Vanguard Group created the price-cutting fervor that became an Olympic sport in money management. Now it’s feeling the toll of that competition.
The fund giant amassed $6.3 trillion on founder Jack Bogle’s once-contrarian idea that it could thrive by focusing on cutting costs for investors. That ethos, which helped Vanguard earn the trust of small savers and big institutions alike, has been showing its limits in a turbulent year.
Net flows to Vanguard’s funds slowed in 2020 as rivals continue to roll out similar products and amid the rise of so-called robo-advisors and almost-free trading. The vast majority of its growth came from exchange-traded funds, though they offer even thinner fees than the index mutual funds that long propelled its success. The company staged an abrupt retreat in recent months from some of its boldest plans for global expansion.
It all shows that even the world’s second-largest asset manager isn’t impervious to the combined pressures of industry competition and the discombobulating effects of the Covid-19 pandemic on the financial world. As Vanguard charts a course through the storm, it’s ditched business lines, closed overseas offices and seen senior executives depart. Now the firm is swiveling to focus more squarely on what it knows best: catering to individual investors.
“Their roots are in retail — that higher-touch institutional service model isn’t necessarily their strength,” said Kyle Sanders, an asset management analyst at Edward Jones. “They were just never reaching that level of success.”
It’s no help that competition in retail investing is fiercer than ever, with customers expecting virtually-free experiences at a range of firms — whether it’s getting automated advice online or making no-fee trades through Charles Schwab Corp. or the financial-technology phenomenon Robinhood Markets Inc.
This year, as the Dow Jones Industrial Average rebounded from a blistering selloff to soar past 30,000 for the first time, funds run by Vanguard in the U.S. drew about $159.1 billion in total net flows through October, coming in 19% below the approximately $197 billion it collected by the same point last year. That’s the money manager’s lowest level of net flows for the first 10 months of a year since 2013.
Vanguard’s storied mutual funds took in just $10.4 billion over the same 10-month period. Its ETFs brought in a net $148.7 billion, with around 20% of that coming from conversions of shares from its mutual funds to its ETFs, according to company data.
The squeeze on inflows isn’t just affecting Vanguard. Its main rival, publicly traded BlackRock Inc., saw total net flows through the first three quarters of the year dip 12% from the year-earlier period to $264 billion.
Unlike such rivals, Vanguard has an unusual structure in which it’s owned by its funds and therefore the investors in them. The Valley Forge, Pennsylvania-based firm’s main mission is to give customers “the best chance for investment success,” said company spokesman Freddy Martino.
Amid heightened competition among low-cost money managers, Vanguard has made a series of moves this year rolling back its global ambitions. It withdrew from Hong Kong and Japan, and returned $21 billion in managed assets to government clients in China. It shuttered most of its Australia institutional business.