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Investing Specialists

What New CEO Bill McNabb Has in Mind for Vanguard

A conversation with Vanguard's new leader.

The McNabb era has officially begun at Vanguard. Before Bill McNabb took the CEO reins from John Brennan Aug. 31, 2008, though, I spoke with him at length about the bear market, what scares him, and other topics. A portion of the edited transcript follows here. You can read more of it, including McNabb's thoughts on a potential Vanguard hedge fund, recent manager changes, and other possible new developments, in September's Vanguard Fund Family Report, which will be published later this month. Here's a sample of my conversation with Vanguard's new leader.

Q: How has Vanguard fared thus far in this bear market?
A: I think we've fared very well on a couple of fronts. Our fixed-income guys are often characterized as just running very low cost, highly predictable funds, but they're also extraordinarily good analysts. They were very early to recognize some of the potential problems. So, our fixed-income funds have held up really well and are well clear of all of these kinds of exposures that many others have experienced.

From a business standpoint, one of our great strengths is the diversification of our fund lineup. We're continuing to see some long-term flows into different categories. In the last six or seven months in particular it's been pretty close to a 50/50 split between stocks and the fixed-income and money market side, which insulates us a little bit better than other firms that are tilted more one way or the other.

Our clients have handled this, I think, better than a lot of the public discussions. When you watch television or read some of the blogs you think everybody's bailing out of the market. Our clients have been very steadfast, and the transaction volumes are actually down versus what I would call the normal levels.

Q: What is the most potentially disruptive trend in money management now? What keeps you awake at night?
A: I think the speed with which globalization's taking place has a ton of potential to be highly disruptive. It contributes to the size and complexity of what's going on out there. Regulatory issues become way more complicated, security risks become more complicated. I was reading a Gartner report recently. They were prognosticating that by 2012, so four years from now, 24/7 cross-border, cross-exchange, cross-instrument trading will be the norm. And portfolios will be more global in nature. We're already seeing that on the institutional side, where people are starting to think much less about traditional domestic versus international or developed international versus emerging-markets exposures, and just saying "I want to look at the world globally." So I think globalization is, obviously, going to present a lot of opportunities, but it's also going to present a lot of complexities. And it's going to accelerate a lot of change in the marketplace.

Q: You recently launched a global stock index fund. What about a Global Bond Fund?
A: That's something we're looking at. We offer one in Europe in our Irish-domiciled funds. And one of the first projects that I worked on 22 years ago was whether or not we should launch an International Bond Fund. I didn't get very far. At the time, non-U.S. bonds were almost all sovereign. And essentially, you could make the argument that you weren't picking up a lot of diversification. It was simply another way to play currencies. And the academic community was split right down the middle on that score. Half the academic side thought it was pure currency play and the other half thought it offered a mild diversification benefit. Today the global bond market has evolved dramatically from that point and will continue to evolve. And it's probably time for us to step back and at least think about it. And if we do it we'll do it low cost and really high quality.

Q: What won't change at Vanguard under your leadership?
A: Well, I think our values won't change: putting the investor first. We will be a mutual, mutual fund organization for the next several centuries. One of the first questions I got asked by the press was, "So, are you going to think about going public?" I just about choked. Our biggest competitive strength is our (mutual ownership) structure. And we all believe in it very deeply. It's fantastic to have all of your people's interests fully aligned with those of the client. So that's certainly not going to change.

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