Where Vanguard Is Growing

Opportunities for Growth

Susan Dziubinski: Talk a little bit about some growth areas for Vanguard. You alluded to earlier a little bit about Vanguard’s advice business. Talk a little bit about it, what it’s doing in the advice space, and what this might mean for individual investors.

Alec Lucas: What’s really interesting about Vanguard is, it’s got its start as a no-load shop. So, back in the day when Vanguard started in the mid-70s, the way that you got advice was you paid a load, and that’s how advice was given, and it famously started by sort of bypassing the advice structure at the time. Actually, that was early on. It did initially actually have a load, to correct myself. But it’s reentered the advice business. It started that in the 1990s, but that’s really amped up in recent years with the launch of Vanguard Personal Advisor Services as well as Vanguard Digital Advisor. So, if you have as little as $3,000, you can for an all-in cost, including advice and fund fees, 20 basis points, so $20 for every $10,000 invested, you can have a diversified global portfolio tailored to your own goals. So, it’s a really compelling offer.

And as your financial life gets more complicated, at $50,000, you can get access to a human advisor; at $500,000, you can get a dedicated certified financial planner. And for those high-net-worth individuals who are more than $5 million, they can get personal trust services, access to private equity. So, in entering Vanguard’s ecosystem advice, you not only get access to their funds—and they’ve in recent years launched very compelling actively managed funds that are part of that advice package; they’re kind of high alpha or high-conviction strategies that are part of this advice package that are actually only available in certain cases to advice customers, so that those advisors can help investors sort of stay the course when they might be otherwise prone to bail. It is really a compelling offer that they have and has really extended, I think, their leadership in the United States.

International Growth and U.S. Investors

Dziubinski: Now, let’s talk a little bit about what you alluded to: It does have leadership here in the U.S., but it sort of has modest non-U.S. assets. So, what is the firm doing to amp up its growth internationally and what, if anything, does that mean for an investor here in the U.S.?

Lucas: Vanguard had about $550 billion in non-U.S. assets at year-end 2020, and at the end of last year, it was about $530 billion in assets. Part of that drop was the market. Another part of it was Vanguard has sort of refocused its international operations in recent years. And what it did is, previously it had certain relationships with institutional payers where it would be giving them a fairly low-cost access to investment options, and those investment options were then being passed on to the end investor with a surcharge added, essentially. So, Vanguard pulled away from those relationships. This happened in Asia, for example. So, it actually withdrew some of the AUM that it had. It purposely shrunk its business to focus on financial advisors and to focus on individual investors. Historically, in growing its overseas assets, it’s sought to lead with index products, exchange-traded funds, and now more recently, advice.

There’s been some fits and starts. It launched an advice offer in the United Kingdom a couple years ago, I actually think it was April 2022. And it just recently in this first quarter decided to close that business, which was a bit of a surprise. When I asked them about that, they said, they launched an offer that was really geared toward retirees and got quite a bit of interest but from more younger investors, and they thought that they could improve the business. And I think Vanguard’s goal is to play the long game. When I talked to them about their non-U.S. business, they cited a study of Italian investors that are paying, I think the figure was 206 basis points all-in for advice plus fund fees. Contrast that with what U.S. investors can pay as little as 20 basis points. So, your average Italian investor is paying 10 times more than what’s available to a U.S. investor. So, Vanguard thinks that it has the long-term advantage in terms of its competitive low-cost positioning in terms of growing its non-U.S. business. But it has had some setbacks. It’s made some major changes, for example, in what it’s done in China. So, it remains to be seen. I think if we look back 10 years from now, this next decade, the next 20 years is going to be about the growth of Vanguard’s non-U.S. business.

Active Fixed-Income Strategies

Dziubinski: As far as future growth goes, the firm is branching out into active fixed-income strategies. Tell us about that.

Lucas: Yes. So, they launched an emerging-markets bond fund in 2016. It became available for investors in late 2017. They’ve launched a core-plus multisector bond fund. There’s a high-yield fund. On Aug. 29, about a third of its assets went to an internal team managed by Vanguard. So, if we step back, what’s happened here is that Vanguard CIO Greg Davis used to head up their fixed-income group, and he saw an opportunity a few years back to bolster Vanguard’s in-house fixed-income capabilities. They’ve made some key external hires. One I’d would point to is Sara Devereux. She joined Vanguard in October 2019 from Goldman Sachs. She’d worked there for about 20 years. She was originally head of rates at Vanguard and then took over the fixed-income group on July 1, 2021, when John Hollyer retired. And so, she has really, I think, helped key efforts for Vanguard to compete with best-in-class fixed-income products, and we’ve seen a number of funds launched, the ones I mentioned.

Dziubinski: Interesting. The last growth area for Vanguard—at least the last one we’re going to talk about—relates to the firm’s efforts around environmental, social, and governance investing, or ESG. BlackRock has leaned pretty heavily into ESG as a key pillar for its business. What’s Vanguard doing here?

Lucas: Vanguard is committed to its indexing business. And so, in that respect, it is trying to vote its proxies responsibly for its indexing business, and it has a whole team, a stewardship team, devoted to doing that. At the same time, it’s ramped up its efforts to increase ESG offers. So, it has a head of global ESG product that was named a few years back. I think that happened in 2020. And then, it’s launched some funds. It’s adopted, in one case, a Baillie Gifford positive impact fund. It partnered with a new subadvisor that was originally founded in 1991, hence the name of the firm is Ninety One. It was founded in Cape Town, South Africa. And so, it launched a global high-conviction fund that’s only investing in companies that are committed to reducing carbon and/or facilitating positive environmental change. It invests in about 25 companies. What Vanguard is trying to do is give investors choice. If you think back to its purpose, is to take a stand for all investors. So, it’s trying to take a stand for investors who just want to index their assets and not think about other things. It’s also trying to take a stand for investors who care deeply about the environment and want their values expressed in the way they invest, and it’s trying to give them options to do that, and it’s launched a number of funds to help them do that in recent years.