Vanguard investment management: Exceptional talent at low cost to you
April 03, 2013
You won't be surprised to know that keeping costs low plays a big role in how Vanguard serves clients. But there's another focus we pursue with equal fervor: attracting exceptional managers for our funds, whether they happen to be in-house or external.
While this might seem paradoxical, Vanguard has long been adept at selecting outstanding managers, and it has helped set us apart from other fund providers, according to a recent Vanguard research paper.
There are four key factors that allow us to offer our clients great fund management talent while still containing costs:
Relationships with leading external managers
In addition to our internal investment managers, Vanguard works with 29 independent investment management firms that employ 48 teams of professionals with hundreds of supporting analysts. The majority of our actively managed equity funds are managed this way.
"These firms manage the portfolios that we believe would benefit from their specialized expertise," said Dan Newhall, head of manager oversight for Vanguard Portfolio Review Department. "By going to the outside, we're able to draw on the diverse talents and investment philosophies of these managers."
A number of Vanguard's actively managed funds use several managers, with each managing a portion of the portfolio. "A multimanager approach allows us to reduce the natural volatility of any one manager," Mr. Newhall said.
The review process external managers go through before beginning a relationship with Vanguard is intensive. When considering a manager, Vanguard Portfolio Review Department focuses on four key elements—firm, people, philosophy, and process. We build relationships only with those forms that meet our high standards for each element.
"Our senior analysts are responsible for knowing every manager in their respective search categories and to have an overall view of each manager's capabilities," Mr. Newhall said.
In-house investment managers
Of the $2 trillion in U.S. mutual fund assets managed by Vanguard as of January 2013, some $1.6 trillion was overseen by our Equity Investment and Fixed Income Groups.
Vanguard employs teams of investment professionals to manage those active portfolios that we believe we can run as well as anyone else we might consider hiring, and at a very low cost. This is the case for all of our money market funds, most of our fixed income funds, and a majority of our quantitatively managed stock funds.
"Vanguard delivers investment management excellence on an enormous scale," said Chief Investment Officer Tim Buckley. "Our ability to serve millions of clients across hundreds of mandates reflects our strengths in two organizational disciplines: people development and process excellence. Our team of more than 300 investment professionals is among the best at both."
Rigorous oversight for all managers
Solid selection means little without ongoing oversight to ensure managers maintain their capabilities and quality, particularly in the case of external managers. Vanguard Portfolio Review Department also monitors the external investment managers regularly. A committee of senior Vanguard management and the board of directors meets regularly with our fund managers and has the ultimate decision-making authority.
"Our rigorous, multi-level oversight process ensures adherence to the style defined by the mandates of our funds," said Mr. Newhall.
Our at-cost advantage at work
Vanguard's at-cost structure, along with our size, is key to keeping costs low, according to Vanguard research. Mr. Newhall noted that Vanguard can negotiate very favorable fees on behalf of shareholders relative to our competitors.
Those lower fees allow us to keep expenses to our funds down. The cost of Vanguard's active funds, on average, is less than one quarter of the average cost of the industry's active funds.* Vanguard research shows that, over the long term, lower costs provide an advantage to investors in actively managed funds (and, of course, index funds) because they get to keep more of their returns.
*Source: Lipper Inc., as of December 31, 2012. Vanguard's average annual expenses for actively managed funds are 0.28%, compared with the industry average of 1.14%.
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