OREANDA-NEWS. December 17, 2015. Navigating complex and choppy markets can be challenging, especially when media headlines are bold and investment choices are abundant. Vanguard's investment management groups—which include Vanguard Fixed Income Group, Vanguard Quantitative Equity Group, and Vanguard Equity Index Group—know these challenges well as they manage nearly \\$3 trillion for clients around the world.1 Given the backdrop of a slow-growth economy and a guarded outlook for investment returns, Vanguard Chief Investment Officer Tim Buckley in this interview describes his team's investment approach and how they think about risk and reward in uncertain and volatile markets.

Vanguard: What is the biggest change you've seen among investors over the past two decades?

Tim Buckley: Investors of all types—individual, institutions, financial advisors—are gravitating toward indexing strategies to give them inexpensive market exposure. We welcome that trend because when costs go down, investors keep more of their returns, regardless of whether they use an index or an active fund. That's the Vanguard way of thinking and the world is coming around to that.

We still believe in active management, and many investors do as well. They're simply becoming more selective about what they'll pay for and how much they'll pay. They don't want to pay managers for simply exposing them to the market or to reward a value manager for doing well when value stocks are in favor. Less expensive products can provide them market exposures. Investors should be willing to pay for superior security selection but only if managers don't destroy their excess return through high expenses.

How has Vanguard's investment group evolved to accommodate growth?

Mr. Buckley: It all comes down to great people. Our philosophy is to always have the best team on the field and make sure we have a wealth of talent coming in behind them. People are our priority because if you have the talent, then we believe the shareholder will be well taken care of.

We draw from all levels of experience. Some people come to us right out of school, while others are seasoned professionals who can challenge how we do things and help us explore new avenues. We embrace a rotational culture and invest heavily in mentoring programs to keep our leadership pipeline full. For example, the current head of our Fixed Income Group, Greg Davis, once ran our Asia-Pacific investment operations. Similarly, John Hollyer, who leads our Risk Management Group, previously oversaw our money market funds. Vanguard leaders and portfolio managers are constantly learning and growing, which results in a deeper understanding of the markets, our funds, and our operations. We believe in synergy, not silos.

Vanguard is now managing money on three continents. What has changed as a result of this expansion?

Mr. Buckley: The sun never sets on our trading day. If part of a portfolio is invested in Europe, then we want to manage that part of the portfolio in Europe, where we have the most knowledge and expertise on those markets. We've globalized our trading functions with investments in our trading floors and systems, so that international portfolios are managed with the same level of expertise around the globe. It's partly about technology and partly about culture. Our goal is to make sure that every person in our organization, regardless of tenure or role or geographic location, understands and can execute upon the Vanguard way of investing.

How would you define the "Vanguard way of investing"?

Mr. Buckley: We're known as a low-cost provider, but our approach encompasses so much more than cost. Take indexing, for example. One of the largest misconceptions is that indexing is all about how closely a fund tracks its index. It's not that simple. The art to indexing is to balance tight tracking of the index with minimal market impact. We also need to be mindful of tax efficiency, cash flow management, and index selection as part of our work. It takes a deep, skilled team to master the challenges of indexing, which is why we invest so much in our people.

If there's an art to indexing, is there an art to active management?

Mr. Buckley: Active management brings its own set of challenges. The goal is to maximize return for a given level of risk. For our fixed income funds, our philosophy is about consistently "hitting singles" instead of swinging for the fences. We take very measured risk with a lot of research behind it. This has served our investors well in times of market volatility and has helped our funds outperform 100% of their peer group averages over the past ten years.2

As for equities, our internal team takes a quantitative approach. This group is comprised of some of the brightest minds at Vanguard. They study the market extensively, crunch huge amounts of data, and use quantitative modeling to determine which securities look better than others. Our model isn't static; it's constantly evaluated and refined, which has led to fantastic performance the last three years with 100% of our internally managed active equity funds outperforming their peer group averages.3

How does Vanguard's investment process account for market volatility and uncertainty?

Mr. Buckley: First, we focus on risk management, which is embedded in our investment thinking. Where other organizations might consider risk management a final step in the process, we make it part of everything we do. Risk analysts work side-by-side with our portfolio managers to inform the discussion about what risks are in the portfolio, which risks are being rewarded and which risks should be avoided. They're always going to hold the bar high and make sure we have the right controls in place to serve our investors well.

Second, helping investors succeed isn't just about giving them a better fund; it's also about giving them insights into market and economic conditions, portfolio construction, and our time-tested investment philosophy. We have an entire research department dedicated to helping clients use our funds to help meet their long-term goals.----

1Data as of November 30, 2015.
2This figure is the number of Vanguard active fixed income funds managed internally (17 of 17) that outperformed their Lipper peer-group averages over the ten-year period ended September 30, 2015. Results will vary for other time periods. Only funds with a minimum ten-year history were included in the comparisons. (Source: Lipper, a Thomson Reuters Company.) Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all the investments are subject to risks. For the most recent performance, visit our website at https://institutional.vanguard.com/performance.
3This figure is the number of Vanguard active equity funds managed internally (6 of 6) that outperformed their Lipper peer-group averages over the three-year period ended September 30, 2015. Results will vary for other time periods. Only funds with a minimum three-year history were included in the comparisons. (Source: Lipper, a Thomson Reuters Company.) Note that the competitive performance data shown represent past performance, which is not a guarantee of future results, and that all the investments are subject to risks. For the most recent performance, visit our website at https://institutional.vanguard.com/performance.