For Americans, Warren Buffett included, the late John Bogle is a financial folk hero. His creation, the $7.7trn Vanguard Group, is a household word. For context, the house that Bogle built manages assets 22 times South Africa’s GDP on behalf of 30 million clients.
Bogle’s mission was to offer small investors low costs with returns that matched the stock market. His index funds grew from an oddity to ubiquity. Buffett loves to tell pilgrims at the annual Berkshire AGM that his wife Astrid will receive her inheritance via units in Vanguard’s S&P500 Index Fund.
A big part of Vanguard’s success is the now wide acceptance among investors that few active managers beat the indices, and as a result, there has been consistent outperformance by passive funds. Plus, Vanguard’s super-low fees. Astrid’s S&P500 fund charges a fee of just four basis points a year – the Vanguard website says its prices are 83% less than fund averages in the highly competitive US market.
___STEADY_PAYWALL___So why have the Europeans, Asians – and South Africans – been so slow to join the Bogleheads? Perhaps because the penny hasn’t dropped, costs are critical in determining the end value of long-term portfolios like retirement funds. Then again, it did take the Americans a couple of decades before they caught on.
We all progress at different rates. Whole nations too. The excellent piece below explains that Vanguard managers are surprised at the slow global uptake. However, there’s an inevitability about the worldwide spread of Bogle converts. Because the rational perspective always prevails. – Alec Hogg
*Less than 20 tickets (of an initial 180) are left for the BizNews@10 one-day conference in Hermanus on Friday, August 4. If you want to join us, please book soonest. Here’s the link: https://qkt.io/zLaR1L
Bogleheads rule in America – but pioneer of passive funds is struggling elsewhere
By Loukia Gyftopoulou for Bloomberg Businessweek
(Bloomberg Businessweek) — Inside the London outpost of US fund giant Vanguard Group, the message was blunt. There’s only one way here: the Vanguard Way.
Familiar talk about expanding across Europe – about exporting the vision of founder John Bogle, America’s great popularizer of the low-cost index fund – was starting to sound like a warning.
Bosses are watching back in Malvern, Pennsylvania, 3,500 miles and a world away from the City of London, the UK crew was told. Their patience might have its limits.
“It’s like we have a rich uncle in the States who’s paying for this,” Sean Hagerty, a Vanguardian who spent 20 years in Malvern before being dispatched to the UK, told employees that morning. “And one day, he may get tired of it.’’
That disquieting message, delivered in 2019 and repeated ever since, is getting a lot louder these days. Because the hard truth is this: Vanguard, the late Bogle’s quirky creation and practically a household name in the US, is struggling to sell itself to the rest of world.
That might be difficult to fathom for America’s legions of Vanguard enthusiasts, known as Bogleheads. Founded in 1975, back when the Dow was bumping along 700, Vanguard today stands as a mighty US monument to the triumph of passive investing. It oversees a staggering $7.7 trillion in assets. Only BlackRock Inc. manages more.
Customers? Vanguard has more than 30 million of them. To put that in perspective, consider this: Switzerland has 8.8 million people. It’s safe to say that just about everyone in the US with a 401(k) plan – that’s roughly 60 million people, more than the entire population of Italy – has heard of Vanguard.
So Vanguard might seem like a shoo-in to become a Coke or Apple of funds, a US power brand primed for export.
And yet, the opposite has happened. Leave the US, and Vanguard can start to look less like an aspirational brand and more like an interloper who acts like everything, everywhere is just like it is back home, or should be.
In this case, that includes Vanguard’s $7.7 trillion version of American exceptionalism: an abiding belief that the world will beat a path to its door.
“We’re here to change the European market,” Hagerty, managing director for Vanguard Europe, said in an interview. “It needs to be changed.”
Things haven’t quite turned out that way. Already, Vanguard has retreated in Asia. It’s shut its offices in Tokyo, Hong Kong, Singapore and, largely, in Shanghai. Now, its European campaign, field-marshalled by Hagerty, is feeling pressure too, Vanguard insiders say.
Interviews with more than two dozen current and former employees in a range of roles and locations paint an unsparing portrait. (The people spoke on the condition they not be named to avoid jeopardizing their careers.)
Vanguard, these people say, often has misread its customers and employees in Europe. It’s done the same with local industry players who are vital to its success.
They point to a series of time-sucking missteps, from trying to impose US business models across the Atlantic to struggling with differences in regulations, business practices and cultures.
Several recall long phone calls with Malvern explaining that, yes, Vanguard had to follow European rules, just like everyone else, even though it’s based in the US. (Vanguard hasn’t been accused of breaking any rules.)
Some fumbles have amounted to business equivalents of cultural faux pas. In Dublin, for instance, where Vanguard employs 40 people, a friendly request for a meeting with the Central Bank of Ireland prompted confusion. Executives in the US told local staff that they didn’t understand why Vanguard had to take the meeting at all. (Unlike the US Federal Reserve, the Irish central bank routinely checks in on large investment firms via its regulatory division.)
Insiders say it took several years for Vanguard to adjust to the fact that the British might not want to invest like the Swiss, who might not think about funds like the Italians, who might have different ideas about all of this than the Germans.
For a time, Vanguard was pitching very British FTSE 100 index funds to people in Zurich. Swiss staff had to explain that Swiss wealth managers catering to Swiss clients expected investment products denominated in Swiss francs, in addition to euros and dollars. One employee recalls explaining to bosses that what worked once for Vanguard in Tokyo might not work today in Berlin.
Vanguard, meantime, has been spending many millions to expand its reach from the Baltic to the Mediterranean. At one point, it was expanding so quickly in London that its office there ran out of desks, former employees say. Today, the company employs roughly 1,000 people across Europe. It’s opening an outpost in Manchester and expanding in Berlin.
And yet the payoff – or at least one big enough to move the needle back in Pennsylvania – remains elusive.
By Vanguard’s own count, the company has pulled in $163 billion of assets in the UK since landing there in 2009. Four offices on the Continent – Berlin, Frankfurt, Milan, Zurich – have amassed a combined $137 billion.
The total – roughly $300 billion – might sound like a lot. But it represents a mere 3.9% slice of Vanguard’s $7.7 trillion pie. And keep in mind that for most of the past decade, European stock markets have been rising, albeit with ups and downs.
Hagerty is quick to acknowledge he isn’t in Malvern anymore. Via Teams in early June, he conceded that Vanguard has moved slowly at times. Asked about his “rich uncle” comments, he nodded and laughed.
That support may not last forever. Mortimer “Tim” Buckley, the former Bogle assistant who runs Vanguard Group, at some point has to show his board that the long, costly push into Europe will pay dividends.
Buckley, 54, declined to be interviewed for this story. But in a Feb. 21 interview on Masters in Business with Barry Ritholtz on Bloomberg Radio, he was upfront: Vanguard has had to make some tough decisions.
“Internationally, we were spread too thin,” Buckley said. Rather than focusing on core customers – individual investors – the company was trying to pitch itself to institutions too. That isn’t what we’re about, Vanguard belatedly concluded. It didn’t help that the company was losing market share back home in its critical 401(k) business.
“We basically pulled back from Asia,” Buckley said. “And we gave back $125 billion in assets, which most people think is crazy.”
Freddy Martino, a spokesperson for Vanguard in Malvern, referred questions back to Europe.
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Sobering Fact
Inside his offices in the Walbrook Building, a Norman Foster-designed hulk a short walk from the Bank of England, Hagerty is still coming to grips with one sobering fact: Most people in Europe don’t know who or what Vanguard is.
A brand survey of 800 people in 2019 found that even in the UK, with its Anglosphere ties of a language and culture, the Vanguard name hardly resonated at all. Some respondents thought Vanguard might be a pipe company. Others guessed it was a heavy metal band, according to someone who worked at Vanguard at the time.
Hagerty, 62, says it took Americans a long time to come around too.
“They thought we were an airline,” he says of US investors back in 1990s, when he signed on in Malvern, “and called us to book flights to Kansas City.”
Hagerty is an affable Pennsylvanian who seems plucked straight off the Vanguard campus. He studied accounting at a small college in western New York, just over the state line, and then communications at Villanova, 16 miles from Malvern. After a stint in accounting and a dozen years at a Pittsburgh bank, he joined the Bogleheads. He’s been at Vanguard ever since.
If Vanguard’s overseas aspirations have been thwarted for now, it hasn’t been for lack of ambition. As recently as 2017, the company was still dreaming of expanding all across the continent and, as in Asia, of trying to sell itself not only to individuals but also to institutions, according to people familiar with the matter. In the end, Vanguard narrowed its sights. Today it has offices in Switzerland, the UK, Germany and Italy.
Each time, Vanguard — which relies on word of mouth in the US — waited for the phones to start ringing, according to the people. They didn’t. In the end, management agreed they had to spend time and money on marketing.
And so, in Germany, Vanguard began advertising on Berlin Klassik Radio and at ski resorts. It put billboards in the London Underground. In Switzerland and Italy, it mostly still leans on conferences and meetings with wealth advisers who might steer investors to Vanguard.
Early ambitions to sell Vanguard products to pension funds in the UK have been put on ice. So has a short-lived financial planning arm to offer retirement advice via the firm’s personal investor platform.
Malvern believes Europe will come around to the Vanguard Way. And, indeed, the company has won over many UK financial advisers.
Vanguard also has made some headway in exchange-traded funds marketed to ordinary investors. But there, too, the situation is mixed. In the first six months of 2023, it ranked No. 2 in ETF sales in Germany with €8.2 billion of inflows. At No. 1, BlackRock handled four times as many flows, according to data compiled by Morningstar Inc. Europe-wide, Vanguard was seventh for AUM among money managers, data as of end of March show.
Vanguard has been extolling its virtues to financial advisers across the Channel, according to Hagerty and another executive. In particular, it’s working on Germany, where people tend to invest through these intermediaries.
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But, again, Vanguard is Vanguard. It wants German advisers to swap one of their standard industry practices – working on commissions – for a US-style fee model. Vanguard, in other words, expects the Germans to fall in line with the Americans. Never mind that the European Commission had to pull back on this issue after the German financial industry kicked up a fuss.
“We did it in the US, and we’re going to do it in Germany,” Hagerty insists of the drive. “We’re going to do it or die trying.”
The our-way-or-the-highway talk worried some of Vanguard’s European employees. So does the way Vanguard has rotated executives from Pennsylvania and elsewhere into key roles in Europe, in some cases, despite scant experience on the ground.
Vanguard DNA, former European staff say, sometimes can trump local knowledge. In the London offices, Brits joked that Brexit seemed to baffle their US colleagues. Some of the American arrivals, they said, seemed to think Britain’s departure from the European Union would mean they’d promptly be deported.
Sniping aside, the pressure is on. Bogle’s vision of index funds with paper-thin fees has changed the way America invests. But it also means that his singular creation, which is owned by the people who invest in its funds, needs to amass assets on vast scale to throw off money to cover costs and push into new markets and products.
Executives from the headquarters flew to London in June to discuss European investment strategy. Not everyone agreed on the way forward, according to people familiar with those talks. UK staff urged their visitors to expand Vanguard’s range of offerings. The US side’s response: Let’s wait and see.
Hagerty sums up the Vanguard view.
“I don’t think we should give clients what they want,” he says. Vanguard, he says, gives people what Vanguard thinks they should want.
Employees in Europe know what that’s like. Some complain that sometimes their ideas aren’t taken seriously; Hagerty says he’s always open to good ones. Others have voted with their feet, particularly on the Continent; Vanguard says turnover hasn’t been that high.
Hagerty says Europe is well positioned to start making a real contribution. According to people familiar with the matter, he told senior London staff in 2021 that HQ expected to start seeing results in two or three years – which, on that timetable, means this year or next. Vanguard declines to comment on that, but executives say privately that profits aren’t the priority.
If so, that might be a good thing. According to a person familiar with internal Vanguard discussions, the European operation might need longer to start making money. A Vanguard spokesperson for Europe declined to comment.
Hagerty is unbowed. Momentum is building. The $300 billion Vanguard has amassed in Europe is plenty to scale the business, he says. Headquarters is as committed as ever to spreading the Gospel of Bogle.
For Hagerty, as for so many Vanguard believers, it’s not just business. It’s personal.
“The mission runs deep,” he says.
–With assistance from Annie Massa and Steven Arons.
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