Winning The Loser’s Game                                                                                                  ...
Agenda•    Standing Out From The Crowd•    The Case for Indexing•    Support to Advisers2   VANGUARD ASSET MANAGEMENT - CO...
Winning the losers game• Standing Out From The Crowd•    The Case for Indexing•    Support to Advisers3    VANGUARD ASSET ...
Start With Why?                                               WHY?                                               HOW?     ...
Why does Vanguard exist?“Our core purpose is to take a stand for all investors, to treat them fairly and to       give the...
Standing Out From The Crowd• The Vanguard Group exists to serve the needs of our clients – unique mutual structure• The cl...
The Vanguard Group Inc’s unique ownership structure…                                                      Profits         ...
The Vanguard Group’s integrated and well-alignedbusiness model creates a virtuous loop for the investor                   ...
A global presence allows Vanguard to serve investorsworldwideAsset management services for private and public pension fund...
Winning the loser’s game•    Standing Out From The Crowd• The Case for Indexing•    Support to Advisers10 VANGUARD ASSET M...
The case for indexing “Most investors, both institutional and individual, will find that the best way to own common stocks...
The market and the Regulator’s view of index investing?• “There has been a long term trend towards a rising proportion of ...
Why indexing works - the theoryA Zero-Sum Game  –   Performance of active managers is normally distributed around the mark...
Importance of costs – the theory• Costs reduce the returns• After costs, the average active manager underperforms the mark...
What percentage of active managers underperformtheir benchmark?                                          5 years   10 year...
What percentage of active managers underperform   their benchmark?The percentage of all funds that started the given perio...
The case for indexing globally   What percentage of active managers underperform their benchmark?The percentage of all fun...
Can I pick winning funds in advance?                                                 Quintile Rank in Subsequent Non-Overl...
“You get what you don’t pay for”                                              28 cents                                    ...
What is the impact of the total costs?   Costs matter• Costs, like interest, compound over time• Impact on investment retu...
Winning the losers game•    Standing Out From The Crowd•    The Case for Indexing• Support to Advisers21 VANGUARD ASSET MA...
Funds available on Source Pensions                                                                                        ...
23 VANGUARD ASSET MANAGEMENT, LIMITED - CONFIDENTIAL
Conclusion• The majority of active funds underperform their benchmark index after costs.• Selecting funds which will consi...
Important InformationThe opinions expressed in this presentation are those of individual speakers and may not be represent...
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Vanguard's presentation on XXXXXXXXX at the PensionSource Fund Manager Conference 2012

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Vanguard's presentation on XXXXXXXXX at the PensionSource Fund Manager Conference 2012

  1. 1. Winning The Loser’s Game David Plumstead National Development ManagerThis document is directed at investment professionals and should not be distributed to, or relied upon by retail investors.The value of investments and the income from them may fall or rise and investors may get back less than they invested.© 2012 Vanguard Asset Management, Limited
  2. 2. Agenda• Standing Out From The Crowd• The Case for Indexing• Support to Advisers2 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  3. 3. Winning the losers game• Standing Out From The Crowd• The Case for Indexing• Support to Advisers3 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  4. 4. Start With Why? WHY? HOW? WHAT?4 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  5. 5. Why does Vanguard exist?“Our core purpose is to take a stand for all investors, to treat them fairly and to give them the best chance of investment success”5 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  6. 6. Standing Out From The Crowd• The Vanguard Group exists to serve the needs of our clients – unique mutual structure• The client first philosophy is the foundation of every Vanguard business throughout the world• We are an at cost provider – this isn’t just a strategy, it’s an inevitable outcome The Vanguard Group’s Expense Ratio vs. US Industry Average Note: This chart is included for reference purposes only. The data is based only on US domiciled funds which are not available for sale in the UK. Expense ratios as of December 31, 2011. Vanguard expense ratios range from 0.05%–1.84%. Average expense ratios are represented as a percentage of net assets. Source fro the industry average expense ratios: 1975–1977 Weisenberger Panorama; and Lipper Inc. thereafter. 6 VANGUARD ASSET MANAGEMENT, LIMITED - CONFIDENTIAL
  7. 7. The Vanguard Group Inc’s unique ownership structure… Profits owns owns invests invests owns owns Profits Vanguard funds refers to US domiciled funds.7 VANGUARD ASSET MANAGEMENT, LIMITED - CONFIDENTIAL
  8. 8. The Vanguard Group’s integrated and well-alignedbusiness model creates a virtuous loop for the investor The value to our clients of our low costsVanguard Group’s Expense Ratio vs. US Industry Average Estimates in millions of dollars Low-cost mutual funds Long-term out-performance Generates Delivered by a Combined economies with highest of scale high-performing quality crew service and investor advocacy Long-Term Redemption RatioWhere the cash went in 2011 Vanguard Funds vs. Industry Spread Consistent 35% Vanguard cash flow and 29.7% 30% Strong 26.2% 26.7% asset growth 25.5% 25% 22.4% client loyalty 20.6% 20.1% 20% 17.9% 14.9% 14.9% 15.5% 15% 10.1% 10.1% 13.2% 10% 5% 10.5% 10.0% 11.8% 11.3% 10.6% 11.2% 9.2% 0% 2005 2006 2007 2008 2009 2010 2011 *Note: This slide is included for reference purposes only. The data is based only on US domiciled funds which are not available for sale in the UK. Source: The Vanguard Group “The value to our clients of our low costs”: The chart shows the total additional fund operating costs that Vanguard shareholders would have paid each year if we had charged the fund industry’s average expense ratio (1.12% in 2011). 92 basis points on $1.65 trillion in mutual fund assets under management could translate into approximately $15 billion in savings. Calculation: 92 basis points comes from subtracting the industry average expense ratio of1.12% from the Vanguard average expense ratio of 0.20%. This number is then multiplied by Vanguard’s assets under management of $1.65 trillion to get the result of $15 billion. This hypothetical illustration does not represent any particular investment and only holds true if the returns are identical. There is no assurance that individual investors will experience similar savings. 8 VANGUARD ASSET MANAGEMENT, LIMITED - CONFIDENTIAL
  9. 9. A global presence allows Vanguard to serve investorsworldwideAsset management services for private and public pension funds, financial advisors andinstitutions, and government and charitable organizations Key Statistics* • £1.3 trillion AUM • 13,000 employees • 25m clients • 6,000 institutional clients • 800 charity clients • Offices in 15 locations *As at 30 June 2012 Source: The Vanguard Group, Inc. Assets under management for The Vanguard Group.9 VANGUARD ASSET MANAGEMENT, LIMITED - CONFIDENTIAL • Clients in more than 80 countries
  10. 10. Winning the loser’s game• Standing Out From The Crowd• The Case for Indexing• Support to Advisers10 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  11. 11. The case for indexing “Most investors, both institutional and individual, will find that the best way to own common stocks (shares) is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.” – Warren Buffett – Berkshire Hathaway Annual Report 199611 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  12. 12. The market and the Regulator’s view of index investing?• “There has been a long term trend towards a rising proportion of assets being managed passively.”*• “It is anticipated that the changes to adviser remuneration in the RDR may lead to advisers recommending passive funds more frequently”*• “According to the IMA, the proportion of Institutional assets managed passively is approximately 36%, whereas only 6% of retail funds are indexed….there remains considerable scope for growth in this area.”** Net retail sales of tracker funds Funds under management of tracker funds RDR - Levelling the playing field Sources: *FSA Retail Conduct Risk Outlook – Feb 2011, page 9. **Asset Management in the UK 2011-12. The IMA Annual Survey, page 58.12 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  13. 13. Why indexing works - the theoryA Zero-Sum Game – Performance of active managers is normally distributed around the market return Likelihood Below the market Better than the market Return = Market performance13 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  14. 14. Importance of costs – the theory• Costs reduce the returns• After costs, the average active manager underperforms the market Average return after costs Average return before costs Likelihood Below the market Better than the market Return Market Performance Impact of costs 1.54% average* * Source: The quoted TER for the average active equity fund represents the simple average (not asset weighted) TER of UK domiciled active equity funds across all sectors and includes retail and institutional share classes - source: Vanguard Asset Management using TER data from Morningstar based on the latest available annual report as at January 2012. 14 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  15. 15. What percentage of active managers underperformtheir benchmark? 5 years 10 years 15 years UK Equity ? ? ? UK Gilts ? ? ?15 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  16. 16. What percentage of active managers underperform their benchmark?The percentage of all funds that started the given period but either underperformed or dropped out of the sample: 5 years 10 years 15 years UK Equity 77% 74% 73% UK Gilts 84% 93% 92% Sources: Vanguard calculations, using data from Morningstar, Inc., FTSE and Barclays Capital. Included funds are from the following Morningstar categories: UK equity – Flex cap, large-cap blend, large-cap growth, large-cap value, small-cap; UK bonds – UK government. Performance is for periods ending on 31 December 2011. Basis of performance calculation is net of fees, income reinvested, closing NAV prices. Figures account for survivorship bias. Benchmarks are specified in the fund prospectuses 16 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  17. 17. The case for indexing globally What percentage of active managers underperform their benchmark?The percentage of all funds that started the given period but either underperformed or dropped out of the sample. Emerging UK Europe US Global Markets (15 years) (15 years) (15 years) (15 years) (15 years)Domesticequities 73% 83% 87% 93% 79%Domestic bonds 92% 100% 100% 100% - Sources: Vanguard calculations, using data from Morningstar, Inc., FTSE , MSCI and Barclays. Included funds are from the following Morningstar categories: UK equity – flex cap, large-cap blend, large-cap growth, large-cap value, small-cap; Europe equity – large-cap blend, large-cap growth, large-cap value, flexcap, small-cap; Global – large-cap blend, large-cap growth, large-cap value, flex-cap, small-cap; US equity – large-cap blend, large-cap growth, large-cap value, flex-cap, small-cap; Emerging markets equity – emerging markets; Europe bond – EUR diversified; US bond – USD diversified; Global bond – global; UK bonds – UK government. Performance is for periods ending on 31 December 2011. Basis of performance calculation is net of fees, income reinvested, closing NAV prices. Benchmarks are specified in the fund prospectuses. 17 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  18. 18. Can I pick winning funds in advance? Quintile Rank in Subsequent Non-Overlapping Five Year Period (% of funds) Risk-Adjusted Return Ending Dec 2011 Rank 5 Year Ending Dec 2006 Highest Lowest High Medium Low Missing Total Quintile Quintile Highest Quintile 15.6 14.3 10.4 13.0 23.4 23.4 100.0 (Top 20%) High 19.2 8.2 16.4 12.3 9.6 34.2 100.0 Medium 12.5 15.0 18.8 18.8 8.8 26.3 100.0 Low 15.8 22.4 6.6 19.7 9.2 26.3 100.0 Lowest Quintile 3.8 10.3 11.5 16.7 17.9 39.7 100.0 (Bottom 20%) Source: Vanguard and Morningstar. Notes: The far left column ranks all active U.K. equity funds based on their risk-adjusted returns relative to their peer group (Morningstar category) during the five year period as of the date listed. Each quintile includes the funds within that quintile from each of the UK Morningstar categories. The remaining columns show how these quintiles performed over the next five years.18 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  19. 19. “You get what you don’t pay for” 28 cents (1/5)19 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  20. 20. What is the impact of the total costs? Costs matter• Costs, like interest, compound over time• Impact on investment returns not always obvious• Table shows the impact of AMC over time• Assumes neutral growth so that the long-term effect of costs is readily apparent Note how a low-cost portfolio, such as 0.2%, has over 95% of the capital after 25 years, while a high-cost portfolio, say 2%, has eroded by almost 40%.This is a hypothetical example it does not reflect anyparticular investment. The example assumes a zero rateof return and does not account for market movement.Source: Vanguard Asset Management, Limited. 20 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  21. 21. Winning the losers game• Standing Out From The Crowd• The Case for Indexing• Support to Advisers21 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  22. 22. Funds available on Source Pensions Pre-set dilution Pre-set dilutionFund Benchmark Share Class TER levy on levy on purchase redemptionEquity EUR 0.30%US 500 Stock Index Fund S&P 500 Index - - EUR Hedged 0.30%European Stock Index Fund MSCI Europe Index EUR 0.40% 0.20% -Eurozone Stock Index Fund MSCI EMU Index EUR 0.40% 0.05% -Japan Stock Index Fund MSCI Japan Index EUR 0.40% - -Emerging Markets Stock Index Fund MSCI Emerging Markets Index EUR 0.65% 0.25% 0.25% EUR 0.40%Global Stock Index Fund MSCI World Index - - EUR Hedged 0.40%SRI European Stock Fund FTSE All World Developed Europe Index EUR 0.50% 0.20% -SRI Global Stock Fund FTSE All World Developed Index EUR 0.50% - -Fixed Income Barclays Capital Global Aggregate EuroEuro Government Bond Index Fund EUR 0.20% 0.10% - Government Float Adjusted Bond Index Barclays Capital Global Aggregate Euro NonEuro Investment Grade Bond Index Fund EUR 0.30% 0.40% Government Float Adjusted Bond Index Barclays Capital Eurozone Inflation-Linked FloatEurozone Inflation-Linked Bond Index Fund EUR 0.20% 0.15% Adjusted Bond Index Barclays Capital Global Aggregate US Credit FloatU.S Investment Grade Credit Index Fund EUR 0.30% 0.50% Adjusted Bond Index Barclays Capital Euro Aggregate Treasury 20+20+ Year Euro Treasury Index Fund EUR 0.30% 0.10% Year Index Source: Vanguard Asset Management, Ltd. As at 31st October 2012 22 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  23. 23. 23 VANGUARD ASSET MANAGEMENT, LIMITED - CONFIDENTIAL
  24. 24. Conclusion• The majority of active funds underperform their benchmark index after costs.• Selecting funds which will consistently outperform is extremely difficult.• Is the outperformance worth paying for?• Costs matter! You get what you don’t pay for.• Programme of support to advisers• Vanguard’s Euro share class funds are now available on Source Pensions 24 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
  25. 25. Important InformationThe opinions expressed in this presentation are those of individual speakers and may not be representative of Vanguard Asset Management, Limited. This presentation is designed onlyfor 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 sellsecurities 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 ofthis presentation when making any investment decisions.The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. This fund invests in overseas markets and the value of thisinvestment may fall or rise as a result of changes in exchange rates. This fund invests in emerging markets which can be more volatile than more established markets. As a result thevalue of your investment may rise or fall. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion ofthe capital value of your investment and the level of income may fluctuate. Funds investing in fixed interest securities carry the high risk of default on repayment and erosion of thecapital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Past performance is nota reliable indicator of future results.The Manager of Vanguard Investment Series plc is Vanguard Group (Ireland) Limited. Vanguard Asset Management, Limited is a distributor of Vanguard Investment Series plc.Vanguard Investment Series plc has been authorised by the Central Bank of Ireland as a UCITS and has been registered for public distribution in certain EU countries. Prospectiveinvestors are referred to the Funds prospectus for further information. Prospective investors are also urged to consult their own professional advisors on the implications of making aninvestment in, and holding or disposing shares of the Funds and the receipt of distributions with respect to such shares under the law of the countries in which they are liable to taxation.The Central Bank of Ireland has granted authorisation for the Vanguard 20+ Year Euro Treasury Index Fund to invest up to 100% of net assets in different Transferable Securities andMoney Market Instruments issued or guaranteed by any EU Member State, its local authorities, non-EU Member States or public international body of which one or more EU MemberStates are members. As at 31st May 2012, the Vanguard 20+ Year Euro Treasury Index Fund invests more than 35% of its scheme property in transferable securities and moneymarket instruments issued or guaranteed by France and Germany. The Central Bank of Ireland has granted authorisation for the Vanguard Eurozone Inflation Linked Bond Index Fundto invest up to 100% of net assets in different Transferable Securities and Money Market Instruments issued or guaranteed by any EU Member State, its local authorities, non-EUMember States or public international body of which one or more EU Member States are members. As at 31st May 2012, the Vanguard Eurozone Inflation Linked Bond Index Fundinvests more than 35% of its scheme property in transferable securities and money market instruments issued or guaranteed by Italy and France. For further information on the fund’sinvestment policy, please refer to the Key Investor Information Document (“KIID”).The KIID and the Prospectus for these funds is available in local languages from Vanguard Asset Management, Limited via our website https://global.vanguard.com/.Issued by VanguardAsset Management, Limited which is authorised and regulated in the UK by the Financial Services Authority.Standard & Poor’s®, S&P 500®, are registered trademarks of Standard & Poors Financial Services LLC ("S&P") and have been licensed for use by Vanguard. The Vanguard funds arenot sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P, its affiliates and all of their third-party licensors disclaim any and all warranties and representations, expressor implied, including any warranties of merchantability or fitness for a particular purpose or use as to the S&P index data. Vanguard makes no representation regarding the advisability ofinvesting in third-party products that utilize S&P indexes.All rights in the FTSE All World Developed Europe Index and FTSE All World Developed Index (the “Index”) vest in FTSE International Limited (“FTSE”). “FTSE®” is a trademark ofLondon Stock Exchange Group companies and is used by FTSE under licence.The SRI Global stock Fund and SRI European Stock Fund (the “Product”) has been developed solely byVanguard. The Index is calculated by FTSE or its agent. FTSE and its licensors are not connected to and do not sponsor, advise, recommend, endorse or promote the Product and donot accept any liability whatsoever to any person arising out of (a) the use of, reliance on or any error in the Index or (b )investment in or operation of the Product. FTSE makes no claim,prediction, warranty or representation either as to the results to be obtained from the Product or the suitability of the Index for the purpose to which it is being put by Vanguard.The funds or securities referred to herein are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. The prospectus orthe Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with Vanguard and any related funds.© 2012 Vanguard Asset Management ,Limited. All rights reserved. 25 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL VAM-2012-11-12-0350

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