Vanguard Investments UKHelping clients avoid “dumb mistakes”<br />New Model Adviser Conference – January 2011<br />Business Development Executives – Glyn Jones & Matt Abouzeid<br />This document is directed at investment professionals in the UK only and should not be distributed to,or relied upon, by private investors.<br />
Client promises are changing… because they have to<br />I’ll be your Behavioural Coach and protect you from making “dumb mistakes”<br />I’ll beat the market for you<br />I’ll get you the best product<br />Client promise<br />1990’s<br />2010<br />2000’s<br />Really?<br />Thank you!<br />The Internet is here!<br />
Some of the ‘dumb’ mistakes that clients make .............<br />Market timing – it’s very difficult to get it right<br />Cost – the impact on investor returns<br />Fund picking – chasing the ‘best new ideas’ <br />Behavioural bias – investor behaviour gets in the way of long term investing success<br />
Market Timing: Net cash flows into UK bond and equity mutual funds.<br />2002<br />Equities: £3.2bn inflows<br />Bonds: £3.6bn inflows<br />2003<br />Equities: £2.9bn inflows<br />Bonds: £4.8bn inflows<br />Source: Vanguard Investments UK, Limited using Lipper Investment Management and IMA data.<br />Indices used are FTSE All Share TR vs. Barclays Capital Sterling Aggregate TR 12 month rolling performance from 2000 to 2010 in GBP. Sales data is net retail sales and taken from IMA figures.<br />
Why Indexing Works – The Theory Bit<br />A Zero-Sum game<br />Performance of active managers is normally distributed around the market return<br />Likelihood<br />Return<br />Better than the market<br />Below the market<br />= Market Performance<br />
Cost: The Importance of Costs – The Theory<br /><ul><li>Costs reduce the returns
After costs, the average active manager underperforms the market</li></ul>Average return before costs<br />Average return after costs<br />Likelihood<br />Return<br />Below the market<br />Better than the market<br />Market Performance<br />Impact of costs<br />1.66% average*<br />* Source: “Fund Expenses A Transatlantic Study”– Lipper September 2009<br />
Costs….impact investor returns<br />UK Large Cap Equity funds with low costs outperform funds with high costs.<br />Net Return to Investors<br />Source: Vanguard Investments UK, Limited using Morningstar Direct data.<br />Returns of UK Equity Funds calculated on a NAV to NAV basis with net income reinvested.Data period: 31/12/1995 to 31/12/2010.<br />Costs are based on net expense ratios for 2009.<br />
Fund Picking: Does chasing the best investment ideas work?<br /><ul><li>Clients too often succumb to the bright lights and marketing hype.
Investor returns versus fund returns – how much do you get to keep?
Short-term focus – holding periods for UK equities have fallen sharply.
Institutional investors do similar things to retail investors – they ‘hire and fire’ at the wrong time.</li></ul>The effect of US fund manager changes on returns<br />This slide contains US data that may not necessarily be relevant to the UK market. It is included for reference purposes only. <br />
Behavioural bias<br />Your clients have behavioural biases that may prevent them from achieving investment success<br />Inertia - failure to save/participate in markets- failure to adjust to circumstances- failure to rebalance<br />Overconfidence - limited diversification- illusion of control- too much trading<br />You can play an important role in mitigating these biases and keeping your clients on track<br />Remember, we all have biases!<br />
Average returns and volatility of actively managed UK portfolios versus market benchmarks<br />
The truths...... with added Plain Talk ™<br />The truth about time<br /><ul><li>The power of compounding
Client education</li></ul>Low cost, high value investment solutions<br />TER same as AMC – start at 0.15%<br />Other charges: SDRT & dilution levies<br />Transparency & fairness<br />Not all index managers are the same<br />Replication vs. Optimisation<br />Benchmark construction<br />Approach to securities lending<br />Index funds or ETF’s <br />Scale and Expertise <br />£1trn AUM, approx. half in index funds<br />30+ years of indexing expertise from the people who started it.<br />Source: Vanguard Group as of September 30, 2010<br />Exchangerate $/£ at 0.64416, source exchangerates.org.uk<br />
Active & passive across a spectrum <br />Cost<br />Fully active portfolio<br />Portfolio completion<br />Active + Passive within IMA sectors or Morningstar style boxes<br />Core – PassiveSatellite – Active<br />Passive Portfolio actively managed<br />Passive<br />Active<br />
Best practice discussions<br />Building a successful fee based practice<br /><ul><li> Achieving profitable growth
Behavioural Finance</li></li></ul><li>The Advisor as Alpha<br />When left to their own devices, investor behaviour has a negative impact on investor returns.<br />-Market timing - Cost - Fund picking - Behavioural bias<br />Advisors play a critical roll as their client’s ‘counsellor’ and ‘teacher of the investment truths’.<br />Client propositions are being re-anchored around coaching and keeping to the financial plan rather than investment performance.<br />Vanguard offers low-cost, high value investment options.<br />We’d be delighted to talk this through in more detail<br />