A penny for your thoughts, Mr. Vanguard?
IF YOU EVER meet with Vanguard CEO and competive rower William McNabb, don't try to surprise him with a signed copy of the Olympic rowing saga Boys in the Boat. He'll pull out his own personal copy - annotated, underlined, indexed, highlighted with inspirational passages.
It's the sort of preparation and organization that's helped McNabb and his team make Vanguard firm with more than $2.6 trillion under management, supervising more 401(k) money than any other company.
Gary Thompson visited the Malvern headquarters of the mutual-fund giant to sit down with McNabb, who talked about choosing Chesco over Wall Street, and why being located in the Philadelphia area is so important to the company's mission and its success.
Q) I look over my shoulder when I take $200 out of an ATM. What's it like to have $2.6 trillion under management?
People will say, the $3 trillion Vanguard Group, or the $3 trillion CEO, and I say, whoa, whoa, whoa - time out, back up - it's not our money. This is our clients' money. We're here to steward it and make sure it's invested well. So we have to be very careful about how much it costs to run the portfolios. It's the one thing you can control.
Q) That's different than the rhetoric you hear on Wall Street, where investment firms refer to clients as "muppets."
We're not Wall Street. I don't ever want to be part of Wall Street. I left Wall Street. We have a Main Street philosophy, and the great thing about Malvern - and it's really the Philly region in general - is that it's really one of the more underappreciated regions in the country.
We have our share of issues. The poverty rate is way too high. There are all the education challenges K-12, but there are 108 universities within two hours of here. And you know, if you are us, and we're the biggest investment firm headquartered here by a long shot, we can recruit just locally and do very well.
Q) People may not know you started your professional life as an educator. You taught language and coached rowing at Haverford School, while rowing competively on the Schuylkill.
Standing in front of a bunch of 13-year-old boys to get them interested in first-year Latin certainly posed its own set of challenges. I went from there to grad school at Penn, but it was really coaching and teaching and competing on the river that actually kind of bonded me to Philadelphia.
My wife is from here. We went after grad school to New York for a couple of years, but I actually wanted to come back.
Q) You had some offers from Wall Street firms, but you turned them down to work in the sleepy suburbs for company that back then had "only" $20 billion under management.
I actually went to see my old rowing coach who lived in Roxborough. We went to Dalessandro's and ordered a couple of cheesesteaks and sat in his backyard in a little rowhouse on Cinnaminson Street and had a couple of beers and talked about life.
I had gone to Wharton and everybody there wanted to work on Wall Street. I was getting recruited by a lot of places and his point was, go where you passion is. Go where your values are.
You could feel the passion around the company, around what it was trying to do, and it was pretty contagious. Everything we do is built around the concept that we are owned by the client, and the client is the center of the universe.
Q) Sometimes doing what's best for the client means telling them stuff they may not want to hear. For example, you've said recently that the big bounceback numbers we've seen in the stock market over the last five years are over, and folks should be prepared for less robust returns.
We run a very sophisticated set of models that try to come up with probabilities of different return scenarios. If you look at valuations of stocks today, they're pretty high. They're not in bubble territory but they're on the high end of normal.
The good news is that companies are far healthier than the last time stocks were this highly valued. But the bad news is that if you look over 100 years or so of history, typically when stocks are valued this highly, the next decade of returns is low.
So over the next 10 years, the best models say the highest probability is in the 6- to 8-percent range instead of 9 or 10, which would be more normal. Couple that with 2.5 or 3 percent with bonds in a balanced portfolio and it's going to have lower returns than is typically normal.
These are probabilities, but we've been pretty public about talking about it because the last thing I want is people to be complacent after the returns we've had the last several years.
Q) So folks should save more to be ready. How much of their gross income should set aside for retirement?
It drives our research guys crazy, because I go to the high end. I say 12 to 15 percent. That's a hard number, with all the pressure of education and housing and health care - all costs that have grown faster than wages. When you do the math, at 15 percent, you can take a very stark set of returns and you're going to be OK.
Q) Father's Day is this weekend, and you're a father of four. Does business teach you anything about parenting?
Parenting is way more complicated than just about anything you do. My wife would say it would be better if I approached parenting the way I do at the office. Very strategically.