WASHINGTON — At the Vanguard Group, nearly everything has a nautical theme. After all, the client-owned mutual-fund giant was named for Rear Adm. Horatio Nelson’s flagship at the Battle of the Nile.
Employees are “the crew,” the cafeteria is “the galley,” the company store is “the chandlery” and the fitness center is named “Shipshape.”
Commanding the 13,500-member crew is Bill McNabb, chief executive of one of the world’s largest, most influential financial-services companies, with $2 trillion under management and 25 million investor accounts.
Because of its size, Vanguard’s influence on everything from equity markets to corporations to regulation extends far beyond the mid-Atlantic area. You wouldn’t know it from the mild, unassuming McNabb, who loves the liberal arts, takes commercial flights and relaxes by competing in endurance races.
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The 55-year-old has enjoyed a meteoric rise since he joined Vanguard in June 1986. He became vice president of marketing services in 1989, assumed responsibility for all institutional sales activity in 1991 and became head of Vanguard’s Institutional Investor Group in 1995. Now, he’s only the third chief executive in Vanguard’s history, after founder John C. Bogle and Jack Brennan.
This transcript of our hourlong conversation was edited for length and clarity.
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Q: If a deep European recession develops, what will that mean for U.S. stocks and/or banks?
A: Europe is in a recession. And if it deepens, the biggest thing is, it’s hard to predict what the impact in equity markets is going to be in the short run. The only thing you can expect with any certainty is the volatility is going to continue.
I think the most important element in our markets over the next few years is controlling, in a sense, what we can control in U.S. markets. And that would be the debt-deficit situation. If the U.S. has a credible plan to get its fiscal house in order — by the way, it doesn’t have to happen overnight, either. We don’t have to go to a balanced budget tomorrow. But if there’s a plan that people can extrapolate and say we’re on a good path there, it will remove so much of the uncertainty from the market.
Q: So are you bullish on the economy?
A: I am neutral on the U.S. in the short run until this issue gets resolved. I am actually very bullish over the long run.
Ours is still the most vibrant economy in the world. If you look, one of the best correlations to GDP growth is growth of the employee base.
And over the next 20 years at our employee base, the number of working people will actually grow more here than anywhere in the developed world, with the exception of India. Despite the K-through-12 issues on education, we still have the best university system in the world.
Q: How do you assure the “little guy” about investing his savings in a 401(k) and that buy-and-hold still works?
A: We think we help the little guy compete. We’ve got very sophisticated people facing off against all these sophisticated constituencies that are out there on behalf of the investor.
This is an old example: indexing. There’s kind of a mythology out there, somewhat perpetuated by us, that we invented indexing.
We didn’t invent indexing. Indexing was invented on the West Coast in 1971 by Wells Fargo investment advisers.
So our genius was applying an institutional concept to the retail investor. A lot of the work we do in different funds or advice or so forth is trying to give what I call institutional sophistication to retail investors so they can benefit from it.
Q: What other examples do you have?
A: Let’s take a target-date fund, which looks like this really simple, one-stop shop. It’s actually very sophisticated. You’ve got asset allocation among stocks, bonds, cash, sometimes other asset classes.
It’s being constantly changed as you’re aging. Probably the most important element is it’s being rebalanced on a regular basis.
Most individual investors don’t have the discipline to do that on their own. We do record keeping for about 4 million participants in 401(k) plans. The [market] peaked in October 2007, when the stock market was at 14,000, and then you went through this horrific downdraft. Our average participant was back to whole by the end of 2009, early 2010. Now, 90 percent are ahead.
Q: Are those gains because stock prices have risen?
A: And contributions [to the plans] at cheaper prices. Now, is it phenomenal returns? No. You put it in the context of what was going on.
The people I feel horrible for [are the ones who were] planning on retiring at the end of 2008. I had a plan sponsor say, “Bill, how do you answer this question? My participants said, ‘I’ve contributed to my plan for 25 years. I’ve done everything you told me. I’ve been balanced and diversified. I was going to retire at the end of the year, and my account’s down 25 percent.’ ”
Q: What was your answer?
A: I said, “Joe, you’ve got to just be very honest. You needed to be fully invested. You needed to be fully diversified. But if you didn’t, your standard of living isn’t going to be what you thought it was going to be. Or you’re going to have to work a couple of extra years.” It is what it is. The only way to do it is to be brutally honest, and we’re always talking to people about saving more than you think you should.
Q: What is the worst idea to come out of the investment world during the last 10 years?
A: There were so many bad ideas. Certainly one is the structured investment vehicles that so many funds invested in. You were packaging up all these components, bond components, and they get AAA ratings. Yet when you look at the underlying tranches, they weren’t AAA.
I tell you what I’m worried about. There is a tremendous amount of product proliferation going on right now. You can see it in most of the exchange-traded-fund area.
People are slicing the markets into very narrow compartments. They are implying you should time the market to take advantage of this slice.
It’s a horrible thing for investors. Investors tend to be always too late to some little sector movement.
Q: What is the best idea?
A: Target retirement funds. They are incredibly simple to understand, yet incredibly sophisticated underneath. Obviously, I think ours are the best. A couple of our competitors do it really well, also. I think 401(k) participants are much better off as a result.
Q: You’ve got a fairly stressful job. What do you do to relax?
A: It’s mostly family time and exercise. I’m kind of an endurance person.
Q: What kind of endurance? Marathons? Running? Triathlons? Rowing?
A: I do a little of each, actually. Season by season … A lot of cycling these days.
Q: What do you read?
A: I read a lot of fiction now.
I really like biographies when they are really well done. I’m reading [Walter] Isaacson’s Steve Jobs book. When [David] McCullough came up with “1776” a few years ago, I probably read that twice. I just found that incredibly useful.