The future of active management

Christine Kashkari: 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: Christine, wonderful be here.

Christine: Joe, the debate rages on. 

Joe: Yes, well, again, can't wait. 

Christine: 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: I'm so happy to be here and look forward to the discussion.

Joe: We're going to hear today from one of the great investors of the past 25, 30 years. And Jean is a portfolio manager and 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’ve got public/private markets, and then as you said, Christine, in the world of AI, is it a headwind or tailwind? 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: And I can't wait to get into all of that. So, I also want to go a step back and talk about the rise of index funds. Can you talk a little bit about what the circumstances that brought that about? 

Jean: 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 there is 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, 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, and that 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: Yeah, Mag 7. 

Jean:  The Mag 7, they've been called many things, and if you take sort of 25 being the penultimate year in just a very large percentage of, particularly U.S. 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 the 1970s, those 50 stocks were highly concentrated, but they represented many different industries. So 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 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? 

Joe: Yeah, sure. So brass tax for the listener. They're at their computer screen, and they see all the list of these active ETFs and mutual funds. How do they go about saying, “I want to find the top third? What are some of the criteria that I should be looking for, say, ‘Joe, don't focus on that, focus on this.’ What are the questions I should be asking, whatever it is to help me pick because the reward is there.” 

Jean: All great investors have underperformed. It’s not possible or feasible to do well every day. So, what you really are trying to look for is a firm and then the managers that over time, and I would say the shortest time period should be five years.

Joe: Really? OK.

Jean: That's really where you can begin to really differentiate skill. 

We, at Wellington, all our investors are paid over mostly three- and five-year performance. So, really trying to align it with our clients perspectives. So, how do you elongate your time horizon to really find those managers that are actually really skilled. So that would be one piece of advice I would give your clients.

Joe: Makes differences. Was anything in the next level down so, let's say you deliver that return. Is it research, is a process? 

Jean: So maybe I'll talk a little bit about what Wellington focuses on. At heart, Wellington is a research-based firm. So, we have a long, long history of deep, differentiated fundamental research. We have global industry analysts that spend 20, 30, sometimes 40 years following an industry. 

I followed the pharmaceutical and biotech industry. It was a privilege of my life to do it for 30 years. I know every disease, how it's treated, and how it will be treated in the future. 
Most people who are listening might have had someone who's had one of the anti-PD-1s for cancer. The drugs that have really, if you have Melanoma or have non-small lung cancer, your loved one might be alive today because of those drugs—the largest category of cancer today. 

If I go back to 10 years ago, a little bit more than 10 years ago, and the ability to meet with scientists that spent their whole career, probably 30 years studying anti-PD-1s and studying that part of the immune system and having access to those brains—that's the level of depth we get into when we're trying to figure out: Is this going to be an important new medicine that's going to change the course of how patients are treated? 

That's what I did every day of my professional career. And so you just accumulate immense knowledge about what is the basis and that how it might change. And if we can figure out, based on that research, how the world is going to change—it's a tall order—then hopefully that gives us a really good chance of generating insights that lead to positioning that leads to alpha in the portfolios. That's what we're trying to do. 

Christine: Jean, I love that story that you shared earlier about how your own mother would go to you versus your cardiologist brother for health questions. 

Jean: Well, I'm going to tell you, I have a brother who's a cardiologist, and hopefully he's not listening to this. But my mother had to like inquire, her nurse practitioner asked her about a cholesterol medicine. 

I will say it's when my brother had just graduated to being a cardiologist, and my mother said, “I'm going to go ask my daughter about this.” The nurse practitioner said to her, “Don't you have a son that's a cardiologist?”

But, I knew a lot about drugs. I knew a lot about drugs that were new. So, there's a lot of depth. 

Christine: So Jean, I'm curious whether it's your models or the way that you do your research, how is AI upending all of this? 

Jean: It's quite exciting, and it's very, very interesting time in the market. 

There's only two paths from here. 

Joe: Boom.

Jean: Because of that concentration in one industry, either AI will not develop as those companies hope, and it will not be sort of the breakthrough technology that we think it could be, and those earnings will never materialize, and they're fundamentally overvalued companies, and you'll get dispersion and breath in the indices because of that. 

Or, the technology will be broadly used across every company in the world, and there will be benefits to that. And then you'll have earnings coming from companies that maybe are at lower PEs or lower valuations.  

I suspect it's going to be the second path. 

I was at a conference earlier, late last year, and one of the things: don't think about it as the internet, think about it as electricity. And I think it's a really good analogy. We use the Internet, but it didn't change our business model at Wellington. It changed certain parts of industry's business model. 

AI could change everyone's business model. So you can imagine that our analysts and portfolio managers are asking companies and CEOs and CFOs: how much are you investing? How are you doing it? Are you building it? What tools are you using? How is it going to change what you do? Are you innovating from it? 

So, I just think either way, we've had this period, like I said, of QE, and of this concentration that's been a more difficult backdrop. It's been a headwind for active management. And I think we're entering a period of just so much more change that it could be a tailwind for active management and maybe even a renaissance of active management in the next period of time. 

Joe: Let's extend it a little bit in terms of, you mentioned even in your comments, around private,  investment. So let's talk about private equity. I’ve got my public equity—active and passive index funds—and then I’ve got my private equity allocation.  Am I thinking about that wrong? 

Jean: The two major trends in the asset management industry in the past 15 years have been the rise of passive and the creation, really, of the private market. Predictions are it will grow to $30 trillion. So the question is: How do you have access to that? 

The vast majority of people don't have access to the private markets. I think that will change in the next decade. Twenty-five years ago, everyone had access to the economy, the growth in the economy, the lending of the economy, the drivers of economic growth and vitality. You could access that through the public markets and just the way companies are staying private. They're not choosing to go to the public markets. 

All of that means that investors are missing out on aspects of growth in the market. So. I think that will be the biggest change in the next 15 years: How do individual investors get access to private markets, and how do you get access to that excess growth? 

Hopefully, because they're at a stage where they're creating a lot of value, and you have to give up some liquidity for that. So that would be something that individuals will have to become educated on: At what percent can you tolerate having less liquidity to get access to the sort of higher returns that private markets have shown? 

Joe: Yeah, we talked a little bit about that last year, right, Christine, with private equity: Isn’t it just an extension of active, is it just as bullish there, or is there something separate I should be thinking about, does the structure matter more? 

Jean: One of the interesting things—the areas that we're investing in the privates are like an extension of our public. So, I'll give you an example. When I followed the biotech and pharmaceutical industry, over my 30 years of following it, there was probably 5% of the companies were private. Most of the companies were public. That has really changed. 

So, if you take the last 10 years, the number of private biotech companies has really increased. And so, for us, if we're going to follow the public markets, we better know what's happening on the private side. So, that's why having this continuum of private to public—large pharmaceutical companies will do a deal with a private company. We often have an advantage because we know that private company, so we know, is that a good deal or not a good deal? 

Joe: I don't want to put words in your mouth, Jean, but if I'm looking for good active managers, do they have the ability to pursue that active management, because I'm thinking structures. So my small world, I'm thinking structures. I got my little active equity box. I got my little private equity box as separate. You're saying, no, it's a continuum. 

Jean: It's a continuum. It's a continuum of value creation. You have to know that part of the economy to be able to be great public investors as well. 

Joe: I'm listening to you as one of the best active managers, at least in my career. I've been in the business and your track record speaks for itself. So, for those that are listening, what was your secret to success? Because great investors in the data are rare. They're rare. And then, other advice for the broad investment community. What, if anything, could you give as a little guidance for someone? 

Jean: So maybe I'll just do a little bit about my personal background…

Joe: Because I'd love to hear it, apologies, whatever you're comfortable with.

Jean: My parents are Irish immigrants, and my father was a bricklayer. My mother raised six children. We did not talk about stocks at the dinner table. And I remember being at Wellesley College my first year, and it was the crash of ’87.  A lot of my classmates were talking about it and would they have tuition? Would they be able to pay their tuition? And I was like, what is the stock market? 

I just happened to get a job at a brokerage firm and that was my introduction into the markets. I really was quite interested in what was happening: Why were stocks going up and up and down? I could verbalize that as I left college, and that's how I found my way to Wellington. 

So, I would say a couple of things that have allowed me to be successful. One, I had an amazing mentor, Ed Owens, who ran the Vanguard Healthcare Fund until he retired in 2012. He might be one of the best 15 investors of all time. I learned from one of the best. So that created a real discipline about what it meant to really know that industry. 

I often say in our company, one, can you generate insights from information? Not everyone can do that. There are really smart people that can't generate insights from information. Two, can you act on those insights? And then three, can you construct portfolios around those insights? 

Those are three different skills that take time to develop and build. You're not going to be a great portfolio manager if you don't know how to generate insights about the world. Even if you can generate insights, if you can't say, “This is the time to buy or this is the time to sell,” and act on it. Become a risk taker. You have to be humble enough to know that you don't know everything. 

But then you have to be resilient. If you're not resilient enough to withstand periods of underperformance or uncertainty—because if you're certain, if everything is certain, there's no opportunity. 

Christine: Jean, on that note, we are so privileged to have you here. Thank you so much for spending the time and sharing your deep expertise and background with us. 

Jean: Thank you so much for having me on. 

Joe: It's a pleasure, Jean. I think we got to some of those edge listeners. 

Christine: That's research edge for you, thank you.

And thank you, everyone, for joining us today. We'll look forward to having you join us for our next episode of Better Vantage by Vanguard. 

If you enjoyed this episode and found it helpful, subscribe and share. 

Notes:

*Source: Kerzérho, Raymond, “The Passive vs. Active Fund Monitor,” PWL Capital, 2025.

Private investments involve a high degree of risk, and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.

Visit Vanguard.com to obtain a Vanguard fund prospectus, or, if applicable, a summary prospectus, which contains investment objectives, risks, charges, expenses, and other information; read and consider carefully before investing.

Disclosures:

All investing is subject to risk, including the possible loss of principal. Diversification does not ensure a profit or protect against a loss. Bond funds are subject to the risk that an issuer will fail to make payment on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments. Investments in stocks or bonds issues by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets.

Past performance is not a guarantee of future returns. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.  

Trading in cryptocurrency ETFs and mutual funds may involve significant risk and may not be suitable for all investors. 

Private investments involve a high degree of risk and, therefore, should be undertaken only by prospective investors capable of evaluating and bearing the risks such an investment represents. Investors in private equity generally must meet certain minimum financial qualifications that may make it unsuitable for specific market participants.  

Vanguard is owned by its funds, which are owned by Vanguard’s fund shareholder clients.