Bill McNabb Chief Executive Of Vanguard Focus On Low Fee’s Not Growth


Bill McNabb was a young Wall Street banker at Chase Manhattan in the mid-1980s when he was called to an interview with Jack Bogle, founder of Vanguard, at the time an obscure Pennsylvania-based group founded 10 years earlier. It was the last of 30 interviews faced by the bright Wharton MBA graduate in his quest to join a company that today is a titan of the asset management world, boasting assets of $4.5tn. “Mr Bogle looked at my résumé and said Vanguard had $20bn [under management] and it would be amazing if it got to $25bn,” Mr McNabb recalls. His future boss was struggling to understand why an investment banker working on big leveraged buyouts and complex takeovers wanted to become a product manager focused on the nascent industry of guaranteed investment contracts. “All my peers on Wall Street thought I was out of my mind [to join Vanguard],” Mr McNabb says.

But he adds: “Sometimes it is better to be lucky than smart.” And 30 years on, Mr McNabb’s bold call proved right. He has enjoyed a stellar career at Vanguard, rising through the ranks by working in marketing services, institutional sales and the international unit before landing the chief executive job in 2008 just as the global financial crisis was roiling the investment world. At that time, Vanguard’s assets already stood at $1.3tn. With Mr McNabb at the helm they have ballooned to $4.5tn — the second-largest pool in the world behind BlackRock.

In a moved that stunned the global asset management industry, Vanguard announced a management overhaul in July. Chief investment officer Tim Buckley, 48, was promoted to succeed Mr McNabb as chief executive at the start of 2018. The change comes at an important time for Vanguard, which has cemented its status as the world’s leading low-cost fund provider, specialising in passive management strategies. Born: 1957 Total pay: Not disclosed Education: 1979: BA (government), Dartmouth College 1983: MBA, Wharton School, University of Philadelphia Career: 1979: The Haverford School, Pennsylvania 1983: Chase Manhattan Bank 1986: Starts at Vanguard 1989: Vice-president of marketing services 1991: Head of institutional sales 1995: Managing director and head of institutional investor group 2006: Head of international business 2008: Chief executive and president Speaking from the company’s Valley Forge headquarters a few weeks after that decision, the tall and athletic 60-year-old admits there was surprise over the succession but says that after 10 years at the top, it was a natural “breaking point”. “The fact that I am staying on as chairman for the foreseeable future, probably a couple of years . . . that is a big deal,” he says.

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In particular, Mr McNabb will act as an “ambassador” focused on international opportunities, as Vanguard expands in markets including the UK and China. Nearly all of Vanguard’s growth has stemmed from its home market. US investors account for more than 90 per cent of its assets. “It’s hard as a chief executive to get around the world,” he says. “I have pretty good contacts with clients and regulators. It is a natural thing for me.” A second area of focus is US regulation. “I have spent a lot of time with regulators and think tanks on big policy issues,” says Mr McNabb, who has been active in Washington for years and is on the board of the Investment Company Institute, the US trade body. “When I came in [as chief executive] it was the middle of the financial crisis,” he says. John Brennan, his predecessor as chairman and chief executive, “helped me a lot”. He says Vanguard’s insights are valued because of its structure. It is owned by its clients, which allows it to cut fees continuously as it gets bigger. Many competitors have historically used fees to boost profits that fund payouts to shareholders. “We represent the voices of 20m-plus investors that use our funds. They [the regulators] know we are not coming at it to boost our stock price.”

He will help his successor “navigate the board”, as well as provide advice to colleagues and mentor younger staff members. Vanguard has ridden high on the explosive growth in exchange traded funds, which registered net inflows of more than $1tn in the three years to the end of 2016. According to the latest information from the company, it has $800bn in ETFs, up from $40bn in 2009. It has a further $3.7tn in mutual funds. Mr McNabb bats away suggestions that Vanguard will find it tough to maintain its growth rate or indeed overtake arch-rival BlackRock, which has about $1tn more in assets. “It’s not even something we think about. Growth is never an objective,” he says, wheeling out the company line that Vanguard is “fanatically focused” on costs and putting investors at the centre. That is not to underestimate his competitive instincts. “People used to ignore us.

But all of a sudden, publicly traded asset managers and their operating margins are being competed away. “Price competition has come to the business — and there is more to come on that,” he says. Vanguard Asset Management: Founded 1975 Assets under management: $4.5tn Employees: 15,000 Headquarters: Valley Forge, Pennsylvania Ownership: Mutual Further afield, he admits there are “two or three” things that keep the top team up at night. He cites lower world growth, “very high” valuations in bond and equity markets, geopolitical tensions in the Middle East and North Korea, and uncertainty over Brexit. “None of that is reflected in the volatility of the markets, but we know it is there,” he says. “Volatility as a measure, it seems, is incredibly muted.” He is much less worried about fears that record-breaking flows into ETFs and the growth in passive investment generally are inflating a market bubble.

“The kinds of ETFs that we are going to support are going to be broad based and highly liquid. I don’t see the bubble issue,” he says. But he acknowledges there can be real pain in a market downturn. His advice is to avoid esoteric ETFs, and those that are thinly traded and have leverage. As the end of the summer nears and before he heads off on a trip to Kenya, including visits to a Maasai village and an elephant orphanage, Mr McNabb has one final word about his successor. “We have worked closely together for 26 years,” he says, adding Vanguard had only had four chief executives in more than 40 years. “Continuity has been one of our great strengths.”