It is perhaps ironic that the second largest asset manager in the world is now pushing its new active funds in the UK market at a time when passive funds are seeing record flows.
But having amassed more than $215bn globally in its funds since the start of the year, this is unlikely to be a concern for Vanguard.
However assets didn’t initially come easily for the asset manager, who had to contend with the pre-RDR landscape when it first launched in the UK seven years ago.
Head of UK retail sales Neil Cowell says: “As an asset manager we started by focusing on the advisory community in the UK, not all of which was accessible to us at the time, pre-RDR. Most of the platforms in the UK had a pricing model which required rebates and different share classes, which we didn’t offer.
“We could only interact with those firms which could only already deal with a post-RDR world. Then post-RDR the market opened up for us. It’s been very steady and good progress in the advice community since then.”
In the UK intermediary space Vanguard has around £40bn of assets. Cowell, who joined Vanguard in November 2011 from Standard Life, says over 8,000 adviser firms now use Vanguard’s index funds, active funds and ETFs in their clients’ portfolios.
Cowell says: “The good news is that costs continue to drop for investors and some of our competitors have dropped expense ratios on select index funds and ETFs in response to our low-cost leadership.
“Our biggest challenge is also an opportunity, and that’s changing the perception that Vanguard only offers index funds and ETFs. In fact, we also offer a low-cost active equity and fixed income range for investors in the UK.”
Vanguard has just lined up a series of fixed income products as it continues to expand in the active management space. The range will be managed by Vanguard’s existing 150-strong fixed income team.
In May 2016, the US asset manager launched its first series of active funds for the UK market, managed both internally and through third party fund managers, including Baillie Gifford and Wellington.
As at the end of June, the Vanguard Global Equity Income, Global Equity, Global Emerging Markets and Global balanced funds have all outperformed their benchmark sectors, according to Morningstar.
The Global Equity Income and Global Equity funds have returned 35.6 per cent and 42.8 per cent respectively versus the IA Global Equity Income and Global sectors at 29 per cent and 33.7 per cent.
For the same one-year period, the Global Emerging Markets and Global balanced funds returned 48.9 per cent and 22.9 per cent respectively. The IA Global Emerging Market and the Mixed Investment 40-85% Shares sectors returned 42.2 per cent and 20 per cent respectively.
Cowell says: “Building scalable funds is important to us because as our funds grow in size, we will continue to use the resulting operating efficiencies to lower costs for our clients. We have always refrained from unnecessarily expanding our product line-up and offering ‘hot’ products for the sake of gathering more assets.”
Meanwhile, Vanguard’s LifeStrategy range, which has just passed £8bn in assets, continues to be one of the firm’s flagship fund ranges, with £3bn in net cash flow this year alone.
However, the family of five all-in-one portfolios has recently been criticised for its US bias and its future success questioned.
The fund contains 25 per cent UK equities and 75 per cent global ex UK equities.
Cowell says the firm is regularly challenged on the LifeStrategy range’s methodology around market cycles.
He says: “LifeStrategy does what it says it will do. All funds behave in line with each other, balancing risk and return beautifully and of course in any given time there might be an opportunity with certain commissions might from a tactical perspective not line up beautifully but that is not the point of that range.
“The point is not to look around corners, it is just to say get your asset allocation right and let time and low cost do the heavy lifting.”
Unsurprisingly, Cowell says the low-cost element of the range remains one of the most compelling stories for the firm.
He says: “When we launched it six years ago LifeStrategy was 31 basis points and over three or four cycles we have reduced that to 22 basis points. That is just the machine in action with people knowing what it does, the scale growing and fixed costs staying. We will keep driving costs down as much as we can.”
Ambitions for Vanguard are big, and the trip certainly doesn’t end in the UK.
Cowell says: “We want to create the same strong Vanguard brand in as many places internationally as we can. The UK and Europe is a good example where we are starting to do that. The UK has got the right conditions with a great retirement market which we are examining, and it has got a terrific IFA market and an appetite for direct.
“There are parts of the world where Vanguard is not there yet and we want to create the US model internationally.”
Thomas Becket, chief investment officer at Psigma Investment Management
Vanguard have become our first port of call for our passive fund selection, as the fees they charge are competitive, they don’t aim to do anything fancy that diverts attention away from simple replication and we also find their information to be clear and easily understood by end retail clients.
The question I would ask of them is how do they go from being the right company, with the right products at the right time, to being the right company, with the wrong products at the wrong time?
The aggressive switch to passive instruments that we have seen across the investor and adviser communities has been impressive, but like all cycles there will be a change in direction in the future and the allure of passives will wane. Vanguard appears to be trying to diversify their business towards more active strategies, but we would encourage them to stick to what they are so good at.
Ben Yearsley, director at Shore Financial Planning
It is fair to say that in the UK Vanguard is purely known as a passive investment house. If you want passive you think Vanguard. In addition, it isn’t just plain vanilla either, it has more innovative funds such as the Life Strategy range.
However, what they have yet to do is showcase their active expertise. That will be a much harder sell in to the UK as there are huge numbers of excellent active managers to choose from and historically US firms have been poor at launching active funds into the UK. Their platform launch is interesting, but by keeping it to in-house funds, I think it will struggle. Even in the passive space, investors and advisers like spreading assets between different fund houses. Why not make it the passive investment platform and open it up to other ETFs and tracker funds?