Interview with Ryan Barrows of Vanguard UK
Well it's a great pleasure to meet you Ryan Barrows, you're Head of Personal Investing for the UK, Vanguard. Now, I was absolutely blown away by your product I've got to say.
So I'm going to be embarrassingly in praise of your product today. So maybe you'd just like to tell us about why you chose to introduce Vanguard's new product Vanguard Direct right now.
Yes for us it'll always go back to our mission, so the way we define our mission is to take a stand for all investors, treat them fairly and give them the best chance for investment success and so while we've been doing that in the US for a long time I think now we've really started to think about how could we do that more broadly for global investors. Now, as in terms of why specifically now we've been very deeply present in the UK market for 10 years so we moved our headquarters, the European headquarters, to London in 2009 and have been serving financial advisers and other institutions since then really over the past three or four years post the Retail Distribution Review from the FCA which created a lot more fee transparency which is really important to us we felt like it was the right time to begin to serve UK individual investors directly.
Transparency of fees
And I love the transparency of your fees so let's just talk about the fees that you have. So with Vanguard direct you pay just 15 basis points in order to have an account held by you.
Well I suppose it I'd probably start, if I'm an investor I care about like my all-in cost, right, so that will include what you pay for funds or ETFs or your investments and what you pay the administrator of the platform. So our platform fee is 15 basis points or 0.15% of the investments you have with us but it's capped and that's one of the things we're really really proud of so...
No Management Fee above £250k
So above £250,000 you don't pay any more so its 350 pounds and that's it?
Yeah 375 pounds is the maximum you could pay and when we look at the platform space in the UK now there were lots of platforms that were you know they charge that percentage point but then it kept going for a long time so it actually got quite expensive if you were a more affluent investor or if you had some platforms that had, you know, more of a constant fee. But then that was quite expensive if you were a smaller investor and so you know our goal is to make investing accessible and low cost for everyone and so we really wanted to combine a structure that made it sort of work both if you were newer to investing and those who may be further down the investing path.
Vanguard Playpen: Vanguard funds only
So with Vanguard Direct the deal is that you can only buy Vanguard funds so as long as you're willing to be in that Vanguard playpen, and I've got to say it's not particularly limiting because you have almost every choice of equity region, you have different asset types. So you have credit funds and these are geographically based as well so you have a very wide selection of funds, but it is limited to just Vanguard products.
That's right yeah so Vanguard funds and ETFs only but I think just to talk more about the point you had there's a bit of a misconception I feel in the industry that diversification is achieved by owning several fund managers. Now it could be a way to diversification but it's not necessarily. If you owned six UK equity funds you probably just created a UK equity tracker fund for yourself and you're not really as diversified as you might be whereas if you own the Vanguard LifeStrategy 60% equity fund in that single fund you own global equity markets and global bond markets all in one single wrapper so it's actually quite diversified from an investment perspective even though it's a single fund.
I think some people describe it as a kind of frozen meal where you get everything: you get the beef, you get the gravy and you get the potatoes all in one thing, pre-diversified.
Yeah it's having it all in one spot. We think making investing less intimidating is really important and there's a lot of, I think, companies in the investment industry who have an interest in making it seem complicated and you know while there's certainly a lot of nuance in certain areas we think there's some core principles that everyone should understand, right. And so for us it's goals, balance, cost and discipline. So number one is know why you're investing and it's many people don't know and you want to invest differently if you're investing to say buy a retirement home in five years versus if you're investing for your own personal retirement in 40 years right so you need to know that. Balance is around you know making sure that you have the right asset allocation for that level of risk. You know cost we've talked a little bit about we think it's the one factor in an investor's control that has an impact on their future returns. And then discipline is about not panicking effectively, so stick with your discipline with the allocation you've chosen for the long run.
So it's kind of like staying in the roller coaster. So when markets do dip you don't panic and sell.
Yeah and that's what the LifeStrategy funds and we have a Target Retirement fund which does a slightly different thing but they're what we think of as kind of as broadly diversified investments within one fund do is it takes care a lot of the discipline stuff for you. So it will keep that same asset allocation that you chose that matched with your goal without you having to do anything so it's quite user friendly. I suppose from the investor's perspective if you don't want to be you know yourself keeping track of, "Is my equity, fixed income allocation out of whack?" which most investors probably won't want to do.
So rebalancing can be a real pain because if you do have a strategy then let's say the equities rally more than the bonds then every once in a while you sell some of the equity and buy more of the bonds.
That's right yeah.
So it's all done for you.
If we just you know if you and I took a time machine back to March of 2009 and had decided for our level of risk for whatever we were investing in and we wanted to have 60% equity and 40% bonds if we had just bought that and then forgotten about it I know what the exact number would be but it'd be probably closer to 75 percent equity and 25 percent bond now and so the fund does that within it so it keeps that constant level of, well, it keeps the fix between equity and bonds which is really what we think the best way you control the risk and the volatility within your portfolio.
No trading cost with aggregated trades
So if I bought one of your ETFs so let's say I bought some kind of UK equity tracker, FTSE 100 tracker, from Vanguard through another provider now for that other provider they would charge me some kind of holding fee for holding the the fund within their platform and yours would probably be lower so that'll be 15 basis points, point one five percent as we've already discussed. But there is also the trading cost. So one of the really amazing things about Vanguard Direct is that you aggregate everybody's trades every day. There are two ways to trade, right? So one way, which is a good way to do it which I didn't do, is you do this kind of aggregated trade so you aggregate everybody's trade and then what's the fee for that?
So that's that's free for the investor.
So just say that again.
Free for the investor. No additional cost we charge it at 15 basis points we want to be clear about that. But we believe in long term investing right. We believe for most investors you should buy and hold for an extended period of time. And because of that you know even an ETF which is traded on a market and you could buy it at 9:30 a.m. or 3:00 p.m. if you're going to hold it for 15 years you're probably pretty indifferent to whether or not you bought it in the morning or the afternoon of a specific day and so because of that we want to make it easy for people to access those ETFs which I know could potentially be intimidating for investors who are less familiar with them.
Okay so that's one way of doing it, the smart way, now I did it the dumb way and you do get charged a small fee for that, I think it's about seven pounds?
That's right the other way to trade is called "Quote and Deal" which effectively means that you can ask depending on whether you're buying or selling but let's say you were you were buying you can say show me what the price is right now and then we'll give you the quote so it'll be whatever it is 15 pounds 20 and then you have 15 seconds to say yes I like that price or you can let it let it expire effectively so it lets you know exactly what price you'll pay but because we route your order to market individually so we can't aggregate them and scale we charge the investor effectively what our cost is to do that for them.
Education: Tutorials on Asset Allocation
Okay I did it the dumb way. So another thing which I love about your website but which is difficult to find is the education piece. Now there are some really nice tutorials about Asset Allocation. So my background is in Asset Allocation so I know a bit about it, and it was just very clearly done but I had to dig to find it. So it's great if you can find it. Is that one of your focusses going forward?
Certainly education is a big part of what we want to do which is from a pure mission-driven perspective there's a lot of things going on in the UK and it's a very, there's a lot of things thrown at individuals between pensions freedom and you know fewer people have defined benefit pensions at work, new tax wrappers the tax limits change. All those types of things, and so we want to do everything we can to help people focus on the things that will help them achieve their investment goals.
Things like low cost for example?
Like low-cost and it all goes back to goals balance and cost discipline right and so part of it is just having people know that costs are important and there's in one of the I think a fallacy that we're a bit sensitive to is that when people hear low costs they think "cheap" necessarily and that's you know, our strategy, which is a great one if you can execute on it, is to be both the lowest cost and the highest quality. And we think actually low cost leads to high quality in investments because you are keeping more of your money as opposed to the person who's managing the investments.
Because the unbelievable thing about compounding is it works against you as well so if you're paying 1% every year for the next 40 years that compounds and it has a massive drag on your returns.
It does and you generally think as an investor "One percent that doesn't seem like much right?" but it's that 1% doesn't grow then for the next 40 years and then you know so it would be a significant difference versus a much lower cost portfolio.
So I mean if you're looking at long-term returns in the equity market of around 7%, let's be optimistic, maybe 8%. And if you've got a 2% fee that you're playing an active manager that can erode your value over the long-term massively, right? That two percent over 40, 50 years of investment can be really brutal.
And that's the way we think it's seven or I'd be if I could sign up for seven or eight right now I would sign up! Yeah equity markets have had a really good run for the last eight years as soon as everyone knows but I think the way we think about it is fees. So our best guess is that a balanced portfolio between equities and fixed income will return about 5%. Well, we shouldn't say that, because it's the distribution around that. That's the middle of the distribution but let's just assume it was 5%. If you're paying 2% in fees the way we think about is you're paying 40% of your return to the investment manager right, so that's a lot. And we prefer for your, because the investor is the one who's taking the risk at the end of the day, right, it's their money, and so we think the investor should get the benefit of the return from that risk instead of then investment manager.
And if you consider inflation as well then suddenly that fee becomes, you know, the kind of tipping point between profit and loss.
Yeah okay so education will be a part of the website?
It is. You know I think we are working on how can we make it more prominent because it's you know we do need to make it a bit easier to find.
Duration of the funds
I mean the other thing I noticed as well was that it was quite hard to find a duration of some of the funds. So for example when it has, I mean obviously for the 100% equity I wouldn't expect the duration, but if you're looking at bond risk this idea of duration is very important for calculating your risk. So I mean if you have a duration of one year versus five years that increases the sensitivity to interest rates massively.
And if we are about to see interest rates go up that's why I'm kind of paranoid about the duration at the moment. So I actually had to look it up. It's around nine years, I think, for some of the Vanguard funds the LifeStrategy ones.
Yeah so in general our funds like LifeStrategy that hold bonds will hold an aggregate type bond index. So it'll have the mix of you know your 30ish year plus, you know government generally, right because corps [corporate bonds] generally aren't that long, so that'll be roughly the duration of the market of fixed income if you will. And so one of those challenges we always have that we're trying to do as best we can is how do we serve people who may be much more knowledgeable about investing and those who aren't and so most people will probably not understand, your audience may, sorry I don't mean to insult people who are out there, but you know the duration is a relatively tricky concept. And so we focus probably more on the know how much you're balancing between equity and fixed income in the first place right and do people understand it. And we think of bonds as almost ballast in your portfolio right. Most people won't invest in bonds because they're trying to make a certain return you're making it to reduce the volatility of your portfolio and then the equity component is really there to build on a lot of the returns.
So it's like cash plus, you know just get cash, so low volatility but a little bit of extra income.
Yeah. To your point with Bank of England rates at 25 basis points which is no doubt lower than inflation I mean in inflation adjusted terms you're losing money on cash so hopefully they'll at least keep you above where you are making money inflation adjusted.
Cooperative structure: Low cost, Simplicity and Transperancy
Okay so maybe you could talk briefly about the mutual structure in the US because I know in the US the people who invest in Vanguard funds actually own the company, it's kind of like a co-operative almost, as we call it here in the UK but in the U.S. it's a mutual structure. But that doesn't extend to the UK?
That's right yeah. So when Mr. Bogle, who is our founder, or I should say Jack Bogle, who's maybe known to some of your audience founded Vanguard it was founded on the concept of low cost and simplicity and transparency and really the concept is as Vanguard got bigger the benefits of that scale because we can be more efficient should get back to clients and the mechanism for that is we lower our cost and so it is it is technically mutually owned but it is mutually owned in the US and it's not mutually owned here in the same way in the sense that our UK investors don't own the management company. Now practically speaking the management company isn't traded on the public markets there's no way for our investors in the U.S. to sell the management company if you will. The real benefit they get from the long term is that the prices have declined as the company's got bigger and so what I would say is that while the actual investment structure is different the philosophy is exactly the same. I started with Vanguard in the in the US and it's not it feels exactly the same to me from a culture perspective and our goal in the UK is just as much as it is in the US to lower the cost of investing for investors over time and so I think the practical reality will be very similar to what it has been.
So you're not a member of the club but you still get the low cost.
Our goal is to lower the cost. Cost is not the benefit to investors. Investors don't invest to get low cost they invest to achieve their outcomes. We just think low cost is a way to help them achieve their investment outcome. But it was so is education and so you know our goal is to help our investors achieve their investment outcomes, and keeping costs low over time is a big part of that.
So when I opened the account, which I did almost straight away after you launched it, I opened an ISA, so I put in the full limit of my ISA. But there are two other products that you offer, I think one of them is a junior ISA if you want to save for your children.
So it's kind of a very nice, tax efficient wrapper for saving for your children. The other one was just like a general account which is not inside an ISA where you just hold your funds but not in a tax wrapper. So I think you're also planning to launch a SIPP, is that the case?
We are working on a now.
SIPP: Self Invested Personal Pension
What is a SIPP?
A SIPP is a Self Invested Personal Pension okay so for anyone in your audience who may have a defined contribution pension at work it's a similar pension structure and what that means generally is you get a tax benefit on the way in and so the contributions go in tax free so you can you get basically a top-up from HMRC if you will on your contributions.
Which is great if you're a higher rate taxpayer.
It is. And then on the way out the tax book is a bit more complicated but there are some tax advantages when you withdraw from your pension as well later in life so it's definitely something it's clearly a retirement vehicle right so if you are thinking about saving for retirement a SIPP is certainly something that you you would want to consider.
So I mean if you think about your target audience I mean I've spoken to various robo funds and a lot of them have a very clear idea in their head of okay my kind of clients is a tech-savvy person who's maybe 40 years old. What's your kind of envisioned customer, if you like?
That is maybe the question I've been asked most over the past several years and we think about it differently in all honesty. So we want to attract investors who, we have a perspective on how to invest, right, we're not just here to make money we don't offer the latest fund that's getting a lot of cash flow we believe there's a right way to invest. It goes back to those investment principles. We're trying to attract investors who believe in our way of investing because we think it will help them achieve their goals. And that's going to be we have young folks we have older folks we have wealthy folks we have folks who have you know their whole thousand pounds of savings with us and everything in between and we're more than okay with that. The things that are important to us are we want you to invest for the long-term we've intentionally not designed our service to be great for people who want to, you know, dive in and out of ETFs right. We don't have level 2 quotes and sort of all the things you'd want to do if you wanted to be an active trader.
A day trader.
Yeah we want people who want to buy and hold and invest for the long run so that's the that's the important thing for us. Now to your point on the sign up and thank you for saying it was easy, that was one of our goals too. We think, we wanted to make it... consumers compare everything now to what they experienced in all walks of life so we didn't want to just compare ourselves the service digitally to other investment management companies we wanted to try and make it as easy as a Google or a Facebook or an Apple and could we continue to make it easier and more digital for clients to use as well.
Beautiful Website Design
And it's so much more beautiful than your other website which I think you're going to phase out? But you've done a really beautiful job on the design so you can see the breakdown of the sector risk and you can also see the regional breakdown of your portfolio which I think is just fantastic. I'm not sure it's particularly useful but I found it very reassuring.
James and the team who did it will be very happy to hear that so I have I had personally nothing to do with it.
But I mean even you term sheets were ugly, I don't like to say this, but even your term sheets were ugly. iShares term sheets - very pretty but the Vanguard ones are quite minimal. But this website just blew me away.
Well I think that's we are as we serve more individual investors directly we do have to go back you know the term sheets have been with the funds for a while you know there were fewer individuals using them and so as we become better at serving individual investors we'll continue to think about how could we do that better and how can we make it easier and how can we make it more straightforward and get the information in a clear way.
Active vs. Passive
Okay is there anything that you think is kind of shaping the markets at the moment because I think one of the things we discussed before was what drives people into passive funds and out of active funds.
And you saying that it's actually the market activities or the movement in the stock market which usually drives people towards passive.
Yeah well you know if I said when I read some of the material that's out there in the market now people will say well you have to be "Yes, you can keep your costs down" but they almost position investing like a luxury good. "You get what you pay for, right?" So it's not that you know you have the Four Seasons and you have the Travel Lodge you know? But that's not the way investing works in our perspective and so you know for us it's really about low cost. And it's not about passive versus active it's just you know effectively if your fund manager, your platform, or whoever it is is charging you 2% you then have to outperform by 2% to recoup that. That's not free, and so our perspective has always been the lower you can keep the cost of investing the better your chances of investment success. And so I guess if there's one thing to highlight it's that we would want everyone to understand their all-in cost both on the fund side, the platform side and then if they pay an advisor what they pay their advisor. And then you know after that there's real sort of differences between passive and active that you know they both can be right in different different situations. And i realize I just haven't defined passive and active, would that be helpful?
Let's just talk about that briefly just just say what it is
Yeah so you know a passive fund is really meant to track an index and in general meant to replicate the market.
It's like you buy the whole stock market.
You almost buy every stock that exists that's sort of logical conclusion. Now a benchmark like the FTSE 100 which investors may have heard of that's the largest companies that are in the UK right so that's but you could also buy that FTSE 250 which is smaller companies. And so what you're basically saying, "I'm not trying to pick individual securities that I think are going to do well". You know, the market, as you mentioned before over the course of the last hundred-ish years has gone up about seven or eight percent and I'm comfortable with that seven or eight. No guarantees it'll be seven or eight percent, but that's what I'm trying to buy. An active fund in effect they're saying "I'm trying to pick the stocks that are going to do better than the others", to do better than that seven or eight percent. Now the after cost and I think the after cost track record of active globally hasn't been as great. But our perspective is that it's largely due to the cost. So we believe that active can be an important part of an investor's portfolio but you have to be really good at the manager bit and keeping your costs down. And that's where we think we can add a lot of value because as an individual investor we use a firm called Baillie Gifford, it's a great active manager. As an individual investor I can't sort of send them an email and say hey, I'd like to come in and interview the portfolio manager and see if he or she is going to do a great job managing my money but we can right. And so we have the ability to do that kind of selection process on behalf of our investors to find you know what we think are the sort of top quality active managers in the industry.
So this kind of whole active passive debate I think for the average active manager you'd pay something like 1.3%, 1.4% whereas with a passive fund, or one of your passive funds, it's usually less than 0.2% so usually that's 7 times cheaper or 10 times cheaper which has a massive effect on returns. And then the question about whether they can actually outperform is a contentious one but I think the SPIVA survey in the US tends to show that most active managers don't manage to beat the when you take away their fees.
and they're not consistent, also, over time. I've talked about that a lot.
I was going to say that's another one, the active funds you tend to see people you see cash flow go into funds after they've had a good run of performance.
Yeah people chase performance like the Pied Piper.
Yeah and then when they have bad performance people sell them and so you know even if on average an active fund has outperformed over ten years it's really important that investors stay invested over that whole ten years right. If it's a fund that you believe in and a manager you believe in stay the course would be our advice. But don't choose certainly based on the past year or two years or three years of performance because the data would indicate that that's not a great predictor of future outperformance.
And choose a veteran who's been through a couple of business cycles maybe.
Okay so last question for you, I know it's almost like sacrilege to say that, you know, Vanguard would do active but in fact you do have several active offerings. So one of the things is a style, set of style funds.
So you can have things like momentum or value but the idea here is that you just choose a style of investing. So it's a subset of the equity market. Would you like to expand a little bit on why you did that?
I can do yeah so we have the style funds are all ETFs so they're exchange-traded funds.
And they're equity only.
Equity only at this point. So why did we launch the what we call the factor ETFs? So the short version is that the academic research the PhDs who really look into sort of securities performance would say there are some things that over the last call it 30, 40, 50 years have outperformed. So we'll take value as an example in general companies that trade at a lower premium to their peers right so if you have like grocery stores is an example. If the average grocery store trades at 12 times earnings to price if you buy grocery stores that traded eight times earning to price over time that has outperformed right and so what that ETF does is it takes that factor and says we are going to invest in companies that trade at lower multiples than their peers and the academic literature said over the past 30 to 40 years that has outperformed companies that sort of trade at multiples above theirs. But as anything in investing there's no guarantee that sort of the past will indicate the future but that's the logic behind them if that makes sense.
And you have a fairly wide selection of those kind of pseudo-active funds as well don't you? I think there are four?
There are yeah.
So I'll put you on the spot and I'll ask you to list them now. So we've got value, we've got momentum...
Liquidity. And then I'm forgetting the the fourth one. It is minimum volatility.
Oh volatility's a popular one isn't it?
Apologies, and so yes they're all different different things so momentum the thought process is something that has risen recently will continue to rise.
Which tends to work.
Again it's not because we believe that it's because the data indicates it has worked you know in the past. Liquidity is actually things that trade less frequently.
That tends to be small cap stocks doesn't it?
They have less liquidity.
They tend to have a bit of a premium associated with them because as as investors you generally want to how easy it is to sell is important. So if you are a buy and hold investor and are comfortable holding something over a long period of time that's less important to you so if that's something you're comfortable with that you can potentially capture a small premium over over historical ETFs.
So the kind of general principle is that you have some kind of risk premium and by being willing to put your capital at risk and taking that risk premium you harvest the return for taking that risk so it might be the fact it's cheap or it's small or its illiquid. But these are just allowing people to harvest all these different flavours of risk premium.
That's right you raise an important point of there is risk there right it is additional risk and you should be rewarded for that risk over the long run but the one thing I would highlight for for any investors, I mean I would say if you understand investing and you can read it and it makes sense to you and it appeals to you they may be funds for you. If you're a newer investor I, you know, it may not be the right product for you because it's really targeted at investors who understand more the kind of research. You don't have to be able to cite Fama and French in 1972 you know, but you want to understand it.
Or do John Cochrane's stochastic calculus course which I did, which is very unpleasant but very interesting. And then the minimum volatility one's interesting too because there you're combining different assets, different stocks to reduce the overall volatility or risk, the daily price move of the fund, and a lot of people have found that over a long period of time people have found that that has performed fairly well.
Yeah you know the minimum volatility bit I think I would say the key factor is less the outperformance of that one than it should have lower volatility than...
So that's more of a safety play?
That's less of at "we are trying to outperform the market" as opposed to "we're trying to achieve a certain level of performance at a lower level of volatility" for the investor.
So some people buy EM funds that way. They want the exposure to EM growth but they want low volatility so they go for some minimum volatility EM fund.
Yeah, so that one's a different one in the sense of it's not, the target isn't to outperform it's to have the same performance or similar performance at lower risk but you know the minimum volatility is a good example. The minimum volatility fund will likely outperform when the market is doing well versus an index fund and will likely overperform when the market is doing less well because it's you know that's effectively what it's meant to do.
So when there's a kind of panic on you go for the minimum volatility product because...
Yeah it's not quite that easy right because if it you know if everyone did that then... there's no free ride in investing. So you need to hold it over the long period of time you know so I guess that hopefully that didn't come across as if the markets go down run out and buy the minimum volatility fund.
Okay this will go out with a warning that says "this is not investment advice", that'll be clear.
Yeah and that's and I think for any of the active strategists I would just say read the key facts sheet we have information about what the strategy is and then I would recommend making sure you understand it first.
Okay well that's been fantastic! Thank you so much for your time I really enjoyed it. No, thank you. I hope we meet again. Thank you very much.
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