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Vanguard pivots from indexing to active in bid for overseas growth

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Walking through Vanguard Group's headquarters in Malvern, Penn., is a lesson in naval history.

Paintings of the 18th-century ship that inspired the company's name jostle with seascapes and a framed letter from legendary British Admiral Horatio Nelson. Even the campus itself conjures tales of derring-do, with buildings swooping along a shallow curve, as if tracing a galleon from stern to bow.

This maritime heritage is taking on new significance as the $4.4-trillion (U.S.) firm looks overseas for growth amid the biggest leadership shakeup in almost a decade. Vanguard is pushing into Europe and Asia-Pacific, but it's de-emphasizing the index-tracking products that brought in about 75 per cent of its assets in favour of an armada of actively managed funds, which Europeans tend to prefer. The offerings will still have Vanguard's signature emphasis on low fees, with some undercutting European rivals by more than half.

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"We're trying to catch up with what we've already done on the indexing side, to be able to offer low-cost, high-quality, active products to investors on a more global basis," said Greg Davis, the 46-year-old incoming chief investment officer, during an interview at the company's offices.

About $275-billion of the company's assets lie overseas, yet this equates to less than 10 per cent of Vanguard's overall bulk. And while Vanguard is a household name in the United States, it's a relative newbie compared with Europe's asset-management brands.

Global growth

Vanguard plans to change all that. The company began offering new mutual funds in Europe for the first time in nine years last May and listed four active exchange-traded funds a few months prior. It has started similar ETFs in Canada and plans to set up its first active fixed-income fund in Europe within six months, according to Mr. Davis.

Active funds are "pretty ubiquitous" in Europe, where that style of management resonates, according to Rich Powers, head of ETF product management. These types of funds house about 86 per cent of assets in the region versus about 65 per cent in the United States, where index-tracking ETFs are more established. The active funds typically cost more, according to data from Morningstar, but that hasn't yet been a deal breaker for investors on the continent.

"In the last five years, all the headlines are about the onslaught of passive, but we have more or less doubled our assets under management in that time," said Maarten Slendebroek, chief executive officer at Britain-based Jupiter Fund Management PLC, which manages about $61-billion. "If you have really strong performance and you outperform, then customers will be happy to pay."

Vanguard plans to test that thesis. Investors pay an average of 1.02 per cent in fees for star managers on euro-based funds, Morningstar's data show. Vanguard is charging 0.22 per cent for its active ETFs and 0.6 per cent for three of its new mutual funds. The company has previously said high costs was one of the main reasons most actively managed funds underperformed their chosen benchmarks in the past 15 years.

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"Because our size, our scale and our ownership structure is so unique, we have this natural ability to continue to lower cost," Mr. Davis said.

Consumer platform

Mr. Davis is taking over as chief investment officer after Vanguard announced this month that the current investment chief, Tim Buckley, will become chief executive. Bill McNabb is stepping down at the end of the year after holding the top job since 2008.

An "inexorable tide" toward fee-based advising has acted as a tailwind in the United States and overseas, according to Mr. McNabb. A new European regulation known as MiFID II that takes effect next year will shine a light on inducements paid to distributors for selling funds, highlighting the more relationship-based approach to advice promoted by the likes of Vanguard.

The company's advisory outfit will support its global aspirations, Mr. Davis said. The firm's Personal Advisor Services platform garnered $83-billion since it began in 2015 for U.S. investors, and help with money-management is something needed by investors around the world, he said. The company started a direct-to-consumer platform in Britain in May.

"The regulatory landscape has shifted in a lot of markets and there's the big global trends toward transparency around fees, better regulation, clearer understanding of the value chain and a recognition that cost actually matters," Mr. McNabb said.

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'Culture carriers'

The company plans to open an office in Germany, where it might list some of its ETFs. It has also opened a sales and marketing office in Shanghai and added economic and strategic resources to an outpost in Hong Kong. Most recently, Vanguard hired a new head of its Mexican business to help the firm expand.

High-achievers rotate around these bases, with Mr. Davis spending time in Australia before his most recent role. These executives act as "culture carriers" for Vanguard's brand of asset management, with employees encouraged to think of one another as "crew members" who lunch in a canteen called the Galley and exercise at the Shipshape gym.

As Mr. McNabb says, "when you walk into these offices, wherever they are, you'd think you were here – except for the accents."

The outgoing CEO has few regrets as he hands over command to Mr. Buckley, but says the company "could have been faster" in establishing itself as a global firm.

Mr. McNabb will leave day-to-day leadership to Mr. Buckley starting in January and focus on corporate governance as Vanguard's chairman. His navigation skills won't go to seed, however – when he's not in the office, he'll be indulging his love for rowing on the Schuylkill River.

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