From the April 2008 issue of Investment Advisor • Subscribe!

Taking the Helm

William McNabb will take cues from his predecessor, John Brennan, as he assumes top spot at Vanguard

On March 1, William McNabb became president and director of Vanguard, succeeding John Brennan. Within a year, McNabb, 50, will also take the CEO reins from Brennan. No newcomer to the Valley Forge, Pennsylvania, investment management company, McNabb's got big shoes to fill, but he's the first to bestow accolades upon his predecessor. After all, McNabb--who's held several senior management roles during his 22 years at Vanguard--says he's "learned a ton" under Brennan's tutelage over the years. "I look forward to continuing to learn from him," McNabb says, as Brennan will remain chairman of the board and active with the leadership team, working on strategic issues and other important initiatives at Vanguard.

McNabb also plans to continue building Vanguard's "deeply experienced leadership team," which he helped Brennan to construct. McNabb also hopes he can maintain the intense drive that Brennan has always exhibited. Brennan is "the least complacent person in the universe," McNabb says admirably. "He's always looking for continuous ways to improve. I hope I will be able to maintain that intensity around continuing improvement." Yet another admirable Brennan trait, McNabb says, is that he's never "let us stray from our core values. I want to do my humblest best to continue that."

Brennan has lots of faith in McNabb's capabilities as well, as he said in a recent statement that, "Working in concert with our experienced senior management team and board, Bill is the ideal person to lead Vanguard into the future."

McNabb talked with Washington Bureau Chief Melanie Waddell in a telephone conversation February 25 about his priorities for Vanguard as he takes on his new role, the economic and investing environment, and what's on everyone's mind as the Presidential election looms.

What's your priority as you take on your new role as president and director--and eventually CEO--of Vanguard?

To continue delivering what we've become known for, which is high value to all of the clients that we serve, and figuring out exactly what that means for each of the client groups, will be one of the things that will continually challenge us, and we'll always be thinking about new services and products. But the bottom line for us is really to make sure we're seen as the highest provider of investment products and services anywhere in the world.

Retirement planning services is a big area for Vanguard. Do you have any specific plans there? Could you talk a bit about the new income mutual funds, called Managed Payout Funds, that Vanguard has in registration at the SEC? Retirement is one of the huge themes, especially in the 401(k) and IRA world. On the 401(k) side, I think you can expect to see us continue a lot of emphasis on so-called automated solutions. We have a program called One Step, which allows an employee [in a] 401(k) plan to automatically be enrolled, get automatic savings increases on an anniversary date, and if they don't choose the investment options, we will default them to a highly diversified, typically a balanced fund, most often these days a target retirement fund. We will supplement that with a great Web site and great education to help them grow as investors. The Payout Funds, you could almost think of them as the back end of this automated retirement plan trend in that somebody who's been saving for retirement for a long period of time, and have accumulated some capital, the thing that's foremost on their mind when they retire is "How do I preserve capital and derive some level of income from it?"

Are these Payout Funds similar to target date funds?

The difference is that some of the competitor products that are out there I would almost call them reverse target funds--you pick a date and you're going to withdraw money toward that date. Let's say you retire today and you pick a 2030 fund and you end up depleting your capital. Our funds, which are still in registration, are going to be very different. The idea behind our funds is going to be much more along the lines of preserving capital and generating a sustainable income for as long as someone's alive.

What do you make of the recent Supreme Court ruling that 401(k) plan participants can sue a plan sponsor?

Remember, this was a pretty narrow ruling. Based on our analysis, it was a very appropriate ruling. If you think about it in more macro terms, if a participant is harmed by an action--or inaction--they ought to be able to recover [any losses]. We'll see what the facts are in this particular case as it plays out, but I think, again, the way we looked at the ruling, it made perfect sense to us.

What's the most worrisome, most challenging aspect of the current economic and investing environment?

If you look at it in historical perspective, the volatility that we're seeing in the equity markets is not really that abnormal, but it's following a period of unprecedented low volatility. I think that's shaken people a little bit. Obviously what we're seeing in the credit markets is a new twist. I don't think we've seen a credit market quite like this one, certainly not at anytime in my investing lifetime. So again, getting people to understand what's going on is very important. We like to tell it as it is, and being very clear with investors about what influences performance, and our investors have really stayed the course. They remain very long term in their orientation and we've not seen that much money movement. But any time you have a period of increased uncertainty you've got to be prepared for an extra level of questions. We've been very gratified that investors have been hungry for information--[asking questions like], "Give us your take on the market," or "Give us your take on how I should behave."

Is Vanguard doing more active management as opposed to passive/index funds?

I've been asked this question a lot. We've offered both active and passive for a very long time now--30-plus years. The first Vanguard funds were all actively managed and we introduced indexing in 1976. The first Vanguard fund goes back to 1929--The Wellington Fund, which is an actively managed balanced fund.The important point regarding active management is the same principles which we think make indexing so attractive we believe apply to active management, which is: we want people who really know what they're doing [when] investing money; you want the long-term perspective; and you want to keep your costs to a minimum. You add that up, that's what gives an active manager the best opportunity to outperform. We manage nearly $400 billion in active investments, so it's a big part of what we do.

How about the ETFs? Are they gathering more assets than mutual funds?

No. The ETFs are growing very rapidly, though. Our ETF assets essentially doubled from 2006 to 2007, and our cash flow more than doubled in ETFs. It's a healthy piece of what we do, but one of our great strengths is that we are very diversified in terms of both investment type and client type, and that's very important to us as well.

What do you foresee in the international business going forward?

We established our first international business nearly 12 years ago. It's become a pretty significant business for us and I'm very excited by the opportunity that it offers. As I travel the globe and talk to investors, it seems there are a lot of people who are very hungry for our value proposition, and we are encouraged by that. There are some big trends that influence us. Indexing is certainly picking up steam overseas; in certain parts of the world it's highly developed and in others it's evolving. Pension plans are evolving--many parts of the world are beginning to move more from just defined benefit to a defined contribution system, and we offer on the DC side in particular a lot of expertise and that's been an important part of our growth in Latin America, Australia. As that trend continues it should favor that way we think of the world.

Anything on the regulatory front you're watching? What do you think of the short-form prospectus that the SEC is proposing?

I think the short-form prospectus is directionally terrific. There's a lot of good in the proposal and at a high level we're very supportive of the effort. I think what's on everyone's mind at this point is what happens to tax policy as we go through the [Presidential] election and what goes on with capital gains and income levels. All of that will impact the markets in a pretty significant way down the road.


Washington Bureau Chief Melanie Waddell can be reached at mwaddell@investmentadvisor.com.
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