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Buckley on Risks, Bonds & More

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Tim Buckley, managing director of Vanguard’s Retail Investor Group since 2006, will become the firm’s chief investment officer at end-2012, succeeding Gus Sauter. Buckley shared his views on what lies ahead for the fund giant.

 What will you bring to your new role as CIO?

The ultimate measure of Vanguard’s success is the success of our clients. To that end, we will continue to focus on three broad areas: our people, our investment teams, and our global operations.

 What is your view of the risk-management process?

From a philosophical perspective, there are several factors that set [Vanguard] apart. It all starts with our unique ownership structure. Being client-owned minimizes risks and conflicts of interest. For example, we don’t have a proprietary trading desk where Vanguard places bets for the company coffers—or worse, against our clients. All of the assets we manage are our clients’ assets, and we’re investing for them.

From a technical standpoint, we have a rigorous and robust risk-management operation. We invest heavily and judiciously in our risk controls. We continuously look at our controls, as the markets are dynamic. We test them and we look for evidence that they work. It’s an important part of how we manage the funds. As a Vanguard investor, you should expect nothing less.

 What are some of your biggest concerns?

Some young investors are not taking enough risk, and too many older investors may be taking too much risk. The former is a consequence of the market environment, and the latter is a consequence of monetary policy.

On the other end of the age spectrum, retirees are struggling to find investment income in this low interest rate environment, and may have taken on additional risk such as swapping bonds for dividend-paying equities, or investing in longer-term or lower-quality bonds.

 Why offer actively managed funds?

In my mind, the active-passive debate has been overplayed. Vanguard believes in low-cost investing, whether that’s executed in a disciplined active strategy or in an index fund. Some of our largest and most prominent funds are actively managed, including Wellington, GNMA, Health Care, Short-Term Investment-Grade, and Intermediate-Term Tax-Exempt. In fact, about 45% of our $1.8 trillion in U.S. fund assets under management are invested in actively managed funds.

Many people might not realize that we started as an active shop. Before the introduction of Vanguard 500 Index Fund in 1976, Vanguard offered only active funds, such as Wellington, Windsor, Wellesley and Explorer.

For many people, it makes sense to build an entire portfolio of index funds. Other investors may want to have a core holding of index funds and invest selectively in low-cost actively managed funds for the opportunity to earn higher returns, recognizing that periodic underperformance is part of the equation.

It’s not that you can’t outperform the index, but it can easily be diminished by high costs. And too much of the time, the discussion evolves to an index versus active debate and an either-or proposition. We do not view it that way. It is all about costs.

What’s some of the best advice you’ve received?

Tune out the hype. This is something that [Vanguard Chairman Emeritus] Jack Brennan has said quite often over the years. Whether you’re talking about how to invest in the markets or how to invest in your own career, it rings true on many levels.

Over the past 15 years, we’ve seen people enticed by the dot-com craze, the hedge fund craze, the real estate craze, the alternatives craze. Looking back at each of those, it’s easy to see the hype behind them.


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