Bill Jamieson: Vanguard set to shake UK investment tree

'Vanguard is going for the mass market of small retail investors,' writes Bill Jamieson. Picture: Matt Morton/PA Wire
'Vanguard is going for the mass market of small retail investors,' writes Bill Jamieson. Picture: Matt Morton/PA Wire
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Only rarely is that hackneyed phrase “elephant in the room” justified. But it is certainly so to describe low-cost US tracker fund giant Vanguard’s move on the UK small investor market.

The US group, launched in 1975, is one of the world’s largest investment companies, with assets under management of more than $4 trillion (£3tn). It has enjoyed explosive growth by enabling investors to invest in the stock market at rock-bottom cost.

The average total cost of investing in a Vanguard fund is just 0.29%

While it has been operating in the UK for eight years with index-tracking and exchange traded funds (ETFs), these have only been available to financial advisers and wealth managers as the minimum investment has been £100,000.

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All that is now to change. Vanguard is going for the mass market of small retail investors by drastically lowering the entry level for its funds to just £500. Monthly savings plans can be started for as low as £100. The average total cost of investing in a Vanguard fund is just 0.29 per cent.

It sets a major challenge for the UK investment industry where a swing has already been well under way from high-cost active managed funds to index-tracking funds and ETFs where fees and charges are lower. Now Vanguard has set out to undercut even these.

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Until now, one of the most competitive offers in the UK has been provided by the financial supermarket group Hargreaves Lansdown. It is a popular one-stop shop for thousands of private investors wanting to build a share portfolio without incurring the fees and charges of many of the long-established and better-known investment-management groups.

But even Hargreaves Lansdown is threatened. Its Vantage platform looks expensive in comparison, with the total annual cost around 1.1 per cent – some four times the Vanguard level.

Sean Hagerty, managing director of Vanguard Europe, claims the launch would “lower the cost of investing” in the UK with its platform charging an annual fee of 0.15 per cent of the first £250,000 of an investment. The platform fee will not apply to amounts over £250,000, meaning the charge is effectively capped at £375. He cited a 2016 report by the Financial Conduct Authority that criticised active fund managers for overcharging customers and delivering below-market returns.

Vanguard’s cheapest fund is the FTSE100 ETF, which has an ongoing charge figure (OCF) of just 0.06 per cent, while its most expensive is the Vanguard Global Emerging Markets fund, with an OCF of 0.8 per cent. Little wonder that on the Vanguard announcement last week, shares in Hargreaves Lansdown sagged 4.7 per cent at one point. Household name fund management groups such as Jupiter, Schroders and Aberdeen also suffered share-price falls.

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It may not prove the lethal knockout blow that some fear. There’s a powerful inertia factor among private investors. And, as Vanguard does not provide a platform for other funds and trusts, many will be reluctant to put all their investment nest eggs in one fund-manager basket.

However, this may not be the only elephant charging into the UK fund management room. Asset managers have been fretting over the intentions of IT giants such as Google and Amazon with their awesome marketing and distribution reach, although lack of experience and track record with regulatory issues may prove formidable hurdles.

Scottish Mortgage payout poser

Oh, the perils of success. Edinburgh investment trust giant Scottish Mortgage has achieved an outstanding 41 per cent total return to shareholders for the year to March.

The trust has been greatly helped by investments in technology behemoths such as Tesla Motors. But this has created a poser over dividend payouts. The group’s capital performance may be stunning but the dividend yield is just 0.8 per cent as the portfolio is increasingly dominated by non-dividend payers.

This, and greater weighting in unquoted “unicorns” which also don’t pay dividends, means the trust has had to use up nearly all its remaining revenue reserve – the pot of undistributed investment income built up over the years. The group will either have to cut the dividend next year or take some money out of its capital reserves.

And while Scottish Mortgage has a great capital performance to fall back on, there is a potential conflict of interest between the maintenance of the dividend and its ambition to deliver both income and outstanding capital growth.

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