Take 5: Vanguard's new CIO Greg Davis talks bonds, stocks and costs

Having just stepped into the role, this veteran of the firm now oversees $3.8 trillion in assets in more than 300 mutual funds and exchange-traded funds

Jul 24, 2017 @ 1:28 pm

By John Waggoner

Earlier this month, Greg Davis became Vanguard's chief investment officer, overseeing the $3.8 trillion in assets in more than 300 mutual funds and exchange-traded funds. Mr. Davis, 46, took the role from Vanguard's new CEO, Timothy Buckley. Mr. Davis has led Vanguard's Fixed Income Group since 2014, with responsibility for portfolio management, strategy, credit research, trading and planning functions. He also previously served as the company's Asia-Pacific chief investment officer and a director of Vanguard Investments Australia. Here are excerpts from my conversation with Mr. Davis last Friday.

arjuna-design: Bond people and stock people look at the world differently, and each often looks at the other like they have two heads. You're a bond guy. What is it like to be working with stock guys?

Greg Davis: It's going to be interesting. I've been in the role for a week, but I'm going to be spending a lot more time with the equity team and going deeper into day-to-day operations. The goal is to spend time with the teams, how they manage equities, their quantitative models and their equity strategies. I'll also be spending time with the global investment group, going a couple layers deeper than what I already know.

I've found that when I've changed jobs, the best way to learn is to meet with people one on one. You find out where it is going well, where operations are getting better. I call it a listening tour.

IN: The Federal Reserve creates money, and increasingly, Vanguard invests it. Your largest fund has more than half a trillion dollars in assets. Are you concerned about capacity constraints at any of your funds?

GD: When we think about having large, highly diversified portfolios, I don't feel that there are capacity issues. We have ample ability to put money to work and produce high-quality investment performance. We have not had any discussion of closing any fixed-income funds at this point. But it's something that Vanguard always looks at — doing what's best for shareholders. Typically, the process begins with managers raising their hands if they think there are capacity problems. Then there's a review department involved in that conversation, and then it goes to the global investment committee.

(More: Having reached the summit, can Vanguard maintain its perch?)

IN: You could make the argument that both stocks and bonds are expensive now, relative to their historical norms. Are there any reasonable alternatives that Vanguard can offer to worried investors?

GD: We still believe a combo of stocks, bonds and cash is the appropriate mix for investment goals. We do have a commodity sleeve for our managed payoff fund, but for the vast majority of investors, stocks, bonds and cash are the best tools for long-term investors. We also think international diversification is the right thing for investors. It provides access to companies throughout the world. If you look at our target-date funds, which represent our best investment thinking, the international equity and fixed-income portions have gone up over time. We've tried to reduce home bias, and think that for investors to be on that efficient frontier, they need to be exposed to markets outside the U.S.

IN: Every investor has a closet of anxieties about the markets. What worries you most?

GD: What I think about is how volatility has been so low for so long. Markets keep going up, and I think that could lure investors into being complacent and thinking that the markets only go up. There will be a downturn in the market sometime, and we don't want to be in a scenario where people are buying high and selling low.

IN: Advisers have a wide array of choices when it comes to mutual fund platforms. Why should they go to Vanguard instead of DFA or Schwab or Fidelity?

GD: It boils down to a couple of things. Our overall structure allows us to be the lowest-cost provider possible. No one else can match Vanguard on price. Our economies of scale let us continue to lower costs extensively. We don't have a loss-leader strategy. We have an ownership strategy.

But it's not just cost; it's having the right product lineup and making sure we're offering long-term value to clients. We're not looking for trendy or niche products; we want to offer what has enduring value. We get good pricing on our external managers and have tremendous expertise internally. Right now we're trying to add about 2,000 people to provide the right level of services. On the investment side, we're also adding head count and increasing our footprint. It's really a global team trading in Australia and London, and it's a great thing to have local experts.

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