Chairman's perspective on the global markets and economy

10 October 2016 | Topical insights


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Vanguard Chairman and Chief Executive Officer Bill McNabb shares his views on economic and market trends in a letter to Vanguard fund shareholders.

Valley Forge, Pennsylvania
9 September 2016

Dear Shareholder,

As the global economy continued to expand at a slow but sustained pace in recent months, a series of disquieting developments highlighted the need for investors to remain disciplined.

Bill McNabbChief among these events was the Brexit vote and the resulting political drama in the United Kingdom, but plenty of others moved the markets as well. We saw major swings in the prices of oil and other commodities, a sharp decline in sterling against other currencies, uneven job numbers in the United States, shifting expectations about when the Bank of England and US Federal Reserve would change interest rates (and in which directions), and declines in already negative yields for European and Japanese government bonds.

In addition, August marked a milestone: 40 years since Vanguard introduced the first index mutual fund for individual investors.

In ways that are perhaps still not fully appreciated, indexing has vastly improved investing for individuals, advisers and institutions all over the world. Later in this letter, I'll discuss the revolution wrought by what was initially a little-heralded new fund from a fledgling firm in the suburbs of Philadelphia.

Brexit adds another layer of uncertainty for investors

I think it's fair to say that the result of the 23 June Brexit vote caught even the "Leave" side off guard. Although we saw some market jitters in the run-up to the referendum, the unexpected outcome triggered a spike in market volatility worldwide. Equities around the world lost 5%–10% in the first two trading sessions following the vote, with UK and European markets among the hardest hit; global bonds, though, headed in the other direction. It was a textbook illustration of the value of having a diversified portfolio.

That kind of volatility can push investors to "do something". But some of the worst days in the share markets are sometimes followed by some of the best – as happened at the end of June. Investors who scrambled to protect their portfolios by shedding equities amid headlines warning of a global market meltdown may well have ended up locking in post-Brexit losses, then missing out on the strong rebound that took place just days later. Those headlines were noise that investors would have been better off tuning out. I'm pleased to say that Vanguard investors on the whole did just that – we continued to see cash flows into our funds in the days after the vote.

For the 12-month period ending 30 September 2016, equities generally finished higher, with UK shares (represented by the FTSE 100 Index) and US shares (represented by the S&P 500 Index) both up about 10%.

In a surprise, bonds turned in a solid performance that few would have predicted a year ago. It seemed as if interest rates had fallen so far that they couldn't go any lower, but many did. Central banks in Japan and a number of European countries set key monetary policy rates below zero. These policies held down short-term rates, while more muted expectations for global growth and inflation weighed on longer-term rates.

Yields in the United Kingdom and the United States weren't quite as low as in many developed countries, notwithstanding the Bank of England's decision in August to cut the policy rate from 0.5% to 0.25% – its first change since 2009. The US Federal Reserve, in contrast, held the federal funds target rate steady in the 0.25%–0.5% range. Further out on the maturity spectrum, the bellwether 10-year US Treasury yield dropped in early July to a record low 1.36%, before moving back up a little to end the period at 1.58%. Over the 12 months ending 31 August, US bonds returned about 6%, and non-US bonds returned even more – about 11% – for US-based investors, again underscoring the markets' unpredictability and the merits of diversification.

Over the years, many investors have embraced indexing

Market upsets like Brexit aren't rare occurrences. Fortunately, indexing has proved to be a durable behavioural tool to help keep investors from making bad financial decisions when upsets happen. In fact, this is one of indexing's less appreciated benefits: Holding index funds as part of a broadly diversified portfolio can counterbalance that tendency to react to news headlines. When times are volatile, you'll know you might have some exposure to a part of the market that has dropped, but also to other parts that may be holding up better.

Vanguard's launch, in August 1976, of the first index fund for individual investors initially met a frosty reception. Its mandate to track the performance of a broadly diversified benchmark at a low cost seemed underwhelming to an investing public accustomed to funds that offered the chance to outperform. Investors have since come around, as experience has demonstrated the benefits of low costs and broad diversification.

According to the Investment Association (a trade group that represents investment managers), passively managed funds accounted for about 12% of total assets invested in the United Kingdom as of August 2016, with about £136 billion under management – up from less than £20 billion in 2005. In the United States, where it has a longer track record, indexing accounted for about 30% of fund assets at the end of 2015, according to the Investment Company Institute. In Europe, traditional index funds account for about 8% of total long-term fund assets as of July 2016, and exchange-traded funds account for a further 7%, according to Fund Radar, a monthly analysis of fund sales trends published by MackayWilliams.

Some now even proclaim the "triumph of indexing", implying that it's the only way to invest. In our view, the rise of indexing has served to underscore an investment principle that long predates 1976: A long-term, low-cost, diversified approach gives investors the best chance for success. That's true whether the investments you choose are indexed or actively managed – or both.

As always, thank you for investing with Vanguard.


Bill McNabb signature

F. William McNabb III
Chairman and Chief Executive Officer
The Vanguard Group, Inc.

Important information:

This article is designed for use by, and is directed only at, persons resident in the UK.

This article was produced by Vanguard Asset Management, Limited. It is for educational purposes only and is not a recommendation or solicitation to buy or sell investments.

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

The opinions expressed in this article are those of the individual author and may not be representative of Vanguard Asset Management, Ltd.

Issued by Vanguard Asset Management, Ltd, which is authorised and regulated in the UK by the Financial Conduct Authority.


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