Vanguard’s own May outflow is a reminder that plenty of legacy issues remain. Unlike local players such as UBS and DWS, the American company doesn’t have a private wealth or retail banking division. That’s barely a factor in the U.S., but in Europe it means competitors have a deep customer base to sell ETFs to.
“If you’re a German millionaire, chances are that you have a long-time family relationship with a banker, and that banker is the one picking products and chances are that they’re putting you into that bank’s products,” said Dave Nadig, chief investment officer and director of research at ETF Flows. “That’s a very, very tough market to crack.”
It’s a disadvantage for new entrants that shows few signs of disappearing soon.
Credit Suisse Group AG announced earlier this year it’s converting several of its index funds to ETFs as it looks to capitalize on its own massive private bank. That marks a return to the market a decade after the Swiss bank sold its old business to BlackRock -- and means yet more competition in an already crowded field.
If there’s an abundance of issuers in Europe, it’s nothing to the proliferation of products. BlackRock alone offers several hundred, holding everything from corporate bonds that have lost investment-grade ratings to Italian mid-caps. Amundi has about 150, according to Bloomberg Intelligence. These line-ups appeal more to hedge funds and asset managers who invest tactically than the kind of broad, diversified index-tracking funds on offer at Vanguard, which has just a few dozen vehicles in Europe.
“They’re not in favor of product proliferation, they’re all about scale,” said Hortense Bioy, director of passive funds and sustainability research in Europe for Morningstar. “You won’t go to Vanguard if you’re looking for something specific, so it’s hard for them to catch up with other players.”
Building Blocks
To Merz, it’s all about staying faithful to Vanguard’s strategy of focusing on broad-based building blocks. The firm wants to help investors construct “simple and cost-efficient” portfolios, he said, in keeping with Bogle’s philosophy of investing only in what you need.
Vanguard has consistently pushed that message, including starting a web and TV ad campaign earlier this year in the U.K., where it offers an online platform that lets self-directed investors trade its ETFs. It also slashed fees on several U.K.-listed funds in October. The nine months of consecutive inflows before May -- plus the huge March outperformance -- may be evidence that the message is gaining traction.
The question remains whether the mom-and-pop crowd -- and hence Vanguard -- can ever meaningfully upset the dominance of Europe’s big money players.
“It can be difficult for any non-European company to penetrate,” said Morningstar’s Bioy. “It’s a different market.”
This article was provided by Bloomberg News.