Dan Culloton: You've launched the Vanguard Explorer Value earlier this year. Are more active launches possible?
Bill McNabb: I think so. Again, there aren't that many spaces we don't have a good active offering, but if we think we can do it in a world-class way, we're going to do it. Interestingly, five years ago, active capacity was tight around the world and you had two things going on. A lot of money had flowed to active investment firms in general, and so people were being pretty selective about what they were doing from a growth standpoint, and they had the hedge fund phenomenon. You had the people going after, try their luck at running hedge funds and so forth, and you watch that dynamic kind of implode a little bit in '06, '07, or certainly into '08.
And we certainly get a lot more calls today than we got in 2005. People want to talk to us and again the screening process is very rigorous that we go through, but we're seeing some really interesting things. We're seeing boutiques get created out of larger firms, – you know, Sanders Capital. We just added to Windsor II. That's a great example.
One of the legends in value investing in my view, leaves AllianceBernstein thinks about retirement, decides I want to create a firm and something really special, and we're really privileged to have an early discussion with him. And so that's one we didn't vet for 10 years although we've known [Lewis Sanders] for longer than that.
Culloton: Because he is sub-advised?
McNabb: He is sub-advised for a long period of time, but so there is a dynamic out there. If there is a good capability in a space that we don't have or where we can add to what we already do have, we are more than willing to consider it.
Culloton: How do you battle against the institutional imperative, the idea that you're growing and launching and introducing things, simply because you've reached a scale where it seems like you have to in order to keep all of the smart people that you've hired as you've grown, engaged in?
McNabb: Our product development process is the opposite of that. If we acted on every smart idea our guys had, we'd be launching something about every hour, because it's a creative smart group.
We try to look at a set of criteria for any new product and you can judge whether we apply the criteria perfectly or not, but we're looking for something that's long-term, enduring, not a fad, something that we can be best-in-class at. Those are important, sort of, check-the-box items for us. And if we can't answer yes to any of those, then we need to step back and say it doesn't make sense, and so there are certain categories you're likely never to see us. You're not going to see us slice and dice the way some of the competition is doing in the ETF world, for example, because we don't think those are long-term enduring ways to build portfolios. If people want that there will be other places for them to go to get that.
So, for us it's much more about the – I call them the basic building blocks, so that people can really construct the kind of diversified portfolios they want.
Culloton: Not too long ago you decided to close Vanguard Capital Value, because it was giving a lot of hot money, because of its very strong 2009 performance. Part of the reason for closing that fund was in a sense to save investors from themselves from chasing hot money. A lot of your bond funds have also been getting high flows too, why not close some of the bond funds for the same reason, even though there may not be capacity constraints and so diversified and the bond markets bigger?
McNabb: It has actually crossed our mind a couple times in a couple of categories to do something temporary, but I think we spent a lot of time educating bond investors about long-term and what might happen with different interest rate scenarios, and we remain pretty convinced that most of the investors who are coming to us are actually making long-term allocation decisions and actually get the risk that they are taking.
Is that true on the margin for everybody? I'm sure it's not. But we sense that it's a much longer term perspective. What we are seeing with Capital Value was really – the fund was up 90% in an eight-month period or something like that, and you're seeing money come in afterwards. Here on the bond side, what you're really looking – again people are really sort of searching for, they're searching for yield. There's no question about that but they're not necessarily looking for homerun total return. It's a little bit more of a push for yield.