President and Chief Investment Officer, The Vanguard Group, Inc.
Inside ETFs 2019 Opening Keynote: The Uncertainty Advantage, Greg Davis, Vanguard
Live from Inside ETFs 2019 in Hollywood, FLA, Greg Davis, Chief Investment Officer, Vanguard, discusses the changing environment for investing and how to find value in tumultuous times.
Transcript (3 segments)
A
Ann0:00
It's a great honor each year to introduce the keynote and chairman of our conference. This year I welcome Tom Moran again. For those who don't know, Tom is a manager at Vanguard Financial Advisory Services, responsible for divisional strategy, overseeing the business, relationship management, daily operations, and more than 50,000 US-based financial advisors who entrust nearly two trillion dollars of their clients' assets to Vanguard. Tom, with that, join me in welcoming us.
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Tom Moran0:40
Thank you, Ann. Good morning, John. Thanks for the introduction and for the kind words about Jack Bogle. I've known Jack for more than 30 years. He had a profound impact on my life and millions of investors. It's ironic to recognize Jack at an ETF conference because he wasn't fond of ETFs, preferring traditional index mutual funds. He also felt financial advisors were unnecessary. He'd say, 'All you need is a total stock market fund and total bond market fund.' He didn't like the sales profession either. In the early days at Vanguard, we weren't allowed to sell; we could only educate. If you said 'sell,' you had to put a dollar in a jar. About 15 years ago, I had a memorable interaction with Jack on a plane. He asked what I was doing at Vanguard. I said I was head of sales for a new division serving financial advisors, selling ETFs. He was not happy and said, 'I hope you're happy with the career choices you made.' He didn't speak for the rest of the flight. Despite his views, Jack would support a conference dedicated to low-cost indexing education. The theme this year is 'Changing Time, Solutions Defined.' It's a great theme given the dynamic environment. We have geopolitical changes, central bank policy changes, technology advances. We need to help clients thrive. I'm pleased to introduce my colleague Greg Davis, Vanguard CIO. Greg has been with Vanguard for over two decades, starting in fixed income, becoming Asia-Pacific CIO, and global CIO in 2017. He manages over four trillion dollars. He'll talk about Vanguard's economic and market outlook and the role of bonds. Please join me in welcoming Greg Davis.
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Greg Davis6:41
Thank you, Tom. Good morning everyone. It's a pleasure to be here at the Inside ETFs conference. I'll provide an overview of Vanguard's market and economic outlook and the role of fixed income. The top question I get is what's driving market volatility and what should investors do. The good news is that the principles of good investing still hold. Uncertainty reinforces the value you provide as behavioral coaches. Our inspiration for this year's outlook is Rocky Balboa. His down-but-not-out attitude aligns with our outlook. We expect global growth to slow due to tighter financial conditions and uncertainty. In the US, growth to about 2%, Europe to 1%, China to 6% but slowing. We've increased the odds of a recession in 2019 from 30% to 35%, but still unlikely. For 2020, odds rise to 40-50%. Inflation remains steady. We expect the Fed to raise rates once more, likely in June. Volatility has returned, with 20 days last year where the S&P moved 2%. That's normal compared to historical crises. Your role as a behavioral coach is important, as advisors can add 150 basis points of value. Over the next 10 years, we expect US stocks to return about 5% annualized, international stocks 7.5%. With lower equity returns, bonds play a dual role: ballast and returns. Fixed income hedges against equity downturns. In the worst decile months for equities over 30 years, high-quality bonds posted gains. In late 2018, Treasuries returned 2.5% while equities were down. Bonds also provide returns over time even in rising rates. Our 10-year outlook for bonds is about 3%. Cash yields are more attractive at 3%, shrinking the equity risk premium. For shorter horizons, consider high-quality short duration given the flat yield curve. Costs matter; most active manager alpha disappears after fees. Low costs increase success. Regarding risk, we believe in smart risk-taking. We're positioning defensively, expecting yield curve to steepen as Fed nears end of tightening. Credit may hold in near term but darker clouds ahead. I encourage you to assess your clients' risk tolerance. Remember, everyone is a genius in a bull market, but during stress a calm head matters. As Rocky says, it's about how hard you can get hit and keep moving forward. Thank you and enjoy the conference.