Ludwig: So is it fair to say that you hew to a type of index investing philosophy, that you’re of the mind that alpha is nothing more than well-timed beta?

Chapin: That’s good! It may sound as if we sort of speak out of both sides of our mouth when I say that we get the beta cheaply using a core of ETFs and that we also think we can identify some active managers who will add alpha—excess returns—over time. But we’ve had some success in following such an approach. So, we do that at the margin.

In fixed income, we have been less active in using ETFs. We use mutual funds, depending on the client, and we also work with separate account bond managers to construct individual portfolios for our clients. In the municipal bond space, where we have a lot of money invested, we employ a money manager who picks individual bonds and structures portfolios for clients.

That’s also true in the taxable bond space, where we use actively managed mutual funds or separate accounts. The big problem with index funds in this space is that they’re going to be heavily weighted in Treasurys or, in the case of high-yield ETFs, heavily concentrated in a small number of bonds.

Ludwig: As far as the U.S. economy in general, how would you characterize your views generally? On one hand, there are people like Paul Krugman at the New York Times, who say that there wasn’t enough stimulus at the outset. And, on the other hand, you’ve got guys like Ed Yardeni, who say they wish Ben Bernanke would just take a vacation.

Chapin: In general, it’s been a less robust recovery than we all would have hoped for. But let’s all remember that it was a particularly deep and dangerous recession. So, we were saying a couple years ago that it was going to take a while to climb out of this, and I think that’s proving to be the case. We’re not worried about the idea of a double-dip recession.

But also, it’s hard to get optimistic that, all of a sudden we’ll get 3 percent economic growth given the problems with the European economy and the apparent slowdown in Asia, particularly China. We’re all kind of muddling through. The bottom line is everybody, including ourselves, is saying, “Well, Congress isn't going to do anything until January. And tax rates are going up, and spending is going down automatically unless they do something.” And obviously, that’s bad and would cause us to fall back into a recession. So they will, of course, do something constructive. They have to!

Ludwig: So you're cautiously optimistic, time being the crucial variable?

Chapin: Time and a return of sanity being the crucial variables. It’s hard to be totally optimistic that the current acrimony will go away immediately following the November elections. But the eternal optimist in me hopes that some sort of rationality and spirit of compromise prevails in the interest of the greater good.

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