Acquired
02:56:53 · David Rosenthal, Ben Gilbert
[02:56:53] S1: Yeah. There hasn't been a Jack Bogle in the private asset world of VC and private equity, and there hasn't been another Jack Bogle in the public asset world either. He is one of one. [02:57:03] S0: There hasn't been another Jack Bogle in any industry. I mean, that's the interesting thing to call out here is to spoil one of my giant endnotes of this episode, my quintessence. There's no reason why mutual ownership of a corporation needs to be strictly in the asset management business. I mean Yeah. Why if this is a better form of capitalism, which I think, like, I'm excited about this model. I'm I'm fascinated by it. It seems like this, like, really beautiful, elegant structure that provides a lot of durability. Why aren't we seeing it in retail and grocery and technology? And why aren't the customers always the owners of the company? Or at least why isn't there literally any other examples other than REI? REI. An Algorand. But that's probably the biggest example. And then a handful of small grocery stores, and the other scale players are probably just insurance companies or banks. [02:58:00] S1: Yeah. Yeah. [02:58:00] S0: But, like, why why isn't the economy littered with this? [02:58:03] S1: Let's table this question for analysis. But to keep it on Saleem and Vanguard today Yes. They're entering private assets for the first time.
02:58:03 · David Rosenthal, Ben Gilbert
[02:58:03] S1: Let's table this question for analysis. But to keep it on Saleem and Vanguard today Yes. They're entering private assets for the first time. [02:58:09] S0: They are entering private assets. And the big thing is these companies are staying private longer, and so so much more of the innovation engine of the American economy is happening in private markets. And so if you're gonna best serve investors, then you you do wanna find some way to get exposure to it. And the question is, can they do it in a Vanguard y way where they they do it at at cost or as close to at cost as possible? And we've seen an announcement of an alliance with Blackstone, the huge private equity firm, which will be really interesting. And I think the question is what's the economics there and at what scale can they do it? Because at least historically, the private markets were a lot smaller than the public markets. Now with multiple trillion or near trillion dollar companies in the late stage private markets. They're pretty big now. [02:59:02] S1: Yep. Yep. Yeah. This needs to get figured out one way or another. Navigating the fee question is gonna be a big one because, again, like we said, this is a fundamentally different market where the asset needs to pick the investor and access is limited and scarce. So, like, the best investors in private markets think, like, Sequoia, Benchmark, etcetera, and the venture world at least. Like, why would they ever give up their fees?
02:59:02 · David Rosenthal, Ben Gilbert
[02:59:02] S1: Yep. Yep. Yeah. This needs to get figured out one way or another. Navigating the fee question is gonna be a big one because, again, like we said, this is a fundamentally different market where the asset needs to pick the investor and access is limited and scarce. So, like, the best investors in private markets think, like, Sequoia, Benchmark, etcetera, and the venture world at least. Like, why would they ever give up their fees? [02:59:27] S0: Right. Right. The other thing that's happened is the success of the index fund has sort of created a barbell in a lot of people's portfolio where you kinda own Vanguard as your, like, 80%, your your cheap beta for most of your net worth. And then you kinda, like, play with the other 20% and look for asymmetric bets to make. Does Vanguard wanna play in that 20% at all? Are they satisfied kind of being the the core for most people? That'll be the interesting thing to watch. [02:59:58] S1: Yep. And it seems like Saleem is moving them in the direction of, like, yes, private assets, crypto, etcetera. [03:00:04] S0: Yeah. My big question is when you are owned by your current set of customers, why grow? You don't have any shareholders to appease. Like, normally in a company, when I buy a share of Apple, it's because I think Apple is gonna compound their profits, their cash flows in the future at a higher rate than anything else that I could invest in. And so it's their job to grow to benefit me as the shareholder. Vanguard doesn't have that. Their their only charter is appease the needs of their current customers.
03:00:04 · Ben Gilbert, David Rosenthal
[03:00:04] S0: Yeah. My big question is when you are owned by your current set of customers, why grow? You don't have any shareholders to appease. Like, normally in a company, when I buy a share of Apple, it's because I think Apple is gonna compound their profits, their cash flows in the future at a higher rate than anything else that I could invest in. And so it's their job to grow to benefit me as the shareholder. Vanguard doesn't have that. Their their only charter is appease the needs of their current customers. [03:00:42] S1: Right. That's a great point. There actually is no built in incentive or obligation to grow That's right. With a structure like Vanguard. The only reason to do so is if you believe the mission of the company, either as set up by Jack or as it, you know, should be today is to bring the service to as many people as possible. But that's just a value judgment. There's no incentive there. Right.
03:00:42 · David Rosenthal, Ben Gilbert
[03:00:42] S1: Right. That's a great point. There actually is no built in incentive or obligation to grow That's right. With a structure like Vanguard. The only reason to do so is if you believe the mission of the company, either as set up by Jack or as it, you know, should be today is to bring the service to as many people as possible. But that's just a value judgment. There's no incentive there. Right. [03:01:13] S0: The answer I suspect Vanguard leadership would give you is you do actually need to grow to stay competitive because you need to keep investing in the platform, and the current cash flows off our small management fees are not enough to make all the investments that we wanna make. Yeah. So you do need to fund, like, a a fixed cost build out with your future customers. So you sort of have to grow to to get them in. The other thing I would suspect they would say is to best serve our current customers, we need more products to offer them. And so we need to enter wealth management, and we need to enter private equity in order to better serve our owners slash customers. And I think that that's there's merits to that too. [03:01:59] S1: Okay. So that's the last couple years in the new management at Vanguard. Take us to today by the numbers.
03:01:59 · David Rosenthal, Ben Gilbert
[03:01:59] S1: Okay. So that's the last couple years in the new management at Vanguard. Take us to today by the numbers. [03:02:05] S0: So total assets is now $12,000,000,000,000. 2,000,000,000,000 of that, interestingly, is active. Yes. So just to underscore that Jack Bogle was not a index passive zealot, he was a zealot for low fees. And I think this is the DNA of Vanguard is can they figure out how to, using their mutual ownership structure, continue to enter more and more sectors where they can squash fees to zero or as near zero as possible, especially in these scenarios where they can get average returns at a dramatically below market cost. That is the, like, magic of the whole thing. [03:02:42] S1: Yep. Yep. Again, very Costco like. Yes. You've seen Costco expand into vacations and autos and high you know? Yeah. Why can't Vanguard do the same? [03:02:51] S0: Yep. So it's crazy. As much as we've talked about the index fund as the central narrative of this story, Vanguard's AUM was mostly their active funds for the first twenty years. By 1994, indexing was still only 15% of their total assets under management. And then as we talked about, they really took off in the nineties and February. Today, 84% of their assets are passive index funds. But you go back to 1974, it was 0%. Right. And it stayed sub 15% for the first nearly two decades. [03:03:26] S1: Yeah. Twenty years.