Vanguard’s $3 Trillion Man

12-Oct-2014

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







By Kirsten Grind, WSJ,

Vanguard Group’s chief executive, F. William McNabb III, runs the largest mutual-fund company in the U.S.—just how large was highlighted last month, when the firm said it had surpassed $3 trillion in assets under management.

Mr. McNabb, 57, has helped the suburban Philadelphia firm grow from $1.4 trillion in assets since he took over in 2008, in part by espousing the benefits of low-cost, passive investing. Especially in the past couple of years, investors have flocked to index and exchange-traded funds, Vanguard staples.

But Vanguard faces challenges, including the possibility of more-extensive regulation of the fund industry. Mr. McNabb talked about reaching the assets milestone and what’s ahead. Here are edited excerpts of the conversation:

WSJ: You reached $3 trillion in assets. How have you done that?

MR. McNABB: We’ve lived through very ebullient markets since the trough of the crash—you can’t forget the lift you get from markets. Obviously equities have been incredible, but fixed income has been better than people expected during the period. We created some strategic initiatives in 2009 and 2010 to focus more clearly on ETFs and target-date funds as part of the 401(k) system. We put more emphasis on growing our non-U.S. operations. And we’ve seen more adoption of our way of thinking from our direct retail clients.

WSJ: Investors, analysts and the media still strongly associate Vanguard with John “Jack” Bogle, the retired founder. How have you differentiated yourself?

MR. McNABB: I don’t spend a lot of time thinking about how we’re different. I think about things we have in common. If you look at both [former CEO] Jack Brennan and Jack Bogle, the things we shared were a maniacal focus on our ownership [Vanguard is owned by its mutual funds] and the fact that we only serve one constituency, our investors. We express it differently: Jack Bogle would be way more public, and I’m driving it more inside the company, I think, and spending a lot of time focusing on that. What I’m trying to do is make it a much more global organization and take the culture to many different places.

WSJ: Investors have been pouring money into passively managed funds. Last year, for example, such funds saw $159 billion in net inflows, while funds run by stock pickers saw outflows of $11.7 billion. Are you surprised by how quickly that segment of the industry has grown?

MR. McNABB: I think the speed has caught everyone a little by surprise, but I’m not totally shocked. There are a couple things at work there.

One, there has been a definite change in the way advised assets are managed. Mutual funds were sold through advisers and brokers for decades, and the business model was transaction-based. There’s a huge shift to a more fee-based model, where your adviser is now acting as your portfolio manager and charging asset-based fees. In order to be able to do that and have a cost that makes sense, they’re looking at the cost of the underlying investment products more carefully. There’s also much more focus on getting asset allocation right.

All of those things are driving the shift to lower-cost investing, and indexing is the purest form of that. Higher-cost funds and products are having the most difficulty. What’s surprising to me is how long it took to get there.

WSJ: Mutual-fund regulation is all over the news, with the Financial Stability Oversight Council debating whether asset managers should be deemed “systemically important” and the Securities and Exchange Commission preparing new rules to boost the oversight of mutual funds. Money funds also saw new rules pass. Is the new focus warranted?

MR. McNABB: Asset management is a fundamentally different business than banking. Banking involves a tremendous amount of leverage on a relative basis. In the fund business, it’s an agency business, so the investor gets the gains and the losses and they take all the risk for that. Funds have little to no leverage—in our case, none.

To me, it’s an application of a regulatory framework and regime that’s really not designed for asset managers. That’s where a lot of the concern has come from—let’s make sure we don’t just do new things that add cost to the system and curtail people doing things they should be doing on behalf of clients. More recently, you’ve seen discussions around focusing more on activities, and asking, “Are there any activities that create systemic risk?” I don’t think anyone knows the specific answer yet, but I think it’s a fair question.

WSJ: Vanguard markets itself as a low-cost provider of mutual funds and ETFs, helped by its unusual corporate structure that allows it to pass on cost savings to investors. But a former employee has sued, alleging that structure helped avoid paying millions of dollars in taxes. What’s your response?

MR. McNABB: Our structure has been in place coming up on 40 years and we’ve had close scrutiny by every regulatory body and agency in the world, and everyone’s been pretty satisfied by what we’ve done. From my perspective, this is one of those things that has no merit and we will defend it vigorously.

WSJ: What keeps you up at night?

MR. McNABB: You certainly have to look at what’s going on in the cyberworld for a huge set of worries for not just us but every business in the country. It’s going to age me a little more than I’ll like. If you look at Target , Home Depot , J.P. Morgan and a list of other companies that have had challenges—these companies are all spending tens of millions, if not billions of dollars, making sure their tech infrastructure is as bulletproof as possible, and yet they’ve had issues. Cybersecurity is the biggest risk to American business today because it’s really pervasive. The second thing: There’s a lot of geopolitical uncertainty right now—how that affects markets and how that affects growth.

WSJ: Ever think about moving the company from Malvern, Pa., to Wall Street?

MR. McNABB: Not in a million years. We’re not Wall Street, we serve Main Street. We have 25 million investors who come to us directly for 401(k) plans, and advisers. We have endowments and foundations and institutional investors, but it’s a small percentage of what we do. I have no interest in Wall Street. I’ve been there, done that.

 


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