 This is very sad day for me and for the Bogle heads at this point in the conference I'd normally be introducing Jack Bogle who would then proceed to import His words of wisdom on those of us in attendance Today represents the first time in our events 18-year history that we know in advance that Jack won't be joining us However, I think that Jack is looking down on us and saying keep the conference going. I'm with you in spirit Years ago in Las Vegas Jack asked me if he could have an informal non-scripted chat with Bill Bernstein and we all know that what Jack wants he gets So that was the start of what I dubbed the Farside Chat with Jack and Bill and it's continued as part of the conference agenda ever since then Today we're going to have a very special guest sit in for Jack and continue the Farside Chat Bill McDabb is the former CEO and chairman of Vanguard Leading the firm for a decade until he stepped down as chairman at the end of last year He assumed the role of CEO in 2008 just two weeks before the collapse of Lehman Brothers Which marked the beginning of the global financial crisis Bill's consistent focus on doing the right thing for clients help Vanguard its crew and its clients navigate one of the Most economically tumultuous periods in the nation's history During this tenure as CEO Vanguard grew to serve more than 20 million investors around the world and assets quadruple from one trillion dollars in 2008 to more than five trillion at the end of 2018 He always attributed this success to putting clients interests first and working hard to earn and maintain investors trust Today Bill serves as chairman on the board of the Philadelphia Zoo and is a member of the board of directors of United Health Group and IBM He's an active alumnus of Dartmouth College and the Wharton School of the University of Pennsylvania And was an awarded an honorary doctorate from St. Joseph University He continues to be an active member in the investment management industry Champa championing championing good governance practices among public companies. Please welcome Bill Mcdavid and builds McNabb's companion for this fireside chat is a retired Neurologist who helped co-found efficient frontier advisors He's written a number of best-selling titles on both finance and economic history He holds both a PhD in chemistry and an MD Please welcome one of the brightest guys. I know Dr. Bill Bernstein And have at it guys everything is fair game except politics Yeah, well, you know we we got three four hours every year of the public Jack Boogle And it was quite an education. It was it was quite a personal and emotional experience So we saw a lot of what I suspect was the public Jack even in front of this group what I'd like you to speak to Bill is What you saw as the private Jack not only him personally but what I'm really more interested in is what he told you about the capital markets and retirement investing and just investing in general for For small investors that he might not have said in public Whoa It might be a couple of days here The first of all I'm now. Thank you and I thank all of you for being here. It's this is a very emotional time I think We held a service for Jack in March on the campus and the entire company was tuned in and We actually were able to have all Jack's successors Jack front and can buck leave myself As well as Jack's son John speak to the entire company So you think about it for generations a leadership represented I can't think of another company in America where that could happen and you know again You got to give Jack Boogle so much credit for sort of creating that legacy. So again, I know he is looking down He would greatly appreciate Seeing all of you here You know Bill I thought what I might do is I might start with a just a couple of quick Boogle stories because I think they actually get will give you a sense of the man what it was like to work for him and I and I tell this because the day we heard about Jack's passing I happened to be on campus and I was Walking just walking around, you know, just crisscrossing building building and I had so many different crew members come up and say something And people I knew, you know, I've worked at Vanguard for 33 years So I know a lot of a lot of our crew but there were also some folks I don't know and new people and that the most common question was, you know, what are your favorite memories? What are your favorite memories? And you know, there was a lot but there were three That I sort of told on a repeated basis. So I thought I'd start with that and then we can delve into some of the more deeper questions about the markets and so forth. So I had the privilege of Yeah, I came to Philadelphia in right after college to teach I was teaching in a boys school and coaching through sports Sort of stumbled my way to Penn and sort of worked my way through Wharton Went up to New York for a couple years and was Frankly pretty dissatisfied where I was working. I love the work actually I was an analyst working for what's now JP Morgan Chase, but I didn't like the culture I didn't like a lot of the I'll call it strategic direction. So I began to get itchy My wife is from Philly. I love my time here. So we began thinking about coming back her family's all from here And I got a call from a friend of mine from business school who had gone into executive search He goes I've got sort of good news and bad news and I said, well, give me the good news And he says I've just been hired by this little company you've probably never heard of Vanguard to do a search and I think you'd be perfect I'm like, well, what could the bad news be and he says it's not exactly The kind of role you would envision yourself doing and I said, what do you mean? He says well, you know, you're you're doing Leverage buyouts and M&A transactions all this fancy stuff on Wall Street. He goes they're looking for a GIC product manager Now I'm gonna ask this audience is pretty how many of you know what a GIC is Yeah, all right. So almost a third Guaranteed investment contract. It was kind of like a certificate of deposit If you will issued by an insurance company to a qualified plan So it was the most popular option along with company stock in the early 401k days And we were just getting into 401k business and we had just begun work there and so Jack and others within Vanguard decided we needed to sort of beef up our efforts there If we were going to be successful. I didn't I didn't know what it was, you know, it's before the internet So I'm running around going to libraries looking it up Trying to find trying to find out stories. Anyway, I had to come down and One thing it has not changed in Vanguard is we're very rigorous in our interview process So I think I came three different times Probably went through 20 some odd interviews remember we're a few hundred people and At that point about 20 billion under management and finally the last interview they're like we want you to you know meet the founder And again, this I'm it's a pretty junior level role within the company, but So I was I was surprised but if you made more than I think 15 or $20,000 in those days Jack had interview and had to sign off You know, again, the attention to detail was pretty great. So anyway, I come in to do the interview and Jack kind of picks up my resume and he looks at it and he goes, you know, I bet you're an ambitious young fella I don't know why you'd come here Literally and I'm well, mr. Bogle. He asked me to And then for the next hour and a half Jack proceeded to tell me why I should be there And you know, he held court. He was lying lying on his couch He had just come back from a heart incident as he called it and he the doctors were making him put his feet up And so we went through this about an hour and a half. I think I got two words in edge wise So I go home and my wife says well, I go Because she was really by this time she was ready to come back to Philly and I said I have no idea. I didn't say anything And she goes, well, what are you gonna do? I said, well, I'm off for the job I'm going I said it was compelling because you could feel the passion you could feel the energy you could feel There was something different, you know, there was something obviously different about Jack You all know that but there was something different about the mission at the company and it really appealed to me So I accepted the I was fortunate. I got the job. I really wasn't qualified for it but I'm forever grateful that somebody took a bet and then I Was here only about a week and I got a call from Jack saying hey, let's have lunch And so we go and we have lunch and this is really the second part of the story and We go to our galley as you know, everything's not at all even in those early days we had two buildings back then and we're going through the line and Jack is negotiating with the chef over an order of french fries and The chef is saying mr. Bogle you can't have french fries and I could for your heart and he's like Oh, how about a half an order and they're going back and forth and you know again? I had just left JPMorgan Chase, you know, I Been privileged quote-unquote to have lunch with the vice chair of the bank Who would push a button under the table and like six waiters would come running in So I'm watching this going Like I think my eyes are popping out of my head and he turns to me he goes What are you staring at? I Said I've never seen anything like this And he says well he goes let me let me make a point really clear. He goes everybody's job here matters and It doesn't matter whether you're a chef in the cafeteria or you're an executive or your portfolio manager Everybody matters and he goes the only thing that's gonna really get me upset is if I see a big shot kicking a little shot I'm gonna kick the big shot out of the company and it was one of those object lessons, right? You know, you're a young you're 20 I was 29 years old You know trying to figure out what I wanted to do with my life And you you know you get this sort of wisdom imparted to you and I never forgot that conversation And then the third story and then we will get serious But I again, I just want to give you the flavor for what it was like to work with Jack so many of you know, he was a very avid squash player and Despite all the hard issues he would find a doctor who would sign off and let him play squash You know, he would just sort of rotate. I'm looking at his daughters and they're like, yeah, yeah, they knew the story so 1994 late 94 I Was privileged to be asked to join the executive team Jack was still CEO and so I was gonna join the what we call senior staff and and run the 401k business and the the other institutional businesses and Jack's health had begun to turn but he was still feisty as ever and it's like let's go play squash Now I'm not much of a squash player just to be very clear but you know, I had 30 years on Jack and I was a ex-roller So I had a fair amount of fitness so I could run around the court so We go and he goes hey, he goes I hate to do this But I don't think he hated to do it at all. He goes he taught me to work the defibrillator So you want to talk about intimidation, right, you know You got the founder and you know the lifeblood of the company and he's teaching you to work the defibrillator He goes, I don't think we'll need it but just in case So forget my strategy of just running around. I'm like one shot and I'm done like go for go for the winner all the time So we played in the first two games Jack won next two games I won and then he sort of slumped up. Oh my god here comes and He said, you know, I don't think I he goes, you know me. I never quit but he goes I just don't think I can finish. I'm like, thank you. Thank you. Thank you. We're gonna get out of here He's gonna be alive. I don't have to work the defibrillator so so we left and You know, and then Jack's health deteriorated further and he was in and out of the company a lot And you know, he ended up going to the hospital and waiting for the transplant So about nine months after the transplant I get a call and it's not hey Bill. How you doing? It's not it's we have unfinished business It's Jack and his son John had given him a new squash racket and So we had to go play squash. I had not looked at a squash racket since then Jack had been playing non-stop, but it was and trust me. This was one of those you've heard of boss's golf There was bosses squash. There were there was no way I was gonna win this match. So but we but you know, it was just classic Jack and You know, you mentioned that he would always, you know, encourage people to keep going You know, his phrase was press on regardless as you know, and it was a great great Lesson about press on regardless and you know, again, these are things that are imprinted on you And you know, as you're joining the executive team to see that kind of fire and that kind of passion Was really important. So those are, you know, a couple of Fun stories, if you will it give you a sense of what it was like to work for him, you know in terms of the business stuff I think the most important lesson he imparted and it's interesting I'm not sure he would say this. So I say it with, you know, all respect he had this phrase that he loved to use in a lot of his speeches around creative destruction and Joseph Schumpter the great Austrian economist had had really You know written extensively about this and Jack just loved it And I think Jack looked in himself as the creative destroyer And you know somebody who would upend the markets up end of the way business was done And so he took Schumpter's words very very much to heart and We talked a lot about that in my early days as CEO and you know, what was interesting is It gave you Confidence as a leader it also provoked you to think about How do you actually disrupt yourself and If you think about Vanguard and many of you have lived through multiple generations of the organization We have changed quite a bit With the times, you know from a little startup where you know the virtual Relationship was through the post office box and a huge technological revolution was the 800 phone number To you know the creation of vanguard.com to now all the virtual advice and you know things you can do in that space and you know, it was Jack's philosophy about creative destruction, which was way ahead of all the other writers who talked about disruption and You know, you know, whether it was Andy Grove only the paranoid survive or you know some of the other Clay Christiansen who you know, has written extensively about this Jack was really ahead of them and Actually viewed his life's work if you will as being a disruptor That wisdom more than all the market stuff, believe it or not was actually the most valuable Lesson that he imparted at least for me because what it challenged us to do as a leadership team is to think about How would you beat Vanguard? How would you? Do a better job serving our clients than we can do and then what do you have to do to respond to that as an organization? And we certainly don't always get it right, but that's what we've tried to do That's but you know, that's been at the heart of the heart and soul of Who we are and if you think about it, you know, jack's initial Revolutions if you will were all around our structure and then around low cost and then indexing being the you know purest expression of the low cost But so many of the other things that we've done since are really built upon upon the foundation of Creative destruction and finding ways to disrupt yourselves before somebody else does it to you. So again when I think back When I think back to all the different lessons Jack imparted that probably was the single most important bill now there are lots of things we could talk about in terms of capital markets and Structure and whatnot and I'm happy to go there But it was that notion at least for me and and and you know again some of it may have been timing Coming into my role in the middle, you know at the beginning of the crisis That actually was very liberating and and and Jack and I did have a lot of conversations in those early days and It was very very good, but you know sort of I'll call it a lesson imparted Well that that brings a brings up a second question then which is you know, we all know about his 1951 senior thesis at Princeton, which you know the heart of which was was the disruption of Of the industry so obviously, you know the desire to do that in that drive Arrows, you know when he was very young man, and do you have any sense of of where that came from? Yeah, I think so so You know his I Think it's you know, you know most of you have heard Jack's family story and you know, he ended up his family had been very successful and Fairly well-to-do and then during the Great Depression lost everything essentially and had to start over and Jack actually was a Scholarship student at Blair Academy Again, I had the privilege of being at Blair a couple months ago doing a memorial for Jack and Was extraordinary to see His impact on Blair Academy. I actually think some of it started their bill on you know He had the weight tables. He was you know, he was very aware He was on scholarship and you know, there were a lot of other very well-to-do students there And I think that created a restlessness in him that Made him question things a little bit more deeply than Others might have might have done it at the same age or with the same sets of experiences and it was that restlessness and Questioning about how things could be better. I think that was fundamental to who he was, you know interestingly When he came out of Princeton the two choices he had Were to go to work for Philadelphia National Bank, which was kind of the thing you should have done or Go work for this little mutual fund company that he you know He'd written about the the industry and I think he actually wrestled with that decision But then you know decided to go with Walter Morgan as you all know and again, I think the The you know what what was exposed in the in the 1951 thesis got reinforced by being with mr. Morgan again, I had the privilege of Interacting with Walter Morgan for a number of years before he passed away And because he would he would come to board meetings and he would come to events and so forth And he took great pride obviously in what Jack had accomplished Again, he was kind of a revolutionary in his day in that the Wellington fund was a balanced fund focused on high quality companies and high dividends and you know really high quality bonds during a period where it was Leverage and really aggressive growth if you will were the mantras of the day So I think he found a kindred spirit which sort of reinforced some of those notions But I think a lot of it came from the way, you know Came from Blair and came from the restlessness that was created there and you know this I don't know how yet yet you teach this because I'm not sure it can be I think it's just something that is sparked in an individual but his creativity was one of his great strengths and you know when you would be in meetings with him the The questions that would come from Jack were different than the questions that would come from 98 out of a hundred other people And I don't you know, I don't know exactly where that comes from except You know the background certainly had something to do with it in the restlessness but he was never satisfied with just sort of conventional thinking and I think that lack of satisfaction and that embracing of I'll call it disruptive ways of doing things started at a young age and Became just part of his mantras as time went on Yeah, I'm Mel Mel Turner last night reminded me of one of my favorite passages from Fred Schwedz where the customers yachts Which was you know in brokers? Or explain to the younger brokers how the business work They explained that they would throw all the money at the ceiling and what stuck to the ceiling was the clients And so it was obvious it was obvious that that was the world back then that Jack wanted to disrupt. Oh What what made Jack unhappy about the capital markets in the last decade or two? What what what net what was what did he see now that he wanted to disrupt? Yeah, so And this is where Jack and I sometimes had I will say spirited discussions You know Jack worried about ETFs Initially, he thought that they were a trading vehicle I think as many of you have read Jack didn't speak about it a lot, but he did talk about it, especially later in life You know, we'd actually had the opportunity to launch the first ETF, you know what became the spider You know the state street did and then the you know the quadruple queue or whatever it is, you know on Nasdaq He he passed on that because he felt they were just trading vehicles and in the early days That's actually what they were. They were essentially a derivative substitute and So he he really was not very aligned with the whole Creation of that and you know, he he continued to worry about it even as You know, we got more into that business and you know, I think the point You know, I tried to make to him I know Gus Otter our CIO at the time who you know invented our class structure for ETFs, you know, we made the point that you don't have to use these as a trading vehicle You know, the beauty is they can actually serve that purpose But they can also be a buy-and-hold strategy and be incredibly effective as well especially for an advisor putting up a portfolio together in a very low-cost way for someone and You may have seen Jack soften on that a little bit over time and he would talk about that He would talk about the difference, but you know bill I do think he really worried about the product proliferation there He worried about some of the, you know crazy structures that were coming out. He worried about leverage In in ETFs implicit leverage in particular So I think that was a fairly big concern But you know for me what was interesting was it was actually the same set of concerns that Jack had always had about the mutual fund industry It was a very parallel set of concerns because again I sat through all the meetings during the late 80s and early 90s with him on product development stuff where He worried that there was a new fund coming out every hour You know different flavor or something and he just thought it was all being done just for salesmanship as opposed for really good investment principles and You know one of the things he charged us with As a result was any time we brought a new fund out. We really had to be asking the fundamental question about is this a needed and useful solution for people and You know it was a really good test for us But I think he continued right up to his last days to worry about the product proliferation in particular on the ETF side You know, I think on the capital market side the other concern he had and one which I share pretty deeply was the rise of algorithmic trading and What you know what's happening in that world and he spoke about that several times You know, it's a really really complex topic as some of you know because In a sense without Some of this trading now I'm not sure markets would actually work as well as they work And that has more to do with the structure of the US markets than anything else But a lot of admitting if you will that's there is you know, these algorithmic traders Actually provide an incredible You know the problem is they don't necessarily provide the liquidity when you most need it Because they're not regulated in that way and I think there's Jack Jack was always sort of pushing the SEC to think about that I think the SEC actually is looking at that many of the world changes that have occurred to sort of rain rain some of that in They may have had their origins in some of Jack's speeches and then certainly some of our policy advocacy to Type things up there and I would say we're in a better place than we were as a result Yeah couple of thoughts about that You know, whenever I hear hedge fund manager talk about that that's the hedge funds to society That they in particular provide the equity remember right here words we provide the equity They are like all large corporations, you know faces challenges from within and Without and I'd like you to address each of those and I'll Direct it to start the easy one which is what you see as the external challenges to them But then we'll get to the internal ones. Yes, you know on the external side. There's no shortage of challenges right now I mean, there are you know many competitors who are actually trying to come at us on the price side being very selective about how they do that and You know the interesting thing is the market's actually been pretty Pretty discerning about that So when you know some people come out with you know really low-cost funds or ETFs they will get the other prices of the other products sweet that gets sort of plundered together and You know get a lot of analysts have actually Call our competitors on that and actually has a reverse that much But the fact is low cost is no longer argument alone. I actually think this is a good thing And you know the competitor in me hates it, but the Societal person in me locked up because investors are better up at the end of the day Jack's dream Changing the industry is actually happening people are actually paying attention to cost So from a competitive standpoint, that's certainly an issue for us. Well, the second one is we're big and we're Increasingly the largest shareholder in most companies and so that puts you under the microscope both from a regulatory and government standpoint as well as from a just outside pundit standpoint and we certainly hear a lot about those issues You know, there have been a couple of papers written about You know Vanguard's too big it needs to be broken up because It's good to exert too much control on American and so forth and you know There's even a conspiracy theory out there that somehow Larry Fink and I were working together to raise airline prices Because we both are the most significant owners in airlines and that would be you know a really good thing for us, which This is a great example of somebody mixing correlation causation and I don't really understand the difference between two But I say it, you know partly tongue-in-cheek, but seriously as well I mean we actually have to spend time on this up You know we have to spend a lot of time educating people so I look at the from the external standpoint just the scrutiny it goes on Because of the success of the firm and that's it's a privilege to have that Screwing in a sense, but it's also you know It takes a lot of time for our leadership team and time that you'd rather frankly devote to the clients Just being focused on the business You know internally I think the biggest risk we have is our success And it is coming from places and I know Tim Buckley shares this with me Again, you do not grow up in the house of Oval with With with a notion that complacency is a good thing. I just say that you know, it was so imparted So frequently imparted to us that you know the minute complacency seeps in your debt and You know one of the one of the really interesting things Probably two months into Tim taken over as CEO He put a book on all of his leaders table leaders desk called founders mentality and it was sort of getting back to the urgency of a brand new company and Having to you know earn your way each and every day You know not again, no no disrespect to the past but just saying Have we Maintained our sense of urgency. So I had a couple people running into my office and go The hair's on fire on what can you believe Tim's doing like I think the board actually made a great choice The next generation because that's exactly what he should be doing And so bill that's the thing that I think worries us I think we've got the right leadership team to combat it, but it's a never-ending battle Yeah, the more successful you are in some ways the less willing you are to take risk and Increasing new ways of doing things and thinking outside the box and which is again about our hallmark I grew up in Rochester, New York So I watched this up close of course on Eastman Kodak Many of you probably know the story Eastman Kodak actually invented digital Kodak did not you know This got to sort of the definition of what Eastman Kodak is Eastman Kodak considered itself a film company and That if you read their mission statement and so forth that's what it was all about And they missed this unbelievable revolution that was going on if Eastman Kodak had considered itself Its main mission in life to be the preserver of memories They would have approached it completely differently So one of the things that he did You know as we were getting bigger and more successful we actually Restated our mission and you know we went back I actually I reread everyone at Jack's speeches looked at a lot of Jack Brennan's writings on this and so forth and the team Came up with you know our current Purpose if you will which is to take a stand for all investors treat them fairly and give them the best chance for investment success And you might notice in there there's nothing about being the low cost provider mutual funds or you know anything that's That's really limiting that And get we're not going away from low cost mutual funds. Trust me, but the idea that our job is to give investors the best chance for success and to take a stand for them It was so deeply embedded in the founding of this company We felt very important to make the statement and you know bill for me. That's how you try to combat You know that the thing I worry about but look I'd be I would be less than honest I didn't tell you I would you know, but about every night worried that success goes to our head and Again, I had great faith in the leadership team that's in place, but that will be a never ending battle for us Yeah, there's something that I think about a lot which is not just the differentiation between what the public sector does government does and what the But there's a third sector, which we don't think enough about which is the non-profit sector almost all education in this country is done in non-profits and you know the for-profit Sector education of that matter the prisons hasn't exactly covered itself in glory healthcare Most of us are going to wind up in the hospitals They're run by non-profits. So the question I have for you Uh, is does van Gogh view itself as a non-profit corporation? Um, sure answers. No, um, we actually view ourselves as a very profit oriented Organization, but we define it differently than others do. We don't define it the traditional P&L We actually define it in what's the net return to our investors Um at the end of the day, that's what matters So, you know, our maniacal focus on cost over the years is to make sure that more of what the investor earns in the marketplace Stays with the investor. That's actually how we measure profitability Um, because if you think about it being owned by the funds and therefore the clients and funds At the end of the day, they're like if you if you do the analogy to shareholder You know creating earnings for your shareholders, which is what a public company is We're trying to create earnings for our shareholders, which are our fund holders We try to do that in the most efficient and cost-effective way And frankly when we look at success of the firm You know, there there were four metrics that we we we focused on Three external one internal and the metrics were Externally how are our funds performing versus our competitors? So how do we measure up because you all have a choice? Be it a Vanguard fund or even an ABC fund and There's thousands of funds. We know there are more funds than there are securities now. So, um, it's sort of an interesting factoid and So we we have we we were maniacal about that The second thing that we actually measure up We sometimes survey people to death and we hear that I apologize for it, but we want to know what our clients think. So we client loyalty And we can measure this both mathematically as well as through survey data the mathematical measure is The redemption ratio and a fund So how long do people stay in a particular fund? And one of the things we're really proud of is our fund shareholders time to stay with us three times as long As the average shareholder in the industry I'm very well client base and then you know, we will use survey data to reinforce that message The third metric was the expense ratio, you know, because we know the one thing we could control We couldn't control the absolute return in market We could control our expenses. And so we could have a real say on what the net return was And so we were you know, that goes back to 1974 And so those three aspects fund performance client loyalty and expense ratio We're how we thought about the external side And the sense fund performance and the expense ratio if you sort of look at them together That is in a sense of P and L for how you're doing for your investors Um, by the way, you might be interested the fourth metric Was our employee engagement or crew member engagement So we wanted people to think this was a great place to work And you know despite what the Philadelphia Inquirer says occasionally We actually are a great place to work. Our turnover is extraordinarily low and We have a great group of people who are just dedicated to the client. They love the mission. They love being here You know, I can't tell you how many 25 30 year celebrations I've been to in the last few years People who you know that year since the beginning or near the beginning Um, so that effort was actually really important to us as well because we thought without great people None of the other stuff is going to happen I'd like to shift gears now a little bit and talk about some more general MAPRO issues and what I want to segue into that ESG investing And I know you're an enthusiast About that you think a lot about it. And I'm wondering if you think about those three components Different people's tend to People tend to put them home from all together. I don't think they're the same thing I think they have different sets of returns and considerations and I want you to address that Yeah, so ESG has become you know quite the buzz word or buzz phrase if you will in the industry In europe and parts of the pacific it's um Actually required to be Strict around some of these issues Yeah, so let me let me start with G Because I think that's the easiest one to get your hands around your governance And this is the one we think we can affect the most to to be blunt How well our company's got and This gets into forward composition How How boards compensate their management teams how boards will receive strategy risk and so forth and we think that There's a lot of influence that big investors can have here and you know, what's interesting is just sort of a side note Um People always are like well, you know if you're an index sure. What do you care? Because you have to know the stocks. Why do you care about governance? And then we'll hear the follow-on is you don't care and you know, you guys don't Don't pay a lot of attention to this and before we wrote our first letter on jack brettner wrote a letter to 2005 I think jack both will give a speech on this in maybe 2001 So before that speech before jack brettner wrote the letter no active manager in the u.s Except, you know the act of this we're actually talking about governance. Like it was not a topic and so Our view is it's a really important role for a shareholder Because you know when we first started this journey board members have frankly lost their way a little bit If you would ask a board like I gave a speech on this 2008 or nine I said, you know Board should engage with their big shareholders. They should be willing to hear what the shareholder thinks about the company and so forth About the board composition And I almost got run out of the board board members. Why would we do that? I'm like, who do you think you represent? And then there's like the stunned silence and we had the shareholder. Yeah. Yeah, you guys elect us So and I say that a little bit tongue-in-cheek, but it's a really important concept So the g is something we think we can influence now bill. You I mean you've done more Mathematical research on factors and all kinds of things So you know probably doing this better than I do. There is no evidence yet That quote unquote better government companies perform better This is one of the holy grails is to figure out any of these factors actually drive return And there's lots of debate in the industry about this and you'll see different Interpretations of data And you know, it's hard to actually define what is with governance. We have our notion is good governance is that At the highest level the board Is doing an effective job overseeing talent strategy and risk and I say what we're seeing The processes making sure management is doing the right things not actually doing the board's jobs to govern not to manage um And They're they're putting the shareholder interests, you know, right there at the top doesn't mean other stakeholders don't matter We can get to that in a minute because there's been a lot written about that but The shareholder really has to be in the room and you know what I think over time we will see that Better government companies as we define them and we find ways to sort of look at that Mathematically a little bit more effectively I think we will see that it does lead to better performance generally, but it won't be no guarantee It will be no guarantee. So we're spending a lot of time on that When you get into the other two factors societal and environmental Yeah, everybody's definition is very different and as you know, many esg products that are out there today are They're what they what I call exclusionary they screen certain names out based on certain criteria So, you know, you might have a carbon footprint fund, you know, so Companies with high carbon footprint. You're not going to invest in you're only going to invest in companies with low carbon footprint Now there's there's two theories on this that are out there, you know, there's the That there's there's one that's I would say the real the real story, which is some people just want that and they're willing to give up Potential return for it. That's fine. Actually, I think that that's something that's an individual's choice And then there are people who will say we know that these You know funds will outperform in the long run I don't think we know that, you know, again all math we've seen does not Necessarily suggest that so it doesn't mean that the fund has no reason to exist But I promise that a factor like that is going to lead outperformance. I think is misleading at best and so We're actually spending quite a bit of time on on the topic I think the From a from a product standpoint if you will creating indices and so forth Anything that you do there you've got to be very clear with investors about the trade-offs that they potentially are making Okay, so it is long as you're clear on that that I think it's fine to have these kinds of vehicles But I think it's incredibly misleading to tell people that you think they're going to outperform You know socially responsible investing was a big thing in the late 90s And the way the screens worked is you had an overweight attack And so 1998 1999 you were socially responsible and you were outperforming the broad market by a thousand base points So everybody thought you were a hero Then the tech wreck happened and guess what those products disappeared You know people people were so disappointed They didn't understand actually the factors That they were supposed to So that's the exclusionary side. So the more The complex side is how do you engage with companies around these issues? And again, I'm going to bring you back to sort of our fundamental belief on governance, which is boards boards, you know, if you look historically and you were you know, you were do a survey 20 years going to say What's your primary job? They would say pick the CEO Pick the right CEO and all good things will happen. I think it's much more complex today I think boards have a really important role to play in the oversight of not just the CEO slouching Which is still important but talent overall in the company It's the company that's got sufficient talent for the evolving marketplace Strategy oversight and risk And you know many of these environmental and societal Social issues if you will fall in the risk category So from a governance standpoint, we want to we actually want to know how companies are thinking about these issues Without necessarily saying one, you know, one interpretation of an important let's use climate change example We're we're less interested in somebody saying we believe the science or we don't believe the science We're much more interested in a board saying Here's how we view it from a risk perspective in terms of how consumers view our business Our supply chain works all of those sorts of things And here's how we're thinking about that because if there's greater clarity around how you interpret different types of risk theoretically You have a more accurate stock price if you will And that kind of transparency we think is really necessary So that's where we've been spending quite a bit of our time on the engagement side Is really trying to understand how companies view these factors from a risk perspective And you know, can you learn something that actually makes the market of our pricing mechanisms work even more effectively It's by no means In exact science at this point and you know one of the things I think we're going to see as time goes on is There's a lot of pressure For shareholders to you know act on some of these issues Because the government's not and so you know You've got a lot of stakeholders out there who are frustrated with a lack of action in certain categories of these Topics and so they push really hard for other constituents to try to have an effect And I think it's a very very difficult thing for a company You know a shareholder to do because again everybody's interpretation is really different I'll give you I'll give you just one practical example So I have a great family friend. She's a very very very devout quaker If you're familiar with quaker quaker beliefs One of the fundamental beliefs is Work work cannot be tolerated just through in military. Therefore anything military related is bad And so she asked me she's young Very idealistic. She's like so what can I invest in? And she started running through companies and you know, she started with like some of the cool tech companies I'm like, you know, she starts with google and I'm like, I don't think you can do that if you're in the military I mean, these things is doing all the you know satellite stuff that drones are based on so she's horrified by that What what about that? You know, they make really cool stuff. Well, you know, look at apples military business So, you know by the time we worked our way through I think we were down about five companies I'm out of the s&p 500 that she can invest in. I mean it was Really, you know And I tell the story because I actually really felt maybe she wanted to express her beliefs In the way she invested and she was willing to sacrifice her term But the the problem was Her her definition of socially responsible so broad that literally I mean treasury about to be the last thing she You know, um, so, you know, she couldn't invest So, you know To me that's at at the heart of all this discussion around esg is everyone has a very different interpretation You know what what is environmentally sound to view Maybe very different than that And how we as a provider actually get our hands around that is actually pretty complicated Yeah, I mean I I tend to look at it I'm somewhat somewhat different angle And I tend to separate them out. I when I look at she governs, I see that as a positive return factor I think there's pretty good data that are pretty good data and we come back to that, you know, if you look for example companies where the Executives are spending all their time in private jets going around for personal purposes They're spending 20 million dollars for a house. You can actually ice like that It's a negative return factor Very very big one and that goes all the way back hundreds of years, you know, john london south c company You know, george hudson, which railways recently Newfield is a classic example or is a classic example of that these are bad actors pretty easy to To identify and so that's one. I think negative Slept or there's some more subtleties you can get out as well That's from she I looked at as negative Strong negative return factors. For example, you look going back 80 90 years alcohol tobacco Fireworks, okay, they should be here. They should be on the agency's deals with us, right? All have all people market by two four percent of over an 80 or 90 year Period and the reason is very simple people avoid those companies the prices will fall with expected returns Will rise and so the idea that you're going to affect social policy by Disinvesting this company's makes no sense at all. I mean, it's more likely that those companies will get like a private And will stay public scrutiny. I've never understood it as as a as a As a tool for advocacy You know And then as far as governance because i'm looking at more general issues You know about the point of view is in terms of societal in just a side of the Society and the health of the capitalist System where we've now all the conversation system Was heavily on stock options which really incentivizes companies to To to manipulate for short term monies reports And not to think of the long term And they don't embrace the one box Theory of the long term agreement Yeah, you know, so a couple of Just ads so I couldn't agree with you more on the you know Your observations around the e and the s at least historically so No question that those Companies in the industry listed have out of form And again, this is part of why when we talk to people about doing some of these exclusionary screens We really try to remind them that you are likely giving up return and just understand that as an investor. So 100% agreement there, you know on the on the governance side One of the really important things we think is The emergence of vanguard And you know other index providers is actually changing Some of the dynamic And it's actually I think positive change. I think it's still very early innings again, this is something uh jack mobile and I spoke quite a bit about For the last couple of years because it was This is a real this is a real c change And here here's here's the heart of the issue. So We talked everybody talks about Long termism. So, you know, you look at a lot of your traditional funds and traditional managers Look at the portfolio of turnover It belies the idea that they're long term most active funds on the on average active fund turnovers about 80% Even if you factor if you say, okay, let's just do name turnover name turnovers over 50% So that means the holding period is less than two years So when somebody who says I'm really long term oriented, they're not Okay, and that's where a lot of the pressure has come from. So I so I I agree with your observation They're on the short-term zone. Here's the difference for our index holdings We can't sell a stock. We don't like what's going on in the company We are a permanent share and what's interesting is we're now having those discussions with companies And it's a very different set of discussions than what they're used to because We can't just if we don't like what we hear we just can't go home and say let's just get out of this And go pick another company in the sector and be happy Um, so active engagement with boards and independent directors has become a big thing We'll probably do 1,100 Engagements this year and that number is just going to keep rolling And most of it is around this notion of what's it going to be a permanent shareholder And what how can you as an organization better align yourself with a permanent sense of capital And it doesn't mean that short-term actors have no You know place in this universe But they shouldn't have an outside voice It should not have an outside voice somebody who owns You know one percent of a company and wants them to spin this division You know merge this thing and do this and do this to jack up the stock place for the quarter If that's detrimental to our long-term long-term value of the company We're actually going to stand against that From a you know from a government standpoint and You know we're beginning to have a much I would say there's a much more There's a much larger voice Now it's really the challenge of course is If you can well imagine everybody wants to politicize that voice as quickly as they can and push You know social agenda In political issues as opposed to economic issues. And so the way we deal with that is when Somebody let's say somebody on the yes an activist society a social activist comes to us with an idea Our first question is show us the link to long-term value creation and we'll have a discussion You know, so if you're writing a proposal to a board To be considered for the shareholders, we want to see the link to long-term value creation If there's a link, we're going to listen or you know, we may disagree, but we're at least going to listen If there's no link, we're not going to spend a lot of time on it So that's kind of how we're trying to to handle this bill and and again, it's very new territory You can imagine these are tricky issues to deal with The the fundamental underlying principle though is what's in the interest of our long-term investors because again as I started by saying We have investors who tend to stay with us for a very long period of time And therefore and then in our index funds in particular, but also many of our active funds have very low turnover relative to their peers You know, we are We are by definition long-term shareholder if not a permanent shareholder and we need to reflect that and we need to reflect those values Do you or can you even speak to how well you would leave the platform? So we don't coordinate with blackout. There used to be one We can't They would be all kinds of anti-trust issues and frankly Shouldn't say this, but I will because you guys are friends You know what black rock says and what black rock does are sometimes very different We try to do what we actually say so you know You know, it's and again I I pay a lot of attention to what they say because they actually say some important things and they're very influential But I I think how you If you look at for example, how we compensate active managers So I've spent most of the time talking on index. I think all of you know Because we get we get notes from you all the time that All of our active managers are under incentive contracts where it's long from longer term performance that's rewarded natural performance And it's and by the way, it's it's perfectly symmetrical if they under perform they get paid less if they outperform they get paid more and What that does is it sets them to think longer term Most of them are on three year. I would like to see it go to five We have a couple I think we've managed to do that, but you know That's very different than anybody else in the industry So people will talk about long term long term long term and then you look at how they send their portfolio managers And you look at how they act how you know how they actually act is quite different. So for me So we we don't coordinate with them We certainly pay attention to what they say we pay attention to what state street says we pay attention to what tier crush says All of these organizations have Intelligent, thoughtful, constructive things to say on this topic So you've got to be a student of what they say, but you know, we're we're Trying to carve our own way here, you know, frankly I Again with all humility the guy who runs this for us clint born is considered by most people in the industry to be the best so frankly people pay a lot of attention to what clint says and What he does and I think we're actually able to affect change a little bit Work greatly and even our direct influence because it blends off on us here Yeah, I'm a liar. Um, did you did you see happens to Michael Burry's interview at Bloomberg? Okay, just just as a Michael Burry was was the hero of the big short this this autistic Scientologist who uh called the other financial crisis by He loved reading corporate bond offering statements. Uh, he he went on record to saying that that Mark's from Charlie the fishing hills did that thing and he thought that there was you know, an outsized play and undervalued Small value stocks and Japanese stocks and these hundred dollars He was going to be describing he was going to be picking them up. I wonder how you responded to that With a chuckle, you know, um, look, he's You know, I think he's coming an active manager. So he's you know, it's a story So I would say two things. Um, one, you know, so let's like look at the practicals Is indexing the bubble? I don't think so at all. Um, you know the difference between the financial crisis that he You know didn't talk quite elegantly about in his own way was um, you know One of the most important elements of that was massive massive massive amounts of leverage Right, so the leverage was a critical component there. Um, there's no leverage in Investing right in what we do at the index side where we were purely agents. So The fact that there's no leverage actually Moves a lot of risk and frankly if you think about it, um, because we're not a proprietary investor. We're an agency You know, you're the ones who bear off risks Like funds go, you know, index goes up. You do well index goes down. You don't do as well That's very different than what was going on during the financial crisis where you know proprietary Positions were really what was driving so much of what went on So I think the analogy is is very weak now to his observations that value stocks may be Actually really valuable today I'm much more agnostic about you know, I think there has been a massive premium Put on growth, you know, we are at the longest period in history of value under performance And you know, if you look at sort of value versus growth, you see these tremendous waves Over time where once one outperforms usually for much longer than one expects Um, but they usually cross this is the longest period what we've seen growth outperform I would argue and again, I you know, I'd be really interested because you know, you've written a lot about factors And you've you've you've thought about this probably more deeply than I have But I think when you look at macroeconomic policy and its impact on the capital markets um, it's actually really Reinforced the importance of growth and so I think growth stocks have been bid up as a result because you know, we've lived in this very Low growth economic time. So investors have put a huge premium on finding growth You know to some level of growth and what that's done is it's really proven the price of growth stocks to a level Or the gap between growth stocks and value stocks to a level we've not seen um Usually those sorts of things do eventually reverse themselves. So that's where you know, I and again I I look at what Barry's saying on that front and it's somewhat interesting when and how that all happens I don't know. You know, we are in unprecedented territory in terms of central bank intervention and that shows no signs of abatement and I think that's actually distorted the markets to a large degree This is a personal opinion not necessarily a backyard opinion, but I I think the what's gone on both at the Fed and in central banks in terms of monetary policies is so unprecedented. We've not gotten back to normal and You know, there is a sense among the central banks that They can make economies more recession proof than their predecessors I'm not sure that's a good thing by the way because I think perceptions are actually important go back to Schumann, but um We're we're living in a period that we've never seen this kind of intervention And it is definitely having distortion effects on the capital markets. Um, no question in my mind Yeah, I mean with regard to the future of value premiums my late mother used to say from your books to God's ears You know And I do see the same thing that you're seeing in terms of the over-evaluation of of both stocks Certainly as being a function of low inflation And low interest rates, which gets to my I think it's going to be my My last question. Yeah, my last question, which is You know, do you see the equity risk premium and the risk-free rate between components of returns risk-free rate for for extinct some of that as Historically shifted to lower values over the past 20 or 30 years, you know until until You know 30 or 30 or 35 years ago those existed within fairly narrow Bounds and we seem to have jumped The shot in terms of the low and those values. No wonder you think that's common Um, yeah So look the short answer is I don't know because again, you know the policy The policy changes are so profound. Um, it's hard to see it reversing anytime soon um The the low the low risk-free rate feels to me like a A even longer term thing that we're going to live with. I think the equity risk premium That one i'm not sure about, you know, I I think there's a possibility that we'll see Um our returns and norms there, but I I don't know when It's certainly a long ways out, but you know that question bill does bring up I think a really really important notion and you know, again, you're you're going to have people far far smarter than I Talk about this, but I know if jack were here. He'd want to remind people of his little formula Or predicting future returns, which happens to correlate very closely with our own Multivariable capital markets model, which has got like a quantum computing going on or whatever um We look we actually on an absolute basis Are expecting lower equity returns over the next decade um Nothing is under a sure thing, but it's close to a sure thing in my in my view just where evaluations are today And it's not going to be a straight line So the combination of lower equity returns And perhaps to even normal volatility. That's not a good combination for investors You know, normally when we see real volatility at least people are like, well, you know Holds out their reward for that in the long run Um, I'm not convinced of that right now. I'll give bill. I don't know what your own work suggests there, but we think you know, even if you took the equity risk premium as Sort of what it's been historically and you look at where where The risk-free rate is today you put those together you get a much lower return than what we've seen historically If if it stays a little bit compressed as you suggest That's that's just the worst if you will and again, I hate to be Debbie downer on that But I think as investors we all have to be thinking about portfolio allocation standpoint what that what the implications of you know, 10 year returns are in terms of How we draw down when we're in retirement how much we need to save when the accumulation phase and so forth And I think it's actually a really really important point Yeah, I mean, you know It certainly feels as if the risk-free rate the rate on fixed income assets in general But it's going to be low from now out to the horizon and come up with any number of narratives Why that should be that I've learned over the years not to trust narratives And I also can remember 35 years ago or 40 years ago when it seemed like we were going to be in an inflationary environment for So I think a lot of what you know, I talked about I sounded pretty critical of central banks and Look, I get what they're doing in a sense that the thing that they fear the most Is deflation because as bad as inflation can be deflation Once you get into a deflationary spiral It is just the death of the economy And I think they've been obsessed with that and when you look at the demographic factors in particular You can see why people are pushing against Doing everything possible to prevent deflation from setting in broadly and And again, um, I'm not enough of a demographer, but as you sort of look at what the data suggests There's going to be a lot of downward pressure Because of the age of the population and so forth glowing This is not a u.s. Phenomenon. It is a global phenomenon And I I do think that you're right bill that that could shape the narrative for a long time out Thank you Thank you so much I'm going to take a 20 minute break