The future: Building an engine for a long-term enterprise
February 20, 2014
Investment success demands a long-term perspective, an ability to manage short-term exigencies while pursuing long-term opportunities. In running the Vanguard business, the same lesson applies.
"Business planning is ultimately about making trade-offs between the present and the future," said Glenn W. Reed, managing director of our Strategy and Finance Group.
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"We want to strike the right balance between, on the one hand, holding down current-year operating costs to keep fund expense ratios low for our clients today and, on the other hand, making the right longer-term investments to promote future growth, mitigate risk, and enhance the client service experience, all with a view toward ultimately lowering fund expense ratios in the future.
"Those longer-term expenditures are necessary for us to sustain our low-cost leadership in the years to come without sacrificing high-value service."
Two examples illustrate how Vanguard is constantly managing costs with the long term in mind.
New benchmarks, lower fees
In 2012, we created a stir in the investment business when we announced we were changing the benchmarks tracked by 22 of our index funds.
This change involved a complex six-month effort by more than 200 Vanguard crew members, requiring more than 19,000 trades. We were able to minimize turnover, transaction costs, and realized capital gains during the transition.
By mid-2013, 16 U.S. stock and balanced index funds had switched from MSCI benchmarks to new ones developed by the University of Chicago's Center for Research in Security Prices (CRSP), and six Vanguard international stock index funds had moved from MSCI benchmarks to those run by FTSE.
Because we secured lower long-term licensing fees from CRSP and FTSE, shifting to their benchmarks will provide considerable savings for clients over the long term.
"We took the cost of paying index providers—which was a variable cost that was going to grow under the old arrangements we had—and instead made it a fixed cost," said Mr. Reed. "As a result, our funds will be better able to achieve economies of scale, which in turn can continue to lower the cost of investing for our clients."
Infrastructure for the next century
In another multiyear project, Vanguard is making significant enhancements to its global investment management infrastructure. With Vanguard clients now residing in more than 80 countries, the need has grown for improved management of data, orders, legal compliance, and risk monitoring.
Mr. Reed noted that this project will consolidate all of Vanguard's trading operations on the same technology systems and platforms. As a result, trades will be executed more quickly and efficiently around the clock.
"As Vanguard continues to attract new clients from around the world, we need to expand our global investment management capabilities," he said. "And even if we weren't growing so rapidly, we would still need to build out our enterprise infrastructure, because the investment industry is increasingly global and complex."
This project is being implemented in stages and will take several years to complete.
"Just as we encourage our clients to keep a long-term perspective when investing, we need to do the same in managing our business," Mr. Reed said. "We like to say that we are building a '100-year company.' "