Vanguard CEO Tim Buckley spoke encouragingly about the world’s response to the outbreak of coronavirus that has left much of the global economy in stasis or dying on the vine.
While there were reasons to worry or despair, Buckley noted in a Thursday Vanguard roundtable discussion that billions of people cooperated to disrupt lives, close schools, cancel events, work from home and otherwise isolate themselves just to keep each other healthy and safe.
“I think we’ll remember those great moments more so than the really challenging ones,” said Buckley. “This has been one of the most encouraging years of my lifetime.”
But Buckley also believes that “challenging times are ahead” for markets and the economy, and investors will be relying on their financial advisors to see them through the problems.
The Value Of Advice
Advisors have already demonstrated some of that value to their clients, said Tom Rampulla, managing director of Vanguard Financial Advisor Services, by keeping them away from timing the markets. Trying to time the U.S. stock market bottom, which happened on March 23, could have prevented clients from enjoying the recovery rally that occurred in subsequent months, he said.
This value was demonstrated when advisors were forced to adopt virtual communications to help clients stay on course, said Rampulla. “You had to engage with clients to protect them. I’m blown away by the adaptability of the business model,” he said.
Rampulla said that about $2 trillion of Vanguard’s $6 trillion assets come from the recommendations of financial advisors.
“Just being there for clients is really important,” he added. “Advisors can serve clients best by being their emotional circuit breakers. Be present. Reassure them.”
Rampulla noted that advisors will have to treat newer clients differently from older, well-established clients. While established clients are likely to reach out to advisors when market or economic concerns arise, advisors will need to be more proactive and reach out directly to newer clients who may be reluctant to initiate contact.
Technology Is Ascendant
Of course, during the Covid-19 pandemic, most of this communication will have to occur virtually using technology, said Buckley, affirming the industry’s long, slow move towards adopting virtual models of providing advice and managing firms.
“They [virtual models] will probably take off coming out of this crisis,” said Buckley. “They were adopted by advisors to help them scale better, but now virtul models are being accepted by the broad consumer out there.”
Rampulla added that some clients will still prefer to be served with face-to-face advice, especially on personal issues, but that “being able to do both is definitely a plus from a competitive advantage perspective.”
Advisors are going to have to find ways to be more engaging in their virtual interactions, said Rampulla, or clients and prospects will tune them out, or even move to another provider.
He cited data from a recent Vanguard study showing that 87% of retail investors have received some level of support virtually, with most (90%) saying video conferences and meetings with advisors was “as good or superior” to other modes of meeting and communicating. And 30% said that they would want to keep most of their interactions virtual.
“You’ll see a shift to virtual, and we’re all going to have to make that shift,” said Rampulla.
Most of this shift was already underway, said Buckley, but it was accelerated by Covid-19.
Rampulla added that Vanguard is working on a new business-to-business application of its digital advice offering, which allow advisors to offer their clients the power of a Vanguard roboadvisor to their clients for the first time. The company has been piloting this new platform over the past six months with “a couple dozen” advisory firms.
“We’ve built our digital business to scale,” said Rampulla. “We’re taking the technology of that platform and rearchitecturing it so we can make it available to you, our clients.”
Rampulla added that Vanguard has no designs to get directly into the RIA custody business at this time.
The Road Ahead
Buckley and Rampulla also outlined Vanguard’s mid-year market and economic outlook. The firm expects the recovery from this point to be proteracted and slow, with GDP growth not returning to its normal long-term trend until “well into 2021.”
“I think we’ll see a two-phase economic recovery, and we’re already well into phase one,” said Buckley. Phase one includes the gradual reopening of storefronts, restaurants and other businesses in limited capacity—which will prevent many small businesses from making a profit. “Phase two recovery is when you actually start to see demand start to surge. We believe that fear is going to prohibit a full recovery.”
Vanguard expects a 15% chance of an upside surprise like an earlier-than-expected widely available vaccine or herd immunity or successful new therapeutic treatments that mitigate long-ter health outcomes.
On the other hand, there’s a 35% chance of a downside risk coming to fruition, including resurgence of the virus requiring additional shutdowns, a mutation into more virulent forms, or delays in the development of vaccines, he said.
Vanguard’s baseline forecast, which it gives a 50% probability of coming to fruition, includes a gradual, staggered return to work, local recurrences of the virus that can be suppressed, nervous consumers avoiding highly social activities and an effective vaccine widely available in late 2021.
“it always comes up, what shape is the recovery, a V, W, or U?” said Buckley. “Some people call it a swish. I would say that the recovery is gong too have the shape of the virus, it’s the only shape that matters. The virus is unpredictable, it can mutate and undermine our vaccine efforts, which would be a huge setback, but it can also weaken. With that type of uncertainty, it helps for people to stay diversified.”
Equities seem “fairly valued,” said Buckley, who added that over the near term Vanguard expects 4%-6% annual returns from U.S. equities and 7% to 9% returns from international equities, with fixed income also fairly valued but offering more muted returns.
Investors in well-diversified ETFs and mutual funds should fare well, said Buckley.
Lessons From Retail Customers
“What doesn’t make sense is the euphoria surrounding some individual compabies and the mentality you’re seeing from many new investors,” said Buckley. “Al of these free traading platforms… it reminds me so much of 1999, people think ‘I’ll find something that’s always going up,’ it’s like that dot-com bubble, and those kinds of lessons are hard to learn. This is a time for diversification and discipline, not figuring out the individual winners. There’s way too much uncertainty out there.”
Vanguard noted that trading among its retail investors had been elevated since U.S. markets reached record peaks on Feb. 19. In the first 22 trading days since that peak, 16 were among the highest U.S. household trading days since the company started tracking that information in 2011.
Still, only about 8% of Vanguard self-directed households made trades between Feb. 19 and March 20, and half of those only made one trade. Most of these trades—about 70%—were moving money into equity, but since Feb. 19, Vanguard has experienced “modestly positive” flows into fixed income.
Most of this trading is being conducted by affluent households with multiple types of accounts. Vanguard customers with only a defined contribution plan traded the least out of all segments.
“Our investors walk our talk, the whle idea of staying the course,” said Buckley. “From february to the end of May, about 20% of investors panicked, sold equites and went to all cash and bonds. At Vanguard, 90% of our clients didn’t do anything at all. Seven percent actually did what Tom said he needed encouragement to do: rebalance into the storm. Only 0.4% actually panicked and went to all-cash or all-bonds.”
During the first quarter of 2020, younger do-it-yourself investors and those with high allocations to equities suffered the worst losses.
Older investors, who were more likely to carry larger fixed income allocations or even adhere to the oft-maligned “balanced” 60/40 stock/bond portfolio, fared much better, which to Buckley proves the enduring value of balanced strategies.
“I’ve heard people question the 60-40 portfolio mso many times, and I think they get confused,” said Buckley. “Bonds are supposed to be there as the ballast, and equities act as the sail that drives you forward. So 60% drives growth, while 40% stabilizes you and provides balance. That rule hasn’t changed. 60-40 is alive and well.”