Franquin: Our process is very collaborative, and we rely heavily on the feedback that’s funneled up from our regional trader teams, as well as checks from our risk management team. We work together to identify efficient ways to handle an index event—be it from a stock split, a change in index composition, or a rebalance. It’s essential that we understand the risks associated with each trade, across each of our portfolios. Taxation is different across nations, specific trades may affect certain national economies more than others, and our network of partners on the ground are unique from region to region. We use the combined knowledge of our teams to understand the risks of each trade, how each can affect portfolio construction, and if we need to be aware of any potential hedging bets from the arbitrage community.
Having people on the ground is a real advantage. Those relationships between our analysts and local brokers help us in many ways. They give us the power to recognize and realize a fair price of execution. They grant us a close-up view of volume and liquidity. They give us resources to effectively spread a rebalance trade over time, which can significantly decrease market impact. They help us identify attractive allocations to initial public offerings. In short, our relationships help us manage risk across the reality of the market. The way we execute a specific trade can add up to hundreds of millions of dollars in value across all of our portfolios.
We also manage a shareholder-friendly securities lending program, which offers an additional source of revenue for our investors. Vanguard has a conservative, highly regarded securities lending program. Our value-oriented approach generally restricts lending strategies to high-demand securities to earn a higher premium per transaction and minimizes risk because only a small portion of the fund’s holdings are on loan at any point in time. And importantly, 100% of all lending revenues, net of expenses, are returned directly to the Vanguard funds to enhance shareholder returns.