InvestmentsApr 4 2016

‘We are going to make life hard for our competitors’

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Vanguard is one of the main players in the UK passive market, but further lowering of prices by providers such as Fidelity International and iShares (part of BlackRock) has made the space highly competitive.

John James, managing director for Vanguard Europe, credits the company’s structure for its ability to constantly compete on cost.

He explains: “It comes out of our ownership structure – we’re a mutual, so all our profit goes back into lowering fees for our client. We are going to make life hard for our competitors and we are also going to make things better for the end investor. That really drives our whole culture here.

“We celebrate price lowering, we don’t celebrate paying profits to external shareholders.”

He continues: “Since we’ve been here, we’ve lowered the prices of our funds. I think our average expense ratio has come down from about 40 basis points to about 20, so we feel like we’ve had a big impact already. For us, we’re about growing size and scale, not for ego, [but] because that allows us to lower fees again.”

Does that mean more product launches from Vanguard this year? Yes, says Mr James – in fact, the firm is preparing to launch a product and service offering based on what it sees as a direct-to-consumer opportunity.

Details are scant, but he can reveal the following: “The direct-to-consumer [launch] is purely thinking there’s a percentage of the UK market that doesn’t have access to investing how they want to, and so they want to go direct. We want to make sure we’ve got something in place for that.”

Mr James took up his current role in July 2015, having headed up parts of the US and Australian business before then.

“So, eight years at Vanguard: I spent the first two years running sales and distribution for our ETFs in the US, then went and spent five years as CEO of the Australian business.

“One of the unique things about us is we generally rotate senior leaders. So in some respects, the transition here was reasonably well planned.”

CV - John James

2015 – present Managing director, Europe at Vanguard

2010 – 2015 Managing director, Australia at Vanguard

2008 – 2010 Head of broker dealer sales and distribution, Vanguard US

2004 – 2008 Chief executive, Port Adelaide Football Club

1998 – 2004 General manager of corporate solutions, MLC Australia

1994 – 1998 Regional and country (New Zealand) manager, Rothschild Australia Asset Management

He stresses, though, that he is in his current role for the long term, and that he is excited by the “growth and size” of the opportunity in the UK. With the European business at just over $100bn (£69.5bn), he says there is a “good foundation” on which to expand.

“The first thing is really [to] extend our reach across the UK,” he suggests. “We continue to build product, we continue to see great opportunities in the adviser and wealth manager segments. But we really see a great opportunity in the retirement pensions space as well, so that’s the big focus for the UK.”

More broadly, the plan is to continue offering products, or “building blocks”, that expand on the existing ranges. But these are not “fad” products, he suggests. “For us, it’s continuing to think through what are the building blocks we can provide that are long and enduring products. We never launch a product we don’t think will be on our rack for the rest of history.”

Last December, Vanguard launched its first active exchange-traded funds (ETFs) in the UK, run by its quantitative equity group. The four active ETFs will target exposure to different factors – value, momentum, liquidity and volatility – through globally diversified equity exposure.

“The best hidden secret at Vanguard is [that] out of our $3.5trn globally, we manage close to $1trn in active,” says Mr James.

“Outside the US, we’ve generally led with our passive and indexing range, so we just think it’s a natural step to bring in some active building blocks for our clients, to be able to run a portfolio where they’ve got both active and passive.”

These are not smart beta products, though, according to Mr James, who says he does not “even like the words”.

“We think those factors over a long period of time can outperform and we do that with our own methodology,” he explains.

“We do that at a low cost, but we also think if investors want to take a particular factor tilt, it enables them [to have] another building block, and we’re also looking at some more active later in the year.”

The competitive pricing in the passive market is putting pressure on active fund houses, which means greater scrutiny of this area of the industry looks increasingly likely. But Mr James insists it is not about active versus passive, citing the recent launch of the active ETF range.

“I think there’s a whole focus on the end-to-end value chain around cost, so it’s probably every aspect of what’s being delivered to an investor. There’ll be increasing competitive pressure, regulatory pressure around that.

“We think active is good, but we think active at a low price is where it should be at,” he says. “At the end of the day, price is only an issue in the absence of value.”

If there are excessive fees for closet tracking, then absolutely, we would be totally supportive of the regulator clamping down on that. John James, Vanguard

The ongoing FCA market study into asset management seems to offer an opportunity to delve deeper into the issues of fee transparency and closet trackers – that is, funds that are actively managed and charging active fees, but that appear to do little more than replicate an index.

He agrees. “We think it’s a really good thing to review the asset management industry and check what’s working and what’s not working. Check, does the entire value chain connect, and are we being transparent? Do people know what they’re getting?

“We think, strategically, it’s a great initiative as a participant in the industry.

“Our feedback has been, in doing any sort of review, be careful in looking at a solo part of the value chain, because you do need to look at the entirety. And let’s make sure consumers know what they’re getting, making sure it’s transparent, making sure there are no aspects of it that are not working.”

Does he think it likely the FCA will regulate closet trackers at any point, as some in the industry have been suggesting recently?

“I actually don’t have a view on whether there are closet trackers or not, but it makes sense that the regulator’s role is to make sure the investor’s getting the right deal… so if there are excessive fees for closet tracking, then absolutely, we would be totally supportive of the regulator clamping down on that. [But] how, I’m not too sure.”

While passive investing has become more popular among advisers and investors in the UK, the market here is still some way behind the industry in the US.

The figures remain impressive, though: Mr James points out that since the global financial crisis, Vanguard has taken in $1trn of net new cashflow globally. This he puts down to “market volatility, loss of faith by consumers in the big institutions”.

With the opportunity in passives still yet to be fully exploited in the UK, the likelihood is that competition will only get more ferocious.

He observes: “I think it’s going to be tough for new entrants. It’s a really competitive market, we’ve got long-established players with really good brand names.

“Normally when prices are coming down, it’s the really good that survive. So, I would say there’s more pressure on staying in than [on] coming in, because it’s getting more and more competitive. It’s a great thing for the investor.”

Ellie Duncan is deputy features editor at Investment Adviser