Vanguard is seen by many advisers as the doyen of passive fund management. Globally it manages $5 trillion (£3.5 trillion) of assets and around 90% of its $370 billion inflows for 2017 were into index-tracking funds.
In the UK Vanguard has £50 billion of assets. Founder Jack Bogle is, to some extent, considered the architect of passive investing and has predicted passives will eventually account for 90% of the investment market.
So it might surprise some to discover Vanguard has its roots in active management, launching in 1975 with 11 active funds. What is more, it currently has a quarter of its global assets invested in its own active products.
Vanguard senior national development manager Andy Surrey (pictured) tells New Model Adviser® more.
No more years of hurt
We have been doing sub-advised for 43 years. It is the way we do all of our products and it has some real structural advantages.
The UK market is starting to recognise this. There is a bad joke I always tell: if you are limited to English football players, you end up with an England football team (albeit one that may actually do better than you thought once every 28 years). Likewise, if funds of funds are limited to UK-domiciled managers, you get pooled managers as well.
That narrows the field of talent massively. Whereas, with sub-advised you can go anywhere. They do not have to be a UK-domiciled entity.
In our emerging markets products we use Baillie Gifford. We use Pzena Investment Management, for whom (Citywire AA-rated) Allison Fisch is principal portfolio manager.
It is a New York-based boutique and one of the best deep value investors on the planet. It is incredibly precise and skilled.
We also use Oaktree Capital, which is the long side of a Connecticut-based long-short hedge fund.
You cannot do that if you are only filtering by what is in the IA Global Emerging Markets sector, for example. The end of that joke, by the way, is: if you choose any player in the world, you are Manchester City.
We took equity sectors available for selling in the UK 15 years ago, which was 513 funds. But here is the brutal bit: two-thirds of them did not survive.
They just do not exist any more as most were merged. So of the funds that survived, the majority underperformed.
The 10% that survived and outperformed are what we call the successful funds. That is where we are looking. There are ways to improve your odds of not picking underperforming funds.
We did some work, in which we discovered the difference between an investor on their own and an advised investor’s returns was 3%. Half of that was down to a behavioural gap.
The truth of the matter is, looking at that 10% of successful funds, every single one underperformed for at least four years. So underperformance is completely normal and we would like to see more patience.
You often see processes in which, if a fund is underperforming for 12 months, it is put on a watch list. If it is still underperforming six months or a year later, it is sold.
People should be more patient. If you want to get to the end of the road, this is what you have to get used to.
When it comes to fees, we negotiate every basis point (bp) because we know it counts. When you are running $1 trillion of active, one basis point is a lot of money.
The average operating cashflow of index funds is still way too high, likewise with active. If someone paid 50 bps for an index fund, everyone would look at them as if they were mad.
You know you can get that for 15 bps. But there are people buying active funds for 1.5% and you can get them for 60 bps. That is madder surely.
Low cost gets you closer. It can turn a mediocre fund into a good fund and it can turn a good fund into a great fund. The advantage of low cost is huge.