“Those who stand for nothing fall for anything.” – Alexander Hamilton, first US Secretary of the Treasury
In Act 1, Scene 2 of William Shakespeare’s play, Julius Caesar, a soothsayer warned Caesar to, “Beware the Ides of March.” But Caesar failed to heed this advice, and he was assassinated on March 15th in the year BCE 44. Over 400 years later, the Ides of March still symbolize impending doom. Vanguard’s former OCIO clients could learn a lesson from this.
Trustees Are no Longer Protected by the Spirit of Jack Bogle
Recently, Mercer completed its acquisition of Vanguard’s outsourced chief investment officer (OCIO) business, raising concerns about the shift towards active managers and alternative investments. Vanguard’s focus on low-cost index funds might face a challenge under Mercer’s ownership. In a recent interview with Pensions & Investments, Mercer’s US CIO highlighted the wider range of strategies available to Vanguard’s OCIO clients, including active strategies and alternative investments.
However, the evidence suggests that few active managers consistently outperform index funds, and alternatives may not add value to institutional portfolios. The push towards these higher-fee options could pose risks to clients’ portfolios, emphasizing the need for caution and due diligence.
A Brief History of Vanguard Index Funds
In 1976, Jack Bogle launched the Vanguard 500 Index Fund, pioneering the index fund concept based on Eugene Fama’s efficient market hypothesis. Vanguard’s success in providing low-cost, passive investment options challenged the traditional active management model, leading to widespread adoption of index investing across various asset classes.
Something Old and Something New: The Outsourced Chief Investment Officer
The rise of OCIOs in the early 2000s introduced complex portfolio strategies reliant on active management and alternative investments, mirroring the Yale Endowment’s approach. However, the performance of OCIO-managed plans has often fallen short, raising questions about the strategy’s effectiveness.
Vanguard’s foray into OCIO services offered a unique approach focusing on index funds and prudent investment strategies, distinguishing itself from traditional OCIO providers. The potential shift under Mercer’s ownership raises concerns about departing from this philosophy.
Mercer Hoists a Red Flag on the HMS Vanguard
The acquisition of Vanguard’s OCIO practice by Mercer raises red flags about potential shifts towards active strategies and alternative investments. Mercer’s significant size and market presence may hinder the ability to outperform efficiently, echoing concerns raised by value investing pioneer Ben Graham.
Continued emphasis on low-cost, index-based strategies remains vital for institutional success, aligning with the advice of investment luminaries like David Swensen and Warren Buffett. Trustees should evaluate Mercer’s approach to ensure it aligns with their long-term objectives and commitment to prudent investing.
Wisdom from Swensen and Buffett
The legacy of David Swensen and Warren Buffett underscores the value of simplicity and prudence in investing. Vanguard’s former OCIO clients embraced this philosophy by prioritizing low-cost index funds, backed by solid evidence. Mercer should respect their clients’ decisions and uphold the principles of sound investing to ensure long-term success.