The world’s second biggest asset manager, Vanguard, is gearing up to disrupt Australia’s big superannuation funds by announcing it will return tens of billions of dollars it now invests on behalf of their members and instead compete for the money directly.
The $8.9 trillion investment manager, described as the “Amazon of financial services” for its disruption of Wall Street incumbents, will cease managing bespoke investments for Australia’s superannuation funds as it prepares for a disruptive second push into superannuation and seeks to manage retirement nest eggs directly with potentially lower fees.
It is estimated the move, revealed by The Australian Financial Review, would see Vanguard abandon up to $100 billion in investment mandates from third-party fund managers, which was been a core part of its Australian strategy since entering the market 20 years ago.
The index fund pioneer is the second largest holder of mandates from not-for-profit funds in the country, after IFM Investors, which is owned by 27 funds in the $748 billion industry superannuation sector, according to research house Rainmaker Information.
The retreat is being seen as an indication of how serious the behemoth fund manager is about its plan to steal a share of the $2.9 trillion Australian superannuation market from incumbent players, including its traditional industry fund clients, which have boomed since the Hayne royal commission.
Vanguard Australia managing director Frank Kolimago said this strategic shift was part of its “ambitious agenda” for Australia, but would not be “abrupt”, giving clients up to 24 months to find another manager or bring investment functions in-house.
“We will push hard into the strategy of improving outcomes for individual investors, whether that is through a direct relationship or a financial intermediary, typically a like-minded adviser,” Mr Kolimago told The Australian Financial Review.
“We need to make choices about where to devote our attention, energy and resources. We want to align more philosophically with where Vanguard globally thinks we can have the biggest impact and that is serving the end investor.”
It will stop providing customised portfolios to these third-party institutional investors, but continue to offer off-the-shelf pooled investments like managed funds to the market.
Institutional mandates have formed a large part of Vanguard’s Australian revenue over the two decades. According to Rainmaker, they account for $50 billion of Vanguard’s total $160 billion in domestic assets under management.
Multiple sources estimated mandates from other third-party managers outside the not-for-profit sector could be worth an additional $50 billion. Mr Kolimago declined to comment on the specific numbers but confirmed the business accounted for the “larger part” of its institutional portfolio.
But while a significant part of the strategy until now, the local boss said the business of customising and running bespoke portfolios for institutional clients was a global outlier.
“Australia really was unique in Vanguard’s overall global footprint in terms of having a dedicated focus and business segment in this area,” he said.
By contrast, it has extensive experience as a pension fund investor in its own right, including in the US$4.3 trillion 401K market, which Mr Kolimago was previously involved in leading Vanguard’s offer in.
That is why industry observers believe its soon-to-be-former clients have the most to lose from Vanguard’s Australian pivot into becoming a service provider to a major player.
“It’s going to give the industry funds some well-deserved and true to label competition,” said a senior investment industry figure, who asked not to be identified, echoing the sentiments of many responding privately to the revelation on Thursday.
“They are the second biggest manager in the world. They have the commercial nous. They understand customer lifecycle management. And they are phenomenal at education and engagement – plus they are cheaper.”
Some pointed to a conflict of interest were Vanguard to push ahead with its plans to launch a prudentially regulated retail super fund while managing the money of competitors.
But Mr Kolimago said the shift was purely strategic and not motivated by legal issues or any negative feedback from institutional clients-cum-competitors.
Those clients, some of whom have been outsourcing investment to Vanguard for decades, were “generally understanding” and welcomed the transition period of up to two years, he said.
The “comprehensive” process of applying for a superannuation licence and entering the market was “tracking well”, he added, with an intended launch date of mid-2021 for its retail superannuation product, which will be led by executive Michael Lovett.
He declined to comment on raging policy debates in the superannuation sector including the legislated rise in the superannuation guarantee to 12 per cent and Morrison government’s controversial early-release scheme, other than to say Vanguard considered Australia’s retirement system to be “one of the world’s best”.
Vanguard’s Australian direct-to-consumer push is also escalating, with the Personal Investor portal launched in April having now signed up 10,000 investors, with growth of about 2000 since late August. The low-cost investment platform provides free trades on in-house Vanguard ETFs.
It comes as a new wave of low-cost investment platforms has surged amid the coronavirus pandemic, with Aussie equities broker Superhero onboarding 10,000 traders in its first three weeks, and US shares platform Stake hitting 100,000 users.
Vanguard’s retreat from institutional client work is also an indication of the lucrative rapport it has developed with Australia’s financial advisers over its 20 years operating in the country.
It now counts 12,500 Australian financial advisers as clients, according to Mr Kolimago, which represents an incredible 57 per cent penetration rate in the industry.
Given their fractured relationship with the industry super lobby, which has criticised independent financial advisers for decades and warned consumers against using their services, some advisers welcomed the retreat.
“Best news I’ve heard all day,” said one financial adviser and Vanguard client. “I am continually looking for good managers to use that will restrict or refuse to deal with the industry funds.”
In the US, the company’s incredible rise since being founded in 1974 by legendary investor Jack Bogle has been partly predicated on cult-like support from independent advisers, who became sceptical of active fund managers and their exorbitant fees.
Vanguard developed the term “adviser alpha”, which has become an influential concept in practice management for financial advisers. It refers to the value of financial advice being in client relationships rather than investment management and returns.
It previously launched a super fund shortly after entering the Australian market, but transferred the management of it to National Australia Bank’s MLC Wealth business in 2012.