box. You would think they might be at odds. What's that like?

So a couple of years ago I wrote a column about this shocking little aspect of Vanguard that I think nobody understood, which is the patents that Vanguard had on the way you manage taxes for mutual funds, which made your mutual funds behave more like atfs and that there was no tax pass through typically. It kind of made me think of a question. When you're the size of Vanguard, how do you balance discipline on the one hand with the need for creativity and occasionally thinking out of the box. You would think they might be at odds. What's that like?

Yeah, the main thing very it's a great question. The main thing goes back to, like what's the enduring philosophy. What are we trying to accomplish for our clients. And you know, at the end of the day, they come to us to try to get long term exposure to a segment of the market, and we want to do that in the best possible way, making sure they're getting the market return, you know, minus the expense ratio, which again we will try to you know offset with security lending revenue and you know thoughtful rebalancing strategies. But at the end of the day, it's really boils down to you know, broad based exposure in a low cost, diversified way for our clients, which we think will ultimately serve them really well as they're constructing their portfolios.

Yeah, the main thing very it's a great question. The main thing goes back to, like what's the enduring philosophy. What are we trying to accomplish for our clients. And you know, at the end of the day, they come to us to try to get long term exposure to a segment of the market, and we want to do that in the best possible way, making sure they're getting the market return, you know, minus the expense ratio, which again we will try to you know offset with security lending revenue and you know thoughtful rebalancing strategies. But at the end of the day, it's really boils down to you know, broad based exposure in a low cost, diversified way for our clients, which we think will ultimately serve them really well as they're constructing their portfolios.

Most people think of Vanguard as passive. First, tell us a little bit about what the chief investment officer does for the passive side of an investment business.

Most people think of Vanguard as passive. First, tell us a little bit about what the chief investment officer does for the passive side of an investment business.

A big part of it is really around when there's more complicated corporate actions that are happening that you know, entail a level risk. There's conversations that happen with our risk management department to make sure we're comfortable in terms of what kind of exposure that that that creates in the fund.

A big part of it is really around when there's more complicated corporate actions that are happening that you know, entail a level risk. There's conversations that happen with our risk management department to make sure we're comfortable in terms of what kind of exposure that that that creates in the fund.

And when you say corporate actions, we're talking about M and A, I POS bankruptcies. Anytime somebody outside of your decision making process either exits or enters.

And when you say corporate actions, we're talking about M and A, I POS bankruptcies. Anytime somebody outside of your decision making process either exits or enters.

A market, yeah, exactly.

A market, yeah, exactly.

So when you know when there's major turnover like that that happens, you know you always have the option, Hey, can you do it exactly on the time that it enters the benchmark?

So when you know when there's major turnover like that that happens, you know you always have the option, Hey, can you do it exactly on the time that it enters the benchmark?

Do you need to do some of it ahead of time?

Do you need to do some of it ahead of time?

Do you need to do some of it afterwards to try to smooth out the process. And you know that's a risk decision that you have to make. You know how much liquidy is going to be there when there's a major activity that happens. Is the pricing more attractive right away versus waiting until it starts trading in the secondary market. Those are the considerations and the conversations that we have with our risk team and our senior investment professionals on the equity side.

Do you need to do some of it afterwards to try to smooth out the process. And you know that's a risk decision that you have to make. You know how much liquidy is going to be there when there's a major activity that happens. Is the pricing more attractive right away versus waiting until it starts trading in the secondary market. Those are the considerations and the conversations that we have with our risk team and our senior investment professionals on the equity side.

So it's pretty well established amongst the academic research that passive on the equity side beats active over the long haul, but that's not true on the fixed income side. Active on the fixed income tends to be passive because the choices amongst fixed income are just so much greater than what you have in equity. Tell us a little bit about what USCIO do on the bond side.

So it's pretty well established amongst the academic research that passive on the equity side beats active over the long haul, but that's not true on the fixed income side. Active on the fixed income tends to be passive because the choices amongst fixed income are just so much greater than what you have in equity. Tell us a little bit about what USCIO do on the bond side.

So on the bond side, we have both, so you know, we do bond indexing in a highly diversified way, cutting across segments including you know, treasuries and including governments, corporates, mortgages and things of that nature, global portfolios that give you a tremendous amount of diversification that's headed back to the US dollar, which in a highly diversified way is a great way to get to get bond exposure. To your point, in terms of you know, active fixed income, we do have a very large active fixed income team where that team has been very successful in terms of being able to add value over the long term. And so when you look at some of the results, and a big chunk of that comes from, you know, our credit research capabilities within the team, both investment grade, emerging market as well as high yield. But ninety two percent of our active bond funds have done better than the average fund over their lipper group averages over a five year period and eighty seven percent of our active fixed income fund of outperform at benchmarks on a three year basis against their benchmarks. And then you know, if you look at a five year time horizon's seventy seven percent. So you know our active team has been successful outperforming at benchmarks. And you know, big part of it is do you have the credit team that can do to due diligence because credit is where we think we can add the most value by credit research, and we see that on the municipal bond side as well, where we have a very active municipal bond franchise, and the credit research allows that team to consistently add value relative to the benchmarks, providing better, better outcomes for our client's long term.

So on the bond side, we have both, so you know, we do bond indexing in a highly diversified way, cutting across segments including you know, treasuries and including governments, corporates, mortgages and things of that nature, global portfolios that give you a tremendous amount of diversification that's headed back to the US dollar, which in a highly diversified way is a great way to get to get bond exposure. To your point, in terms of you know, active fixed income, we do have a very large active fixed income team where that team has been very successful in terms of being able to add value over the long term. And so when you look at some of the results, and a big chunk of that comes from, you know, our credit research capabilities within the team, both investment grade, emerging market as well as high yield. But ninety two percent of our active bond funds have done better than the average fund over their lipper group averages over a five year period and eighty seven percent of our active fixed income fund of outperform at benchmarks on a three year basis against their benchmarks. And then you know, if you look at a five year time horizon's seventy seven percent. So you know our active team has been successful outperforming at benchmarks. And you know, big part of it is do you have the credit team that can do to due diligence because credit is where we think we can add the most value by credit research, and we see that on the municipal bond side as well, where we have a very active municipal bond franchise, and the credit research allows that team to consistently add value relative to the benchmarks, providing better, better outcomes for our client's long term.

It's really quite fascinating. On the equity side, two or three percent of the stocks are where all the value is created. On the fixed income side, it seems like eliminating the worst ten twenty thirty percent of stocks in terms of either risk or duration is where all the alpha gets generated.

It's really quite fascinating. On the equity side, two or three percent of the stocks are where all the value is created. On the fixed income side, it seems like eliminating the worst ten twenty thirty percent of stocks in terms of either risk or duration is where all the alpha gets generated.

Yeah, I mean in fixed income because again it tends to be a defense into act class. What you want to do is you want to try try to avoid the losers, right, where you know, what's the what's the upside When you invest in the bond, you know, you get your money back, You get your money back, you get your coup on payments and your principal. You know, at maturity on time, the downside is you get zero because the company files for bankruptcy and there's no recovery value. So you know, again, for defensive asset class, we've always thought that you want to limit the amount of risk that you take in in what's supposed to be ballanced in the portfolio. And you know, the way we're able to accomplish that is that, you know, because we are we have so much scale and ability, you know, to keep costs low. At Vanguard at the end of the day, our active fix income managers don't need to take the same level of risk as some of our competitors, simply because they don't have the same level of headwind. Our expense ratios are lower, so when things don't look attractively priced in the marketplace, you don't need to sit there and try to overcome a heavy expense ratio all the time. We can be patient, we can wait, we can wait till the market's a bit more attractive. And when we feel what we feel, we're being rewarded for risk taking.

Yeah, I mean in fixed income because again it tends to be a defense into act class. What you want to do is you want to try try to avoid the losers, right, where you know, what's the what's the upside When you invest in the bond, you know, you get your money back, You get your money back, you get your coup on payments and your principal. You know, at maturity on time, the downside is you get zero because the company files for bankruptcy and there's no recovery value. So you know, again, for defensive asset class, we've always thought that you want to limit the amount of risk that you take in in what's supposed to be ballanced in the portfolio. And you know, the way we're able to accomplish that is that, you know, because we are we have so much scale and ability, you know, to keep costs low. At Vanguard at the end of the day, our active fix income managers don't need to take the same level of risk as some of our competitors, simply because they don't have the same level of headwind. Our expense ratios are lower, so when things don't look attractively priced in the marketplace, you don't need to sit there and try to overcome a heavy expense ratio all the time. We can be patient, we can wait, we can wait till the market's a bit more attractive. And when we feel what we feel, we're being rewarded for risk taking.

There's a little mold ultiplier effect from the low cost side of Vanguard in that you don't have to swing at every pitch. The ability to say no, no, we're good with this, We'll wait till opportunities look a lot more attractive. I don't get that sense from a lot of people in finance. They're judged every month, they're judged every quarter, and they feel like, what's the old joke, never never mistake activity for progress?

There's a little mold ultiplier effect from the low cost side of Vanguard in that you don't have to swing at every pitch. The ability to say no, no, we're good with this, We'll wait till opportunities look a lot more attractive. I don't get that sense from a lot of people in finance. They're judged every month, they're judged every quarter, and they feel like, what's the old joke, never never mistake activity for progress?

That's right?

That's right?

That seems to be really common in Wall Street.

That seems to be really common in Wall Street.

Yeah.

Yeah.

I mean for our teams, our active teams, their performance is valued on a three year basis, so you know, three years, Ye, it's amazing. So when we think about how how those teams are evaluated, it's a three year number.

I mean for our teams, our active teams, their performance is valued on a three year basis, so you know, three years, Ye, it's amazing. So when we think about how how those teams are evaluated, it's a three year number.

So how did you perform?

So how did you perform?

Because in any given quarter, any given year, you know, you could have you know, winners and losers in terms of strategies. But what you're trying to do is you're trying to string you know, good periods together and over three year period, we feel like there's enough opportunities for teams if they're good at what they do to add value, and that's what we've been able to demonstrate over time.

Because in any given quarter, any given year, you know, you could have you know, winners and losers in terms of strategies. But what you're trying to do is you're trying to string you know, good periods together and over three year period, we feel like there's enough opportunities for teams if they're good at what they do to add value, and that's what we've been able to demonstrate over time.

It's so fascinating because I would assume that intellectually everybody understands that's true, but emotionally two bad quarters and it's like, we know, we told you three years, but we're getting pressure from investors and we have to make a change, Like to stay with that is really challenging.

It's so fascinating because I would assume that intellectually everybody understands that's true, but emotionally two bad quarters and it's like, we know, we told you three years, but we're getting pressure from investors and we have to make a change, Like to stay with that is really challenging.

Well, you know, it's a great point, Barry, but the reality is, like when you're running portfolio is in a highly risk controlled way. You're trying to manage the downside, right, So when you have three years, you have three years again because you're trying to make sure people have an opportunity for their strategies to play out over time. But you're also making sure that you're contraining the risk that even if you do have a bad year, it's not going to be it's not going to be so bad that investors start running for the hills.

Well, you know, it's a great point, Barry, but the reality is, like when you're running portfolio is in a highly risk controlled way. You're trying to manage the downside, right, So when you have three years, you have three years again because you're trying to make sure people have an opportunity for their strategies to play out over time. But you're also making sure that you're contraining the risk that even if you do have a bad year, it's not going to be it's not going to be so bad that investors start running for the hills.

Again.

Again.

We want investors to stay in each product long term because we think they provide good, long term, enduring value for our clients.

We want investors to stay in each product long term because we think they provide good, long term, enduring value for our clients.

And Vanguard famously, during the financial crisis, not only did you not see outflows, you actually saw inflows. I got to imagine a year like twenty twenty two wasn't horrible for Vanguard's asset growth.

And Vanguard famously, during the financial crisis, not only did you not see outflows, you actually saw inflows. I got to imagine a year like twenty twenty two wasn't horrible for Vanguard's asset growth.

You know, it's interesting.

You know, it's interesting.

I mean, there's certain segments of markets that did quite well, certain segments of the business. But you know, you also have you also have a period of time when there's repricing that happens in the fixed income space, like we saw and it was pretty rapid last year, right, and you had a.

I mean, there's certain segments of markets that did quite well, certain segments of the business. But you know, you also have you also have a period of time when there's repricing that happens in the fixed income space, like we saw and it was pretty rapid last year, right, and you had a.

Five hundred basis points of rate increases.

Five hundred basis points of rate increases.

Exactly, that's exactly. And when you saw you know, the US AD down thirteen percent last year. For folks who again who are investing for retirement and in their five twenty nine plans, they're not concerned about it. But when you translate that to folks who might have a heavy municipal bond portfolio, right, and those folks who are in retirement, and you know, they don't like principal losses. They like tax free income, but they also don't like principal losses. So when you have a big backup like that, you tend to see outflows in that segment of the market more than you would see in the taxable market, which tends to be in our case more long term retirement orient in things of that nature. So you will see some pressure on unis in those types of interest rate environments.

Exactly, that's exactly. And when you saw you know, the US AD down thirteen percent last year. For folks who again who are investing for retirement and in their five twenty nine plans, they're not concerned about it. But when you translate that to folks who might have a heavy municipal bond portfolio, right, and those folks who are in retirement, and you know, they don't like principal losses. They like tax free income, but they also don't like principal losses. So when you have a big backup like that, you tend to see outflows in that segment of the market more than you would see in the taxable market, which tends to be in our case more long term retirement orient in things of that nature. So you will see some pressure on unis in those types of interest rate environments.

Huh. Really interesting. So let's talk a little bit about last year, where all I heard was the sixty portfolio is dead.

Huh. Really interesting. So let's talk a little bit about last year, where all I heard was the sixty portfolio is dead.

Discuss it's interesting. I mean, we've heard that over and over again. You know, it was a tough year for investors in terms of both stocks and bonds being down, where stocks were down about twenty percent, the USAG was down thirteen percent.

Discuss it's interesting. I mean, we've heard that over and over again. You know, it was a tough year for investors in terms of both stocks and bonds being down, where stocks were down about twenty percent, the USAG was down thirteen percent.

When was the last time we saw stocks and bonds down? Double jigg It's like eighty one something like.

When was the last time we saw stocks and bonds down? Double jigg It's like eighty one something like.

That somewhere in that type of horizon. Yeah, exactly.

That somewhere in that type of horizon. Yeah, exactly.

So it's not something that many investors have been accustomed to or have seen in their lifetimes. But the reality is, the reality is when you think about the components in the terms of long term investing, the bond portion of the of the equation provides that balance in diversification. Now, again, in any one given year, you will have a sixty, You can have a sixty forty portfolio that underperforms and both sides of the equation go down. But for a long term investor who's saving for retirement, that balance and diversification has has proved and developed delivered really good long term returns. So when you go back to nineteen twenty six, if you were an investor since then, sixty forty portfolio has returned eight point eight.

So it's not something that many investors have been accustomed to or have seen in their lifetimes. But the reality is, the reality is when you think about the components in the terms of long term investing, the bond portion of the of the equation provides that balance in diversification. Now, again, in any one given year, you will have a sixty, You can have a sixty forty portfolio that underperforms and both sides of the equation go down. But for a long term investor who's saving for retirement, that balance and diversification has has proved and developed delivered really good long term returns. So when you go back to nineteen twenty six, if you were an investor since then, sixty forty portfolio has returned eight point eight.

Percent on average over that time horizon, which is impressive.

Percent on average over that time horizon, which is impressive.

Yeah, because you know, again it provides you diversification and reduces some of the volatility. But there will be periods of time where again that type of portfolio when you know, we were an environment where interest rates were held down to historically low levels, so you know, when they repriced, it's not surprising that you see losses on the bond side of the equation. But if you go back to the period before twenty twenty two, from twenty nineteen to twenty twenty one, a sixty forty portfolio actually produced fourteen percent returns over that time horizon, which is above the long term average. So you know, in a grand scheme of things, it's not surprising that there's periods of outperformance and that ultimately will lead to periods of underperformance.

Yeah, because you know, again it provides you diversification and reduces some of the volatility. But there will be periods of time where again that type of portfolio when you know, we were an environment where interest rates were held down to historically low levels, so you know, when they repriced, it's not surprising that you see losses on the bond side of the equation. But if you go back to the period before twenty twenty two, from twenty nineteen to twenty twenty one, a sixty forty portfolio actually produced fourteen percent returns over that time horizon, which is above the long term average. So you know, in a grand scheme of things, it's not surprising that there's periods of outperformance and that ultimately will lead to periods of underperformance.

That's right, and I'm glad you mentioned the period before that. Go to the decade before twenty twenty two. The equity side was something like thirteen percent, and then whatever you got from bonds was just a bonus. That's exactly the top of that. People forget that when they see a single year like twenty twenty two, and they really forget that in a year like twenty twenty three where everything is going up, I mean other than gold, what hasn't been going up this year? How do you deal with the opposite of last year with the first half like this year.

That's right, and I'm glad you mentioned the period before that. Go to the decade before twenty twenty two. The equity side was something like thirteen percent, and then whatever you got from bonds was just a bonus. That's exactly the top of that. People forget that when they see a single year like twenty twenty two, and they really forget that in a year like twenty twenty three where everything is going up, I mean other than gold, what hasn't been going up this year? How do you deal with the opposite of last year with the first half like this year.

Well, look, you know, clearly the equity market has been on a tremendous tear so far this year, up eighteen eighteen nineteen percent year to date. But the key thing there is, like again, investors have to keep in mind that that's probably not sustainable long term. And so again the importance of having a diversified portfolio is critically important. And just think about, you know, fixed income and money markets as an asset class. You know, for a decade you weren't earning anything in a money market fund because interest rates by the Federal Reserve were pegged to zero and you have to take on significant duration risk and credit risk just to earn a couple percentage points. And now you know you're in an environment where money market funds are yielding five and a quarter percent. You have, you know, the US AG that's yielding somewhere close to five percent, so four and a half five percent, And so in a grand scheme of things, investors are actually being rewarded for having exposure.

Well, look, you know, clearly the equity market has been on a tremendous tear so far this year, up eighteen eighteen nineteen percent year to date. But the key thing there is, like again, investors have to keep in mind that that's probably not sustainable long term. And so again the importance of having a diversified portfolio is critically important. And just think about, you know, fixed income and money markets as an asset class. You know, for a decade you weren't earning anything in a money market fund because interest rates by the Federal Reserve were pegged to zero and you have to take on significant duration risk and credit risk just to earn a couple percentage points. And now you know you're in an environment where money market funds are yielding five and a quarter percent. You have, you know, the US AG that's yielding somewhere close to five percent, so four and a half five percent, And so in a grand scheme of things, investors are actually being rewarded for having exposure.

To money markets and bond funds.

To money markets and bond funds.

And so, you know, if people are truly concerned about a sixty forty portfolio, they should be concerned about it for ten years. Now's not the time when you're back to an environment where you're actually getting a real yield when it comes to the bond market.

And so, you know, if people are truly concerned about a sixty forty portfolio, they should be concerned about it for ten years. Now's not the time when you're back to an environment where you're actually getting a real yield when it comes to the bond market.

I'm glad you brought up money markets because it's this overlooked area that when you have rates at ultra low levels, it kind of gets forgotten about. But is it fair to say that this year and perhaps last year you saw a big shift of client cash assets into money markets.

I'm glad you brought up money markets because it's this overlooked area that when you have rates at ultra low levels, it kind of gets forgotten about. But is it fair to say that this year and perhaps last year you saw a big shift of client cash assets into money markets.

We definitely saw we definitely saw a number of clients who started embracing money markets. And the reality is for a lot of investors, it truly is free money. Right, So when you think about what people are earning in their deposit accounts at their banks, and banks have historically been very slow, today very slow in terms of raising deposit rates because those deposits tend to be very sticky. And I've had people stop me, even at Vanguard in the hall way and say, wow, I didn't realize that I've been leaving this much money on the table by keeping you know, a sizeable amount of deposits at my bank.

We definitely saw we definitely saw a number of clients who started embracing money markets. And the reality is for a lot of investors, it truly is free money. Right, So when you think about what people are earning in their deposit accounts at their banks, and banks have historically been very slow, today very slow in terms of raising deposit rates because those deposits tend to be very sticky. And I've had people stop me, even at Vanguard in the hall way and say, wow, I didn't realize that I've been leaving this much money on the table by keeping you know, a sizeable amount of deposits at my bank.

Yeah, I've moved it to a money market.

Yeah, I've moved it to a money market.

Now I'm getting a you know, five and a quarter percent type yield, which is amazing when some folks are still getting you know, less than half a percent in many cases at the in the in the bank.

Now I'm getting a you know, five and a quarter percent type yield, which is amazing when some folks are still getting you know, less than half a percent in many cases at the in the in the bank.

So it's shocking that this has gone on. How much inertia there is in finance that even if you're just getting your December bonus that you're going to pay Uncle Sam in April, leaving that money in a savings account for a third of the year, you're leaving a chunk of change.

So it's shocking that this has gone on. How much inertia there is in finance that even if you're just getting your December bonus that you're going to pay Uncle Sam in April, leaving that money in a savings account for a third of the year, you're leaving a chunk of change.

Free money. It's free money. It's free money.

Free money. It's free money. It's free money.

Quite interesting. So at what point do you think high yields become a headwind for stocks or is it just overall part of the sixty forty portfolio? And hey, we'll either taken on the equity have for the bond half. We don't care.

Quite interesting. So at what point do you think high yields become a headwind for stocks or is it just overall part of the sixty forty portfolio? And hey, we'll either taken on the equity have for the bond half. We don't care.

Well, you know, I think if you look at if you look at what our return expectations are for the global balance portfolio, we're expecting that over the next decade or so, somewhere in the neighborhood of about you know, five and a half percent for a global balance portfolio, so combination of equities, bonds, US and international stocks. And the reality is, you know, our return expectations for the US equity market is a bit more muted. You know, we're expecting US equity market returns to help our somewhere around five percent or so were international equities because of valuations, probably seven to seven and a half perc.

Well, you know, I think if you look at if you look at what our return expectations are for the global balance portfolio, we're expecting that over the next decade or so, somewhere in the neighborhood of about you know, five and a half percent for a global balance portfolio, so combination of equities, bonds, US and international stocks. And the reality is, you know, our return expectations for the US equity market is a bit more muted. You know, we're expecting US equity market returns to help our somewhere around five percent or so were international equities because of valuations, probably seven to seven and a half perc.

So let's talk about that because that gap invaluation has persisted for a long time. Certainly for a few years after the financial crisis, it seemed like US stocks were pricey, forward return expectations were low, and the opposite was true overseas, but the US seemed to be the only place to be. How durable is that shift, given how large that gap has gotten in valuation between US stocks and the rest of the developed world.

So let's talk about that because that gap invaluation has persisted for a long time. Certainly for a few years after the financial crisis, it seemed like US stocks were pricey, forward return expectations were low, and the opposite was true overseas, but the US seemed to be the only place to be. How durable is that shift, given how large that gap has gotten in valuation between US stocks and the rest of the developed world.

Yeah, I mean, if you were to take a look at what's happened over the last last ten years, looking at the s and P five hundred index versus you know, like the Footz Global Allcap XUS there was a seven percentage point difference per year by being seven seven hundred basis points of outperformance by the US market relative to the international markets. But you know, so if you were to take a look at where PE ratios are today between the S and P, which has an earning yield of about five percent, and you look at the Footz Global Allcap x US, it has an earning yield of eight point three percent, right, and so not in substantial there's a substantial difference. Now, there are sector differences, so you know, and we could talk about that to some degree as well, but the reality, even if you adjust for sector differences, there's still a big gap. There's still a big gap in terms of the PE ratios across the US market relative to the rest of the world. And so unless we expect earnings for US companies to vastly outpace what's happening in the international markets, and it might, but there's a lot of great news already priced into the marketplace. And when you think about translating S and P five hundred PE to a you know, an implied equity risk premium. By looking at the ten year treasury yield, you know, you're two hundred basis points below what it's been for the last ten years.

Yeah, I mean, if you were to take a look at what's happened over the last last ten years, looking at the s and P five hundred index versus you know, like the Footz Global Allcap XUS there was a seven percentage point difference per year by being seven seven hundred basis points of outperformance by the US market relative to the international markets. But you know, so if you were to take a look at where PE ratios are today between the S and P, which has an earning yield of about five percent, and you look at the Footz Global Allcap x US, it has an earning yield of eight point three percent, right, and so not in substantial there's a substantial difference. Now, there are sector differences, so you know, and we could talk about that to some degree as well, but the reality, even if you adjust for sector differences, there's still a big gap. There's still a big gap in terms of the PE ratios across the US market relative to the rest of the world. And so unless we expect earnings for US companies to vastly outpace what's happening in the international markets, and it might, but there's a lot of great news already priced into the marketplace. And when you think about translating S and P five hundred PE to a you know, an implied equity risk premium. By looking at the ten year treasury yield, you know, you're two hundred basis points below what it's been for the last ten years.

So let's let's do a little comparison. Because I'm always skeptical when we're people focus on a single metric like price to earnings. I want to make that more three dimensional. So if Europe is at an eight point three earning shield and we're about a five percent, what's the growth rate difference between the two? Meaning are people willing to give up a little bit of earnings in order to accept a faster growth rate that certainly we've seen on the tech side. I can't speak across every sector.

So let's let's do a little comparison. Because I'm always skeptical when we're people focus on a single metric like price to earnings. I want to make that more three dimensional. So if Europe is at an eight point three earning shield and we're about a five percent, what's the growth rate difference between the two? Meaning are people willing to give up a little bit of earnings in order to accept a faster growth rate that certainly we've seen on the tech side. I can't speak across every sector.

Well, I think there's a couple of things. There's a couple of things that are very I mean, one of it is, you know, you know, do you expect the earnings growth to live up to the expectations that are already priced into the US market. And if so, that's fine for where we are, but that's not necessarily going to lead to multiple multiple expansion, right, And a big driver of the outperformance over the last decade of US stocks for relative the international evaluation expansion. So that's all sentiment that's exactly it, and a lot of we would say, a lot of that's probably already baked into the marketplace and is run its course. Could it go further, of course it could, but at some point there is a tipping point where people start saying, well, in the US, I have alternatives. I have alternatives because I can go out and buy a money market fund at five and a quarter percent and I don't have to take a lot of risk. And you know, if if again based on our forecast for US equity markets, they're somewhat muted because valuations are stretched in our view relative to our fair value model. And so I think a lot of investors have alternatives. They can buy money markets, they can buy bond funds, where there was no alternative ten you know, for the last ten years, because we didn't get any real yield when it came to the fixed income or a money market space. But there's really alternatives today for investors either in fixed income money markets.

Well, I think there's a couple of things. There's a couple of things that are very I mean, one of it is, you know, you know, do you expect the earnings growth to live up to the expectations that are already priced into the US market. And if so, that's fine for where we are, but that's not necessarily going to lead to multiple multiple expansion, right, And a big driver of the outperformance over the last decade of US stocks for relative the international evaluation expansion. So that's all sentiment that's exactly it, and a lot of we would say, a lot of that's probably already baked into the marketplace and is run its course. Could it go further, of course it could, but at some point there is a tipping point where people start saying, well, in the US, I have alternatives. I have alternatives because I can go out and buy a money market fund at five and a quarter percent and I don't have to take a lot of risk. And you know, if if again based on our forecast for US equity markets, they're somewhat muted because valuations are stretched in our view relative to our fair value model. And so I think a lot of investors have alternatives. They can buy money markets, they can buy bond funds, where there was no alternative ten you know, for the last ten years, because we didn't get any real yield when it came to the fixed income or a money market space. But there's really alternatives today for investors either in fixed income money markets.

Are international stocks? Right?

Are international stocks? Right?

The twenty ten's were certainly the Tina decade. It's funny you mentioned multiple expansion. When you look at the eighty two to two thousand bull market, something like seventy five percent of those gains came not from earnings growth, but from a multiple expansion. I'm curious if that's kind of repeating now and the twenty twenty pandemic fiscal stimulus, which was massive under two presidents, What does that do in terms of resetting the cycle? And can we stay pricey forget higher for longer? Can we stay pricey for longer given all the stimulus that's coursing through the system.

The twenty ten's were certainly the Tina decade. It's funny you mentioned multiple expansion. When you look at the eighty two to two thousand bull market, something like seventy five percent of those gains came not from earnings growth, but from a multiple expansion. I'm curious if that's kind of repeating now and the twenty twenty pandemic fiscal stimulus, which was massive under two presidents, What does that do in terms of resetting the cycle? And can we stay pricey forget higher for longer? Can we stay pricey for longer given all the stimulus that's coursing through the system.

Well, I think there's a couple of things. One, it becomes a factor. Yeah, you know, the economy can clearly keep rowing along, which we've seen, you know, the fiscal stimulus that we've seen. You know, you know there's over two trillion dollars that was saved. You know, our reports show and some of the data out in the marketplace shows that about a trillion dollars of that has already been spent down. So we you know, investors and savers are definitely eating into that that that safety net, which over time is that continues to decline, should slow the economy down to some degree.