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Episode 13

Interview with Gus Sauter, former Vanguard chief investment officer

April 2019

In this special New School of Super episode, Sunsuper's Head of Advice and Retirement Anne Fuchs speaks with Gus Sauter, former Vanguard Chief Investment Officer and external adviser to the Sunsuper Board Investment Committee. Gus was responsible for overseeing $US2 trillion in funds under management at Vanguard – more than the total value of Australia's entire superannuation pool. So you don't want to miss his views on passive vs active investment management, the power of the mutual or profit-for-member fund model, and what could be in store for global financial markets.

Intro: Welcome to the New School of Super. A fresh look at money matters, your super and the things that could affect your financial dreams now and in future, with Sunsuper's Chief Economist Brian Parker and Head of Advice and Retirement Anne Fuchs.

Anne Fuchs: Hello and thanks for listening. Welcome to the New School of Super, Sunsuper's podcast series covering money, investment markets and, most importantly, helping you achieve your retirement dreams.

My name is Anne Fuchs and I'm Head of Advice and Retirement here at Sunsuper, and the team and I we're incredibly passionate about making sure our members fulfil their retirement dreams. Now, I have a very special guest here today who is going to trump Brian Parker. But before I do that, I need to read out the compliance terms and conditions, so I stay in the good books. So, before we begin, I just need to let our listeners know that we're going to be talking today about financial advice investments, but it's general information only, and any advice doesn't take into account your personal situation. You should consider your circumstances and think about getting personal financial advice before acting on anything that my special guest and I are talking about today and you can get a copy of our product disclosure statement from our website or by calling us on 13 11 84. So, I did that the out-trumping Brian on purpose. And for our listeners, you would know Brian Parker, our Chief Economist here; and I deliberately used that term because my guest today is -- has the same passport as the man I just referenced. That's probably all that's about similar, with me is Gus Sauter, the former Chief Investment Officer from Vanguard and is on this Sunsuper Investment Committee. This man managed more money than the superannuation system in Australia together, close to $3 trillion dollars. Gus, it's so lovely to have you here.

Gus Sauter: Thank you. And it's great to be with you today.

Anne Fuchs: And I understand you landed yesterday. So, you're you finished your jet lag, you had a good night's sleep?

Gus Sauter: I slept eleven hours, so I'm ready to go.

Anne Fuchs: Okay. Good stuff. So, for our listeners today, I thought we could have a bit of a rambling chat with Gus, this man has a wealth of experience working for arguably the most trusted and well-known fund manager in across the world, but also to, just his insights from a career perspective on what got him to where he's got to in what is an incredibly challenging environment. So Gus, do you mind if we start there? What did you study as a boy? Did you know you'd end up where you are here today?

Gus Sauter: I had a strong interest in investing from really about the age of ten or eleven. And I made my first investment in the stock market when I was about eleven years old. So I studied economics, math and finance when I was in school. And I think that's really what prepared me for my career.

Anne Fuchs: And did you know that? Did you move to New York like, you know, like Madonna did, she moved to New York to start a career bright lights, big city? Or was it something that just was more gradual and less premeditated?

Gus Sauter: It was less premeditated, and in fact, I made a commitment to myself that I wouldn't go to New York. And fortunately for me, I worked for Vanguard, which was located in the suburbs of Philadelphia. So, it was kind of like the perfect setting for me.

Anne Fuchs: So what, you've come to contribute to the Sunsuper Investment Committee. Tell me, how did that come about?

Gus Sauter: When I retired from Vanguard about six years ago, Sunsuper had a strong relationship with Vanguard. And when I became available, I think Sunsuper wanted to hear a perspective, a different perspective from a traditional Australian perspective. And so they were looking for somebody, perhaps that I just had a slightly different point of view that could maybe help out.

Anne Fuchs: And so, one of the things we've spoken about in the past, things like unlisted assets, an asset class that's probably not used by retail investors over in the States but quite prevalent here, particularly for Mum and Dad investors within the superannuation. What are your thoughts around that is? An asset class and from a portfolio construction perspective?

Gus Sauter: Yes, you're correct. In the U. S. People really think of the publicly traded assets, stocks, bonds and cash, and that's where most of the money is, at least on the individual side, in the financial advisor community as well, for the most part. When you get to endowments, then you start talking about unlisted assets, and I think it's a bona fide asset class that certainly accomplishes broader diversification and historically has frequently provided extra return as well. So, you think about private equity versus publicly traded equity. Historically, private equity has provided a little bit of a premium return over public equity. And so, you know, it has been a way to improve your results overall.

Anne Fuchs: And from a returns perspective, you're twenty or twenty five years of Vanguard. Well, was that that was it? That long, yes?

Gus Sauter: Yes, twenty-five years in two months.

Anne Fuchs: Okay, there was a sense there was a little bit I didn't get it exactly right. So, over those years, did you – from a, from achieving, it returns perspective. Is it all about our asset allocation? Is its stock picking? Is it a mix? What, What are the key drivers for delivering return for investors?

Gus Sauter: So, asset allocation deals with beta. It's deals with the returns in the marketplace. Whether the marketplaces, stocks or bonds or cash, stock picking or security selection is really trying to do better than the asset class itself is doing. And so really, that's the difference between an alfa and beta. Quite clearly, alfa is swamped by beta, so asset allocation clearly is the most important decision you will make; should you be in stocks, whether it's publicly traded or privately listed, should you be in bonds or cash and then the question and just being in those asset classes can give you a very attractive rate of return. And the question is, can you do better than that? And should you engage in stock picking or trying to find positive alfa and I think it's worthwhile trying to do that. If it's done very well, it's a difficult game, but if you're very sophisticated, you can actually enhance your return.

Anne Fuchs: I think what's fascinating about you, Gus, is that you -- you lead the investment house of what's seen as the leader, the home of passive investing, where, ironically, I know you're incredibly passionate about active investment, so can you explain the paradox that that is?

Gus Sauter: It's kind of funny. When I first started at Vanguard, three percent of our assets were passive index and we helped grow that industry at the time we were really the only player in the index mutual fund industry, and we grew that into a very large portion of our business. Today, it's about seventy or seventy five percent of Vanguard's assets. But the other side of that coin is about twenty-five, or thirty percent of Vanguard's assets are actively managed, and I personally -- the funds that I managed for about eight or nine years were actively managed. So, I believe in indexing. I think it's a very appropriate way for many investors to invest. But if they have additional skill and can identify good managers, then they should complement what they have through active management as well.

Anne Fuchs: Are there any insights you have for our listeners, Gus, around, particularly our listeners who are financial advisors themselves around trends from an investment perspective? Over the last probably five to ten years, Vanguard here in Australia has grown enormously in popularity with the cool versus satellite investment approach. There any sort of insights you could share with our listeners around investment trends for advisors in the US.?

Gus Sauter: Well, certainly that same trend is developing in the US, where indexing has grown substantially from really modest beginning just thirty years ago. And so, we are seeing this core satellite type of approach. We're starting to see a lot of fads as well that by using the term fad, I think that tells you a little bit what I think of it.

And a lot of that tends to be more marketing than substance. I think if you really think of this core satellite approach and then trying to get the right mix, how big is the core? In other words, how much of just trying to do mark market rate of return through indexing versus how big is a satellite? Aggressive? Are you trying to complement what you can get through the core of by way of active management? And that's that's really, I think, the big the big game. It's not all of these fads come and go.

Anne Fuchs: I think I haven't sort of worded you up before, but I really do commend Vanguard in their leadership around Advisor Alfa and the work that you've done. I'm putting you on the spot here, but you could you explain a little bit more, is there any advice to our listeners around Advisor Al, from what that means?

Gus Sauter: About twenty or thirty years ago, the adviser community was very different from what it is today used to be, that advisers would pick individual securities, and that was really what they were hired to do. We think that today advisers have evolved into something different from that, really their biggest…

Anne Fuchs: value, that they can add

Gus Sauter: the biggest value

Anne Fuchs: contribution, I guess.

Gus Sauter: the biggest value that advises today is determining that asset allocation and then how to implement that asset allocation. Should it be with passive, should it be with active? And can they find the right active managers as well? So, it's not -- it's no longer about security selection.

Anne Fuchs: What about - What about, I guess, the role of costs as well of investing.

Gus Sauter: You know, the interesting thing about investing we or about other aspects of our lives we think about you get what you pay for. The interesting thing about investing is you get to keep what you don't pay, and in fact, if you keep more, that's a better return, and you're better off. So cost is extraordinarily important when it comes to investing in it. So, it's the best predictor of future performance. There have been many, many studies, academic and practitioner studies that show the lower cost investing the better your future returns tend to be so. So cost is critical to success in the investment industry.

Anne Fuchs: And so on the Sunsuper Investment Committee, what are, I guess the themes you mentioned earlier that you were brought on board to sort of add a different level of thinking to our investment committee. Is there anything in particular that you're challenging the committee on to think differently about?

Gus Sauter: Well, you know, it is coming with a slightly different perspective. I mean, we all have studied finance. Everybody really understands investing. I grew up in a different environment in the U. S. than what you experience here. Different regulatory environment. And so, there is a slightly different way of thinking, and I try to bring what I experienced in my career to the investment committee and really kind of play a devil's advocate and some opportunities where I challenge what the status quo thinking might be. Or just try to add something that maybe we experienced in the US that you haven't experienced here. So really, just trying to add little things here and there certainly not change anything, major.

Anne Fuchs: Okay, well, we've certainly been through an extraordinary – speaking of change - we have been through an extraordinary amount of change in financial services generally, as I mentioned to you earlier with the Royal Commission, and one of the things we've spoken about is the power of the mutual. The member-owned superannuation and is a big segment of the market, is obviously member owned or industry fund, we're profit for member here it Sunsuper, and it's turned out to be a huge competitive advantage. But tell us about the US landscape when it comes to mutuals and your learnings as Vanguard is probably one of the few mutuals that exist in the U. S.?

Gus Sauter: Yes. Among asset advisers, or asset managers, Vanguard is the only mutual structure in the US. Mutual or member ownership is common in the insurance industry in the US, but not at all in the investment industry. It's given us a huge advantage, though I think one that you experience here. We operate with no conflicts of interests. The we have one fiduciary responsibility instead of two. With a traditional manager in the US, they have to fiduciary responsibilities. One is to the members or the investors in their funds, the others to the owners of the management group, and so we don't have that conflict. We don't have owners of the management group. We just have members who are the owners of our firm. So that's been a huge advantage in that same time, It's also led to our low cost advantage being guarded by far or a the lowest cost provider in the U. S. Mutual fund industry because of our mutual structure.

Anne Fuchs: And what do you think in terms of trust in the finance sector in general? Where is it placed from, from a U. S. point of view?

Gus Sauter: Well, trust is everything when it comes to investing. If, if you lose that and we've seen that happen on a few occasions in the U. S., firms have been totally destroyed. When they've done something on toward that has led to a distrust. So, we think it's very, very important that you really focus on doing the right things for investors and do what's appropriate, to maintain their trust in you, your business is destroyed without it.

And it should be.

Anne Fuchs: Yes, it should be pays dividends if you actually act in a fit and proper fit and proper way.

Gus Sauter: There is no question about it.

Anne Fuchs: We've spoken about trust - I guess taking it a step further. You've arrived here from the States yesterday, and our Chief Economist, Brian Parker, is quite reserved, I guess, about market conditions and where we're heading. But we're here in little old Australia, even though he's in the big smoke in Sydney and I'm here in Brisbane. But you've arrived from the United States, which is still the heart of the global economy. What's your take on the next twelve months for any of our listeners?

Gus Sauter: Well, you listen to ten economists and you get eleven different points of view. I think it's more of the same there are two things that typically end a kind of growth economy. One would be inflation and the central banks moving to stop inflation. The other is exhaustion of spenders of consumers, and I don't see either of those happening now. So I think that the central banks, certainly in the U. S,. and throughout the world, will continue to be accommodative. Certainly, no need to try to stop inflation. The bigger risk, I think, might be actually consumers just becoming exhausted. We've been on a ten-year spending spree without pause, so I'm not so worried that I think it's going to cause an end to the growth in the market, in the marketplace or in the economy. But, you know, it's probably a bigger concern of mine and then inflation. But I think more of the same over the next twelve months.

Anne Fuchs: Well, I think before we finish up one question, it's probably a big one. If you reflect back on your twenty-five years Vanguard and then before that is there. Is there anything in particular that you're really proud of, in terms of the legacy you've left for investors, not just to have their money with Vanguard, but in a general sense. Whether it's around the people you've led, anything that you're incredibly proud of, that's your legacy?

Gus Sauter: You know, it's interesting. I worked for five different companies for a year or two when I first started my career out of school, and when I finally got to Vanguard, I realised literally in the first week that Vanguard was a very, very different company and I knew at that point in time that I wanted to retire at some point, not too soon from Vanguard, and the culture was extremely strong. I love the fact that we were actually working for investors for their benefit. It's a great feeling to think you're working hard, but you're helping people themselves. So I'd have to say that's probably the thing I'm most proud about is what we did for investors, not only in the US but what we've done globally as well as we've expanded internationally.

Anne Fuchs: I commend you on the advocacy around, you know, standing up for investors and the rights of investors. And the growth that you lead is unprecedented and certainly from a Sunsuper point of view, we're incredibly proud to share the partnership with Vanguard and the close relationship that we do have. Being privileged enough to go to Melvin in Pennsylvania and see it's a fantastic place and actually thrilled that you're here today in God's own country, as I call it, opposite Suncorp Stadium, and XXXX brewery here at Sunsuper. But to all our listeners around the country, Gus Sauter, it's been wonderful to have you. Thanks for listening.

Outro: This has been the New School of Super. For information and inspiration to help you plan your future, manager Super, and enjoy your retirement, visit Or if you've got a superannuation or investment question, you'd like Brian and Anne to discuss, then get in touch at for it feature in one of our future New School of Super podcasts.

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