A giant among UK passive providers, Vanguard Asset Management quietly went about launching its first range of active funds in late-2015. Alongside those funds, Vanguard is also now set to launch a direct-to-client proposition in 2016. So when did this leopard change its spots?
The wheels of change were set in motion in the summer last year with the appointment of John James as managing director of Vanguard Europe.
James’ move to London follows stints at both the firm’s Philadelphia and Melbourne offices and a look at Vanguard’s offering globally – and particularly in the US – offers insights into its future plans for the UK. Run out of the US by a quantitative team, one third of the total $3.5trn (£2.5trn) in total assets under management is now in active funds.
Seeking exposure
Vanguard’s new range of UK active funds may only cover four global factors – value, momentum, minimum volatility and liquidity – but for Vanguard, anything that deviates from a market-cap index is active.
“For us, it is a proprietary way of giving people exposure to a particular factor – an investor might want to build a portfolio and overweight their asset allocation to a particular factor,” says James.
“Ours are not smart beta products, they are active products aligned to specific factors that we think have long-term benefit for a portfolio.”
In terms of the new direct-to-consumer proposition, James stresses that it will not be competing with wealth managers.
He says: “A lot of it will be digital. We have not got to what it will look like, but essentially at the highest level, self-directed investors will be able to go to the website and make investment choices.
“That there are individuals who want to educate themselves and do self-directed investing is great, so long as they are very informed. The natural evolution is that at the appropriate point they will get advice.”
The industry’s evolution includes robo -advice, a term which did not exist 18 months ago. James is supportive of the increasing number of services catering to the educated, digital savvy investor, however he stresses again the importance of a face-to-face relationship.
“Our experience is people like to deal with a person, particularly for big advice decisions,” he says. “We think advice plays a really important part in providing financial services, though we are also mindful of giving investors choice.
“We run a very big direct business in the US but we will not be doing robo-advice as we think people have a pivotal role to play. But there will be certain individuals who know exactly what they want and will want to do that in a digital way.”
Still, while the product mix may change, James stresses the “absolute driver” for Vanguard remains price. The firm’s asset-weighted expense ratio is currently 19.7bps – compared with 42.5bps when it first came to the UK in December 2010. The price war initiated by Vanguard and other passive fund providers has certainly been of benefit to UK wealth managers in recent years, but can fees realistically fall further?
“We are very fortunate that we have no conflict because of our ownership structure [owned by its member funds] and so our measure of success is continuing to build scale, which is to pass on lower costs to investors. In some respects that is our mark of success.
“Certainly it will be challenging to keep lowering costs because it is complex. There is a lot going on and all of the time you have to manage that reinvestment back into the business.
“Is there more to go? There is always more you can do and when everything you do is about that then I think it is great for the investor and we will keep pushing it along.”
While passive funds and exchange-traded funds (ETFs) have generally had a fruitful few years on the back of rising markets, recent volatility – particularly in equities – could be seen as a threat to companies such as Vanguard as investors switch to managers, which they believe can add alpha.
For James, the global move to low cost is a bigger pull.
“From advisers to wealth managers, the value chain of cost is being analysed by clients, the regulator and so the first thing that is driving the move to passive has been cost,” he says.
“The second thing is the value proposition has changed for many providers because it used to be ‘I can find you a great fund that is going to outperform’, and we have worked out that is a pretty tough value proposition.
“What we are seeing is a far more balanced view of portfolio construction where the core and satellite approach is now in the everyday vernacular. This market has been under-served in passive. In the US, the retail market is 30% in index funds and in the UK it is 12%.”
A good deal
Cost, transparency, clarity of the value chain, and ensuring that investors are getting a good deal are what James lists as the priorities for the industry.
“It is not about selecting outperformance, it is about asset allocation and managing cost. We as an industry have looked ourselves in the mirror and decided our role as investment professionals is more around balance, discipline and cost.
