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Vanguard goes in for the kill in Europe: Which active asset managers will survive?

Warren Buffett

Vanguard, the fund management firm started by John Bogle as a response to the high active asset management fees that eat into investments, has grown into a giant. The mutual fund management company is set to scale to greater proportions as it eats into asset management market share in Europe. Vanguard has a strong brand, with a simple, clean look and messaging that reminds consumers it puts their interests first. But Vanguard doesn’t need to spend too much money on marketing, as much of its sales work is being done for it. Warren Buffett famously said he would like his own partner’s money housed in an S&P 500 index-tracker – preferably a low-cost option from Vanguard – which helped to generate interest in the company. Mostly, though, investors have wised up en masse to the scourge of high investment costs. The knowledge that asset management fees and other investment-related costs tend to wipe out returns has done most of the marketing work for Vanguard. Investing in passive funds like index-trackers is simply more compelling in a world in which it is hard to generate a steady, growing income through investments. Passive investing has increased rapidly in Europe. All that is required by asset managers to compete with passive funds, says Vanguard, is a decision to take vastly lower fees and trim finances. If you visit the plush London offices of a global asset management firm, you’ll see that it will take a culture shift of seismic proportions to do that. Removing expensive culinary treats and pricey art works from boardrooms and other luxuries like shoe buffers and top-end courtesy creams from bathrooms is just the start. Big salaries for rock star fund managers and cumbersome administrative systems that prop up the sector are some of the other costs that need to be shaved before active asset managers can compete aggressively with passive fund providers. – Jackie Cameron

By Lukanyo Mnyanda

Bloomberg – Vanguard Group Inc. smells an opportunity. The world’s largest mutual-fund company is betting the passive-investment model it pioneered in the U.S. is about to seize more of a foothold in Europe, and it’s lining up for a piece of the action.

Forthcoming regulations such as MiFID II will probably increase the cost of managing money in the region, likely benefiting investments that track indexes to the detriment of active products where managers are paid to pick stocks and bonds.

Vanguard sees this driving up passive investing’s share of the European market from 15 percent to almost a third over the next 10 to 15 years. That would match the proportion in the U.S., where, according to Moody’s Investors Service, tracking funds are set to overtake their pricier peers in seven years’ time.

“Active is dying from its own disease, it’s dying from its own greed,” Tim Buckley, Vanguard’s chief investment officer, said in an interview at the $4 trillion money manager’s London office. “It’s high-cost against low-cost, and high-cost is the dinosaur.”

In its response to U.K. regulators’ proposals aimed at boosting competition among asset managers, Vanguard, which has $1 trillion in active funds, on Monday called for a “health warning” on fees to be included in all funds, saying high costs was one of the main reasons why most actively-managed funds underperformed their chosen benchmarks in the past 15 years.

Passive investing is already expanding rapidly in Europe, with total assets increasing by about 80 percent to €1.1 trillion ($1.2 trillion) in the three years through 2016, according to data provider Morningstar Inc. Vanguard’s European operation has also grown from humble beginnings, from a lone person when the global financial crisis struck to a 300-strong team managing about €110 billion.

Also read: Meet the managers running huge Vanguard index-trackers

During the past 18 months, Vanguard has focuses on “a broadening of our capabilities in Europe as we add new funds and new structures and this is just part of the natural evolution of the business here,” said Mark Fitzgerald, a senior product manager at the company.

Not everyone thinks active investment is destined to suffer a drawn-out decline. The strategy is underperforming because quantitative easing and record-low interest rates make it harder for talented fund managers to distinguish themselves, while boosting the stocks tracked by passive funds to record highs.

To Colin McLean of Edinburgh-based SVM Asset Management, that means the setbacks to active investing might be temporary. “There are still opportunities for active managers, particularly away from the very biggest companies,” the firm’s founder and chief executive officer said. “It will balance itself out.”

Vanguard says it’s cheaper than the competition. It charges an average fee of about 0.18 percent, compared with an industrywide average of about 1 percent, according to the Malvern, Pennsylvania-based company’s data. Charges across its fund offerings are less than market norms because of its focus on passive investing, it says.

“Active could have a bright future if managers would just accept lower margins,” Vanguard’s Buckley said. “Managers haven’t recognised that they’re in a more competitive environment – that you’re no longer competing with amateurs but are in a zero-sum game with other professionals.”

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