Vanguard will soon crush fees for even more investors

Economist

a day ago

The town of Malvern is a 45-minute drive north-west of Philadelphia. It has a population of 3,400 or so, and was the site of a minor drubbing for George Washington's continental army in 1777. It is, in many ways, a fairly unremarkable, affluent corner of the American north-east. But Malvern stands out in one way: it is home to $10trn in assets under management.
In 1975 Jack Bogle set up Vanguard in the town, launching the first index-tracking funds for ordinary savers soon after, with a focus on driving down the cost of investing. It worked. Today Vanguard manages both the world's largest mutual fund and its largest exchange-traded fund (ETF). The firm hosts 28% of American mutual-fund and exchange-traded-fund assets, a share that has climbed by seven percentage points in a decade. In America, though not around the world, Vanguard boasts as many assets as BlackRock, Fidelity and State Street combined. Its devotion to low fees has given it a cult-like following. Some call themselves Bogleheads.
On June 26th The Economist sat down for an interview with Salim Ramji, Vanguard's boss. Mr Ramji joined the firm a year ago from BlackRock, where he oversaw index investments, making him the first outsider to have led Vanguard. He aims to apply what he calls the 'industrial logic' of Vanguard—lower fees combined with better returns—more thoroughly in advice, bonds, wealth management and even private markets. At the same time, he must navigate growing political scrutiny.
Vanguard is a strange financial firm. It is a kind of co-operative, owned by its funds, which are in turn owned by their investors. Rather than raising the value of the company, Vanguard focuses obsessively on driving down fees, forcing the rest of the industry to follow suit. This downward ratchet, the 'Vanguard effect', has saved investors trillions of dollars since the firm's inception. On February 3rd Vangaurd announced that it would trim its average fee from 0.07% to 0.06%. BlackRock's share price fell by 5% on the same day.
Mr Ramji's focus on fixed-income markets is clear from Vanguard's new offerings. All of the six ETFs it has launched in America this year are bond funds. 'The fixed-income market is twice the size of the equity market. It is far more inefficient than the equity market…It is far less understood,' says Mr Ramji. Vanguard is renowned for passive, index-tracking investment, but he argues that some of its best opportunities are in actively managed options, where there is more of a chance to bring down unreasonable fees.
Many of Vanguard's customers are heading into retirement, explaining its new focus on financial advice. In January the firm established a separate advice and wealth-management division, which now oversees a little under $1trn in assets. Vanguard is pitching its services at a less prosperous market than rivals. Mr Ramji notes that the median Vanguard client has assets with the firm of under $100,000. The goal, he says, is to 'democratise advice, just as we have democratised investing'.
In April Vanguard announced a tie-up with Blackstone, a private-markets giant, and Wellington, an asset-management firm. A month later the trio announced an 'all-markets fund' blending public and private assets. 'Private markets, if they are well designed, if they are well managed by the right kind of firm or firms, if they are well priced, can be additive from a risk-return point of view, for certain clients' portfolios,' Mr Ramji argues. He recalls an old Bogle saying: rather than looking for a needle in a haystack, investors should simply buy the haystack. 'Today the haystack includes private as well as public markets.'
To purist Bogleheads some of this is close to heresy. Fees of any kind eat into returns. Private assets with higher fees and management costs are another drag. The die-hards will stick to bread-and-butter options: broad investments in stocks and bonds, with the lowest possible fees.
But the expansion into new markets matters for Vanguard. Athanasios Psarofagis of Bloomberg Intelligence, a research outfit, estimated that the firm, even before its recent cut in fees, accounted for just 9% of American ETF revenues—far behind BlackRock's 28%, even though the two manage a similar volume of assets. Unlike its profit-driven competitors, the firm has few high-fee options to fund investment.
One area of expense is technology upgrades, which are another priority for Mr Ramji. Some are unsexy. Vanguard has spent lots on cloud computing. At the end of last year, it announced a new technology-development office in Hyderabad, India. The next step, Mr Ramji says, will be AI-based assistance for clients, which should start to arrive next year.
Mr Ramji will have to oversee such changes while fighting off political attacks. The size of Vanguard means it has long faced criticism for its dominance of the market. More recently, it has been lumped in with other asset managers by Republican lawmakers, who believe the firms have pushed green dogma onto the American companies they own. The criticism is relatively flimsy: Vanguard left the Net Zero Asset Managers initiative in 2022, over two years before BlackRock and many of its rivals, who bailed out only after President Donald Trump was re-elected.
All the same, Vanguard faces a court case in Texas, along with BlackRock and State Street, filed by the state's Republican attorney-general and supported by a dozen other states. It accuses the firms of colluding to reduce production by coal miners. If it is successful, more could follow.
The company should be able to withstand even fierce shots across the bow. Employees are referred to as crew, owing to Bogle's obsession with the Royal Navy. The Malvern canteen is 'the galley'. Campus buildings—Defence, Goliath and Orion among them—are named after ships of the Napoleonic Wars. Vanguard itself is named after Horatio Nelson's flagship. Perhaps more importantly, the company shows no sign that it is faltering under bombardment. This year it has attracted 29% of American etf inflows, as well as 41% of those into stockmarket funds.
Bogle's ambition for Vanguard was as unique as its corporate culture. In his view, if a day came when his firm's market share began to tread water, putting its fee-cutting model in jeopardy, it would be a mark of success, for it would be proof that rival firms had been pushed into following Vanguard's lead. Mr Ramji takes inspiration from his illustrious predecessor, but in this sense he departs from Bogle's example. Vanguard's current boss wants his firm to rule the waves for a long time to come. ■