Vanguard’s plans to disrupt the Australian superannuation industry.

Dec 14, 2020

Welcome to Finance and Fury – Vanguard bringing in some disruption to Australian markets -

1. If you haven’t heard of them – Vanguard are the world's second biggest asset manager – dealing in index funds and ETFs Vanguard – have almost $9 trillion of funds under management world wide
2. company's incredible rise since being founded in 1974 by investor Jack Bogle – providing low cost access to indexes – originally with managed funds but recently been branching out into ETFs
3. But they have recently been branching out into platform services on top of asset management – little while ago - came out with the Vanguard personal investor platform
   1. Low cost account to access Vanguard investments - an Account Fee of 0.20% per annum, based on the total portfolio value of your account, including any cash held, capped at $600 per annum, per account
      1. A lot of the wholesale funds have high minimum buy ins – about $500k in some cases – so going through a platform gets around this – was third party platforms but Van have come out with their own
   2. Now they are is gearing up to disrupt Australia’s superannuation industry – this is a pretty big play from such a behemoth as Vanguard
   3. It all started when they announced that they will return tens of billions of dollars it now invests on behalf of super funds
   4. They are ceasing managing bespoke investments for Australia's superannuation funds – trustees outsource the investment management of the underlying assets – especially for index fund investments
   5. All as Van prepares for a disruptive second push into superannuation – first was taking over management of funds – not be direct super providers
   6. seeks to manage super accounts directly with potentially lower admin and investment fees
4. This is big for vanguard – it is a lot of sacrifice initially to make what they likely estimate to be better fees long term
   1. Vanguard abandon up to $100 billion in investment mandates from third-party fund managers – this has been a core part of its Australian strategy since entering the market 20 years ago – manage the investments of super funds
   2. Now they want to enter the market directly and similar to the VPI platform, offer super as well
   3. Van is the second largest holder of mandates from not-for-profit funds in Aus – pretty much the industry superannuation sector
   4. The fact they have given this up – good indication of how seriously they are taking this push into the Australian super market
   5. One of the main reasons to do this and abandon their management of other super funds investments is to avoid any conflict of interest - if Vanguard to push ahead with its plans to launch an APRA retail super fund while managing the money of competitors
      1. Whilst they likely wouldn’t do it on purpose – but if their competitors underperformed on the money that they were managing compared to their in house assets – raise some questions
   6. They have some history with super – It previously launched a super fund shortly after entering the Australian market, but transferred the management of it to National Australia Bank's MLC Wealth business in 2012.
5. Some additional competition is needed – the trend over the years and what will occur in the future is a consolidation of super funds – so less competition – has its benefits – covered this in an episode a little while back -
   1. But the Aus super sector is sitting at about $3 trillion of FUM – and this is likely to continue to climb massively –
   2. Not likely to be any time soon that they come into super – may take them a year or two – if not more –
   3. It is a rather comprehensive process of applying for a superannuation licence and entering the market
   4. At last publication – Van said it was "tracking well" - with an intended launch date of mid-2021 for its retail superannuation product – but this could be delayed slightly – but still within the next year to two – but it still is a lengthy process – few reasons:
      1. Firstly – they cant easily abandon the super industry - Vanguard Australia managing director said - would not be "abrupt", giving clients up to 24 months to find another manager or bring investment functions in-house
         1. So super funds and other investment managers have 2 years to try and replace Vanguard – they have a fiduciary duty – cant just walk away
      2. Secondly – lots of due diligence and compliance that needs to be accounted for – government agencies like APRA don’t work that quickly – so this may take a bit of time
   5. However – they will try and ramp up their direct service offerings –
      1. The managing director said - "We will push hard into the strategy of improving outcomes for individual investors, whether that is through a direct relationship or a financial intermediary, typically a like-minded adviser,"
      2. It plans to stop providing portfolio services to third-party institutional investors, but continue to offer off-the-shelf pooled investments like Van managed funds or ETFs to investors
      3. Again – this is a big initial sacrifice for them to make - Institutional mandates and the fees they make from this have formed a large part of Vanguard's Australian revenue over the two decades
         1. Estimates show that these mandates account for $50 billion of Vanguard's total $160 billion in domestic assets under management
      4. But while a significant part of the strategy until now, the local boss said the business of customising and running bespoke portfolios for institutional clients was a global outlier.
   6. It’s going to give the industry funds some well-deserved and true to label competition
      1. They are the second biggest manager in the world – low cost, economies of scale – access to research and the infrastructure
      2. They have are a commercial heavy hitter – have a big brand name to attract attention and lots of market research - They understand customer lifecycle management and could pretty easily provide a MySuper alternative
      3. plus they are cheaper – likely have a lot admin and low ongoing MER/IRC – Van multi index is around 0.29% - compared to the MERs for a lot of industry funds – 0.6-0.8% for similar allocations
   7. They spokesperson said that this shift was strategic – I am excited about it – they have been moving in the right direction for a while – and working with advisers and not against them
      1. Vanguard's Australian direct-to-consumer push is also escalating – as an example - the Personal Investor portal that was launched in April - now has around 10k investors signed up to it, with growth of about 2000 since late August - The low-cost investment platform provides free trades on in-house Vanguard ETFs – and access to their wholesale managed funds without having to meet the minimum investments
      2. One of the most successful strategies that they have is support from advisers - Vanguard's retreat from institutional client work is also an indication of the lucrative rapport it has developed with Australia's financial advisers over its 20 years operating in the country.
         1. according to managing director - It now counts 12,500 Australian financial advisers as clients which represents an incredible 57 per cent penetration rate in the industry.
      3. Given their fractured relationship with the industry super lobby, which has criticised independent financial advisers for decades and warned consumers against using their services, some advisers welcomed the retreat
      4. Vanguard developed the term "adviser alpha", which has become an influential concept in practice management for financial advisers. It refers to the value of financial advice being in client relationships rather than investment management and returns.

Just something to watch out for – may be a trend – Aus super industry could have distribution in the future – Google super, Amazon super, Apple super – etc. – larger brands are thinking of branching out – many years off – and time will tell – but we know that Van is coming out with their own super soon which depending on the fees – may be an option.

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