SD: There are investors who are inclined to seek alpha and there are some who aren’t. We believe in an actively managed approach because it gives you the flexibility to respond to changing market conditions.
Yields are low — every basis point counts. If we can generate a little extra income, that might be a reason to look at active. In a rising rate environment, active skill can be critical. Or in credit, we’re going through a patchy recovery, selection is key and active allows us to choose the best names.
BC: If you had to take risk, would you rather take duration risk, credit risk or illiquidity risk?
SD: We prefer strategies that have the highest information ratios. Part of our philosophy is to focus on diversified sources of alpha, rather than concentrated macro bets. The theory is that this results in compounding alpha and the best risk-adjusted returns over time.
Credit selection is a really good example of a high information ratio strategy where we have edge. We have outstanding teams of experts, a rigorous process, and it results in alpha generation that’s repeatable and reliable across macro scenarios.
As for illiquidity, there are reliable strategies that capitalize on market inefficiencies, and we have had some success there. The key, as we learned in March 2020, is to keep exposures to a manageable size and ensure that your portfolio is balanced and there’s plenty of liquidity overall. You can’t be too stacked in illiquid areas or you can get caught offsides.
To us right now, valuations are rich across the board. An environment like this is where we can really be differentiated because we have low fees — it gives us breathing room to take risk down when investors aren’t getting sufficiently rewarded. When spreads are tight, we take down risk, we go neutral, we generate dry powder to be deployed at more attractive levels later. We can remain patient while our high-fee competitors can’t afford to do so.
BC: When you were named a partner at Goldman in 2014, 14% of new partners were women. Have you noticed a shift in finance since then?
SD: In my 25 years in financial services, I’ve definitely seen improvement in diversity. Right now there’s really strong momentum. I’m super excited for the future, but I recognize, and we all recognize, it’s a marathon, not a sprint. On a personal level, I try to be visible and accessible as a role model. I feel strongly that it’s important to pay it forward and help others along the path where possible.
It’s been great here at Vanguard. We’re super focused on fostering a diverse and inclusive culture. Our differences strengthen our teams to make better decisions—we believe in the business case.