Vanguard - Get More Active

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Discover Vanguard’s active edge

Most people associate Vanguard with passive solutions – and they’re not wrong. After all, they more or less single-handedly led the indexing revolution. But over nearly 40 years, they’ve also become one of the largest managers of actively managed funds in the world. How? By sticking to the triad of top talent, low cost and patience. Here’s what that looks like in practice.

Make your next move to Vanguard’s actively managed funds

Listen. Learn. Repeat.

We brought three advisers together to get their views on active managers in general and Vanguard in particular. Here’s what they had to say – and how Vanguard reacted to it.

Cut through all the noise

What do advisers want from active funds and what are they using them for? This survey has the answers.

Ready, steady, go

Can you finish your 5km run in the time it takes to listen to this podcast? Put your earphones in, get your running shoes on and hit play. Vanguard’s Andrew Surrey and Josh Woodruff will be with you every step of the way.

It’s a match

We delve into the joys and woes of active manager selection, how to separate investing skill from outcomes and the ins and outs of managing fixed income funds.

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Guidance through the wider world of active management is just a click away. Vanguard are here to help you navigate it.

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We brought a group of advisers together to get their stance on active (and passive) investing. The gist of it: active isn’t necessarily the go-to choice for any of them, not least because it doesn’t always live up to its promises. As one adviser put it: ‘History’s made me become a passive adviser because when you’re in an industry where the latest sexy fund is going to burn your fingers, you become a bit wary.’ Sexy or not, active investing has its merits – and Vanguard's Active Distribution Lead, Andrew Surrey, knows them all. Here’s how he reacted to the group’s views on all things active. The panel featured:

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For some, that’s the defining feature of active funds, but Vanguard’s Active Distribution Lead, Andrew Surrey, begs to differ.

Chris Isaac, chartered financial planner at Pareto Financial Planning Gary Lane, managing director at David Kneale Financial Management Mark Fletcher, financial adviser at Moneytree Wealth Management

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Revisiting ‘active or passive’ in the age of volatility

Advisers’ survey shows how respondents are playing their cards in the face of current market conditions

In volatile markets and with a recession looming, the balance between returns and fund costs is put under vast scrutiny. Passive funds have always provided a cost-effective way of accessing market beta, but the debate around active versus passive and the attendant cost factors continues to rage within the investment community. We asked the audience of New Model Adviser for their current take on these vital matters. According to the poll findings, 65% of advisers’ fund flows are currently going into actively managed funds. This reflects a possible belief among managers that active investments have a better chance of generating alpha in volatile markets. Selectivity is vital here, cautions Andrew Surrey, Active Distribution Lead at Vanguard. ‘When looking at the broader active management industry, it’s important to understand the zero-sum game arithmetic that means, in aggregate, when you look at the entire market before costs, the alpha is zero. ‘In other words, the broad industry doesn’t provide any return over and above the index, particularly after costs.’ It's only by selecting exceptional talent that an investor has a chance of finding alpha, Surrey says. ‘This is why, although Vanguard is obviously committed to passive investing, we also run $1.4tn in active strategies.’ [1]

When looking at the broader active management industry, it’s important to understand the zero-sum game arithmetic that means, in aggregate, when you look at the entire market before costs, the alpha is zero.

At the same time, Vanguard blends complementary style factors within its fund offerings. ‘For example, within the global equity fund offered in the UK, half the portfolio is run by a growth manager, Baillie Gifford, and half by a value manager, Wellington Management – two world-class firms with world-class talent. Putting the two complementary approaches together results in a higher consistency of return, in our view.’ Another vital element is costs. The survey showed 47% of respondents believe that great value for an active fund is less than 50 basis points. The other 53% indicated a willingness to pay even more – possibly indicating that this is a low threshold if returns hold up. ‘Cost is one of the bedrock factors of Vanguard’s active offering. For example, the global equity active fund gives access to two incredibly talented teams at just 48 basis points OCF [2]. That helps considerably with the maths of generating a return for our investors,’ Surrey says.

‘Over the ten years to the end of September 2022, 94% of our 93 active funds globally outperformed their peer group averages [3]. ‘A big factor there is our cost structure as well as our ability to identify talent and our underlying managers’ low turnover and long-term approach.’ The ability to range across different asset classes is also vital for diversification and protecting long-term returns. The survey shows 41% of respondents use active funds predominantly for equity exposure, with 36% using them for alternatives and 23% for fixed income. Vanguard ranges across equity and fixed income but uses third-party subadvisors within equity, preferring to use in-house capability for its active fixed income portfolios. ‘While our equity subadvisors include Baillie Gifford, Wellington and Schroders, on the active fixed income side we take a different approach because we think it’s the most helpful for our investors,’ Surrey notes. ‘We hire lots of very talented people who are disciplined and driven with a cohesive team philosophy and enable them to take sophisticated and appropriate levels of risk. Because of our huge scale and low-cost philosophy, they don’t have to take the same levels of risk as higher-cost competitors. ‘We want funds that are transparent and true-to-label. That [they] do what they say on the tin. And the best model for that in active fixed income, we believe, is to do it in-house.’

Andrew Surrey Active Distribution Lead

What are you predominantly using active funds for?

What percentage of your flows are going into active vs passive?

What would great value for an active fund look like?

[1 ] Source: Vanguard as at 31st December 2022. [2 ] Source: Vanguard as at 31st December 2022. The Ongoing Charges Figure (OCF) covers the fund manager’s costs of managing the fund. It does not include dealing costs or additional costs such as audit fees. [3 ] Source: Lipper, a Thomson Reuters company. Data refers to Vanguard Active funds globally. Data as at September 30th, 2022. For the ten-year period, 87 of 93 Vanguard funds outperformed their peer group averages. Results will vary for other time periods. Only funds with a minimum ten-year history were included in the comparison. The competitive performance data shown represents past performance, which is not a guarantee of future results.

Ready, steady, go: Get active with Vanguard

Get into shape while finding out all about Vanguard’s active management endeavours

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We love efficiency as much as the next person – which is why we’ve made a podcast that will get you through your 5km run in 25 minutes while also bringing you up to speed on Vanguard’s best kept secret. The firm is well known for driving the indexing revolution, but that’s only half the story. In addition to bringing indexing to the masses, Vanguard has also quietly become one of the world’s largest managers of active funds. Citywire’s Richard Lander sat down with Active Distribution Lead Andy Surrey and Senior Investment Director Josh Woodruff to discuss the ins and outs of active manager selection in general and Vanguard’s approach in particular. ‘Trying to figure out what the next big thing is can be incredibly difficult for active managers, but it can be done,’ Woodruff says. ‘We think we’ve got a knack for finding some of the best ones out there and we’re dedicated to turning over every stone.’ To find out more, press play and start running.

Why Vanguard are even MORE

THAN YOU

Can you finish your 5km run in the time it takes to listen to this podcast? Put your earphones in, get your running shoes on and hit play. Vanguard’s Andy Surrey and Josh Woodruff will be with you every step of the way

Andrew Surrey Active Distribution Lead

Choose wisely

What should you be looking for in active managers? What value does Vanguard’s oversight and manager search team bring to the table? And how do you separate investing skill from outcomes, considering that they don’t necessarily correlate? Andrew Surrey, Active Distribution Lead, and Katy Righi, Senior Investment Director, Oversight & Manager Search, offer their thoughts.

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