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Fund Family Shareholder Association
INTERVIEW
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GREGORY DAVIS
An Interest in Rates
GREG DAVIS, 43, is Vanguard’s new bond chief, but
he’s no stranger to the firm, having come aboard in
1999 after short stints on Wall Street and a longer
job in the insurance business earlier in his career.
He’s been an index fund manager and group leader,
and spent some time in Vanguard’s Australian office.
It’s clear that with his return stateside, he’s bringing
a lot of energy to the job, which he’ll need given the potential for a bond
market that won’t exhibit the same “wind at our backs” characteristics
as the markets his predecessors enjoyed. Where interest rates are
headed is always a topic for discussion, but Greg also let Jeff DeMaso
and me know that he’s got his eyes on developing some corporate bond
funds for foreign investors, who until now only had access to sovereign
credits through Vanguard. But I’m getting ahead of myself, so listen in.
Greg, first of all, congratulations on your new job, and welcome back.
Thank you. It’s good to be back.
You’ve followed just two other bond chiefs at Vanguard. Ian
MacKinnon diversified offerings at Vanguard, and Bob Auwaerter
introduced the first foreign bond funds and helped you put ETF
options on the map. What are your plans?
Ultimately, I will try to make the operation and the team stronger and
better from a development standpoint. I think we have a huge oppor-
tunity ahead of us to continue to develop capabilities outside just the
U.S. markets. When my time here is over, ideally, I’d have left the place
better than how I found it, have a stronger team in place, and have had
extremely strong performance in a highly risk-controlled way.
When you say capabilities outside of the U.S. market, are you
talking about more foreign bond funds, or Vanguard’s presence
outside the U.S.?
All of our active management is U.S.-focused. We do have a U.K.-based
team, but it’s still relatively small. I would like to see that evolve over time.
There are markets where we don’t invest now, and we could add value—
particularly in the investment-grade space, getting beyond sovereigns.
Let’s talk about the bond market. People often assume that if
rates are no longer falling, then they must be rising. But what
about a period of flat, range-bound rates?
Absolutely, that’s a very highly probable scenario, where you are
range-bound without huge movements up or down in the market. A lot
is going to depend on how economics play out. If you are in a muddle-
along scenario with moderate growth and low inflation, until you see
either one of those two things give, either to the upside or the downside,
you could easily stay in a range-bound bond market environment.
over the 10-year period ending in
March 2014. But the comparisons fall
flat. First off, comparing a Vanguard
fund to more expensive peers is silly.
Quite frankly, as Vanguard inves-
tors, you and I already expect that
Vanguard’s low costs are going to
work to our advantage. Beating peer
funds is, in most cases, a layup, and
simply a way for Vanguard to make
the fund’s performance look strong. I’d
call that obfuscation. If Explorer didn’t
outpace most of its peers, that would
truly be a black eye for the fund and
for Vanguard.
As for outperforming its benchmark
over a single one-year or three-year
period and underperforming over a
five- or 10-year period, well, this still
doesn’t give a good picture of just how
poorly this multimanaged mess has
done.
Even a quick glance at the first chart
on page 5 makes it pretty darned clear
that, over the decade through March,
the fund has been a serial underper-
former. During that period, Vanguard
hired three firms and fired two. But
nothing seemed to work to pull the fund
out of its slump. So now they’ve hired
yet another fund management team.
Vanguard claims that, “When these
managers are combined, several indi-
vidual teams are focused on their best
ideas and can create a better portfo-
lio.” But I find it incredibly difficult
to believe that a fund with no fewer
than 650 stocks at the end of May rep-
resents a focus on the “best ideas” of
the first seven different management
teams and 15 different managers. And
that’s not counting whatever additional
“best ideas” the two members of the
Arrowpoint team bring to the party.
Thou Dost ProtestToo Much
With the addition of Explorer’s
eighth team, Vanguard went all out to
convince the press and shareholders
that its longstanding multimanagement
strategy is a sound one. But consider
Who’s Managing What
Wellington
32%
Kalmar
23%
Granahan
17%
Century
7%
Chartwell
7%
Stephens
6%
Vanguard
4%
Arrowpoint
4%
More Additions
Than Subtractions
Firm
A Cast of
Managers
Total
assets
(billions)
Mgmt.
firms
Wellington
Inception
— 1
Granahan
Hired 2/90
$0.3
2
Chartwell
Hired 8/97
$2.4
3
Vanguard
Hired 8/97
$2.4
4
GMO
Hired 4/00
$4.0
5
Kalmar
Hired 2/05
$9.6
6
AXA Rosenberg Hired 6/07 $12.6
7
GMO
Fired 2/08 $10.2
6
Century
Hired 6/08
$9.0
7
AXA
Fired 8/10
$8.0
6
Stephens
Hired 8/13 $11.2
7
Arrowpoint
Hired 6/14 $12.4
8
Note: Granahan, which originally managed the Explorer II fund,
joined Explorer through a merging of the two funds in 1990.
EXPLORER
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