U.S. mutual fund giant Vanguard is introducing a clutch of low-cost investment products in a move that could shake up the UK retail fund market and pension provision, a senior executive said on Tuesday.
The fund manager plans to launch a broad range of about a dozen low-cost index tracker funds for UK investors this year and will, over time, also look to offer access to active managers at low cost, as it does in the U.S. market.
We would need to assess what the market needs, and which managers we could work with, but we can get the investment services wholesale and provide them to investors cheaply, Tom Rampulla, managing director of Vanguard Investments UK, told Reuters.
In the U.S., Vanguard offers passive funds at an average total expense ratio (TER) of some 16-17 basis points, and access to actively managed funds at an average TER of 26-28 basis points. The total expense ratio is a measure of the total costs associated with managing and operating an investment fund.
If Vanguard can get close to this in the UK, it could force down costs across the market, where retail investors are charged an average TER of 145 basis points for active funds, according to Lipper data.
Sceptics have argued that Vanguard, which has $1.1 trillion under management globally, will struggle to match its low U.S. costs because of the difference in economies of scale, but Rampulla said the UK funds would be competitively priced initially.
And as assets grow and we become more operationally efficient, we will be able to lower expense ratios over time.
Vanguard will keep costs down by delegating the investment management to teams in the United States and Brussels and scaling trading. It has also outsourced fund accounting and transfer agency functions to State Street.
Vanguard does not pay trail fees or commissions, and will work only with fee-based advisers, which it believes will become a larger part of the UK market. Rampulla said it was cheaper to pay for advice than to keep paying commissions over the lifetime of an investment.
To support its UK rollout, Vanguard is hiring sales advisers and customer services staff, aiming to have some 25 employees by year end. It will then build the team to some 40-50 people over the next three years, with senior management, sales and marketing, and analyst hires.
Vanguard is also about to start looking for a head of institutional business, to target both the traditional and defined contribution (DC) pension business in the UK.
The opportunity today in the UK is in the traditional institutional business but that's not exactly growing, and the DC market will grow over time. The DC market is a very high strategic initiative for us, said Rampulla.