Interview with Hugh Watters: A look into Vanguard’s Mutual Funds

What is your role at Vanguard?

My title is a Senior Product Director at Vanguard in our Portfolio Review Department who has the day-to-day oversight of all of our mutual funds. As the senior product director, I have deep subject matter expertise on all of our funds and managers and their philosophy, their process, their approach, etc. And I use that information to engage with our largest and more sophisticated clients to educate them on our funds and the expectations. 

Can you explain the benefits of adding actively managed strategies to a portfolio?

Vanguard currently has over 30 million clients cross the globe. Retail, intermediary and institutional, and they all have different needs and outcomes. Active management we know can play a role in a particular portfolio with those clients who have the right risk tolerance, the right time horizon and of course with access to our internal and external managers. 

What are the benefits of using Vanguard’s Active Mutual Funds?

I think the benefits of the value proposition for using Vanguard’s Active Mutual Funds are cost, talent, and the patience. So cost, we have this unique structure to lower cost over the longer-term period for all of our clients. For the talent perspective we are able to source and give you access to very unique managers who are both internal as well as external. And from a patience standpoint, we create our fund lineup to be enduring with our clients’ interests in mind. 

What is Vanguard’s story with Active Management?

While Vanguard is best known for passive or index investing, the reality is that we were founded in 1975 with 11 actively managed funds. That was a full year before we had our first passive or index fund, so active management is very much ingrained in the culture of Vanguard. 

How many assets under management do we have in active?

Vanguard has USD $1.5 trillion dollars in active strategies. That make us the third largest across the globe in offering this type of solutions to our clients. We have about USD $850 billion dollars with internal managers and about USD $640 billion dollars with external managers. And when we think about external managers, we currently partner with 24 firms and the average tenure with those partners is 14 years

What does our Oversight and Manager Selection process look like? 

Our oversight and manager selection process is multilayered. The first layer is the Portfolio Review Department who has the day-to-day oversight of all of our mutual funds. We have a 20+ person team who is dedicated to this particular roll. The second level is the most senior people at Vanguard and led by our Chairman and CEO, Tim Buckley. What we call the Global Investment Committee. And in the third and final level is our Board of Directors who has the fiduciary responsibility for all the decisions around managers and our mutual funds. What connects these 3 layers is the language or the framework that we have for evaluating managers and that is very qualitatively driven, and by that, I certainly mean it is focus on people, philosophy and process and that allows us to compare one manager to the next on both the oversight as well as the search function.

Can you explain the difference between a single manager and multi-manager approach? 

At Vanguard we offer both single and multi-managed funds across the globe. As an example, in the U.S. we have 23 single managed funds and 14 multi-managed funds. Now the decision to go multi or single is really fund by fund. For a single managed fund is usually a very narrow universe or a unique approach by a particular team or maybe even a strategic sort of partnership. When I think a multi-managed approach is about finding complementary managers in a segment of the market that allows us to hopefully dampen the volatility and come up with a more predictable return stream over the long term.