Aliaga-Díaz and Roach are co-managers on several Vanguard multiasset strategies, including the $1.19 trillion* Vanguard Target Retirement series.

*As of June 30, 2023.

Aliaga-Díaz: We use a simple, straightforward approach to portfolio construction, blending behavioral insights with well-established portfolio and life-cycle investment theories. We have spent years studying client behavior; the insights we gleaned have led us to take a more straightforward and transparent approach to the development and management of target-date funds. At the same time, though, this knowledge of investor behavior has given us the tools needed to enhance our Vanguard Life-Cycle Investing Model (VLCM), which provides a rigorous framework that gives us the ability to evaluate our glide-path decisions and ensure they remain appropriate for investors.

Roach: Furthering Roger’s point, the key for us is to take the years of research that Roger mentioned and then build a suite of portfolios that fit our clients’ needs. Our clients are largely saving for retirement, many through their employer’s retirement plan, so we want to ensure that from a fiduciary standpoint, our target-date funds check the necessary boxes.

In general, what are fiduciaries looking for? First, there’s cost—and not just an investment that is low cost, but a commitment to lowering the cost of investing over time. We have been able to demonstrate consistent cost reduction since we launched these portfolios more than 20 years ago. Second is consistent performance, which we’ve shown over multiple different market cycles. Third is broad market exposure, which we obtain through an allocation to several very broad, very deep index-tracking building blocks, which provide exposure to the total domestic and international stock and bond markets. And finally, there’s the massive wealth of expertise that our team brings to managing these portfolios. Our Equity Index Group has been managing passive portfolios for more than four decades, and the average tenure for our group is over 13 years. We couple this with portfolio construction and asset allocation expertise from Roger’s team in our Investment Strategy Group.  All of this means that Vanguard’s best ideas find their way into these portfolios.

Aliaga-Díaz: I have been at Vanguard for 16 years, and I have spent all of that time in the Investment Strategy Group. I originally joined as an economist—and even to this day I still spend time on economic analysis—but I have since expanded into research and portfolio construction-related efforts. I have been involved in developing some of our proprietary simulation models, including the Vanguard Life-Cycle Investing Model, which we use to evaluate and analyze our target-date funds. Currently I lead the portfolio construction research function within the Investment Strategy Group, which is a global team of about 20 people across the U.K., Australia, and the U.S. The team is dedicated to researching and constructing our target-date funds, including the development of the glide path that these portfolios are built upon.

Then there’s this newest collaboration with Mike, which is a really exciting opportunity to enhance the partnership across our departments. The multiasset space has long operated with input from many teams, but this new organizational structure really formalizes that. Together we’re looking over the asset allocation lineup, conducting annual revisions, and working with Vanguard’s Strategic Asset Allocation Committee (SAAC) to ensure that these portfolios continue to meet the needs of our investors. The new structure makes our process more rigorous, but also easier to understand from the point of view of our external stakeholders.

Roach: I just hit my 25-year Vanguard anniversary on June 1. I came here right after I finished my undergraduate degree, and my first role was as a customer service representative on the retail phone line. I talked to our clients every day, which is an experience that sticks with me today, especially as I’m managing money.

From there, my ambitions led me to a role in our Portfolio Review Department, where I was responsible for the oversight of our money managers, which included the search for potential new managers. That experience helped me hone my own investment philosophy, which was helpful when I later moved into a portfolio manager role in the Quantitative Equity Group, which is Vanguard’s internal actively managed equity team. In between those roles, I ran the equity risk management team, which offers independent oversight of our equity investment processes.  All of the skills that I developed through my career at Vanguard are directly applicable to my new role here as the head of multiasset portfolio management. 

Roach: From a high level, there are several key themes we look for when developing a product or an asset allocation. The first question we ask ourselves is this: What’s the long-term, enduring investment merit of a particular strategy? And then, can we implement it in a scalable fashion? Is it relatively simple to explain? And finally, can we provide it at a reasonable cost? Those are the four initial filters that any idea needs to pass through.

Aliaga-Díaz: Another key thing about target-date funds is the glide path. We design our glide path so that it’s appropriate for the risk profile of the portfolio’s typical investor. We serve an extremely diverse population. They have the common goal of retirement, but beyond that, there are many risk profiles represented. That’s why, when developing our glide path, we consider the most conservative investors. We don’t design for the middle of the road. Retirement savings decisions are highly consequential for a large part of the population, which makes designing a glide path that represents age-appropriate levels of risk a primary goal.

Aliaga-Díaz: We view our Target Retirement Funds as outwardly simple yet inwardly sophisticated. There are so many dimensions that need to be considered. What are an investor’s retirement goals?  How much will cover their basic expenses? How much might they want for discretionary spending? Is there a desire to leave a financial legacy? We as managers have to consider all the investors, the spectrum of circumstances, contribution rates, retirement age. Then there are the impacts of assets outside of the retirement plan, an investor’s attitude toward risk, concerns about loss aversion. There are so many facets to consider, which is why we think a formal framework, or a model, is necessary. It’s impossible to solve for all these dimensions without one.

Our Vanguard Life-Cycle Investing Model was developed in response to these questions. The framework was built from a blend of science, behavioral insights, and the many years of experience we bring to the investment management table. Any new ideas—or changes to existing ones—are stress-tested by our Strategic Asset Allocation Committee, which is composed of global investment leaders from across Vanguard. The SAAC also annually reviews current allocations to make sure they remain appropriate for our target-date fund investors. 

Roach: From a monitoring perspective, and this is really important, Roger and his team’s focus is tied to the long-term success of the portfolios. They’re looking at the strategic asset allocation, thinking about the glide path, and considering the long-term design that best meets the needs of retirement savers. And then my team, from the day-to-day implementation standpoint, we make sure we adhere to that strategic asset allocation. We strive to stay as close to the glide path as possible on a daily basis, while also trying to limit transaction costs that can be associated with portfolio rebalancing.

Surrounding and integrated with these processes, we also have really robust independent oversight through our Investment Management and Finance Risk function and Portfolio Review Department.  These teams monitor everything from our daily risk exposure to the overall health of our products to ensure they are functioning as intended. 

Roach: These portfolios are designed to weather all types of market conditions, specifically over the long term. They’re coming up on their 20^th anniversary in October. In that time, they’ve weathered many so-called once-in-a-lifetime financial events, including the global financial crisis of 2008 and the post-COVID downturn in 2022. We have a strong belief in diversification as a key to risk mitigation, and these portfolios provide exposure to roughly 90% of the global liquid investable market. That said, we do take a less aggressive posture when positioning these portfolios compared to many of our peers. Our hope is that we’ll see less of the downside during market downturns but still be able to achieve meaningful upside participation, which should maximize the likelihood of investors meeting their goals.

Importantly, we don’t make tactical changes to try to capture short-term wins. For us, it’s really about the consistency of performance year-in, year-out that tends to lead to top-tier performance over the long term.

Aliaga-Díaz: That’s right. The investment horizon for target-date funds can be very long, possibly decades.  Market volatility tends to be short-lived, and much shorter than the time horizon of these portfolios. We change allocations based on investor characteristics and long-term return projections, not short-term market conditions. This allows us to play the long game, which we believe is the way to build retirement wealth. 

Aliaga-Díaz: We’ve proactively lowered the cost of investing in our Target Retirement Series by over 70% since inception.* Even more incredible, the industry has followed our lead, which is a great thing for our investors—they can keep more of their hard-earned money.

Roach: In addition to directly returning value to investors through expense ratio reductions, we also return value indirectly through enhancements to our trading strategies, portfolio rebalancing optimization, and very shareholder-friendly securities lending. All of these can add back basis points of value each and every year. That can compound over time and lead to real added return for our investors.

Note: This interview was edited for length and clarity.

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