YouSaid · the spoken record

Fran Kinniry

lines on the record: 102
first: 2019-10-18
most recent: 2019-10-18
sittings or episodes: 1
sources: podcast

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“Yeah, you're exactly right. So in the advisors alpha work that my team and I work on and created, we created the Vanguard risk speedometer. And the Vanguard wrist speedometer looks at cash flow through time. And so what we actually have seen is that throughout most of history, investors would be known as momentum investors, meaning whatever category or sector was doing well, that's where all the flows went”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“And that's going to really then, what is the education coming out of that? You can't choose when you are born Right. So, this idea of taking what the market will give you. The person today who's going to look at the future with reality that it is, they're going to have to save a little bit more. Back to our talk about target retirement funds, we do think with auto enroll, auto save, auto escalate and companies matching, they're in a much better position to maybe generate those kind of returns on their own behavior.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Where the periods we were talking about before for someone born in the 30s and the 40s was probably close to five to seven percent.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“I think if you were thinking about a 10 year horizon and then if you say you're 60, 40 or we could pick whatever ratio you want, stock bonds, two to three on bonds, all of a sudden a balanced portfolio is probably closer to 4%, right?”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“So, in that environment, my mom is always saying, oh, I want to go back to those days where CDs were 18%. And I say, mom, 12% inflation. Inflation was 15%, so you got three nets. So I think in this environment, you also have to understand that inflation is quite low.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“I'll take it right now. But I think another thing is people have to understand is if you are saving to eventually spend it or gift it, you have to think about real returns.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“So, you think about a balanced investor over that time and used the demographic of being born in the 30s, if you were at your peak earning or near retirement and you were able to get 14% from a balance portfolio.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Absolutely not. I mean, from 1982 to 1999, the stock market was up 18 compounded annually and the bond market was up about 10.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and I think education and I think also the role of the advisor, the advisor is doing a great job educating their clients. The way I've always looked at total return is it's a partnership between the capital markets and the investor themselves. And what I mean by that is for a lot of periods, the capital markets did all the heavy lifting. The individual didn't need necessarily to save as much. And so if you're thinking about this partnership of how much the capital markets is going to contribute to your total return versus how much you personally are going to contribute, if we are in a muted return environment, which I think is pretty much consensus, it's certainly Vanguard's outlook to have a muted return, then the partnership is going to have to come more from saving more, spending less and making sure that you're doing your end of the bargain as the saver, work longer, or if not just expect a lower retirement income stream in retirement.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I mean, what you mentioned is true, and it's hard to believe that the U.S. market being actually offering some pretty good yields relative to some of the other high quality developed sovereigns that are out there. So I just would caution everyone, regardless of how low rates go, even if they go to zero or negative, what is the role of bonds in a portfolio? If it is the ballast of the portfolio, then trying not to stretch for yield, kind of take what the market gives you. Anytime we see people trying to engineer returns that the market isn't giving you, that's usually when they get themselves in trouble.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, duration is kind of a, it's another one of those tricky areas because I think what most people don't feel to understand is these risks are trade-off risks So, if you wanted to increase duration, let's just say increase duration, you're taking on interest rate risk, right? So if I went from a five duration to a 10 and interest rates go up, I'm going to lose twice the amount of money because I went from a five duration to a 10. But if you're using duration in hope that if the equities go down and bonds are the ballast, you would double your returns in equity contagion in that environment. So it's really what is the role of a bond portfolio. So, you know, there are some institutional investors, some pretty sophisticated investors that have lengthened duration because they really want the bonds to have that high negative correlation and positive offset to equities. But we are taking on his interest rate risk. So it is hard to kind of think about these risks and make sure you're talking about them with trade-offs.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“A ballast or in a downturn in most environments. I don't want to say all environments, but certainly in all environments, if you increase the risk of your bond portfolio, it's going to look more and more like equities.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“I think what an investor should do is really think about, and you asked me earlier on total return, is don't think about the individual components of your portfolio. So don't look at bonds in isolation of stocks or stocks in isolation of bonds. Because what you see is some bonds, if you're reaching for yield, it could have equity like beta to it. For example, if you're going into high yield bonds or emerging market bonds and the equity market were to have a sell-off, they're going to have equity correlation to it. So you really want to be careful if you were to do that because for most investors, bonds are the diversifier to your equity risk. And we see that time and time again. And we saw it in 0809. We saw it in the internet.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, I totally agree. And so I think the 30, 70, we will continue to challenge that. So to your point, maybe if investors start living to 110 or 120, we're not fixed to that final allocation. We tested every year and we tested very thoroughly. But if we were hypothetically, let's say you wanted to take more risk, risk is kind of a trade-off of longevity risk versus capital depreciation. So if you get 0809 and you're 40% versus 30% value at risk is going to be much. So you're trading one risk for the other.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so we do a lot of modeling on sufficiency. Will this meet sufficiency savings on a life horizon of 100, if not more in years? And so at 3070, if you think about 30% stock, 70% bonds in most environments is going to give you a real return over inflation that's going to last you. Number one, and number two, this is not meant to be 100%. Most clients or people that use them will have social security. At least they have it today, and we hope that they'll have it tomorrow. That's a different topic for a different day.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“automatically and it glides down in risk. And so you think about it starting out if I'll use my son 9010 as my son just graduated from Bucknell. He joins the workforce. He starts out 90-10 and he glides gradually down through time. And on his last day of work, it'll be 30-70.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so in our to talk about Vanguard's target retirement funds, you virtually own the world. You own over 10,000 U.S. non-US stocks, 3,000 US stocks. You own the global equity and fixed income, and it stays rebalanced.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“And so that's a hard thing for the average investor to be successful. Target retirement funds now are the default option, as you mentioned, where it's a basket of multi-asset class funds. Stocks are.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly. And so here's a hundred funds, like, you know, that you have to select from, and we call that unbundled, meaning that think about going into a restaurant and you're at the buffet and you now have to pick it. They're overwhelmed with choice. And we talked earlier about investor behavior. What you probably saw most often is investors buying the things that had grade five and ten year returns. And so investors.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I mean, outside of the invention of index funds, I think target retirement funds will go down as one of the more helpful innovations for the average person trying to save for retirement. And if you go back before target retirement funds, the 401k space, which is where most of these are used, let's say I'm starting day one at Vanguard, I would get a brochure about all the Vanguard funds and I had to make these decisions for myself.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Premiums to them. And you could even kind of think about why those premiums would exist. Some of them could be behavioral, some of them could be just back to misunderstanding the risk. So we do have a series of quant factor funds out there and a whole list of traditional bottom-up funds that you're probably familiar with, the Vanguard has offered for many, many years.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so we have a full suite of tax exempt bond funds. We have, as you mentioned, we have multi-state, so you would own the U.S. in a multi-state way, but we also have single state where there's actually a higher state tax, like New York is quite high. So we offer both. We offer a lot of things in active and passive because we have an ETF on the tax exempt as well. But our active funds on the fixed income side, both tax exempt and taxable, have done quite well. You also talked about some of our factor funds. I've been an author of a lot of papers on smart beta. And so we were really just critical of the term. We didn't think it was smart or it was beta. And we were kind of early in kind of being critical of the narrative. But we believe that there's factors. If you think about a factor, the value factor, momentum factor that actually have a different risk and return stream and they have some”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“So, the areas have done very well for us is the full suite, first off. So, a lot of people may not know, but we are one of the largest managers in tax-exempt.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“That's exactly right. I mean, so, and again, everyone has to pick their ownership structure. We're not here to say that public is wrong or private is wrong. They're just different, right? And so we are owned by our investors. And you kind of think about one master as opposed to multiple masters. And so that allows us to kind of pass back through where you can actually, your original question of how can you have high talent and low cost. Well, A, we have our ownership structure. And B, we pass along scale back to our investors. We also think our brand is very attractive. So what I mean by that is we're able to attract world-class active managers who want to work with us because they know just the brand to be working with Vanguard. They also know we're very patient with our active managers. And so if you actually want to be a pure asset manager and let Vanguard take the client servicing and the distribution, it's an arrangement.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“The owners of our funds through lower costs in the future. And so we pass along the P&L excess back to our investors either in the form of lower costs coming out of that or higher service levels. And so that gives us that advantage relative to some of our competitors.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, it depends on the strategy, but yes, that's exactly right. So, you know, if I'm managing a billion dollars versus a million dollars, my cost should not be, my marginal cost shouldn't be 10x. My marginal costs should shrink, right? And so what we've been able to do at Vanguard, I think the most important thing is to take a giant step back. When Jack Bogle started the Vanguard group, it was a mutual fund. And what that means is that we are owned by our investors. And so there's different ways that you can set up an organization. You can be public equity where the public shareholders get the P&L. You could be a private partnership where the partners get the excess P&L. What Vanguard does, and sometimes people think that Vanguard is a non-profit, but we are actually fiercely for-profit. Everything we do is try to maximize our profit. It's what we do with the profit. We end up giving it back to our shareholders, our owners.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, well, the asset management business is one of the more scalable businesses out there, right? And so what we've been able to...”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Right at the bottom, we study that. And equities went pre-GFC. So if you go back to 07, pre-GFC, equities were at about 68% on the household balance sheet. And that means that the 32% was in more risk-off assets. At the bottom, you mentioned February of 2009. Equities dropped to 36%. So I call this the most hated bull market of all time because this bull market was very front end loaded, meaning a lot of the returns came out of March 09 in that very first. And investors only had 36%. And so, if you look about the IRR, the compound that returned that goes to an investor, the behavioral gap about in Advisor's Alpha, it's one to two percent. It's episodic, but investors tend not to do the right thing at the right time”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Right to rebalance that. And when I've studied cash flow at Vanguard for my 20 plus years, and what we see is that investors, especially in the extreme, so you go back to that 0809 environment, there was huge outflows of equities into the money market. And so investors were not rebalancing on their own. And so working with a behavioral coach who's going to help you through the emotions to stay committed to your policy, we think can add a tremendous amount of value.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, so behavioral coaching is one of the key pillars of Advisors Alpha. And what we mean by that is investing is emotional, right? And we know that you have to be in a decision state where your emotions are calm. And it's hard to stay calm. Let's go back to the global financial crisis, 0809. It's hard to stay calm when you've lost, you know, 45, 50% of your value of your equities. And what you're asking the investor to do is let's just take a $2 million portfolio, a million in stocks, a million in bonds. Your million in stocks now is $500,000 And you're asking without an advisor, you're saying, I'm going to sell 250,000 of bonds that are actually doing quite well in GFC and add to this stock portfolio. So now I have 750, 750.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Or you work with a professional fiduciary, so you could work with, you know, not to say, you could work with someone like Vanguard that actually can find great managers, get access to great managers and deliver outcomes that are superior, even though the cost structure is above an index cost structure.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Total return. So we're into total return or outcomes We believe that what's the most important thing is what our client outcomes. And so what I mean by that, it doesn't have to be all index.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and I think that goes even for liquid space, right? So, and I still think that this gets back to the marketplace being very sophisticated, but maybe not understanding the math. And the math is in most of your listeners will probably be familiar with zero-sum game, which means that if you and I are counterparties, one of us is going to win on that trade and one is going to lose. So on average, active management, whether they be liquid or ill-liquid or alternatives or traditional, it's going to be impossible at the 50th percentile and zero-sum game to win. That doesn't, but I think what misses that is someone is on the right side of that distribution. Someone is winning. And so, you know, if you can find talent, you mentioned a few Vanguard's active funds have actually done very well.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and you see a lot of these, and this is not an anti alternative investment or private investment conversation, but you see people going in reaching for alpha that may or may not be there.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, well, you see people taking risks. They go out on the yield curve, they high yield, junk bonds. You see a lot of...”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly, and we're a client who's in retirement, a high net worth client who's in retirement. Let's say they want to spend the 4% rule. How do you, you know, that worked for if you look at a bond chart, the 60s, 70s, 80s, and 90s, interest rates were above the spend rate. So you could have that was easy. You could have 100% fixed income portfolio, and it was quite easy. But now you have dividend yields it on the equity market of, let's say, 1819 and the bond market somewhere like two. So how do you get to a spending policy of four or five percent?”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, our turtle return is, I think a lot of people try to engineer a return. And what I mean by that is let's take this low yield environment and they think that they may need five or six percent for their spending. So they kind of start with what is my liability stream? And we see this a lot in the institutional space too with endowments and foundations.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Judge me on this, and you're, you know, you're really handicapping yourself, and that's what led to a lot of churn, a lot of turnover and unhappy clients. So we kind of broadened the value proposition. So advisors alpha, you know, is a much more holistic value proposition. It still has investment management if you believe that that is a skill you want to do, but what about financial planning, tax planning, wealth planning, saving planning, retirement income? How do I get a paycheck to me? And then behavioral coaching. Also the service model. I work with a lot of investors that are very busy. They could be a doctor, a lawyer, an entrepreneur, and they don't want to come home at the end of the day and manage their assets. So a service model, you know, I came up with the acronym TWA client may not have the time, willingness, or ability to do it on their own. And for most of those clients, it's worth the 100 basis points of advice.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and think about what a high hurdle that is. If you're charging, you know, let's say 1% in a fee-based arrangement. And then you now, so not only that, but you have to outperform by 1% plus any product fee. So that's a really tough hurdle. So it's a value proposition that you're setting up. You own your value proposition as the advisor and you're telling your client.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Right. And so whether you do that through security selection, market time, fund selection, the value proposition for a very long time in the advice community was outperform a policy portfolio.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“So, advisors Alpha, as you mentioned, we created in 2001, and it really changed the value proposition or the framework of what it means to why hire an advisor. And my prior role, I was an advisor, and I think our value proposition was probably similar to most. And that was a myopic value proposition. Hire me and I'll outperform a policy portfolio, whatever that policy is. That's the traditional.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Absolutely. So the 60 40, while that's one spot on that frontier, I think the main part is having an asset allocation, an investment policy that you're navigating back to. So you're rebalancing to that, being broadly diversified, and either having high talent and low cost. That would be our formula for success for an investor, whether it's 60, 40 or 40, 60 doesn't really matter. But yeah, the 60-40 tends to be that starting point for many investors in a lot of the institutional funds, endowments, foundations were that for a very long time.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“That's right. And so I think the 60 40 gets thrown out there as a starting point, but we believe that the asset allocation should reflect the client's goals and objectives. So we have clients, for example, our target retirement funds. It's a glide path where it starts out 90-10 and gets all the way down to 30, 70.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, I think some context there, just like we started with the context on indexing. The context is I think Vanguard believes in broadly diversified portfolios, low cost, whether it's active or passive, because we actually believe in active.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly Exactly. And so I was a big fan and studied Vanguard from afar from my prior firm. And I ended up at Vanguard because RIA business got rolled up into they were going through a roll-up stage and roll up being other big advisory shops, bringing other advisors together. I had about a year to figure out whether I was going to stay or move somewhere. And I just was, I was a CFA and I happened to be at a CFA event. And Vanguard was entering the advice business. And so a lot of people know about Vanguard's advice today and they may think it's new, but I was.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Right Yes. So 1997, I joined Vanguard. The back story is, like yourself, I was at a registered investment advisory firm back at that time. We had a billion dollars, which was quite large. We were a multi-family office, an institutional advisory firm”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and I think some of the assaults that you're hearing is back to incentives, right? And, you know, Charlie Munger famously said that his whole life, he believed that 95% of what people say or do is due to incentives, and his whole life he underestimated incentives. So I think there's a large crowd that would love to talk about this indexing bubble or all the negatives of indexing. You have to look at the incentives there. The bottom line is indexing is broadly diversified, low cost exposure. And probably one of the greatest things that have happened to investors in the last 50 years.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“And you and I are playing golf, and we're not at our trading desk. The index doesn't move, right? So the index is taking their direction. Index will replicate active managers. So this idea that indexing is driving price or price discovery, if there were only two active managers and they decided to take the day off, the index wouldn't move. There would be no index trading.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Exactly. And I think the other big confusion is that people think that indexing moves price. If there's only two active managers, let's say it's you and I, Barry. Someone's got to.”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source
“Separate accounts, institutional investors, sovereign wealth funds. So actually, the mutual fund and ETFs are somewhere between 30 and 35%. So if you do that math index equities. On the U.S. side is somewhere around 15%”
2019-10-18 · Masters in Business · Fran Kinniry Discusses Diversified Portfolios · IDENTIFIED FROM THE TRANSCRIPT · source