Vanguard passionate about driving down costs in asset management

As boss of the flagship Financial Advisor Services division for Vanguard, the $4tn US indexing giant – responsible for dealing with US wealth managers - Thomas Rampulla is mildly irritated at his firm being labelled the “Big Bad Wolf” of the investment world.

“If you look at Vanguard, an organisation owned by the investors in our funds, the value we have added for our clients has created a huge benefit to society,” he says. “By driving down costs for investors in these market places, we are doing really good work for people in the community.”

Complaints from active managers about a handful of indexing giants dominating the industry and undercutting their more creative brethren are just a sign of “sour grapes” from active managers, who need to slash their overheads and hold themselves much more accountable to the public, claims Mr Rampulla.

Keeping costs low for consumers of portfolio management products is clearly a key measure of success for his $1.3tn chunk of the Vanguard funds empire. What is more, he talks down the brutal, existential current battle being fought between passive and active investors, more intense today than previously in the history of portfolio management. “The battle today is not passive versus active, it is high cost versus low cost,” suggests Mr Rampulla, whose unit deals with more than 1,000 distribution firms across the US.

“Costs are too high in asset management,” he says. “Active managers, regardless of their style, have a much better chance of outperforming if they attract a lower cost.”

In order to be successful, asset managers must demonstrate an attractive process capable of generating alpha, combined with robust risk control. But at a time when margins for product production are falling fast, performance is clearly boosted by lower overheads, claims Mr Rampulla, who joined Vanguard back in 1988.

Increased competition means many asset managers have struggled to make an impact and raise significant assets. “It has gotten harder for active management to outperform, due to the professionalisation of the industry,” he says. “In the 1960s, only 15 per cent of assets were professionally managed, now its 85 per cent, and these are run by CFAs competing against each other.”

The current wave of mergers sweeping through the investment industry, Janus combining with Henderson, Amundi with Pioneer and Aberdeen with Standard Life, should help drive down costs, he believes. “Scale is important for asset management, just like any other industry. Mergers are a natural progression which an industry goes through as it achieves maturity. Some go well and some don’t, but theoretically, it should work, in creating more efficiency.”

The cut-throat competitive environment means there is a huge reluctance at Vanguard to share details of any new strategies being cooked up in its US laboratories. “There are no innovations I can tell you about,” says Mr Rampulla knowingly. “We are trying to service clients better with products and services, but I can’t give you any details at this point in time.”

While he competes mainly against rivals State Street and BlackRock in the US, he praises L&G in London and “similar organisations” in Asia for their high quality products. The one chink in the armour of the global gorillas of passive investment is lack of flexibility, he admits, with an inability to follow active managers into some of today’s attractive markets, including the alternative strategies of real estate and private equity.

“There are some alternative strategies which we run in house today, that we can offer to certain clients,” he says. But these more ‘opportunistic’ portfolios can only be added into the product range if the expertise is available internally. “It will be a value added service, but not a core competency of ours, though theoretically, that is not out of the question.”

Many of the more sophisticated strategies are derived from the institutional sphere, where Vanguard has good relations with and manages assets for some of the largest institutions in the US. “Much of the thought leadership in this market place comes initially from academics, working with pension funds, foundations and charities, before flowing to professional wealth managers and the retail market,” he says, emphasising the concepts of smart beta and factor investing, now penetrating the adviser space.

Products from the Defined Contribution pension area, including the US classic of ‘target date’ funds - using concepts borrowed from behavioural finance - are also beginning to appeal to the UK market place.

“The 401k plan has inspired Americans to become a lot more engaged in managing their personal finances,” he suggests, with Europeans now ready for a similar financial revolution.

He clearly has a soft spot for London, where he spent seven years running Vanguard’s European business, and in fact took UK citizenship for himself and his four children. But European wealth managers, he feels, still lag behind their US peers when it comes to sophistication.

“Wealth managers in the US tend to opt for low cost, passive investing. They are adding value at the adviser level through behavioural coaching and putting the portfolio together. They are not involved in picking stocks or bonds,” he says. 

“The same thing is now beginning to happen in Europe, although they are still a few years behind. When I came to London in 2009, passive flows were still pretty meaningless, but the focus on cost and transparency is becoming a more important part of the ecosystem.”

As yet, there is much more interaction and engagement between fund groups in the US and their customers there than in the corresponding relationship on the eastern side of the Atlantic. “Certain business models” ­­– often prevalent in European private banks – are still standing in the way of progress with some still more concerned about “picking the best stocks and high cost funds”. In these cases, net returns after fees are “never spectacular,” suggests Mr Rampulla.

But tighter regulations targeting unethical distribution of products, including the UK’s RDR regime, similar rules in the Netherlands and the Europe-wide Mifid II directive, will help clients choose the best funds, he believes, although Donald Trump’s proposed abolition of many regulations, including the Dodd-Frank regime to oversee banking and investments after the 2008 financial crisis, will create some uncertainty.

Other changes of regime will also lead to more work for Vanguard’s top management, including the UK’s move to Brexit from the European Union. “We are pretty committed to the City of London and its pro-business environment and great talent pool,” says Mr Rampulla, with most funds for distribution registered in Ireland, and offices spread across Switzerland, France, Italy and Germany. 

“The majority of our European assets are Dublin-based, so we are pretty well placed for Brexit. But there are a lot of questions we need to answer about the management company. We will figure it out over time, but there is not yet enough information from the regulators.” 

The new obstacles apart, Mr Rampulla clearly misses his time in London, where he took his children regularly to watch Fulham Football Club on the banks of the Thames, and the ease of travelling around so many different markets in Europe and the Middle East in a short space of time. But he is also relieved to be back in Malvern, Pennsylvania, at the nerve centre for innovation of ETFs.

“I am now back to where I am from, in Vanguard’s home office. It’s inspiring to have 9,000 colleagues here running round you and the big selling point is that the weather is a lot better.”