Another day, another nail in the coffin of active investment management – or at least of those active managers who can’t make a coherent and convincing case for why investors should give them the time of day. The entry of Vanguard into the UK retail market genuinely does look to be an existential threat to some of the businesses from which it will hope to take market share.
With annual fees starting at 0.08 per cent on its index tracking funds, plus an administration fee of 0.15 per cent for investors with £500 or more in their Vanguard accounts, this will be the cheapest possible way for most investors to buy funds and investment individual savings accounts (ISAs) in the UK, undercutting the leading platforms by a considerable margin.
Moreover, while Vanguard’s rivals may take some comfort from the fact it is only planning to sell its own funds, at least in the short term, they are likely to be disappointed. With investors increasingly convinced that passive funds are their best hope of securing the highest long-term returns, the entry of a new and substantially cheaper player in the market is going to make a splash. Investors won’t be put off taking their business to Vanguard because it only offers its own funds – those low-cost products will be exactly what they want.
The irony is that while Vanguard has made its name in passive fund management, it has increasingly come to recognise that there is a place for actively-managed funds; in fact, around a quarter of the £3.3 trillion worth of assets it now manages globally – making it the second largest fund manager in the world – are in actives.
Importantly, however, Vanguard’s active fund charges are super-low too, starting at around 0.6 per cent a year. It has taken the sting out of the debate over whether the performance of active funds justifies their higher charges by not having higher charges on its active range – or at least not the level of higher charges typical in the active market, where 1.5 per cent a year is standard.
In simple terms, Vanguard has got the message: price is more or less the only game in town right now when it comes to marketing asset management products. For specialist funds delivering a very particular value proposition – exposure to a hard-to-access emerging market or a more esoteric asset class, say – that may be less true, but when it comes to the mainstream market, where most retail investors and their intermediaries commit their money, cost is the killer differentiator.
It’s not difficult to see why. Over pretty much any historical time period you care to look at, active managers, on the whole, are not able to justify their charges. A tiny handful consistently manage to outperform the market and their active rivals, even after the effect of fees, but the numbers are very small.
It was this issue, above all, that prompted the Financial Conduct Authority to issue its damning critique of the actively-managed investment sector last year – it essentially accused many funds of ripping off their investors. And while some asset managers believe the FCA got it wrong because the regulator looked at a period of financial market returns where active managers were naturally going to find it tough to outperform, this is hardly the first study to have reached the same conclusion.
Indeed, all the whingeing in the world about the FCA’s methodology – or, indeed, the merits of Vanguard’s new offering – isn’t going to stem the tide. Many investors now believe they’ve been taken for mugs – and that the risk of this continuing is too great for them to even consider trying to pick one of the small minority of actively-managed funds that will deliver value.
How do asset managers respond to these threats? Well, we’re already seeing one answer to that in the way fund charges have come down across the board in the UK over the past three years. Some managers have gone further – Neil Woodford’s Patient Capital fund, for example, makes no charges at all unless certain performance hurdles are cleared.
Price wars, however, are unhappy experiences for all who get caught up in them. The bigger challenge for active fund managers is going to be to prove they offer something for the money that the likes of Vanguard do not. That will require far greater transparency – both on the breakdown of the fees charged, but also on performance. Attribution data, for example, can demonstrate exactly what value a manager is offering.
In short, this is going to be an exercise in fund marketing: the key will be to assess what investors are looking for from the fund and then to articulate how that need is being met, at an affordable and justifiable price, in the clearest possible terms.
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