December 19, 2022
Michelle Louie, senior portfolio manager for the Equity Index Group for the Americas at Vanguard, discusses her dream job (hint: it’s here at Vanguard), the art and science of index investing, and how Vanguard’s index funds are powered by its people.
Louie co-manages several equity index funds, including Vanguard 500 Index Fund, one of the largest mutual funds in the world. With the Equity Index Group for the Americas, Louie is responsible for more than a dozen portfolios and more than $1 trillion in assets.
Louie: I have been a longtime investor at Vanguard. I grew up in a household with a huge emphasis on financial literacy. Even as a teen I could tell you the difference between a stock and a bond. In college, I majored in finance, but I graduated during the dot-com era, so I launched my career in IT.
With my very first paycheck, I invested in the Vanguard 500 Index Fund. But it quickly became clear to me that IT wasn’t a good fit, so I went to business school. At an MBA career fair, I found Vanguard and was offered an internship.
I find it incredible that I now manage the Vanguard 500 Index Fund portfolio—both because it was my first investment and because it’s the second-largest mutual fund in the world. I’m incredibly fortunate to be doing what I’m doing. I enjoy a close connection with the markets, and I have the honor of managing a team that works closely to drive investment outcomes for our clients. I can’t imagine doing anything else with my career.
Louie: There are a lot of myths about that. As index fund managers, we leverage technology and make data-driven decisions, but much of what we do benefits from human judgment. The process is part art and part science. There is a lot of value that comes from experience, and I have colleagues on this team who have been doing this job for 30-plus years. That kind of knowledge is advantageous during day-to-day decision-making, particularly when responding to unusual situations.
Trading, especially at the quantity at which we execute, is not as simple as hitting a button. The quarterly portfolio rebalances alone can be in excess of $100 billion for our domestic funds. We’re very thoughtful about our trading and how the decisions we make may impact the portfolio and the broader market.
We may decide to spread trading over time instead of simply trading when our benchmark does (typically the U.S. market close for the portfolios I manage), but we do so with a keen eye on the amount of risk we are taking. We are also thoughtful about the way we handle changes in the index—for example, when one company purchases another. Sometimes, there is an opportunity to add value around such events, so we leverage technology and data and pair them with human insight and judgment to add value for our clients on a risk-adjusted basis.
Louie: There are several factors that set our funds apart, and it starts with our team. First, our portfolio managers also act as traders. It’s a unique organizational structure in this industry, and it helps us gain efficiencies, be more productive, and manage risk. We work closely as a team to leverage our deep and broad knowledge of the benchmarks we track and the markets we invest in.
The experience we share as a team gives us the ability to respond to unusual situations, whether it’s the volatility of the past few years or the addition of a huge company like Tesla to the S&P 500 Index. Tesla was a $15 billion trade—the single biggest name we’ve ever traded. That’s the type of transaction that you want a seasoned, tenured professional to handle!
Beyond our structure, there is something special about the way our team members support each other and believe in our collective mission of creating investor value. I love it on a personal level, but from an investor’s standpoint, our organizational structure creates more efficiencies and our team approach helps us to surface the best ideas and drive better outcomes for them.
Vanguard is investor-owned, which means our interests are aligned with those of our investors. As a team, we do everything we can to provide the best investment experience for Vanguard shareholders. Our objective is to track the benchmark, but if we can return value to temper the impact of a fund’s expense ratio—Vanguard’s average is just 0.09% as of December 31, 2021—we will do so. Our scale is an advantage, but at the same time we run a lean organization. We’re a small group considering how much money we manage. To track tightly, we review and assess portfolio risk, performance, and trading strategy and executions daily.
Louie: Securities-lending revenue, net of program expenses, is returned to the funds. This allows us to add additional value for shareholders. Still, we’re conservative with our lending and collateral reinvestment practices—our best-practice range of gross securities lent is far below the range specified by loan regulations.
We find we’re able to collect the most significant lending margin by specializing in difficult-to-borrow securities. We focus on lending stocks that are very much in demand, usually due to either short supply or high volatility.
Louie: There is great value in the combination of portfolio diversification and very low cost, which are two of the fundamental tenets that Vanguard index funds are built upon. It’s impossible to predict the market, which is why I am an indexer. That said, there is room for active investments if they are a good fit within an investor’s portfolio—given, of course, that they are offered at a low cost.
Note: This interview was edited for length and clarity.
For more information about Vanguard funds, visit vanguard.com to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectus; read and consider it carefully before investing.
Vanguard is investor-owned, meaning the fund shareholders own the funds, which in turn own Vanguard.
All investing is subject to risk, including possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss.
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