Madhav Rajan:
Good evening everyone. Hope you're all having a great summer. Thanks for taking the time to be with us today. I'm thrilled that you could be here as we welcome Booth alum Gus Sauter, formerly of Vanguard, currently CEO at social media startup BrandEmPower to today's Distinguished Speaker Series event. The DSS series, of course, is a longstanding Booth tradition. We bring high profile leaders from business, from the government, from the community to come to this forum, to share their insights and experience. And I would say the virtual DSS is something that will stand out as a positive of what we learned during COVID. So, we switch to these virtual series at the beginning of the pandemic.
And in the beginning, we were trying to figure out how our alumni and their companies dealing with COVID. But the series was such a big hit, and we've been able to reach so many people through it, so, we've continued it in the virtual format in the last couple of years. We've had lots of great leaders come on: Tom Ricketts, Jenny Scanlon, JP Gan, Ann Mukherjee, Jose Antonio Alvarez from Santander, just a whole host of people from all over the world. And it's wonderful to be able to introduce today's distinguished speaker who many of you probably know or have heard of. So, Gus George Sauter, we call him Gus, serves as CEO at BrandEmPower, which is a startup in the social media space, centered around college athletes and their financial needs. Prior to that, Gus spent 25 years at the Vanguard. He was the first global chief investment officer, retired from that role at the end of 2012.
And as CIO at Vanguard, he was a member of the CEO senior staff, and he oversaw portfolio management of about $1.7 trillion of internally managed stock, bond and money market funds. He was also a member of the investment committee that oversaw the portfolio management for the external advisors that Vanguard uses. In addition to the stuff he has done with Vanguard, Gus had a huge impact on the industry. He worked on industry issues with the SEC, the Federal Reserve, has testified to Congress. He's also been on lots of industry committees, the ICI’s Trading Committee, the NYSE, Institutional Advisors Trading Committee, NASDAQ Quality of Markets. He was on the PCAOB Investor Advisor Group, and many, many other things.
Currently, Gus is a CEO of a startup, which we'll speak about, and he’s also on six investment committees, including an endowment, an investment advisor, an Australian retirement fund, FINRA and the PGA of America, which we'll be sure to talk to Gus more about. He's a former member of the Booth Advisory Council, writes articles for the Wall Street Journal online edition as a member of the Experts Panel. And earlier this year, we honored Gus with the Chicago Booth Distinguished Alumni Award in the corporate category. Gus, thank you very much for joining us today.
George Sauter:
Oh, thank you, Madhav. I'm happy to have the opportunity.
Madhav Rajan:
So, we have a lots of topics we can chat about, but maybe we could just start by asking you to say a little bit about your career journey. Was this all planned out? How did it sort of work out?
George Sauter:
Virtually, nothing was planned. After going to UChicago, I started working for a local real estate firm. It’s a national firm headquartered in Chicago, LaSalle Partners. Worked there for a couple of years and then moved on from there. And I had a good friend from my days at Chicago, good friend, Chris Dialynis, who was working at PIMCO at the time, and he kept telling me that I needed to get into the investment business. And it was a really the love of life anyways. And I hadn't really pursued that direction, but he talked me into it. He was thinking I might come out to Newport beach and join him at PIMCO, but who wants to move to Newport Beach? I decided I'd move to Ohio and tried to get into the investment business.
And so, I ended up working for a regional bank in Ohio, and I worked there for a couple of years. And I had a good friend in college at Dartmouth, who was actually at the time, he was soon to become the president of Vanguard. So, he talked me into going out to Vanguard, which turned out to be a great opportunity. And I started off running the very small equity group, which consisted of basically one index fund. I was hired to both develop the index fund and also the active quant funds as well. And then as you mentioned in the intro, I served on the investment committee overseeing the external managers. We had about 35 different external managers. And I had an opportunity to be on our CEO’s senior staff my last 15 years at Vanguard. And then as you mentioned, I became CIO my last 12 years. We’d never had a CIO before. I was running the equity department and the head of the fixed income retired and so I got fixed income as well. And then I retired about a decade ago, and as you mentioned, I've been doing a lot of work on investment committees and recently I was pulled back into the workforce by a friend that I met through the Dean's Council at the graduate school, and so now we're co-founders of this new firm that we're trying to get off the ground. Still haven't launched yet, but that's the nutshell version.
Madhav Rajan:
Right so to the audience I wanted to say, as always, the more interactive we make it the better, so I have a bunch of questions that many of the registrants sent in advance, but feel free to put in stuff in the Q&A box, and I’ll sort of weave them into the discussion with Gus. So again, please feel free to send in questions and I'll sort of take them as they come. So, one of the things I wanted to chat with you, something our alumni and students always want to know, Gus, is like, how did your time at Chicago influence your career and sort of, the arc that you had afterward?
George Sauter:
Well, I loved my time there. It was a great opportunity for me. I love the academics and the investment side, you know, finance, obviously, has always been a hallmark of the University of Chicago. So, it was a great learning experience for me,and it did prepare me for my ultimate career that I should have gotten into to begin with, you know, investing. One of the jobs I mentioned that I had at a regional bank in Ohio, I sent letters to every money manager in the state of Ohio, which there's not a big list, but I got a call from the head of the trust department at a regional bank. And he said, "Well, we don't really have any jobs, but I see that you went to the University of Chicago and have your MBA from there." He said, "So, you know, I’d love to just have a cup of coffee with you." And so I said, "Sure, I'll be up tomorrow,” and talked to him. And the next day he said, "You know, we'd like to extend an offer to you." But it was only because I went to UChicago that he even gave me a cup of coffee.
And then, but I felt that Chicago had really prepared me for that opportunity. And then the same thing when I got to go to Vanguard; it was because I had been developing a quantitative money management model at the bank, and Vanguard wanted to develop active quant capabilities within Vanguard, and at the same time build the index side. Indexing is basically passive quant. And so, I'd say that UChicago prepared me for really, every step of my career post the Chicago days. And then, you know, also it created a network of alums and classmates that I've kept in touch with. And that's also helped me throughout my career.
Madhav Rajan:
So, one of the things that some of those may not know is that Gus is the reason that we have CRSP at Chicago, the Center for Research and Security Prices, become sort of an indexer. And many of you may not know, you know, several of the Vanguard domestic equity funds are tied to indexes that we maintain at Chicago Booth. And I think the dollar amounts of those that we actually oversee are staggering, and we owe that all to Gus. So, maybe Gus you could just speak about what was some of the issue going on when you were CIO at Vanguard? What problem were you trying to solve, and why did you think about Chicago Booth as the place to come to for that?
George Sauter:
So, there are a number of index providers, you know? And you know, there are five or six or seven, that are really high-quality index providers. But they, while creating an index, there's a lot of moving, blocking and tackling that you have to do, but it’s not that much different from one index to the next. Yet, everybody wanted premium pricing. We had to pay royalties in order to use an index. And those royalties were staggering. I mean, in the nine digit range. So, you know, we looked at it and said, "We can create indexes ourselves." You know and again, it's not easy, but if you do the blocking and tackling right, you can get it done. And we thought, well, you know should we be spending hundreds of millions of dollars to use various index providers’ indexes? Or should we figure out a different strategy?
And so we had our in our back pocket was, if we need to, we'll create our own. But at the same time, I really didn't want to go that route because I think there's an advantage to have a third party provider. It just seems a little odd if you're tracking your own indexes. So, you know, I thought of various entities and we approached a few. And since CRSP had been at Chicago for forever and had, you know, the security data going back to, I guess, 1926 or something, it seemed like time started in 1926. You know, it seemed like, well, CRSP would be a natural for us to approach. And I happened to be on Dean's Council at the time with Ted Snyder. And so I spoke with Ted, and he was interested in the opportunity, and we decided to go ahead and work together. And work something that worked for the school without being overly expensive for us. I mean, I think it was fair for both parties involved.
Madhav Rajan:
And would you say that has worked out from Vanguard’s standpoint?
George Sauter:
It's been great. You know as expected, the indexes are high quality. Lubos Pastor and John Heaton worked as academic advisors to the creation of those. And they spent a lot of time, and a lot of thoughtful work went into creating the indexes. And, we worked closely together in the development of them, but, you know, they were ultimately the people that were the architects. And as I had anticipated, they’re high quality, which was absolutely a requirement. We weren't going to pay less to get lesser-quality indexes. So they worked out very well, being very high quality, as high quality as you can find in the industry, at a reasonable price.
Madhav Rajan:
Yeah, for those interested, I mean, a few months ago, the Wall Street Journal had an article, right? On the Total Stock Market Index Fund, which is run through CRSP, and they titled it “the Index That Ate Wall Street,” or something. So, it's a great article about the history of CRSP and Vanguard and how the relationship has begun. But again, we hold that all to you. Thank you for that. So, another thing, which is a huge distinction that you created at Vanguard, was that this notion that you could have ETFs, which, you know, back in the day, when you did this, there was unknown quantity or a new quantity to set up the ETF as a share class of the mutual funds at Vanguard, and Vanguard now has, I don't know, 70 or whatever of them. And many of you may not know, Gus actually holds the patent for that. So, maybe you could just speak about how you thought about doing it and what was the whole impetus there?
George Sauter:
You know, I guess we're all a product of our environment. And I started at Vanguard October 5th, 1987. You might recall that two weeks later, October 19th was known as the crash of '87, which was a scary situation to be running a small equity group at the time, and it left a mark on me. So, I was always concerned about the integrity of our funds. We had some outflows during the crash of '87 and we had to go into the marketplace. Marketplace was frozen, but yet we had to execute trades to be able to fund the outflows. And in the summer of '97, let's see, the fall of '97, we had what was known as the Asian Contagion. The summer of '98, we had the Russian debt crisis. And I was just having a flashback thinking, you know, like, "Geez, what if we had another crash like we did in ’87?" In ’87, we only had a billion dollars in the funds, but by '97 or '98, we had hundreds of billions of dollars.
And if we had, let's say 5% of the funds pull out, we've got to liquidate billions and billions of dollars. So, I started thinking about, well, how could we insulate the funds from that impact? And so, I started thinking about, well, most of index providers or index investors, are very long term investors, when, if you look at the holding periods of index investors, it’s much longer than for actively managed funds, even Vanguard's actively managed funds. So, the good news is, we've got long term investors, but the bad news is, there are some that probably aren't so long term. So, I was trying to think of a way that we could get those people who wouldn't be so long term out of the funds without impacting the funds, and that's really what started me thinking about, "Well, if we had another share class of the same fund, but it trades on the exchange, same fund, it just comes into the fund through a different door and leaves through a different door."
But the beauty was that since it traded on an exchange, it had absolutely no impact to our fund. And that's really what the genesis was to create it. It took us a couple years to get it through the SEC, because we were going to put it on what was then the world's largest fund, our S&P 500 Index Fund. And it took me nine months of thinking about it because I feel like world's largest, I think they're in the same boat. So, it took them a long time to approve it, but we finally got it through. And then subsequently got some patents on it.
Madhav Rajan:
Yeah, and so, a couple questions. So, one, some people may not know, but back in the day, Vanguard was not a big fan of ETF, right?. And so, did this sort of change their whole perspective on it?
George Sauter:
Well, Jack Bogle was not a fan of, and Jack Bogle's the founder of Vanguard, is not a fan of ETFs. Nate Most was probably the man known as the godfather of ETFs. And he came into Vanguard twice, and Jack kicked him out of his office twice. That's going back to the late '80s and early '90s. And then subsequently he went to SSGA, State Street Global Advisors, and they started the first ETF, the SPDR contract. So, Jack really, really hated the concept of ETS. His view was, if you create trading instrument, people will trade it. And that was antithetical to what we were trying to accomplish. We wanted long-term investors. My view's a little bit different. I've felt we should have an avenue for investors to invest in the fund, through the distribution channel that they wanted to invest through
So, some investors only deal through a broker, and now this gave them a way to get into our funds through the brokerage relationship. And Jack always took a vacation to lake Placid every year, for the month of August. So, he'd be gone for the whole month of August. We had worked on this for a couple of years inside Vanguard.s Jack was retired, but he still had his research center in our offices. And he came back and from his vacation, it came out in the press while he was on vacation, that we were doing this. And we were about two years into it. We hadn't launched yet. And I remember, we had one building where most people at Vanguard have lunch and you can enter from the second floor or the first floor. I didn't realize he was over the balcony of the second floor. I went into the floor down below, and all of a sudden I heard Jack bellowing, “Gus, what the hell is going on around here?” And so I said, "Hey, I welcome back Jack." But yeah, Jack wasn't a big fan, and it took a little persuasion internally to get people on board, but our board was wildly in favor.
Madhav Rajan:
Yeah, and I think that, you know, the results speak for itself, right? I mean, it's crazy how well Vanguard has done. And it's honestly, if they hadn't done it, as you've said, the things could have been very, very different, particularly with the rise of, you know, iShares, if you will. So, one of the questions on this, you know, the patent expires next year, right? So actually less than a year in May of 2023. What do you think will happen at that point? Will that have a big impact?
George Sauter:
So, I think it's an opportunity for existing funds, funds that want to be able to distribute. I look at ETFs as just a distribution channel. People say, "Oh, it's a new product." It's not really a new product. It's a mutual fund that trades on an exchange. So to me, it's a different distribution channel. And if you have, let's say an active fund that is 15 years old or 30 years old or whatever, but you've really only had the mutual fund channel to go through, this opens it up to being able to trade on the exchange and then basically any investor in America can have access to your fund. So, I think it might be attractive to basically, larger, existing, active funds. And over the years, we did have various fund groups ask us about licensing them,and we got into discussions with several different possibilities, but nothing ever came of it. So, it'll be interesting to see if now that the patent expires, if there will be people pursuing that route.
Madhav Rajan:
The other thing happening in that space is some funds including Dimensional, I mean, converting their mutual funds to ETFs, what's the impetus behind that?
George Sauter:
You know, I think it's the distribution channel. So, right now there are a lot of people who really wouldn't go to a traditional mutual fund. If you have to go through the traditional route, they just don't want to do that. They, you know, if you're using, maybe you have investments with three, four or five different mutual funds, you may not want to have, you know, five different mutual fund companies that you're dealing with. You might want to deal with your broker that has access to all five of them, and you get one consolidated statement. So, it's really an issue about distribution and maybe ease of administration for the investor.
Madhav Rajan:
Thank you. So, we had one question from the audience about indexes. We had talked about, you know, CRSP providing the index for Vanguard. The question is, I think the spirit is, is there much distinction across indexes? So, what distinguishes one index from another in your view?
George Sauter:
Well, you know, in my view, indexing is really investing in a total market, and I've actually gone back to some writings at UChicago because it was largely developed at the University of Chicago back in the '60s. And in looking at it, the discussion was really about trying to get the market rate of return. It wasn’t, you know, let's get the growth market, or you know, the NASDAQ market or anything like that, it was get the market rate of return. So, as a purist, I think that's what indexing is. It's getting the broad market rate of return. And quite honestly, that's probably the easiest index to track because, you know, the broad market is what the broad market is. You have to be able to keep on top of all the corporate actions. So, it's not like you can just create the thing and then go to sleep. There's a lot of blocking and tackling every single day, but the total market indexes will be quite similar, and in fact, they provide very similar returns.
The ones that are more differentiated are when they try to cut up different segments of the marketplace, and the way I look at that is, my terminology, I would say that's a passive investing, a passive way to actively invest. In other words, you're taking an active bet on a segment of the market. You're not taking a bet just on the market, you're taking a bet on, let's say, the large cap growth segment of the market or whatever it might be. That's an active bet. Like, you’re betting against value stocks. You're betting against small cap stocks. But I view that as being passively implemented, as opposed to indexing, a slight difference in terminology. And in fact, DFA Dimensional, they call themselves passive managers. They don't call themselves indexers. But that's where I think you really can get differentiation because how one person defines growth can be very different from the way another person defines growth. And interestingly, those aren't definitions that come out of academia. You can't really just say, you know, here's growth. I mean, we kind of think of, well, if earnings are growing fast, but that's a growth stock, but there's no hard and fast definition. And really the best way to tell if you've got a good index, is if it actually tracks pretty well how active managers are doing in that space. So, Morningstar pulls together managers into the nine Morningstar Style Boxes, and you can see how your indexes track relative to the managers in those style boxes. The indexes typically outperform those managers on average, but because the indexes don't have costs, the managers do. But that's really the gauge of a good index is, is it really doing what active managers have defined as these various investment styles?
Madhav Rajan:
So, there are a couple of questions that have come in about indexing in general. One, let me ask, the question, it relates to what you just said. Will index funds continue to beat 80% of managed funds? Or should you look for the 20% who do beat index funds?
George Sauter:
Yes and yes. So, you know, some people think the argument for indexing, and I think maybe the early arguments for indexing were efficient markets. And if markets are efficient, if everything's perfectly priced, it doesn't make sense to try to outperform the market because you could only outperform by luck. You know, I believe markets are reasonably efficient, but not perfectly so, by any stretch. And if that's the case, indexing still makes sense, because outperformance is a zero sum game. Investors in aggregate own the marketplace. So, for one investor to outperform, another one has to underperform. But on average, they're going to get the market rate of return before any costs. Unfortunately, investors have costs and they're much larger than what you might think. In an actively managed fund, 1% would be low cost for an actively managed fund, and costs aren't just the fees you pay to the money manager. It's also transaction costs. So, that puts an actively managed fund at a pretty big disadvantage. And so, you can look at how indexes perform relative to active managers with the same investment style, and you do see that in any given year maybe 55%, 60% of active management will underperform. But over time, if you look at a 10-year timeframe, you know, '85, '90 or low '90s will underperform their investment style.
So, yes, I think the first part of that question, indexes will beat most money managers, particularly the longer the time period, the greater that will be. But should you look for active managers? You know, hope springs eternal. And as I mentioned earlier, I was hired to develop the active quant business at Vanguard, and I probably suffered from the same overconfidence that every active manager does. You know, every active manager will tell you that they're going to beat the market, despite the fact that they may never have done so. But if you can find great active managers, maybe you can add 50 basis points a year, and if you're adding a half percent a year over an extended timeframe, that can make a difference in your lifestyle.
But you also have to be cognizant of the fact that it's not very easy to find those active managers. At Vanguard, we used external managers for our traditionally managed active funds. And so, we had this investment committee that you referenced earlier, and we spent a lot of time trying to find great active managers. We had a group of, I don't know, 100, 150 people who, that's what they did all day long, was looking for active managers. And we were fortunate to, I think, find a lot of great managers, but we also had some that we had to part ways with. So, it's a difficult game. I think if you're trying to do so, I'd definitely make sure that you're doing in the low-cost active management because high-cost active management is just self-defeating. But if you can find great active managers, it can enhance your return a little bit. But I think indexing is a great, I think of it as a foundation for a portfolio that you can build your overall portfolio on, the core and explore type of approach, if you will. And for many people, 100% index is the right solution, but you know, if you're great finding managers, maybe 50% index and 50% active.
Madhav Rajan:
So, we have a question that came in, plus somebody had earlier sent it in as well, index funds causing corporate governance issues, which was, you know, because of the blocks being voted in ways that some people think are a conflict of interest or, you know what I mean? Like the aggregators, the BlackRocks, Vanguards and others have too much power, if you will, which was never the point, right? That was never the intention. So, the question was, sort of, what can we do about this? What reforms do you think are going to happen in that space?
George Sauter:
Yeah, so there were,probably starting a decade ago, there was some people that were creating some assertions, actually, one of them, Eric Posner, who was a law professor at UChicago. And you know, raising the question, I think in the early days, the question was the index providers had so much ownership in every corporation really - that we could exert influence on management to actually get them to not compete against each other, and thereby raise their profits. You know, basically collude to not compete and have greater profits.
You know, the fallacy of that argument is, while we, you know, maybe you could say, well, you can do that in the airline industry or in hotels or something, but the problem is that we owned everything. And so, the other companies that weren't in those industries, they'd all be at a disadvantage. So, if we tried to do that, you know, we'd be hurting 80% of our portfolio. So, I think that early argument really kind of went by the wayside. I don't think anybody's resting on that one anymore. But people are saying that well, index managers’ incentives are not aligned with the interests of the investors in the funds. The interesting thing there is that, I don't know why you would say index managers. Index managers collectively between the big three, State Street, BlackRock and Vanguard, you know, own more than a quarter of the marketplace I think,so, it's a big block. But at the same time, about 85% of the marketplace is owned by institutional investors. You know, the ultimate owner, the beneficial owner, is perhaps an individual, but it's institutions in aggregate that are really determining what's going on. So, you know, I don't know why you would necessarily single out index providers are creating governance problems. It's more of a, if you're going down that avenue, you should be saying, "Well, institutional investors are creating that problem." But to take the other side of that, because I don't think that's really the case, the large indexers are very large. I mean, Vanguard now has more than $8 trillion worth of assets, BlackRocks, State Street's not quite that big, but State Street's a big organization. SSGA, that is. And they have a lot of money to devote to governance. So, we know that managers don't really invest in stocks. They rent stocks. I mean, the average holding period for an active fund is one year. An index fund holds for forever. So, you know, if you're going to own a stock for a year, you really can't even change the governance of a corporation.
But if you own it for forever, we can go in and talk to management. We spend a lot of money and developed principles that we thought were important, and our CEO would write a letter every year to all of our holdings and say, "This is what we expect of you. And if you don't do this, we're going to vote against you and you can go onto Vanguard's website." And obviously I know Vanguard, but I'm sure that BlackRock and State Street and other large institutions as well have their own programs where they are working with corporations. And if you go on Vanguard's website, you can look up corporate actions and how Vanguard votes those. And you can see that it's pretty aggressive. And a lot of times they don't support shareholder proposals. A lot of people think, well, if you don't support shareholder proposals, you're violating governance principles.Well, I'd invite anyone to go on to Vanguard's website and check out, they give it, a very detailed explanation why they might not have supported a certain shareholder proposal. So, sometimes they will, will support it, but others they won't. But that doesn't necessarily mean they're shirking their responsibility for corporate governance. So, I think there's a lot more going on than people really realize.
Madhav Rajan:
So, one of the things that I think has been trying to happen recently, cause is that like BlackRock, for example, is trying to give the voting rights back to the individual, right? As opposed to, you know what I mean, like say, "You know what? Ultimately we're just aggregating it."So, you think that trend will continue over time and a Vanguard would say, "You know what? I'm just going to figure out how to let the individual vote on their things and not take that on as a corporate responsibility."
George Sauter:
I don't think Vanguard will go that way. I've been retired for 10 years from Vanguard, but I'm still in touch with management and a lot of friends there and the board of directors.,and I don't think Vanguard will go that direction. I think Vanguard, well, number one, I think Vanguard has a lot more resources to figure out appropriately how these things should be voted, as opposed to, you know, I have a few individual stocks and I get these proxies, you know what I’m saying? You know, like, "I happen to have gone through a gazillion proxies in my day at Vanguard." But you know, you have to really think these things through rather than just check a box. So, I quite honestly think investors’ interests are better served by having someone who's really devoting a lot of resources to understanding the various issues than to just turn it over to people who aren't following this thing on a day-to-day basis. I think Vanguard uss its responsibility to make sure it's doing best thing for investors.
Madhav Rajan:
So, I'd mentioned since you left Vanguard, you've been on a number of investment committees, so how do you decide which one of those to take on and how active are you in those types of roles?
George Sauter:
It's interesting. I wanted to have a broad book of business when I started going into, you know these investment committees, and it just happened to work out that way. I ended up on the investment committee for a foundation, an endowment. You mentioned the Australian retirement plan, FINRA. They were all very different and had some different opportunities associated with it. PGA of America, that one has, you know, a great perk to be able to go to the PGA championship and the Ryder Cup.
But they have a lot of similarities, but each one has its own unique aspects as well, partly due to the nature of just a different organization, but also due to the nature of the type of organization, whether it's an endowment or a foundation or FINRA. So, I really wanted to build my book of business that way and make sure that I wasn't just loading up on endowments. So, my book is, it is very diverse and none of the organizations are in the same type of the world, you know, area of the world.
Madhav Rajan:
And I mentioned that you're now CEO of a new firm. Maybe you could say a little bit about what that space is and why you sort of, decided to go into that?
George Sauter:
Yeah. So, I have a friend that I know from my days on the Dean's Council and he was class of '93 MBA and '92 undergrad. He was in the 3-2 program, and he decided it was time to drag me out of retirement, out of full-time retirement. And I just, I've considered myself semi-retired.
And so we're co-founding a new social media firm that we call, kind of the intersection of sports finance and social media. And we still haven't launched yet; we’re in the building phase. But it's been interesting. I've never been a CEO before. I've been a CIO, very different role. So, it's a different challenge, and that's probably why I agreed to do it, but it's been interesting so far. We've got a lot of wood to chop, though.
Madhav Rajan:
So, maybe you could just speak a little bit about what are sort of, regulations around financial planning services for college athletes and what does just the landscape look like?
George Sauter:
Yeah, so, I guess that's probably about the name, image likeness regulations that happened a little over a year ago now. By way of background for those who may not have been following it, there were 25 different states that were going to change their rules that would allow college athletes to endorse products and be paid for endorsements. The NCAA had always prohibited that. But state laws were going to change, enabling certain athletes in those states to make money. The NCAA realized that, that would put the athletes in the other states at a disadvantage. So, last June, the NCAA changed their rules, allowing athletes to be able to endorse products, using their name, image and likeness, NIL characteristics. And so, the NCAA has rules that govern what they can do. Various states, I think it's 25 states now, and maybe increasing have rules that you have to abide by if you happen to be in a college in that state. The various conferences have their rules and the various schools have their own policies. So, you've got potentially four different layers of rules, regulations, and policies that you have to satisfy as a college athlete in order to be able to accept this endorsement income.
The overriding factor is that you have to provide a service that is of equal value to the amount of compensation you're getting. And that, you know, the rationale for the NCAA never wanting to do this before is they didn't want schools to buy championships. They didn't want, you know, the boosters of various schools to basically pay the athletes under the counter money to come to the school and play for the team. And, you know, that was the big fear. So now, you know they're still guarding against that by creating these regulations, that there has to be appropriate value provided by the student athlete. But at the same time, we’ve spoken with some people who are overseeing this at various schools, and they're really concerned about it because one school told me that 50% of their athletes are doing deals that the school doesn't even know about. Yet the school could be sanctioned if the deal violates any of the rules or regulations. So, right now there's a big shake out going on. And it's starting to find some common ground, but it's still kind of the wild west out there.
Madhav Rajan:
One question that came in was, given the career you had at Vanguard, what do you see as things that you learned there, or skills that are now helping you in this new role?
George Sauter:
I guess the greatest thing at Vanguard that I love the most, well, no, the thing was that it was in the investment arena. And I love just thinking about the various things that I'd learned at the University of Chicago, literally in my investment classes, and being able to think about how that could apply to what we were trying to do. And so, that was great. But at the same time, I loved building and my first job graduating from UChicago was as a commercial real estate developer for a couple of years. I mentioned LaSalle Partners earlier on. And you know, I just loved, that was literally physically building buildings, but then at Vanguard, I had the opportunity to basically build the equity team in... I mean, there was one other person in the group when I got there. And so, I had one person working with me back then, and I had the opportunity to build it from scratch. And I just loved that. And so, you know, I think that's helped me in trying to do what I'm trying to pursue now. Maybe not accepting anything is set in stone and trying to think, okay, what's a better way? I mean, right now we're talking about social media. Well, a lot of social media is done in a very similar way, and we're trying to think, you know, is there a better way? I get on social media and next thing you know you've got to go shave again. You know, it’s like eight hours have passed.And you know, I don't really want to create a situation where we're really wasting people's time that they have really a rich experience and can move on. And so, you know, just being willing to try new things, and you know, we all like to mention the ETFs at Vanguard, having the opportunity to just experiment and try new things. And, you know, that's what I learned there that I'm trying to transport over.
Madhav Rajan:
And so, one, we had a question about indexes. So, one of the big issues that's come up now is with ESG, and ESG and is that something that you can measure? How do you think about measuring it? We'd love to get your thoughts on just the whole ESG space and where is that going with index?
George Sauter:
Yeah. So, there are many ways to measure ESG as there are people who want to invest in ESG, and that's the difficulty of trying to create a fund around it, because to one person ESG may mean, you know, no fossil fuels; to another, it may mean, you know, some other industry that they just don't want to invest in, and it's hard to find common ground. I mean, you end up with about 10 companies that probably are acceptable to everybody. But you know, to me, it's a way to express your own personal and social goals. Is it a way to outperform? What I am concerned about is people think, "Oh, well, you can do well by doing good." You can do well by doing good, but to think you can do better by doing good, I think is maybe a little bit over exuberance. You know, I don't see any reason why an ESG portfolio should outperform a non-ESG portfolio. And I've had this debate with consultants. I had one with a firm in Australia that I do work for, and you know, they're saying, “Well, you know,if you follow ESG principles, then you'll grow faster., and then you'll have a better return."
John Cochrane, who, you know is son-in-law of Gene Fama and, you know, presumably going to be a Nobel prize winner at some point in time and was on the faculty in Chicago Booth, now working at the Hoover Institute, I always remember John Cochrane saying like, "Why is that not already in the price?" I mean, if it's true that an ESG firm will grow faster, why is that not in the price? Typically, growth stocks you pay up for them. And so you know, that doesn't mean it's going to have any better return just because it may or may not have better growth prospects. So, to me, it's fine to express your, you know, your social values; however, you should define them. And you know, unfortunately, as they say, it's like, they're so many different definitions of it, but I would say, you know, try to get some diversification across the marketplace. Don't be too narrow in your focus, and then probably don't expect excess returns.
Madhav Rajan:
And would you be in favor of, sort of, doing these mandatory ESG disclosures that companies that the SEC is thinking about?
George Sauter:
I think that's fine. I think it's a little bit difficult to really define it precisely and then follow it precisely. But, you know, I think it's fine for companies to express, you know, here's where we are in certain things. I think you have to understand that different companies have different abilities to follow certain things. I mean, you know, to tell Exxon, you got to get out of the hydrocarbon business is going to be a difficult task, so people should just recognize some things are the nature of the business.
Madhav Rajan:
So, we have a couple of questions that came in about the current market environment. One is: people can feel spooked in an environment where asset prices have come down, certainly from like December and interest rates are up. And what's your advice to younger members of the audience who may not have had experience or historical knowledge of these kinds of things ever happening?
George Sauter:
Yeah. I'm trying to think of how many different cycles I've lived through. '73, '74 was bad, '80, '82, the crash of '87, the tech bubble, the GFC, you know, kind of goes on and on. If you're really too afraid to invest, you're never going to get any returns. I think you recognize that, but it's a function of your time horizon too. If you're 30 years old, what do you really care about what happens in the marketplace right now. The market pullback, what you really care about is where the market is 65 years from now, or when you're 65 years old. And if you look at an historical graph of the growth of a dollar, look at $1, invest in the S&P going back to, well, 1926. And you look at pullbacks there and you don't even see them. You know, like, '73, '74 doesn’t even show up.
So, I think you have to think long term. And if you're not thinking long term, then you probably shouldn't be thinking about the stock market. If you're saving to buy a car next year, your money shouldn't be in stock market anyways. So, I think you just have to tie your asset allocation to what your time horizon is. And then just recognize that if you want to get better than risk free returns, you’ve got to take risk. I mean, the capital market line has a reason for being and just recognize that risk means ups and downs and probably avoid the temptation to time the market. You know, one investment committee I’m on somebody was saying, you know, this was a month ago, we were talking about, you know, the market timing. And I said, you know, like, “You know, right now, I think we’re in market timing. I'd be getting in, not out.” And, you know, typically people invest by looking in the rear view mirror, not looking forward. And so, we're not wired to be great market timers as human beings. And Dick Thaler, Richard Thaler, has written about that extensively and all of the behavioral finance people that UChicago have done that. So, I would just recognize there are going to be ups and downs, but if you're investing for the long term, you're probably best off to just stick with it.
Madhav Rajan:
Yeah. And I guess that one thing that people probably don't understand is that the price of being invested has come down so much, right? I mean, did you ever expect that the cost of investing in the S&P 500 would be what it is today? It's kind incredible, right?
George Sauter:
Yeah. It's like three basis points, two or three basis points. If you don't think in basis points, it says 2/100 of a percent. You know, so it's about as close to free as you can get. And so, you can actually capture the market rate of return.
Madhav Rajan:
Yeah. So, a question was about when you do active investing, I mean, if you think about that, what things other than just the financial metrics would you look at?
George Sauter:
Well, so I guess financial metrics would be, you know, profit, cash flow, things like that, EBITDA. The one thing that, you know, I would consider those. I wouldn't, I'm not a technician. I really don't believe in that. Maybe technical self works if you're a day trader. But I don't think it's a great way to invest long term. If you're long term investing, I think valuations are important. I mentioned John Cochrane's statement about, "Well, why is that not in the price?" Again, I think Richard Thaler's work might explain why some things are not in the price. I mean, we love stocks that are doing well. And you know, we know we're going to grow, but are we paying too much for them? On the other hand, we really don't like stocks that are under pressure and declined a lot and their business is deteriorating. But maybe the price has gone too low on those. So, to me, it's comparing valuations against the, you know, the financial aspects of the company. And so, you can buy some gross stocks, just don't overpay for them. And you can buy some value stocks, some ugly stocks, and you’ll probably get some attractive prices. And we know historically that value stocks have outperformed growth stocks over very long periods of time.
Madhav Rajan:
So, we have some Chicago questions for you. One is that, who was your most influential mentor while you were in school? And then I'll just add to that more broadly, even as you started in your career, who have been people who have been influential to you as mentors?
George Sauter:
So, in school, I never had what you might really consider a mentor or somebody who I was a teacher's assistant for, but I had a couple of professors that had great impact on my life. One of them happened to be undergrad at Dartmouth. He went to the University of Chicago. He was a protege of Milton Friedman. He got his PhD in economics at UChicago and built the Dartmouth economics program after UChicago, which is one of the reasons I wanted to go to UChicago to get my MBA. The other professor that jumps out at me, as having a big impact on me was Bob Hamada, who was one of your predecessors, former Dean of the school, but was the premier professor in corporate finance back in the late '70s at UChicago and was just a wonderful teacher, and I had a couple of courses from him. And then subsequently had discussions with him when I got to Vanguard. And you know, I've had more discussions with him since than I did beforehand, but both of those professors had a profound impact on my life.
Madhav Rajan:
And what about at Vanguard or other roles that you had, who were people who influenced you?
George Sauter:
Yeah. So, I'd say the two people there would be Jack Bogle and Jack Brennan, and Jack Bogle was the founder and former CEO and chairman of Vanguard. Jack Brennan was actually the person who brought me to Vanguard. Jack and I were actually same class undergrad at Dartmouth and good friends at Dartmouth. And we ran into each other at our 10th reunion at Dartmouth. And that's when I was working for the bank, and a month later I got a call from another guy saying, "Well, Jack Brennan told me to give you a call."
And so, Jack, Jack Brennan's really, he's been a mentor to me, despite the fact we're the same age. I mean, we are the same age. We were born on the same day. But yeah, so we were kind of tied at the hip. But Jack Bogle was, you know, he was a thoughtful guy, kind of a big ego, but, you know, he changed the industry. He changed the money management industry, not just indexing, but he changed the money management industry around the world. You mentioned earlier, how much less expensive it is to invest today than it was 20 years ago, 30 years ago. A lot of it can be attributed to Jack Bogle in the creation of Vanguard. Everybody's had to compete against Vanguard. So, they've had to compete on price. And, but Jack had a lot of interesting things that he'd thought about as well, that I learned from. The very first week at Vanguard, he drilled into me, there's a difference between good money and bad money. You know, back in the day in the '80s, you thought, "Well, money is money." Let's get as much of it, you know, invested in our funds as possible. He's like, "Eh, do we really want that money? I don't think it's going to be here next year." So, I learned a lot of lessons from both Jacks.
Madhav Rajan:
The other question about Chicago is you've had a connection back to the school. You were on the Booth Council, you've done guest lecturing, you've been executive in residence. What has that been like for you, sort of, coming back onto campus as an alum? And I would add as a parent of a Booth graduate.
George Sauter:
Yeah. I just absolutely loved all of my experience at Booth, at the time it was GSB, but I loved the beauty of the school, the physical beauty of the school, the academic experience was just fantastic. I had great friends from my college days. And then I had the opportunity to reconnect later, as you mentioned, both on the Dean's council and then as an executive in residence, which gave me the opportunity to... Actually my office was John Heaton's office. And it was right in the center of the finance faculty. So, it was great. Richard Thaler's office was right next to me. Gene Fama was right across the hall and Lars Hansen was just down the hall. So like, three Nobel prize winners within putting distance of where I was. So, that was a lot of fun. But I got to mentor students while I was there. I did some work on trying to create a financial education program for the NFL. I just loved being back in an academic environment. And I've always just... I've loved every aspect of... I even loved Hyde Park. So, it was all great fun for me, both attending and then having great opportunities after attendance.
Madhav Rajan:
And as I mentioned, your son went to Booth and maybe could you speak a little to, if you saw him, the courses he was doing, the things he was doing, how was that different from when you were at the GSB?
George Sauter:
Well, the GSB was a great place for me at the time, but I think it's a far greater school today than it was when I was there. And it was a phenomenal school back then, but I think it's much broader in its offerings today. I mean, you got the leadership classes that we didn't have back then and they're fantastic. I think you're really much more broadly developed today than what we were back then. I mean, we were all just finance majors and now he participated in a program that's a dual program. He got both an MBA and a master's in computer sciences at the same time. So, it was a great opportunity and really the perfect situation for him. And quite honestly, I didn't have any role in his decision to go to the school. I was awfully glad that he made the right choice, but I was going to let him decide that and it worked out, he really enjoyed it. He had a great time. Unfortunately, it was during the COVID years. So, it was a muted experience.
Madhav Rajan:
All right. So, I'm going to ask you a macro question, which came in, can the inflation dragon be slated without high unemployment?
George Sauter:
Without high unemployment? Well, you know, the interesting thing right now, obviously rates were raised today as everyone expected. And I think Jay Powell fielded a question, are we in a recession now? Or do you think we will be? And he pointed out that it's highly unlikely that you're in a recession when you've got 10 or 12 million open job openings and unemployment rate 3.6%. And I agree with that. I think the toughest thing that we're dealing with now is wage inflation. You know, I think the commodity prices have moderated somewhat, well, dramatically from where they were. But wage inflation is going to be an issue I think, and that's going to be a little bit more difficult to tame. So, I don't know that we're going to end up back at 7% unemployment, but I don't think we're going back to like 1982 to try to wring this out, but it could take us longer to get out of it than we might have been otherwise.
I mean, you know, we got out of inflation remarkably quickly back in the early '80s. I mean, remarkably quickly, it was about a year and a half of a lot of pain. I think it's going to take a bit longer than that because it's really going into wages at this point in time. But I don't think we’re going to 7 or 8% unemployment.
Madhav Rajan:
So, we're running close to the end. So, one of the organizations I said you associated with is the PGA of America, you just speak about how that's been, and are you like a big golfer? Is that a passion of yours?
George Sauter:
Well, it used to be when I was younger and then Vanguard kind of destroyed my game. You know, we were not a golfing company, and I went from like a 7 handicap to, well, right now, if I break a hundred, it's a good round. I did play golf with some of the management of PGA one time, and that's the last time they've asked me to play.
But I do love golf, and I keep telling myself, I want to take some time to get out there and get my game back. But, you know, it hasn't gone too well so far. But this opportunity came up, and I thought, you know, geez, what a great way to be involved with the game. And hopefully, you know, do my very small part to help further the game. So, it's been, you know, it’s been a lot of fun. But yeah, my game, I'm not on the committee because of my game.
Madhav Rajan:
I guess becoming CEO now isn't going to help it either, right?
George Sauter:
Yeah.
Madhav Rajan:
Gus, we’re suddenly out of time. I just want to thank you for taking the time to be with us. And also just to congratulate you on just such an amazing career that you've had and all the different impact you've had, not just on Vanguard, which has really changed investing as we know, but on Chicago Booth and all the help you've done to CRSP and being on the school's council and everything else, we're incredibly fortunate to have you as an alum. We're just super grateful that you've been willing to spend so much time with us. So, thank you very much.
George Sauter:
Oh, well, thank you. It's been so much fun. You know, if we have a hundred different paths, we could go down, if we started our life over again, I got the right path right off the bat. I mean, I've been so fortunate. So I've enjoyed my relationship with the school. It's been a lot of fun.
Madhav Rajan:
Alright, thank you. Thanks everyone. Thanks everyone for participating today. See you. Bye guys.
George Sauter:
Bye now.
