In 2017, Vanguard attracted an average inflow of over 1 billion dollars per day, according to Morningstar. These are the largest flows we’ve ever seen in the industry for a single fund family. Andreas Zingg, head of ETF distribution management for continental Europe, Vanguard, shares with RFS the secrets of Vanguard’s success.
Redesigning Financial Services (RFS): Costs for many financial products have come down over the last few decades. How do Vanguard’s costs compare to those of other asset managers?
Andreas Zingg (AZ): That’s right. At Vanguard, lowering costs for investors is the primary purpose of our business. Today, Vanguard manages USD 3.9 trillion in assets with an average expense ratio of just 0.18%. Compared to our industry peers, our average costs are more than 80% cheaper than the industry average of 1.01%. Moreover, as our business continues to grow in volume, our commitment is to continue passing the savings we generate from our growing scale on to our investors in the form of lower expense ratios. For instance, during the 2015 fiscal year, Vanguard passed on aggregate cost savings of about USD 225 million to clients in more than 200 fund shares. And as we continue to grow, our costs will become even cheaper for investors, since our business model is one that operates at cost.
RFS: With the benefit of seeing Vanguard from the inside, what would you say is the secret to Vanguard’s success?
AZ: In my opinion, the secret to Vanguard’s success is clearly the ownership model. This client-owned structure also goes hand-in-hand with the directive that the business has to operate at cost. This means that Vanguard can only charge its clients (and owners) enough to cover its operating costs. Any residual money is used to lower the expense ratios our clients pay us. We have been doing this for forty years now, and investors are realizing that lower fees mean better outcomes. That’s the principle on which Vanguard was founded, and that’s also the principle that defines our company’s DNA today — lower fees mean better outcomes for the investors that place their trust in us.
RFS: Both investors and other money managers often speak of the “Vanguard effect”. What does this mean, exactly?
AZ: It’s actually a catchphrase that Morningstar coined when we opened our London office. They use it to describe the tendency for some of our competitors to drop their expense ratios on select index funds and ETFs in response to our presence in the market. We see this as a positive effect, not least because clients benefit from this overall trend toward lower costs.
RFS: Some commentators have accused Vanguard of initiating a “race to the bottom” in costs, thus crippling the industry as a whole. What are your thoughts on this?
AZ: I would respectfully disagree. In fact, our funds reflect, as closely as possible, the true costs of investing. As our scale has increased, we’ve been lowering costs, something we’ve been doing consistently for 40 years. This is good news for investors, and it invites fund managers to operate more efficiently in the interests of the investors they serve. Moreover, it is also important to note that lower-cost investments have tended to outperform higher-cost-alternatives. After all, gross return minus costs equals net return. Every dollar paid in management fees, trading costs, and taxes is a dollar less of potential return for clients. As such, we will continue to try to lower our costs, because we believe lower costs are in the best interests of the client, who is also our most important stakeholder.
RFS: Do you see this as the end of active management?
AZ: We hope not. No less than a third of our assets under management are actively managed! In all seriousness, we see the issue as being one of low-cost vs high cost, not as active vs indexed. We saw substantial positive net inflows into our actively managed strategies in 2017. Indexing is the most efficient vehicle to connect everyday investors to broad capital markets, and the trend towards indexing is beginning to take hold globally. However, it’s not the only way to invest, and for those with a higher appetite for risk, active strategies offer a chance to outperform the market. However, I do think that costs for active management will come down in the future.
RFS: With trust levels in the industry in decline, how has Vanguard been able to sustain client trust?
AZ: I believe our ownership model offers a source of trust. As mentioned before, as a mutual fund, there is no potential conflict between what might be in our interest as a business, and the interests of our clients. As such, we are never under pressure to chase assets, cyclical trends or “hot” products. Another potential source of trust is the culture we maintain within our business. We devote a lot of time and attention to making sure our employees are the right fit for Vanguard, that their interests are also aligned with our primary purpose of doing what’s right for our investors.
RFS: Vanguard also maintains the largest robo-advisor in the world. What are the benefits of this approach, and how have clients responded?
AZ: Our Personal Advisor Service is actually a hybrid advice program. Like robo-advisors, it uses low cost, broadly diversified products, and emphasizes prudent portfolio construction. However, it offers more than what an algorithm can provide. We believe the human element of an advisor interaction is a key component to addressing an investor’s individualized goals and providing ongoing behavioral coaching. The judgment and ongoing guidance of a human advisor can make an important difference in a client’s investment outcomes. It’s used in the US by a growing segment of our retail client base who prefer not to go it alone. Since the launch in May 2015,the service’s assets have grown to more than USD 100 billion.
RFS: Can you discern any structural trends in the way people are looking to invest?
AZ: We are increasingly seeing investors gravitate to a lowcost, disciplined, balanced, and long-term approach. The growth in indexing has been a reflection of that.
RFS: Historically, Vanguard has been very US-centric, with nearly 95% of the firm’s customer base being in America. What are the reasons for this historical weakness outside of America, and what can be done to strengthen the firm’s global footprint?
AZ: Growth has always been an outcome for us, rather than a goal, including in the US. I’d also say that we’ve made significant strides as a global organization. We now have offices in 12 international locations, and have invested heavily in globalizing critical functions — investment management, IT, Legal, HR, and fund accounting — in response to client demand. Certainly, we believe our value proposition knows no geographic boundaries. We are committed to giving investors everywhere the best chance of investment success.
RFS: Do you expect a wave of consolidation in the industry, as investors become increasingly empowered by web-enabled platforms allowing them to compare manager costs?
AZ: We may see some more consolidation, but largely as a result of product proliferation. According to ETFGI, today there are over 6,000 ETF products on the market globally. More and more ETFs are being launched that offer access to niche areas of a market or asset classes, such as Asian real estate or gold mining companies. While these may play a role in some portfolios, most investors are better served by broadbased, well-diversified investments. The volume of specialist strategies and products could lead to fund consolidation or closures in the future, a trend we have seen in the US for some time.