Acquired
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.
03:03:26 · David Rosenthal, Ben Gilbert
[03:03:26] S1: Yeah. Twenty years. [03:03:26] S0: Yep. Now on to expense ratios. Vanguard's average ETF and mutual fund expense ratio is now down to 0.07% with some ETFs, like the one that I'm in, the VOO, is 0.03. The industry average across mutual funds and ETF is 44 basis points. So that is six and a half times Vanguard's average. So even after all these years and all the Vanguard affecting, there is still quite a bit of difference between Vanguard and the industry average. [03:04:03] S1: The average mutual fund out there. [03:04:05] S0: Yep. Yes. Notably, not the average passive index fund because basically everyone has had to meet Vanguard there. But it's interesting how the Vanguard effect has even dragged down the active public managers too. [03:04:16] S1: Yes. Yes. [03:04:17] S0: 84% of Vanguard's funds have outperformed their peers over the last ten years. They have 20,000 employees. They have 50,000,000 investors worldwide. But notably, the last thing I'll say is a little over 90% of their investors and their investor capital is in The US. So they are not nearly as global as BlackRock or Invesco or Franklin Templeton. Yep. So alright. Should we do analysis? [03:04:43] S1: Well, on this one, I have one more thing Oh. Before we go into analysis. [03:04:49] S0: Oh, lay it on me. [03:04:50] S1: Oh. Listeners might have noticed, we never really said what happened to Wellington. [03:04:58] S0: Oh, in the divorce? After the divorce. [03:05:00] S1: Yep. The crazy thing, they went on to build their own trillion dollar firm a 100% devoted to active management.
03:05:00 · David Rosenthal, Ben Gilbert
[03:05:00] S1: Yep. The crazy thing, they went on to build their own trillion dollar firm a 100% devoted to active management. [03:05:13] S0: It's the anti vogal. [03:05:14] S1: So if you know anything about the active management space today, Wellington Management Company is one of the largest players out there. And, yes, it is the very same Wellington Management Company all the way back to Philadelphia and Walter Morgan. [03:05:30] S0: So they built this giant pure active firm in the era that massively bent toward passive indexing. Yes. So was it the same four guys that sort of stayed and rebuilt it?
03:05:30 · Ben Gilbert, David Rosenthal
[03:05:30] S0: So they built this giant pure active firm in the era that massively bent toward passive indexing. Yes. So was it the same four guys that sort of stayed and rebuilt it? [03:05:41] S1: So after Jack left, the original four IVAS partners took over the firm and slowly rebuilt it into something new. Remember, it had been a public company. They retake it private in a management buyout. And then they basically radically reconfigure what Wellington is. They go out and they recruit a bunch of young, talented, new partners to come in, and then they restructure the partnership into a sort of progressive generational transfer where senior partners age out of their equity in the firm and then younger partners age in. And it's worked incredibly well for them. So the second half of the nineteen eighties as the stock market rebounds, Wellington management gets totally rebuilt. At one point in time, they take over management of MIT's endowment, like the actual MIT. What? The Massachusetts Institute of Technology. They obviously have always been in equities. They built a debt practice, a private capital practice, an alternatives practice. They go international. But probably their closest sort of comp today is Capital Group, the giant firm in Los Angeles that we talked about. Wellington manages about 1,300,000,000,000 in assets today. Capital Group manages 3,000,000,000,000, so larger, but, like, both very well respected. And then the best part, Wellington management still does the investment management for the Wellington fund within Vanguard even to this day.