The Future of Active Management

**Christine Kashkari** (0:07)
For a decade and more, index strategies not active have gotten most of the love from investors. While cash flows to index funds have topped 5.8 trillion, active equity funds have seen outflows of 2.5 trillion. But with the rise in indexing, are investors missing out on the potential value of allocating to active strategies? In this episode, we'll dive into the active index debate, how active is evolving and what it will take to beat markets in the age of AI.
Welcome to Season 2 of Better Vantage by Vanguard, a podcast series hosted by custom content from WSJ and Vanguard. I'm your host, Christine Kashkari, Editorial Director at WSJ Custom Programming. With me is my co-host in this series and our resident expert, Joe Davis, Global Chief Economist at Vanguard.

**Joe Davis** (0:56)
Christine, wonderful to be here.

**Christine Kashkari** (0:58)
Joe, the debate rages on.

**Joe Davis** (0:59)
Yes. Well, again, can't wait.

**Christine Kashkari** (1:02)
Today, we are joined by Jean Hynes, CEO of Wellington Management, the 1.3 trillion asset management company where Vanguard founder Jack Bogle got his start. Jean is going to talk to us today about how she sees active management evolving and what investors can do about it. Thank you for being here, Jean.

**Jean Hynes** (1:19)
I'm so happy to be here. Look forward to the discussion.

**Christine Kashkari** (1:22)
Yeah.

**Joe Davis** (1:22)
We're going to hear today from one of the great investors of past 25, 30 years. And Jean, as a portfolio manager, also leads one of the leading active managers in the world. This show is about outperformance, to build wealth. How can I find it?
Where do I go? We got public-private markets. And then, as you said, Christine, in the world of AIs, that headwind tailwinds. So again, I'm chomping at the bit, because we are lucky to have Jean in this chair, and the listeners are going to really benefit.

**Christine Kashkari** (1:50)
And I can't wait to get into all of that. So I also want to go a step back. We talked earlier about index funds rising. Can you talk a little bit about what the circumstances that brought that about?

**Jean Hynes** (2:00)
I think the rise of index, the real growth of index probably started right after the global financial crisis in 2010 They've been around for quite a long period of time, but the real growth of the market happened post that period. If I take a look back, running an asset management firm, an active asset management firm, one of the things I and our management team say, is there a place for us? Is there a role for us? I do think there is room within that for both active, passive, public, private.
And then we look at the context, because the context in the past 15 years is that not all active managements have produced returns that beat a benchmark.
That's been true for the vast majority of active management. And so why is that the case? So I think the argument is, is there something systematic or fundamental about the markets that don't allow active management to outperform indices? And I would say if you go to the short 15-year period, in the long, long history of the markets, I think there are two things that happened. First, after the global financial crisis, we had a lot of quantitative easing. We call it QE. In that period of this massive quantitative easing from governments around the world, you just had, when you have a lot of money, you had less dispersion. And the lower level of dispersion makes it more difficult for active managers to outperform. So that happened and that QE began to unwind post-COVID. Secondly, then, the last four or five years, you've seen this rise of very large companies and very large innovative companies.

**Joe Davis** (3:34)
Yeah, the MAG-7.

**Jean Hynes** (3:35)
The MAG-7, they've been called many things. And that has just resulted in, if you take sort of 25 being the pent up ultimate year, in just a very large percentage of particularly US indices that are concentrated in not only a small number of names, but a small number of names in a small industry, like a small sector. If you go back to the nifty 50 period in the 1970s, those 50 stocks were highly concentrated, but they represented many different industries. So what the unusual thing about the last couple of years is, it's even a smaller number of stocks, and it's also concentrated very much on AI and technology, but really on AI and the promise of AI.
And so it's very unusual in the history, in the context of the history of markets, to have that level of concentration. So the question is, will it continue?