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Vanguard exec shares outlook, fears bond bubble

Published on NewsOK Modified: December 20, 2012 at 4:52 pm •  Published: December 20, 2012

BOSTON (AP) — The name George "Gus" Sauter may not ring a bell for most investors. But it probably should, because Sauter may very well have influenced how their retirement funds are invested.

As Vanguard's chief investment officer, Sauter has been instrumental in guiding the company to become the largest mutual fund provider and one of the industry's fastest-growing firms, despite its size.

He joined Vanguard in 1987, just as index fund investing was beginning to really catch on, and just over a decade after Jack Bogle founded the company. Bogle became an outspoken advocate for index investing, the no-frills approach of owning all the stocks in a market index. It's a way to minimize costs by avoiding the higher fees charged by professional stock-pickers who fail to beat the market more often than not.

Sauter expanded both the index and actively managed mutual fund lineups at the Valley Forge, Pa.-based company, and led its move into exchange-traded funds in 2001. Two years later, he was named the company's first-ever CIO. Sauter has enhanced Vanguard's reputation as the industry's lowest-cost provider, leading initiatives to cut everything from trading expenses to in-house operational costs.

Vanguard's managed assets exceed $2 trillion, double the total just three years ago. Although many rivals have seen clients continue to withdraw their money, Vanguard attracted $130 billion in net deposits through November. That tops the company's previous full-year record set in 2007.

In June, Sauter announced plans to step down at year-end, and hand over the CIO responsibilities to another Vanguard veteran, Tim Buckley.

At 58, Sauter is young to retire. He's taking a few months off to consider new opportunities, perhaps teaching at a university level, or otherwise promoting financial education to average investors — perhaps targeting professional athletes who all too often stumble when managing their money.

In an interview this week, Sauter discussed his career and his outlook for the market. He's optimistic about stocks. That's one reason why he's aggressive with his own portfolio. Although he doesn't recommend it for others, he has allocated more than 90 percent to stocks, significantly above the level typically considered appropriate for someone his age.

Here are excerpts from the interview:

Q: We're almost at 2013, but what's your outlook for the stock market, say over the next 10 years?

A: The best predictor of future returns is what you're paying for earnings. And valuations now are quite reasonable. (Eds note: Stocks in the S&P 500 are trading at an average of about 14 times earnings over the past 12 months, below the 10-year average of about 15). So stocks are a bit cheap, and you can expect a reasonable return over the next decade — maybe 6, 7, 8 or 9 percent a year, something in line with the historic average.

Corporate earnings are the key factor to look at. Lots of people make the mistake of thinking stock returns are tied to economic strength. But the data don't corroborate that. And the interesting thing about corporate profits is that they are blind to national boundaries. More and more, companies are global, and earnings growth is really independent of the strength of one country's economy.

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