This year alone, the Pennsylvanian passives giant Vanguard has caused quite a stir in the UK retail market, slashing charges across its now circa £8bn LifeStrategy suite and unveiling a direct-to-consumer platform (D2C) with a 0.15% fee.
Despite these headline catching achievements, many in the UK retail space have been quick to downplay the firm’s disruptive potential.
Jason Hollands, Tilney Group managing director, says Vanguard’s impact on the UK retail space thus far has been “minimal” at best. And he finds lumping the passive house’s latest D2C offering with the rest of the platformers like Hargreaves Lansdown and Tilney’s own Bestinvest to be a stretch.
“We have very few clients on the Bestinvest platform who would be passive only and only buying Vanguard products. The reason most of our clients would use our D2C platform is because they want to invest across a range of managers.
“But I’m sure there is a place for what Vanguard does in the UK market,” he says.
“There has been a lot said about challenging the established leaders in the retail platform space but nobody has really made any headways on that yet,” adds Adrian Lowcock, Architas’ investment director.
“I’d like to see evidence before jumping to conclusions that they are a big threat to those established players. They are not as well known in the retail market, so there’s still lot of work to do to get that brand recognition up and that takes time.”
Despite the dismissive tone of traditional retail players, there is no getting around the fact that Vanguard has rapidly been stealing market share away from other competitors.
Its multi-asset LifeStrategy fund range, for instance, has dominated multi-asset inflows in 2017. According to data from Morningstar, Vanguard’s four LifeStrategy funds took in £1.8bn in the first seven months of 2017, accounting for half of the Investment Association Mixed Sector’s £3.6bn total inflows.
Vanguard products have also become a mainstay on various best-seller lists, frequently ending up in the top 10 most popular funds.
The fact that Vanguard is only currently offering its own line of products on its UK retail platform is unlikely to curb demand for fund supermarkets, which offer loads of choices, because as Lowcock notes: “No one fund house has ever had the best active fund managers under one roof.”
If anything, a business like Vanguard’s poses a bigger threat to robo advisers, not retail D2C platforms, argues Hollands.
“If you really want to have a passive-only approach and minimise your fees, it’s clearly a lot cheaper to do that through Vanguard and buy their LifeStrategy funds than going to a so-called robo adviser.”
While Vanguard’s direct service may appear niche alongside the Hargreaves Lansdowns of this world, “a much bigger threat could come if they move full open architecture and allow other funds on their platform,” says David McCann, a director and analyst at Numis.
Many have pointed out that the passives revolution is all well and good, but with the imminent demise of central banks’ extraordinary monetary policy efforts, active investing will be back in fashion once again.
Lowcock suspects that is likely one of the driving factors behind Vanguard’s recent interest in launching active funds in the UK market. A pre-emptive strike, if you will.
“In the UK they have always been known as a passive house, but in America, they are a lot more active. I think they are getting in early because they know the reversal of quantitative easing will change the direction of markets and what works.
“They are repositioning themselves to be known as more than just a passive play.”
Even if we are about to enter a golden era of active management, the overwhelming response to Vanguard’s envelope pushing agenda has made it crystal clear that active managers cannot continue to rest on their laurels, even those with Neil Woodford-esque reputes.
Downplaying Vanguard’s contributions to the UK retail space seems short-sighted and foolhardy.
Staying true to its namesake, the passives player from across the pond has been influential in the democratisation of the investment industry, And besides, the flows don’t lie.
