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  1. 1. 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 />
  2. 2. 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 />
  3. 3. 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 />
  4. 4. 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 />
  5. 5. 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 />
  6. 6. Cost: The Importance of Costs – The Theory<br /><ul><li>Costs reduce the returns
  7. 7. 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 />
  8. 8. 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 />
  9. 9. Fund Picking: Does chasing the best investment ideas work?<br /><ul><li>Clients too often succumb to the bright lights and marketing hype.
  10. 10. Investor returns versus fund returns – how much do you get to keep?
  11. 11. Short-term focus – holding periods for UK equities have fallen sharply.
  12. 12. 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 />
  13. 13. 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 />
  14. 14. Average returns and volatility of actively managed UK portfolios versus market benchmarks<br />
  15. 15. The truths...... with added Plain Talk ™<br />The truth about time<br /><ul><li>The power of compounding
  16. 16. Income reinvestment
  17. 17. “Saving” for short term goals, “investing” for longer term goals
  18. 18. Time on your side (saving), time “against” you (longevity)</li></ul>The truth about risk<br /><ul><li>No return without risk
  19. 19. Balancing asset class returns
  20. 20. Risk of doing nothing/caution
  21. 21. Concentration/diversification
  22. 22. Focus and balanced</li></ul>The truth about cost<br /><ul><li>Compound erosion of costs and taxes
  23. 23. AMCs, TERs … and real totals
  24. 24. Costs are a controllable known!</li></ul>The truth about emotion<br /><ul><li>Tune out the noise
  25. 25. Creating the road map
  26. 26. Stay the course
  27. 27. Avoiding pitfalls
  28. 28. Market timing, performance chasing, miscalculating risk, overweighting, overlapping – inappropriate behaviour.</li></ul>“Our job is to stop clients making dumb mistakes”<br />
  29. 29. …. Be the teacher of “The Truths”<br />
  30. 30. How can Vanguard help your investment proposition and business?<br /><ul><li>Our business is founded on the “truths”
  31. 31. about risk, time, cost and emotion
  32. 32. We work to timeless investment principles
  33. 33. Asset Allocation is key, everything else is noise
  34. 34. Conservative return expectations and diversification are critical
  35. 35. Focus on the controllables – Asset Allocation, Rebalancing and Low Costs
  36. 36. Deep insight on investment research and client behaviour
  37. 37. White papers – fundamental research and empirical evidence
  38. 38. Behavioural finance
  39. 39. Plain talk
  40. 40. Promoting the Adviser as Alpha
  41. 41. “How your adviser adds value”
  42. 42. 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<br />
  43. 43. 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 />
  44. 44. Best practice discussions<br />Building a successful fee based practice<br /><ul><li> Achieving profitable growth
  45. 45. Ensuring client loyalty
  46. 46. Defining a compelling client promise
  47. 47. Keeping your promise
  48. 48. Aligning your people</li></ul>Systemising your Investment Advice process<br /><ul><li> Building a compelling, safe and repeatable investment advice process
  49. 49. Defining your investment principles
  50. 50. Effective portfolio construction
  51. 51. 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 />
  52. 52. Important Information<br />The opinions expressed in this presentation are those of individual speakers and may not be representative of Vanguard Investments UK, Limited. This presentation is designed only for use by, and is directed only at persons resident in, the UK. The material contained in it is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction other than the UK. The information on this presentation does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this presentation when making any investment decisions. Vanguard Investments UK, Limited only gives information on products and services and does not give investment advice based on individual circumstances.<br />“FTSE®” and “FTSE4Good®” are trademarks jointly owned by the London Stock Exchange Plc and The Financial Times Limited and are used by FTSE International Limited under license. “All-Share®”, "All-World®", and All-Small® are trademarks of FTSE. The FTSE All Share Index is calculated by FTSE. FTSE does not sponsor, endorse, or promote this product and is not in any way connected to it; and does not accept any liability in relation to its issue, operation, and trading.<br />The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results. <br />Issued by Vanguard Investments UK, Limited which is authorised and regulated in the UK by the Financial Services Authority. UK10/0394/NA<br />© 2011 Vanguard Investments UK, Limited. All rights reserved.<br />