Taking the Helm

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.