Today I came across an article of Gerry O’Reilly, portfolio manager of the Vanguard Total Stock Market Index Fund. The fund has $ 488 billion AuM.
Key success factor (besides Vanguard’s overall culture) is operational excellence / technology:
Vanguard has invested heavily in technology. Algorithms help managers figure out where to buy and sell while minimizing market impact. Risk software makes sure the portfolio stays close to the index. Because of these technologies, Brennan says, “we probably have the most assets per head of any asset manager in the world.” (The key determinant of staffing, he says, is the number of portfolios, not the assets in them.)
I certainly believe it makes sense to allocate time and money to optimize your execution and operational excellence. Especially in an environment of overall fee pressure and low yields.
The article also reminded me of a 2015 article of AQR: 15 years of international equity management. According to AQR, one of the big changes in their portfolio management throughout the years also involves trading:
We’ve always believed in the importance of implementation to investment success. Over time we’ve dedicated significant resources to improving all aspects of our implementation, ranging from optimization methodologies to risk management and trading. AQR was an early pioneer in the electronic trading space, developing proprietary trading systems and algorithms since the early 2000s. We started with equities, and subsequently extended our algorithmic capabilities to futures and then currencies. We believe the savings in both direct costs (commissions) as well as indirect costs (market impact) have led to meaningful returns enhancements for our investors.
Operational excellence has close ties with how you structure your organisation (another form of organizational alpha — see earlier post on Investment Committees). O’Reilly states that portfolio managers execute their trades themselves — something which I do not often see with other funds:
Unlike other firms, Vanguard doesn’t separate the jobs of portfolio manager and trader. A portfolio manager must know not just what to buy and sell but where to do so. “They have a much tougher job than they used to,” Bruce says, given the increased complexity of the stock market.
For further reading:
- I recently discovered Bloomberg Trade Book blog. It is a fascinating blog about (quite specific) execution topics. Everybody who has to execute trades in ETFs, MOC, etc. might find something useful here (certainly because there isn’t a lot of practitioner material available about this — too boring? too specific? I guess a combination of both).
- Vanguard people appeared in quite some podcasts recently:
- Investor Field Guide: O’Reilly
- MIB: Jack Brennan (former CEO and chairman Vanguard Group)
- MIB: Bill McNabb (current CEO and chairman Vanguard Group — podcast 2016)
- MIB: Bill McNabb (podcast 2015)
- MIB: Jack Bogle
- Best practices for ETF trading — Vanguard