Retiring bond chief and his successor look back and ahead
March 31, 2014
Robert F. Auwaerter, principal and head of Vanguard's Fixed Income Group, is retiring this spring after a 32-year career at Vanguard. His successor, Gregory Davis, assumes leadership of a team that oversees about $750 billion in fixed income assets. We recently sought the two leaders' views about the past and the future of bond investing.
Mr. Auwaerter, how has bond investing evolved over the years?
Bob Auwaerter: One big difference between when I arrived at Vanguard and today is the speed of the markets. In 1981, when a news event occurred, you could sit and contemplate it. If something happened overseas, it might not affect U.S. markets, and if it did, it took a day or so. Now geopolitics is so much more important. Everything is instantaneous. We have to make snap decisions all the time without waiting.
The bond market went through some volatile times during your career. What sticks in your mind as the most memorable?
The end of a remarkable era
When Robert Auwaerter joined Vanguard in 1981, he was a member of our original three-person Fixed Income Group. Over the years, as the department grew, he took on various leadership roles, eventually becoming head in 2003.
Five years later, in September 2008, Lehman Brothers went bankrupt, igniting the nation's worst financial crisis in 70 years. Bill McNabb had been named Vanguard's CEO just two weeks earlier.
"It was, to put it mildly, an extremely challenging time," said Mr. McNabb. "Through it all, I was able to depend on Bob's strong command of the Fixed Income Group, which persevered under these treacherous conditions.
"Bob has been the backbone of our fixed income group for more than three decades, and he was instrumental in building it into the world-class operation it is today," Mr. McNabb added. "Bob's record as a portfolio manager is outstanding, and he's earned a reputation as an extremely dedicated, honest, and insightful decision-maker and leader.
"We are deeply indebted to Bob for his service to our clients over his long and successful career."
Bob Auwaerter: The single most challenging day was September 11, 2001. We knew people in the World Trade Center towers. It was a very tragic day. But in terms of a market crisis, certainly the worst was the Lehman Brothers default in September 2008. The days after that were very difficult because nothing was trading. You didn't know if other big-name firms were still going to exist. Now we know what people felt like during the Great Depression, because the financial system came close to falling apart.
Mr. Davis, turning to today's environment, what do you say to investors who are worried that 2013 was the start of a rough stretch for bonds, in which yields will rise and prices will fall?
Greg Davis: Many people get hung up on the possibility that interest rates are going to rise, which would cause bond prices to fall, but the market has already priced in that possibility. The question becomes: Will rates rise more than what's been priced in? And that's a much more difficult question to answer.
But it's worth remembering that rising rates are not necessarily a bad thing if you have a long time horizon and the average maturity of your bond fund is shorter than your time horizon [the time until you'll need the money]. For example, if you're invested in an intermediate-term bond fund and you have a longer-term time horizon, you're going to get a better total rate of return with interest rates rising, because you're going to be reinvesting those coupon payments and principal payments at higher rates. It becomes a problem when investors, in their search for higher yields, invest in long-duration assets but have a shorter time horizon. That's where you potentially get hurt.
Do you think bond indexing, including bond ETFs, will continue to grow in popularity?
Greg Davis: ETFs in general have made it a lot easier for individual investors and their advisors to gain highly diversified bond market exposure at low cost. So I expect their popularity to continue to increase. In a very low-yielding environment, higher fees can erode a significant proportion of your total expected return. Because there's been a lot of focus on cost, I think bond indexing, including ETFs, will likely continue to grow.
What long-term developments do you foresee in the world's bond markets?
Bob Auwaerter: Today it's truly a global bond market. Vanguard is now involved in all sorts of different markets all across the world. We have a trading and credit research operation in London and a trading floor in Melbourne, Australia, and we're building up a credit research operation there as well.
Greg Davis: Globalization and the continued development of emerging markets have brought a continued broadening of the investment-grade bond market, and I expect that growth to continue.
And just as U.S. investors have embraced international investing on the equity side, I think they will increasingly embrace international fixed income investing. The magnitude will likely be less, because the typical portfolio is more heavily weighted toward stocks, but as people continue to see the potential diversification benefits, we expect continued growing interest in international bonds.
What should clients know about the Vanguard crew in our Fixed Income Group?
Bob Auwaerter: I was once quoted in a financial magazine as saying, "I run the shareholders' money like it's my own, because it is." I think that's a good way to put it. Not only is my own money here, but also my parents' money, my brothers' and sisters' money, and my neighbors' money. And they all know where I live.
Fortunately, everybody here at Vanguard operates with that mindset. When we're trading, we never forget it's the shareholders' money—and that includes us. To me, that's the best mindset for a fiduciary to have.
Greg Davis: Bob has built up a very deep credit research team here, both on the taxable side and on the municipal bond side. And that's for good reason: We want to be able to do our own independent analysis.
As investors found out during the global financial crisis, all ratings are not created equal. It's not necessarily prudent to just rely on an agency's rating or assessment of the credit risk or creditworthiness of a bond issuer.
We feel very good about the fact that we have a highly skilled credit research team that's able to develop its own independent analysis of issuers. I think many investors now realize the need for that as well.
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