A. Active management has become extremely competitive, more competitive than it has ever been. Most assets today are professionally managed. In the zero-sum game of active management, that means it’s tough to get excess returns. And prices have not come down commensurately, so too often that excess return is confiscated by high fees. Until expenses come down, active management will have a tough time outperforming the index.
Read more here about a potential BlackRock-Vanguard duopoly
Q. It might surprise people to know Vanguard has been beefing up its active bond team. Why is that?
A. Vanguard’s low-fee, low-risk approach to fixed income translates across different categories. Imagine that the returns in fixed-income is money spread across the highway: the big bills are in the center and the loose change is on the side. All of our competitors have to run into traffic to pick up the big bills. We can pick up the money on the side. We don’t have to take as much risk because of our low-fee structure.
Q. What are the benefits of Vanguard getting so much bigger?
A. You can see it in our expense-ratio line. We share our greater economies of scale. For every basis point we cut, we save our shareholders $500 million. That is a lot of money. Scale also gives us the ability to invest in new services, technology and innovative products.
Q. And the downside?
A. The downside of success is complacency. People start to think they are entitled to that success. We abhor complacency. We hate reading articles about Vanguard being tops in cash flow or about Vanguard’s size and success. I’d like to toss those aside and talk about what we are trying to do to improve the experience for clients. That is our war cry.
Q. Can Vanguard duplicate the success it has had in the U.S. in other countries?
A. The value we provide does not have geographic boundaries. In certain markets, like Australia, the U.K. and Canada, our message has resonated well. When we enter a market, if there is even a hint we are going to enter, all the competitors start to drop their prices. Does that make it tough on us? Yes. But at the end of the day it’s better for the investor.