Managers hired by Vanguard to run money within its range of actively sub-advised funds know they won't be ditched due to poor performance, according to Andy Surrey, national development manager for the product range in the UK.
The funds include the £27m Vanguard Global Balanced fund, the £14m Vanguard Global Equity Income fund, the £15m Vanguard Global Equity fund and the £19m Vanguard Global Emerging Markets fund.
The funds are run by external sub-advisers including Vanguard’s long-term partner US firm Wellington Management, Edinburgh-based Baillie Gifford, Oaktree Capital, a Los Angeles-based manager and Pzena Investment Management, a $26.6bn (£19.7bn) New York-based boutique.
Mr Surrey said there are four criteria they look for when choosing a fund manager for the range of active funds, and as long as the criteria continues to be met, then the fund managers know they won’t be replaced.
The managers “must be aligned with how we think about markets and investing", Mr Surrey said.
"The investment team must be well-resourced, and they must have an investment philosophy that they can repeat time and again.
"It cannot be that the way they invest just happens to be in favour at the time. It must be a repeatable process."
He said the fund selectors at Vanguard hold up to 200 meetings a year with potential fund managers and operate a traffic light system, requiring the funds it includes on its list to pass through each of those criteria.
He said Vanguard employ 22 people to monitor the funds on the list.
Half the capital in the Vanguard Global Equity fund is managed by Charles Plowden and colleagues at Baillie Gifford, with the other half managed by Wellington.
Mr Plowden is the joint senior partner at Baillie Gifford and also runs the £1.3bn Monks Investment Trust.
Mr Surrey said the Baillie Gifford managers have a distinct growth focus, while Wellington are value managers.
Wellington run all of the money in the Global Balanced fund.
He said: “We are prepared to allocate all of the money in the fund to one manager if we believe in them enough. The investment note put out by Wellington is reputedly the only one read by Warren Buffet."
Wellington Asset Management once employed John Bogle as a fund manager.
He later founded and served as chief executive of Vanguard.
Vanguard also has some of the money in those funds managed by its own in-house managers, who Mr Surrey said must go through the same scrutiny as the external managers.
Vanguard launched its first actively managed fixed income fund on the last day of August.
The fund has an annual charge of 0.3 per cent, which Mr Surrey claimed is far cheaper than its peers.
He said Vanguard believe bond fund managers can achieve only 0.75 per cent of annual outperformance in income terms without taking excessive risk, while the average annual management charge is greater than that.
Mr Surrey said the recently launched Vanguard Global Credit Bond fund, because of its lower charges, can outperform the sector.
Alistair Cunningham, financial planning director at Wingate Financial Planning, said he thinks it is perfectly valid to stick with a fund manager that is under-performing - if they continue to follow the same process they outlined when he first invested in the fund.
He said as long as he continues to believe in the fund manager's process and understands the reasons for the under performance, he will stick with a fund.
But Andrew Wilson, the former head of investment at Towry, who recently launched his own firm, Lockhart Capital, said he would sell a fund if he felt the manager was moving away from the agreed strategy, or if the strategy would become more difficult for the manager to implement due to changes at the corporate level.
david.thorpe@ft.com
