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Fran Kinniry Discusses Diversified Portfolios(Masters in Business, 75 mins) A wide-ranging interview of Fran Kinniry, Global Head of Portfolio Construction at Vanguard, who created their research department and coined the term adviser’s alpha. He debunks the myth that passive investing is largely surpassing active and the incorrect claims that indexing is a bubble threat due to its size. Kinniry also vouches for the simple 60/40 portfolio, a long-time favourite of PMs (though last week we discussed how it was recently declared obsolete by BAML).
He is largely pessimistic on alternatives – alpha is almost nowhere to be found. Kinniry then discusses the scalability of the low-cost asset management business and how Vanguard managed to grow into a behemoth. The best faring funds are tax-exempt, multi-state US portfolios. Then he explains how safer index funds will deal with the aging population that requires higher risk portfolios to carry them through their longer life.
Why does this matter? Even though this interview sounds much like an advertisement for index investing and Vanguard, it’s worth listening for Kinniry’s wealth of experience in investing. He is critical of the narrative around a smart beta, but he believes that there is a quant factor in investing to be exploited. In the low rate, low inflation and high equity valuation world, investors should avoid thinking about individual components in their portfolios. Instead, see bonds as a diversifier to equities as the correlation between the two still holds strongly in a downturn.