133: From the Archives – Gus Sauter and the Early Days of ETFs

In this episode of the From the Archive series, we look at a 2019 interview with Gus Sauter, the former Chief Investment Officer of Vanguard, who worked for more than 25 years at the company. Sauter is also an adviser to the Australian Retirement Trust, then Sunsuper. Index and passive investing have gained momentum in recent years and it is estimated that about 60 per cent of investments follow passive strategies today. Considering this sheer weight of money and the move of more Australian superannuation funds to passive investing in recent years, it is easy to forget that index tracking and the popular investment vehicle for doing so, Exchange Traded Funds, were once controversial. In fact, Jack Bogle, the founder of Vanguard, was not a fan when Sauter launched the ETF business for the company. In this interview, Gus takes us back to those early days and revisits the active/passive debate, a discussion he never tires of. __________ Follow the Investment Innovation Institute [i3] on Linkedin Subscribe to our Newsletter Explore our library of insights from leading institutional investors at [i3] Insights __________ Podcast overview Gus Sauter 1:00 You started a bank at age 8, is that true? 3:00 Then a goldmine in your 20s? 4:20 Gold is an Armageddon type of investment; if the world collapses, gold is probably going to be fine 5:50 My first stock 6:30 I've had the active vs passive debate literally thousands of times and 'no' I'm not tired of it. 7:00 Passive is a good investment strategy, but it is never going to be top performing in any given year 9:00 I'm not totally on board with the efficient market hypothesis 10:00 Why indexing works 12:00 But does the market capitalisation method work in fixed income, where you skew to the most in debt entity? 14:00 Over time, markets have become more efficient, compared to the 1980s. 15:00 Did Jack Bogle cut his holiday short to find out why you were adopting ETFs? 16:00 Jack disagreed on ETFs 17:00 The crisis of 1987, and the subsequent redemptions from mutual funds, shaped my thinking on ETFs 19:30 Is there more institutional takeup of ETFs in the US, than there is in Australia? 20:00 ETFs are not a product; they are a way to distribute index funds. 21:00 Not a fan of smart beta 27:00 You don't think there is necessarily a correlation between GDP growth and stock market returns? 28:30 You can take a great firm and make it a lousy investment by overpaying for it and visa versa 31:30 Working with Sunsuper 33:00 Do you see a lot of similarities or differences between the issues that investors in the US and Australia grapple with? 35:00 Should pension funds in Australia be more dynamic in their asset allocation? 37:30 What have you learned from past crises? 42:00 Jack said: "One day indexing is going to be really big and we'll have US$ 10bn in assets" We now have US$ 4 trillion. Full Transcript of Episode 133 Wouter Klijn  01:00 Gus. Welcome to the show. Gus Sauter Well, thank you. I'm glad to be here. Wouter Klijn  01:52 Let's start a bit with the start. I'm going to take you right back to age eight. There is a website that is called Buggle heads, and it has your buyer up there, and said that at age eight, you started taking deposits and making loans to neighbours, effectively starting your own bank. Is that true? And what is wrong with playing with Lego? Gus Sauter  02:16 It is true. I'm hesitant to admit I think I probably broke several 100 banking laws. But yes, I didn't think my neighbours were going to turn me in. They would give me $1 or two, and I would turn around and deposit it in the bank and earn interest on it, and then turn around and give them the interest that they would have earned. So yeah, I was a little enterprising at eight and not too much into Legos. Wouter Klijn  02:40 So where did you get the idea from? Gus Sauter  02:43 You know, just from my parents and going to the bank with them. And I guess I was just curious about how money could make money for you and and really, that was the genesis. Wouter Klijn  02:53 And then it also says that around in your 20s, you formed your own gold mine, but what inspired you to make that investment? Gus Sauter  03:04 Probably naivety. I was working as a commercial real estate developer in Denver, and we were building, really about 11 story office buildings, and I was working on the financial side of putting these deals together, and this opportunity came along to develop a gold mine, and I figured, well, I'm the financial side raising capital to build buildings. Why can't I raise some capital to build a gold mine and and so I put a venture capital deal together. Took me about three years to run it under. Turned out to be a little bit of a frustrating point in my life. Wouter Klijn  03:35 I can imagine. So looking back, what is your view on gold today? Because a lot of investors think that gold is a bit speculative. It doesn't have any inherent value. How do you look back on that? Gus Sauter  03:47 Yeah, so I started that in 1982 and that was really kind of the height of the gold mania, the gold rush, and I was looking at a little bit more like a mining company, as opposed to the lustre of gold itself, although I must admit, if we were mining for salt, I probably wouldn't have created the firm. So my view then was to hopefully make money mining gold and selling it immediately, not holding on to it. My view is that gold is kind of a Armageddon type of investment. If you if the world collapses, probably gold is, is fine. My view is the world is not going to collapse. And so I, you know, gold doesn't give you any sort of rate of return. It is, you know, as you indicate speculative. You buy it with the idea you can sell it later to somebody at a higher price. There's no dividend on it, no interest. So I think if people do have it in their portfolio, it should be a small, small part of the portfolio. Wouter Klijn  04:47 Yeah, well, I'm glad the world is not coming to an end. So we had banks, we had a gold mine. You mentioned real estate. How did you get started in the asset management industry when my gold mining venture went on? Gus Sauter  04:59 I had a good friend from business school who had kept in contact with me, and he went to work for Pimco, who is now the famous bond management firm, and he kept after me, and kept telling me that I belonged in the investment management industry. And actually, quite honestly, I felt that as well. I bought my first stock when I was 11 or 12 years old after after the banking experience and and I loved investing, so I followed his advice. And interestingly, I had some opportunities, perhaps, to go with PIMCO out on the West Coast, in California, but I grew up in Ohio, in more the centre of the United States, and I wanted to go back home. Unfortunately, there just aren't many investment management firms in Ohio. So I worked for a bank in Ohio in their trust investment area, and got experience. Wouter Klijn  05:47 And I think that that first stock was that a basketball team. Gus Sauter  05:51 The basketball team was actually my second stock. Yes, my first stock was a snowmobile company, and my second one was the Cleveland Cavaliers. I'm proud to say I was one of the original owners of the Cleveland Cavaliers. I grew up 90 miles south of Cleveland, so, yeah, Wouter Klijn  06:07 So taking it to Vanguard, not looking at individual stocks, but we're looking at indexes, and even to deal this day, we still have this discussion about active, passive. You know, what is better? Do you get tired of this conversation? Gus Sauter  06:27 You know, I've had the debate 1000s of times, literally 1000s of times, as we were trying to build indexing back in the 80s and 90s, it was not well received at all. And it was really a brick by brick business building venture, and I was invited to many, many conferences, and interestingly, they would have me on a panel, and I'd be in a debate with somebody else, and it would always be a top performing, active manager. So you know, you're always kind of with with your back in the corner. Indexing is a very good strategy and appropriate for most investors, but it's never going to be top performing in any given year, it's going to be a good performing investment that really compounds over time into top performance. So I actually, I do love the debate, because I think it shows the advantages of indexing and also allows for the advantages of active management to complement indexing. Wouter Klijn  07:18 And it seems that we have moved on a little bit from one against the other two, where I think we see more especially amongst the larger funds that don't always have a choice to go 100% active, that they say, well, we'll do both. We will have a core allocation to passive, and we'll do some things around it in the active space. Do you feel that the this debate has become more sophisticated around this issue. Gus Sauter  07:42 I do. I think a lot of investors have realised that there are significant advantages to indexing, and it should be a core portion of their portfolio. It's a great foundation, because it's going to provide you with very competitive returns that will outperform a majority of investors in the marketplace. So it's a great place to start, and you have a good deal of confidence that it will provide that rate of return for you in the future, at the same time the satellite portion. So a core satellite approach, you can use the satellite portion to invest in actively managed funds to enhance your returns that you get from an index fund. So if you if the index fund is your your ballast, or your foundation, hopefully you can add some incremental return above and beyond that, without too much risk, by investing in active as well thinking about indexing. What is indexing? Wouter Klijn  08:28 And I think in the past, you have made a strong point around an index is a market capitalization weighted construction. Why do you feel strongly that it has to be only that type of model? Gus Sauter  08:45 So it turns out that there are two rationales for why indexing should be an attractive investment number. The first one is based on the modern Efficient Market Hypothesis. I personally believe the markets are quite efficient, but not perfectly so. So I'm not totally on board with the efficient market hypothesis. If you if you believed in the efficient market hypothesis, then clearly the only thing to do is index. I mean, that states that everything's fairly priced and you shouldn't spend any money trying to outperform because you're not going to be able to do it. The other argument is what is called sharp math, or Bill sharp was the inventor of this simple concept that in aggregate, investors get the rate, the market rate of return. I mean, in aggregate, investors own the market. They own it by market capitalization. In other words, they own more stock in in, let's say, Facebook or or Microsoft or bhp, than they would in a small company. So that, by definition, is telling you that investors, in aggregate, own by market capitalization, some will outperform, but others will underperform by the same amount. I mean, to the extent everybody on average gets the market you can't all be above average when you introduce. Costs into the equation, and costs are really significant. I think people really dramatically underestimate the impact of costs. Then all of a sudden, the marginal outperformance before costs become underperformance after costs. And that's really why indexing works, because it's extremely low cost. It's a handful of basis points, or a fraction of a percentage point that you pay in costs, and you get largely the market rate of return, and you'll outperform a majority of investors because of that, but that argument is based on market capitalization weighting. There are, as you're implying, other ways that people are coming up with indexes equal weighting, or things called fundamental indexing. Those really give you something very similar to what you get with capitalization weighting, with tilts to it. So in other words, there are segments of the market, there are large cap stocks, there are small cap stock, there are value oriented stocks, and there are growth-oriented stocks. So all of these different segments of the market will perform a little bit differently from the market as a whole. And when you weight things differently from a market cap weighting, you're actually inadvertently tilting towards one of those investment styles. So when you equal weight an index, you're getting a tilt towards smaller cap stocks. And it turns out that you can just invest in a small cap, a small cap index fund that is capitalization weighted, and get a very similar return. Same thing when people tilt towards value, when these fundamental indexes, they're basically a tilt towards value. You can get the same return if you use a capitalization weighted index that is tilted towards value, so the capitalization weighting is less expensive. You don't have to rebalance as much. It's lower cost than fee wise that most of these other types of indexes charge. And it's it's more tax efficient because you basically buy and hold so I think you can accomplish if you want a small cap tilt or a value tilt, you can do it with capitalization weighted indexes. Wouter Klijn  11:59 I think part of the debate around market capitalization model is around. Is this the best way to construct an index? And I think where this debate becomes most clear is within the fixed income space, where there are issues with having the largest exposure to the most indebted entity in the index, even though that represents the market. Do you think that's a fair comment? And can we still call them indices? Gus Sauter  12:26 So you know, going back to the sharp math, the bill sharp math, which is a mathematical tautology, again, you know, in aggregate, investors are going to get the market rate of return when we start to think of other asset classes other than stocks, like bonds, fixed income. The concept still applies. If you want to be a top performer, outperforming the average capitalization weighting still makes sense. It's true that you put more weight in in companies that have or countries, for that matter, that have greater debt. And people have said, well, so you're taking more risk because you're investing in the most heavily debt laden companies or countries, but at the same time, that's already implicit in the pricing. So in other words, if there's additional risk associated with investing in either that company or that country, it's going to be reflected in a higher yield, a higher rate of return. So so you're really being compensated for that. And the people who say, Well, you know, you're just taking on greater risk, you're being compensated for taking on greater risk. And again, the only way to ensure that you're going to be a top performer over the long term mathematically is by relying on that sharp math and owning the entire market capitalization, weight weight market. Wouter Klijn  13:42 So this is where the efficiency of the markets come back in, where it says, Okay, this is greater risk, but it's priced accordingly. Gus Sauter  13:51 Yeah. So you know, as I said earlier, I don't believe in perfectly efficient markets, but I don't think there are grossly inefficient markets either. And actually, over time, I think the markets have become more and more efficient. I mean, I think back to the 1980s when I started in this business, and quite honestly, active management was a lot easier back then than it is today, and that's because there were greater inefficiencies. So there were greater opportunities to take advantage of mispricings. Today, those mispricings are very small, and even if they're not precise, they're not grossly wrong. And so, you know, it's very, very seldom that you would find a company or a country that is much riskier than its yield would indicate. Wouter Klijn  14:33 I would like to take you back a little bit to innovation in the index space, and especially the exchange traded funds. I understand that you were one of the earlier believers at Vanguard within this vehicle, but I also heard that when Jack Bogle, the founder, found out that you were going into ETFs, that he cut short his holiday and came back to grill you on why you're going down this route, even though he was supposed to have retired already by that stage. What happened there? Gus Sauter  15:01 Yes, Jack was retired at that point, and Jack always went on vacation for the whole month of August. He had a house up in the mountains, and he went away for the month of August. We happened to announce that we were going to launch ETFs while he was away. I mean, that was just pure coincidence. And since he wasn't working with the company anymore. He wasn't aware that we had been working on this for, actually a couple of years. It took a long time for us to to launch because of our unique structure and getting it through the regulators. But so Jack did find out when he was on vacation. I don't know that he actually came back early from the vacation, but, but the day he got back it at Vanguard, and so he still had an office at Vanguard where he did his research. And we have a building that has the the dining area, the dining hall, that most of the employees congregate for lunch, and it has an upper level and a lower level. And I entered it the lower level to go grab some lunch, and Jack happened to be standing in at the upper level, at the top of the stairs, and he saw me at the bottom. And this this foyer is typically filled with lots of people around lunchtime, and Jack has had a booming voice, and he held out, gosh, what the heck is going on around here? So you know, Jack was vocally not in favour. Or, you know, I'll say it's that Jack was against ETFs. Jack and I agreed on an awful lot of things, but we disagreed on that one. Wouter Klijn  16:33 Did he ever turn around on this topic? Gus Sauter  16:35 No, he was very vocal, you know, till his final days that he did not like ETFs. Wouter Klijn  16:42 So what attracted you in ETFs as a vehicle? Gus Sauter  16:45 I started with Vanguard in 1987 to be precise, October 5, 1987 some of your listeners will recall that October 19 was the crash of 87 two weeks after I started. And I think we're all shaped by our experiences, and that was a scary one for me. I was actually managing the very small equity group at that point in time, but it put a lot of pressure on us. And, you know, we had some withdrawals, and I was trying to sell stocks to meet those withdrawals that day. And that really kind of shaped my thinking. When I started thinking about ETFs, I started thinking that we were we had just come out of the late 1997 period, which was known as the Asian contagion, and the markets became very volatile. Then we went into the summer of 98 which was the Russian debt crisis, again, volatility in the markets, and I was worried that we might experience another crash of 87 type of event. So I started thinking about, how could we enable investors that wanted to get out of our funds, enable them to get out of the funds without impacting the fund itself. When an investor gets out of a fund, you have to sell off some of the investments in order to fund their redemption. So I started thinking that if we had a share class of ETFs in the same fund. In other words, you could invest in the Fund two different ways, either directly with the fund, like you typically would, or through the ETF share class. It turns out, because of the mechanics of the ETF share class, if an investor happened to own that share class, they could sell that on the stock exchange, which is where you trade ETFs, and it would have zero impact to the fund. And so I reasoned that if investors were so inclined to sell, they would be attracted to the ETF share class and not to the conventional share class, and that would enable them to have all the flexibility they want without disrupting the investors that were long term oriented and leaving the fund with additional costs. So they really complemented each other. Wouter Klijn  18:46 Yeah, and is that impact mainly in terms of taxation? Gus Sauter  18:50 It's, it's both taxation and transaction costs. Yes. So the taxation piece would be, if you have to sell off an investment that is appreciated in price, you have a capital gain you have to pay tax on. But at the same time, if you have to sell off, you have transaction costs of selling the investments as well. And so we would avoid all of that by if people were in the ETF share class. Wouter Klijn  19:11 I think to a degree, the initial take-up here in Australia was mainly retail, and we don't see a lot of institutional investors using ETFs other than temporary parking money or tilting how's the situation in the US? Is there more institutional take up? Gus Sauter  19:29 There is a little bit more institutional take up in the US. So we see institutions using them for any number of reasons. Sometimes they use them for long term investments. Sometimes, as you indicate, just short terms, they might be migrating from one type of investment to another, or from one manager to another. You can imagine a large institution that has a manager, and they might fire the manager, but they need market exposure while they're looking for a new manager, and so they might move, for short term, into ETFs. So I'd say ETFs. Are used considerably by institutions and tremendously by the advisor community in the US. Wouter Klijn  20:07 So what do you think is going to be the next innovation in indexing or in ETFs? Is that around active ETFs, or perhaps the Smart beta ETFs? What is your view on that? Yeah. Gus Sauter  20:18 So the interesting thing a lot of people talk about ETFs as being a product, and I've been pretty vocal saying they're they're not a product. They're a way to distribute a well known product. In other words, it's a it's really just a different way to distribute an index fund. If you look at all the ETFs they can be done in a traditional mutual fund, ETFs in the United States are legally organised as mutual funds with certain exemptive relief. So they come out of the same part of the tax code. To me, ETFs are really just another way to distribute. I do think they will grow into a way to distribute active funds as well the Smart beta concept I'm not a big fan of. In fact, we had what's become smart beta in the early 90s. We started, I mentioned earlier about the different segments of the market, and that's a little bit of what smart beta is all about, is targeting different segments of the market. You know, talked about fundamental indexing. That's fundamental indexing turned out to be difficult to market, so you rename it smart beta and like, why would anybody get dumb beta if you could get smart beta, but it's really just getting different exposure to different segments of the market, and you can do that through capitalization weighted indexes, which we have offered since the early 90s. But I think my objection is they're being marketed as something that will provide you long term outperformance, and I just don't think that's going to hold up. And I think investors are expecting more than what these products can deliver. Wouter Klijn  21:52 You talked a little bit earlier about the market structure as well, and that you said that in the past, it was probably a little bit easier to be active, and today, markets are a little bit more efficient. There has been a lot of discussion as well about the impact that the large technology firms have on the structure of the market with capital light models, and potentially has changed the structure of the market as well in the sense that there's less ability to participate in the growth. Do you worry about these types of developments? Gus Sauter  22:27 I don't. I think that technology has been an advantage for investing and has reduced costs significantly. So I think on the transaction cost side, it used to be that humans were involved in all trading. And if you wanted to buy something, you had to buy it from a market maker, and or conversely, sell it to a market maker. Now it's done electronically. Almost all trading is electronic nowadays, and it cuts out a layer of profit that that middleman would would earn. And so transaction costs have plummeted. I mean, literally, from what would have been 1% or more if you, if you bought a stock, to now maybe a quarter of a percent. So that is a huge amount of savings to investors. That's a benefit. I think your question is also about investing in technology companies, they are light in capital. As you point out there, it's more human capital than physical capital. That's I don't think that distorts the market. It's just a different way of creating a business. And ultimately, you're investing in businesses for the profit they earn. And it doesn't really matter if the profit is generated by human capital or machinery, like a manufacturing company. So from an investment standpoint, you just have to analyse it differently. I think you were also asking a little bit about, do you get to participate in the early stages of, say, it being kind of venture capital, a lot of firms, Lyft just went IPO last week in the United States. Lyft is like Uber, if Lyft isn't here in Australia, and the people that created Lyft, it went for $22 billion IPO. So these are called unicorns, anything that IPO is for more than a billion dollars, and the venture capital investors do extremely well and and then ultimately, investors, public investors, get to participate after the initial public offering. You know, I think that's just the risk one takes in venture capital for every unicorn we hear about, there are 1000s of dead unicorns along the road. So you should be compensated for risk. And even when these companies do go public, they still generate good profits for investors. I mean, look at companies like Facebook or. Amazon or Google investors, public investors, have made a lot of money investing in those, those companies. Wouter Klijn  25:07 Now, you did work with the Securities and Exchange Commission in the US on equity market structure issues. What did they focus on? Gus Sauter  25:17 It was a number of things. So I worked for help four different commissioners, four consecutive commissioners of the SEC over a decade or more, and they were working on a lot of structural changes to the marketplace, you know, going from that old structure that I mentioned, where everything was driven by humans, and prices were priced in eighth so it was $10 point 125, cents, 12 and a half cents. They created decimalization, so things started being priced in pennies. They brought in electronic trading. They tried to make sure that electronic trading was fair across different platforms. So there are, there used to be three exchanges in the United States. There are probably 50 now, or maybe even more than 50 at this point in time, and it's not fair if you trade on one exchange when there's a better price on another exchange. So they were trying to link the exchanges together to ensure that investors would always get the best price they could. So I sat on a number of panels for the SEC and gave my thoughts and opinions as to how I thought things should be done, and had the opportunity to speak directly with all of the commissioners during that time period. So it was a lot of fun for me to as a practitioner, to help out with the regulators as they were, I think making great improvements in our marketplace. Wouter Klijn  26:36 Yeah, expanding a little bit on this idea of markets and exchanges as a vehicle to participate in profit. A lot of the discussion around emerging markets is about the economic growth and GDP growth and how you can participate in that as an investor, but I think you are a little bit more cynical about the direct relationship between economic growth and GDP and how that translates into markets. Can you expand a bit on that? Gus Sauter  27:06 Yeah, I can give you two examples that explain that GDP growth, economic growth and stock market returns really aren't correlated. So think back to the global financial crisis 10 or 12 years ago, as you recall, Everybody I talked to around the world felt we were going into a very slow growth economic environment, and I agreed with that view. And it turns out we were all right. We've been globally. We've been in a very slow growth economic environment. And then, if you'll recall, at the same time, because of that, people felt that we would have very low equity returns going forward because of this low growth. I was arguing that, no, it would actually be the exact opposite, that you would have high returns going forward because of the perceived risk in the marketplace. We'd had the crash of the tech bubble in 2000 to 2002 and then we had the financial crisis. And I think investors perception of risk was extraordinary. And you know, if you think, Well, if you were expecting a low return in equities, let's say equities have returned historically about 10% and if you expected, say, 5% would you invest in equities when you could get a 4% return on bonds, which, have, you know, a fraction of the volatility. Nobody would invest in equities. They'd put all their money in bonds for, you know, you wouldn't take all that volatility risk for an extra 1% so I was arguing that the stock market had repriced itself so that it could provide great returns going forward. It's all about pricing. That's what determines future returns. You can take a great firm and make it a lousy investment by overpaying for it. Conversely, you can take a lousy firm and make it a great investment by underpaying for it. So it's all about where you price things initially, and the markets had pulled back dramatically, pricing things very low to provide great returns going forward, which we've had over the last decade, extraordinary returns. Another simple example that I give is the period of the 20th century, the 1900s the UK economy grew 1.8% per year. Their GDP growth was 1.8% per year, and the US economy grew 3.2% per year, much faster growing economy, if you compound that out over the 100 year time period, the UK economy grew about seven fold. The US economy grew about 17 fold during that same period of time. During that period of time, the UK equity market returned about 10.1% per year on average, obviously, with volatility. During that same period of time, the US equity market returned 10.1% per year with volatility. So there really has been no correlation between economic growth and equity returns. Wouter Klijn  29:53 You mentioned there as well that the important element in there is risk. Is it a case where. Perhaps people focus too much on on volatility as a measure of risk, rather than taking into account all the other elements, including valuation. Gus Sauter  30:08 Yeah, I think people do do focus on volatility. And if you've got a long time horizon, you don't really need to focus on it. If you've got a short time horizon, I think volatility probably is important to you. If you need your money a year from now, volatility is definitely your enemy. If you you happen to get a bad return over the next year and take your money out, you've got less money to take out. So. So volatility is important, depending on your time horizon, if you're 25 years old, saving for retirement 40 years from now. It doesn't really matter if the market goes down dramatically in the crash of 87 or the the crash of the tech bubble or the global financial crisis. All that matters is where the market is 40 years later, when you you're retired. And actually, if you look at a the stock market itself. Look at the price levels of the stock market over the last 50 years, all of those market crashes look like a blip in the in a heartbeat. When you look at them, they're really nothing when put in a long term perspective. But so people probably do focus on volatility a little bit too much, but people tend to be too short term oriented, too they don't think long term. Wouter Klijn  31:24 You are here in Australia, partly because you're an advisor to the Investment Committee of Sun super. How did you get in contact with them? Gus Sauter  31:32 I retired six years ago from from Vanguard, and Sun super was a client of Vanguard. I had not actually had I spent a lot of time in Australia during my working career, because I did have an investment team in Melbourne. So I got here a couple of times a year, and did meet a number of clients at Vanguard's. But I don't believe I had actually ever met Sun super. Turns out, when I retired, Scott Hartley, who was the CEO of Sun super, was, I think, looking for somebody to lend advice to the Investment Committee of Sun super somebody who had perhaps a slightly different point of view. He was looking for somebody who could, I think, play a slight devil's advocate role, maybe offer a slightly different point of view. And while you know, investing is investing, and we've all had the same theory of investing, you do have a little bit of a different experience depending on your environment. So, you know, my work experience is probably different from what you might experience in Australia. And so I think Scott felt I might be able to add something at the margin to Sun super as either a devil's advocate or something that they just hadn't thought about. Wouter Klijn  32:39 So did you have to play devil's advocate a lot so far. Gus Sauter  32:41 Oh, you know, I I chip in every meeting, and you know, I wouldn't say anything earth shattering, just something that a lot of times there's perceived wisdom. And sometimes I question it. Sometimes I might even believe in the perceived wisdom. But, you know, I just want to be a hair shirt and challenge the thought, so see if people can justify the thought. So I, you know, I try to play a meaningful role without being obnoxious. Wouter Klijn  33:13 So do you see a lot of similarities or differences between the issues that the Australian pension funds and perhaps us institutional investors grapple with… Gus Sauter  33:25 I think the nature of superannuation is a little bit different from institutional investors in the US. So ultimately, Superannuation is about members, whereas institutions in the US frequently might be an endowment, a foundation, a defined benefit plan, a pension plan, and of course, you have those here as well. But Superannuation is not like that. Superannuation would be more similar to our 401, K plan structure, and where you're dealing directly with individuals and members. And so I'd say it's very similar to that, which is, in our view, it's a little bit more retail than institutional. But I'd say it's applied a little bit differently. Here in the US, it's typically stocks, bonds and cash, and here, through most superannuation firms that I'm familiar with, in addition to those big building blocks that everybody's familiar with, they also invest in private investments as well, and alternatives also. Wouter Klijn  34:30 Yeah, I think in the past, you also have put a lot of emphasis on the importance of asset allocation within an investment strategy. And I think in Australia, there's still a lot of funds that have a static asset allocation, high percentage of equities, little bit of bonds. Do you think that makes sense, or should there be a more dynamic form of asset allocation to play into the different circumstances in the market? Gus Sauter  34:56 Investing is a social science and not a hard science, if it were. A hard science, I would say, you know, you should be dynamically adjusting your portfolio given the circumstances. Unfortunately, if you ask 10 economists, what's going to happen in the economy over the next year, you'll get 11 answers and and that's the problem with with investing, we just don't know what's going to happen. I mean, everybody's got an opinion, but frequently the consensus is wrong. So if you were correct and knew that the market was going to go down, and if you're correct in that assumption, then yes, it would make sense to dynamically adjust your portfolio and lighten up on equities. Unfortunately, people overestimate their you know, their knowledge is, there's a it's called in behavioural finance. It's called overconfidence. People suffer dramatically from overconfidence, and they typically do the wrong thing at the wrong time. And so, you know, think to yourself, how many people do you know you've heard of that sold out in 2009 got out of the stock market in 2008 or nine after the market had crashed. And then, I mean, people were asking me, in 2012 When do I get back into the market? Well, the market was already up 100% by 2012 and they've been sitting on the sidelines. So that's the danger of trying to dynamically adjust your portfolio. It's just that we just don't know what's going to happen. Wouter Klijn  36:25 Yeah, I think there's an interesting illustration of that in the annual report of one of the largest Australian super funds. And this is a super fund that has what I call a direct investment option, where they allow the members to manage or pick some of the investments directly. And you could see that over the course of the financial crisis, it's exactly what they did. They sold out at the lowest point and sold back in when already stocks had gone up for most of its recovery, and so destroyed quite a bit of value there, which I think everybody's prone to but it's an interesting question around these direct investment options as well. Gus Sauter  37:05 Yeah, that's, that's, that's a tragic story. I mean, you know, that impacts people's lives and their, ultimately, their retirement. And it's, it's really unfortunate. There's been a whole study in finance called behavioural finance that looks at these issues, and hopefully in the future, we'll learn and be able to counteract them. Wouter Klijn  37:24 Yeah, now throughout your career, you've seen a few crises. Is there anything that we can learn from them? Every crisis is different, but are there some shared elements that people can guard against, or is it more a question of sensible asset allocation? Gus Sauter  37:42 You know, I think it does boil down to sensible asset allocation. At Vanguard, we always talked about stay the course. And the only reason for that is, as I mentioned earlier, because we just don't know what's going to happen. I think the crash of 87 I going into that, you know, I didn't think we were going to get the returns that we had gotten previously. I didn't see a crash coming, and it happened all in one day. And so, you know, it was too late to respond after the fact the tech bubble, actually, we at Vanguard were concerned about that. I mean, that's, to me, that's one of the most visible things that you could observe. I mean, valuations were just ridiculous, and we did. We didn't know how it was going to play out. I mean, we knew that returns were going to be less going forward than historical returns. We didn't know if it would just be you'd get 3% for the next 10 years, or whether you'd see a 43% decline in the market. Well, we got the ladder. Unfortunately, we didn't know that. The other, the other situation I saw that really, you could see, I think pretty plainly, was one I mentioned earlier at the bottom of the market in the global financial crisis, that equity returns were going to be good going forward. But usually, you know, in my career, the only two that really seemed probable to me was the decline of the bubble or the imminent decline of the tech bubble, just returns were just going to be less, and in financial crisis being an opportunity to invest at the bottom. But I didn't see the financial crisis coming. I mean, we knew there was a lot of turmoil, but I didn't see the destruction that we had. So, you know, you didn't have cash sitting on sidelines to bottom, anyways, if you didn't get it out of the market beforehand. So, you know, our view is, really, unfortunately, investors typically are best off if they stay the course. I mean, that's just what we observe historically. Wouter Klijn  39:38 Yeah, and doing a bit of crystal ball gazing. Are there any sort of risks that you think people should look out for today? Gus Sauter  39:45 You know, it's interesting. The markets have been, actually pretty, pretty reasonable, not, not too volatile. You know, we've had a few spikes here and there. But actually, if you're the last five years, historically, that's we've experienced low. Volatility. I think it's more of the same for the foreseeable future. I don't see what upsets the apple cart from an economic standpoint. You know, typically economic expansion ends when either the central banks are trying to fight inflation, which they're not. I mean, they're hoping we get a little bit more inflation, in fact, and the other would be when consumers are so stretched from borrowing that they just can't spend anymore. And while I am a little bit worried that debt levels have increased, I don't think they're at crisis levels, and hopefully we don't get to crisis levels. I mean that that's what happened in the financial crisis, but so I think it's a little bit more of the same kind of muddling along, probably okay returns in the stock market and slow growth for the next year or year and a half. Wouter Klijn  40:50 And summing it all up, I thought I might ask you as well, looking back over the long career that you have, could you share some of the moments that you find most memorable of them as well, and perhaps some points where you said that was a hard period, but I learned a lot from it. Gus Sauter  41:10 Yeah, well, there are so many things that I remember. I mean, you know, obviously the crash of 87 was really scary, and I was two weeks into my job, and I wasn't even thinking about, could I be fired or laid off, because all of a sudden we've got a lot less assets. But fortunately, we stuck with it. So that's certainly my mind. You know, reflecting back on my career, I think the most fun was actually the people relationships, the people I worked with, a great bunch of people still have very strong friendships. Going back, I also enjoyed talking with investors. For the most part. I was, you know, back at the office, overseeing the investment team, but but I would get out and talk with institutional and retail investors from time to time, and I really enjoyed that. And I guess a few particular instances, I remember one day Jack Bogle, early on in my career, coming into my office and standing in the doorway. We had just crossed $2 billion in our s, p5, 100 index fund, the only index fund at that point, and and he said, Gus, you wait some day. Indexing is going to be really big. We'll have $10 billion someday. Jack boogle was not really prone to understatement, but he missed that by by a bit, because he's now Vanguard has $4 trillion worth of indexed assets. But I'll always remember that one, and I guess that you mentioned something that I really learned from that might have even been a scary experience. The financial crisis was extremely, extremely scary, and I had the opportunity with our CEO, Jack Brennan, to speak with the Treasury and various regulators during that period of time trying to figure out what was going to go on. I remember driving in to work at about four in the morning, because that's when our opportunity was to talk with the Treasury. They were working all night long, and I was sleeping for a couple of hours, but it was pitch black out, and I was thinking to myself, you know, the world may have changed going forward, and that was scary. And, you know, I learned I don't want to repeat that one. Wouter Klijn  43:19 No, I can imagine that. Well. Gus, thank you so much for this conversation, and it was a pleasure to talk to you. Gus Sauter 43:28 Well. Thank you very much. It's been very fun to be with you.