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Vanguard Targets European Growth as 'Greed' on Fees Hurts Active

“Active is dying from its own disease, it’s dying from its own greed,” said Tim Buckley, Vanguard’s chief investment officer.

By Lukanyo Mnyanda

(Bloomberg) --Vanguard Group Inc. smells an opportunity. The world’s largest mutual-fund company is betting the passive-investment model it pioneered in the U.S. is about to seize more of a foothold in Europe, and it’s lining up for a piece of the action.

Forthcoming regulations such as MiFID II will probably increase the cost of managing money in the region, likely benefiting investments that track indexes to the detriment of active products where managers are paid to pick stocks and bonds.

Vanguard sees this driving up passive investing’s share of the European market from 15 percent to almost a third over the next 10 to 15 years. That would match the proportion in the U.S., where, according to Moody’s Investors Service, tracking funds are set to overtake their pricier peers in seven years’ time.

“Active is dying from its own disease, it’s dying from its own greed,” Tim Buckley, Vanguard’s chief investment officer, said in an interview at the $4 trillion money manager’s London office. “It’s high-cost against low-cost, and high-cost is the dinosaur.”

In its response to U.K. regulators’ proposals aimed at boosting competition among asset managers, Vanguard, which has $1 trillion in active funds, on Monday called for a “health warning” on fees to be included in all funds, saying high costs was one of the main reasons why most actively-managed funds underperformed their chosen benchmarks in the past 15 years.

Passive investing is already expanding rapidly in Europe, with total assets increasing by about 80 percent to 1.1 trillion euros ($1.2 trillion) in the three years through 2016, according to data provider Morningstar Inc. Vanguard’s European operation has also grown from humble beginnings, from a lone person when the global financial crisis struck to a 300-strong team managing about 110 billion euros.

During the past 18 months, Vanguard has focuses on “a broadening of our capabilities in Europe as we add new funds and new structures and this is just part of the natural evolution of the business here,” said Mark Fitzgerald, a senior product manager at the company.

Not everyone thinks active investment is destined to suffer a drawn-out decline. The strategy is underperforming because quantitative easing and record-low interest rates make it harder for talented fund managers to distinguish themselves, while boosting the stocks tracked by passive funds to record highs.

To Colin McLean of Edinburgh-based SVM Asset Management, that means the setbacks to active investing might be temporary. “There are still opportunities for active managers, particularly away from the very biggest companies,” the firm’s founder and chief executive officer said. “It will balance itself out.”

Click here for latest active-versus-passive flows and performance.

Vanguard says it’s cheaper than the competition. It charges an average fee of about 0.18 percent, compared with an industrywide average of about 1 percent, according to the Malvern, Pennsylvania-based company’s data. Charges across its fund offerings are less than market norms because of its focus on passive investing, it says.

“Active could have a bright future if managers would just accept lower margins,” Vanguard’s Buckley said. “Managers haven’t recognized that they’re in a more competitive environment -- that you’re no longer competing with amateurs but are in a zero-sum game with other professionals.”

--With assistance from Nishant Kumar.To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at [email protected] To contact the editors responsible for this story: Neil Callanan at [email protected] Andrew Blackman, Paul Armstrong

TAGS: Mutual Funds
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