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 It ain't easy to take over for a legend. But that's exactly the task that faced John Brennan in 1996, when he was named to succeed John Bogle as CEO of the Vanguard Group.
In 10-plus years at the helm, Brennan has proven himself equal to the task. Sure, there have been missteps— the company's on-again, off-again (and now decidedly on-again) relationship with exchange-traded funds (ETFs) is one example.
But overall, Brennan has succeeded in driving Vanguard's assets under management up while pushing its costs down, and has delivered solid returns to investors. In the end, that has to be the goal.
Brennan spoke recently with Journal of Indexes senior editor Matt Hougan to discuss the state of the indexing industry, and to examine Brennan's vision for the $1.1 trillion indexing giant.
Journal of Indexes (JoI): What do you see as the big-picture direction of Vanguard? Is the goal to build scale in existing business lines, or are there significant new opportunities you aim to explore?
John Brennan (Brennan): It is an interesting question. We at Vanguard never focus on building scale. We focus 100 percent on delivering two things. First and foremost, we focus on delivering investment results that are consistently superior. That's the dominant objective of the organization. Our second focus is collateral: to constantly improve our service portfolio and what we offer to clients. Our presumption is that if we do each of those well, we'll grow. For us, scale and growth have been a fallout of investment returns and service.
JoI: What about new business lines?
Brennan: I think that we already have a nicely diversified business in terms of the types of clients we attract: individuals, high net worth individuals, advisors and institutions. We feel terrific about the opportunity to continue to attract and retain clients. At the end of the day, however, our operating philosophy is that we can only do a few things well.
We want to be a great investment provider, not a bank, an insurance company or anything else. You won't see us straying from the core segments we serve today. The truth is that there are demographics and natural aspects that make investment management a very attractive business to create value for your clients: aging populations, etc. This business has underlying characteristics that encourage us to focus on what we do best.
JoI: As fund flows have jumped over the years, Vanguard traditionally has lowered expense ratios to match. A few years ago, Vanguard decided to use some of that scale to reward its largest investors with varying share structures. Will we see further segmentation along these lines?
Brennan: We align costs and benefits as well as we can. That was the goal with our Institutional shares, and also when we instituted the Admirals. The Admirals program is also about loyalty, however. One of the only things we measure as an outcome for our business is client loyalty: Once we attract customers, do we serve them well enough that they remain loyal to the firm?
That is why you can qualify for the Admirals, even with fairly low asset levels, if you have been with the firm for 10 years. We feel terrific about it. And overall, I am satisfied with the structure of how the various share classes work.
JoI: What about the Signal shares, your new advisor-focused share class. Where do those fit in?
Brennan: The Signal shares are, in a very real sense, a way of applying the Admiral concept to the institutional/advisor space. And with the Signal shares program in place, we think we are structured the way we want to be for the very, very long-term future.
JoI: Up until recently, Vanguard's structure made it virtually impossible for others to compete on price in the retail space. ETFs have to some degree changed that. Are you concerned?
Brennan: We think that when the issue of costs takes on more prominence, it highlights the competitive advantages that Vanguard brings—not just in any single product line or business category, but across the board. Frankly, having the investing public—both institutions and individuals—understand that lower costs win is something we've been great proponents of. So, no, it's not something that worries us. It's beneficial to the end user, and it highlights the distinguishing characteristics of this firm.
JoI: Your team made a point of patenting your ETF structure. Would you ever license those patents to other firms?
Brennan: To be determined. I guess it would depend on how somebody else wants to use it. We think it is a distinctively better way to offer ETFs. It allows an ETF to be launched at scale, which is very important in terms of providing the cost benefits that you want. We think that the structure has really served the investor well. Could there be a reason to license it? Probably, yes. It's a question of to whom and how and why.
JoI: A few years ago, Vanguard made a major switch to MSCI indexes. How do you feel about that switch, and what drove the decision to make such a major change?
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