Episode Transcript
Dan Reyes:
At Vanguard, commercial success of a particular strategy doesn't necessarily make it a sound
investment idea or a sound investment strategy. We think about products, for instance, in a way
where the first question that we ask ourselves is, does this product offer enduring outcomes,
enduring investment outcomes, again, for decades?
Dana Moody:
Welcome to FTSE Russell Convenes. My name is Dana Moody and I'm a member of the Index
Investment Group at FTSE Russell. Today we're joined by Dan Reyes, the Global Head of Investment
product at Vanguard. Vanguard manages over nine trillion dollars of client assets. Today, we're going
to talk about ETF market trends and also dig a little deeper into Dan's background and career
journey. With that, thanks for joining us today, Dan.
Dan Reyes:
Thank you for having me, Dana.
Dana Moody:
Let's touch on ETFs. Obviously, ETFs are the marquee product in our industry for the last decade and it appears to only be gaining steam. Vanguard has been one of the most dominant players in the ETF market over the last decade in terms of net cash flows. But with the explosion of new entrants into the ETF market in recent years, how is Vanguard thinking about potentially adjusting the firm's
approach for new market dynamics and also novel exposures that have been generating assets?
Dan Reyes:
In some ways, Dana, I mean, we're more vigilant than we ever have been about what's happening
with clients and in particular, client preferences. But we're also really fortunate to have a product
philosophy that's grounded in our investment philosophy. And in many ways, despite the new
entrants or the new trends, the fact that we can keep on coming back to our investment philosophy
is unbelievably helpful for how we think about product.
And at the centrepiece of that investment philosophy is offering products and exposures that we
believe are going to drive investment outcomes over the long term. So when we think about an
investment idea or something that's developing in the market place, we ask ourselves, will this
generate positive returns? Should it generate positive investment outcomes over decades? Is this
idea that we think will last for decades? And in our experience, the idea of generating positive
investment outcomes for our clients is actually what then drives asset growth and cash flow growth.
It's more of an outcome as opposed to a specific objective. Now, that being said, Dana, we are
attuned and we're always keeping an ear to the ground on what our investors are doing and how
their preferences are evolving. And to the extent that those preferences don't undermine the
investment outcomes that we're seeking to deliver, we'll look and we'll investigate those ideas even
further.
Dana Moody:
It definitely sounds like, obviously, the firm's mission to seek out enduring strategies that last not
only for a market cycle, but for years.
Along the same vein around novel exposures and new entrants, there have been many different
types of ETF strategies launched over the last decade. Most have come and gone with a market
cycle. In terms of a lot of thematic exposures, for example. Some call them meme or fad-like
products. However, there has been some products like the Bitcoin ETF that has had outside success.
When does an investment strategy turn from a fad into a sound investment strategy?
Dan Reyes:
You know, at Vanguard, commercial success of a particular strategy doesn't necessarily make it a
sound investment idea or a sound investment strategy. We think about products, for instance, in a
way where the first question that we ask ourselves is, does this product offer enduring outcomes,
enduring investment outcomes, again, for decades, right? And more specifically, what we're going to
ask, is there a plausible economic rationale for why a particular product should generate positive
real returns over the long term? If the answer to that question is no, then there is no transformation
of something from a fad to a sound investment strategy. Our process is structured in a way where
you think about the investment question first, and then you think about the client and trying to
adhere to their preferences. And if the preferences that they want, say, for instance, they want to
access a strategy in a newer or a novel wrapper, and if that novel strategy or the novel wrapper
doesn't undermine the investment outcomes that we're aiming to deliver, then that's the next step
in our process to evaluate and investigate further.
Dana Moody:
Now that totally makes sense. And obviously, Vanguard has a robust framework of how you call it a
decision tree, if you will, to really evaluate the soundness of an investment strategy over the long
term.
Dan Reyes:
Yes, it's absolutely sequential. You have to ask the investment question first, and then if you don't
pass that investment question, you don't even make it to the client or the commercial aspects.
Dana Moody:
Thinking about Vanguard strategy, you kind of already, kind of, gave the broad view of how
Vanguard thinks about investments in the market place. But in terms of the firm’s strategy and
thinking in terms of growth, in the US and globally, not only for its assets, but also revenue, how
does Vanguard assess optimal go-to-market strategy? What are some of those factors that go into
that and how do you balance staying true to the ethos of Vanguard, low cost, long term, but also
factoring in profitability for the business?
Dan Reyes:
We're pretty unique in the sense that our structure gives us effectively different objectives, right?
So revenue maximisation, profitability maximisation, isn't the objective of Vanguard. And that's all
derived, Dana, from the fact that clients own the funds, and the funds own Vanguard. And because
the funds own Vanguard, our owners are effectively the clients. So it creates this virtuous circle
where we're not necessarily trying to maximise revenue or profit at all. It's not something that you
hear us talk about. What we do talk about a lot is whether or not the investment products that we
offer are generating positive investment outcomes and giving investors the best chance for success.
And that, in and of itself, if you produce great product and you surround it with the thought
leadership, the support, the ecosystem, in some instances for some investors, advice that they can
get from Vanguard as well, too, the growth is more of an outcome of focusing on trying to improve
clients' investment outcomes on a day-to-day basis.
Dana Moody:
I think that definitely aligns with, like, obviously for again, enduring products, but also we think
about the ecosystem, market dynamics. It sounds like Vanguard obviously factors all of that in. But
again, with this longer-term approach. But digging on that, one of the points around market
dynamics giving investors the best chance of success, a key component of that is market structure.
In recent years, and specifically in the U.S., equity market indexes and returns have become
increasingly concentrated. I'm thinking even broad market indexes like the Russell 1000, for
example, and this is mainly due to mega-cap companies, i.e. the Magnificent Seven, really gaining
more market share.
How is Vanguard factoring this into how the firm thinks about index construction process of their
products, but also just the broader product lineup in general?
Dan Reyes:
So I think, Dana, you're totally right to highlight the rise of the Magnificent Seven and the role that
that plays in index concentration. And the one thing I would point out, though, is that index
concentration actually isn't something that is new. It changes over time. If you look back to periods
like the 1960s or the early 2000s, you'll see increases and decreases in index concentration.
Right now, we're at a point in index concentration where the market is certainly taking notice, right?
And we undeniably, fundamentally, believe that investors are served well by broadly diversified
broad market exposures, of which those indexes that you reference are still a huge part of them.
The other thing that we focus on is as the index incels, and certain indices become more
concentrated, is making sure that investors have high quality tools to dial up their exposures,
however they see fit that's in line with their investment views and their investment risk tolerances.
But we're also careful not to slice the onion too thinly. We want to make sure that investors, even if
they are modifying their exposures and have access to high quality tools, different exposures to
design what they want, that they're still well-served by broadly diversified exposures.
Dana Moody:
Market concentration is not a new thing. And also, there's so many different tools that firms like
yourself can use to account for that market concentration, but also still delivering those products,
those sound products to investors to give them the outcomes that they need. Investors are
obviously in good hands. With that, I think we're out of time. But thank you, Dan, for joining us. It
was a great discussion. You definitely gave our listeners good insights into the ETF market and how
Vanguard is continuing to position itself for success in the future.
Dan Reyes:
Thank you for having me, Dana. I really appreciate it.
