Given how frequently Sara Devereux emphasizes the importance of “alpha,” the last place you might expect she works is Vanguard Group Inc. After all, the $7.9 trillion asset manager founded by Jack Bogle is best known for making passive index funds mainstream—the exact opposite of trying to beat a benchmark.

Yet Devereux makes no secret of her plans to go on the offensive in active management as global head of Vanguard’s fixed-income group, a $2.1 trillion team she took over at the end of June after John Hollyer retired. When I spoke with Hollyer about Vanguard’s ambitions in early 2019, it had $413 billion in active bond funds. That figure has more than doubled to $1 trillion.

Devereux, in her first media interview since taking over as Vanguard’s fixed-income chief, told me she intends to press the firm’s low-cost advantage even further.

“Our goals at Vanguard are to help all investors, not just Vanguard investors,” she said. “So if by entering new active markets, we not only deliver strong performance—which we have—but we also drive fees down across the industry, we consider that a win.”

The prospect of ever-lower fees should make Vanguard’s rivals sweat. In late July, the Valley Forge, Pennsylvania-based money manager revealed plans for two new active fixed-income funds. The Vanguard Core-Plus Bond Fund, which is set to open to new investors next month, has an expense ratio of 0.2% for Admiral shares, compared with 0.48% for peers. The Vanguard Multi-Sector Income Bond Fund will have an expense ratio that’s about a third of its competition. That’s serious margin pressure in an industry where consolidation isn’t a matter of if, but when.

Devereux, a former partner at Goldman Sachs Group Inc., also discussed her outlook for Federal Reserve policy and whether real U.S. interest rates can ever turn positive. The interview has been edited and condensed:

Brian Chappatta: Let’s start with inflation. Is it just transitory or something more permanent? 

Sara Devereux:  Given the nature of the reopening—increasing demand in the face of supply-chain constraints and base effects—we’re in a period of elevated inflation. But we do believe it’s transitory. Vanguard’s forecast is for core PCE to finish 2021 around 4% but to track back down to the 2% area in the middle of next year.

This slowdown to 2% could be driven by decreases in pandemic-related areas, for example a reversal of price increases in used cars as demand eases and there’s resolution to supply-chain issues. We saw some of that in the latest CPI release. That’s core to our view of it being transitory. But we’re sensitive to upside risk. We’re watching very closely beyond the pandemic-sensitive components. In particular, we’re keeping a close eye on housing.   

We’re also keeping an eye on inflation expectations and wages. At the end of the day, we believe longer-term secular trends such as technology will weigh on inflation. But we acknowledge there is medium-term risk to the upside and a lot of uncertainty.

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