This is a transcript of David Kuo's podcast with Tom Rampulla of Vanguard.
You can listen to or download this podcast here.
David:
This is Money Talk, the weekly investment podcast from the Motley Fool. I'm David Kuo, and today I'm joined by Tom Rampulla, Managing Director of the UK arm of the Vanguard Group. Now in the US, the Vanguard Group is as well known as the Liberty Bell, and just as the Liberty Bell rang out America's independence, the Vanguard Group has given investors a chance to break free from fund managers. Welcome to the Motley Fool podcast, Tom.
Tom:
My pleasure David, thank you.
David:
You're American, aren't you?
Tom:
I am, yes, that's right.
David:
I can tell from the accent.
Tom:
I don't have an accent, do I?
David:
Yes, you do! I think you can do a better job at introducing the Vanguard Group than my somewhat ham-fisted introduction, so can you tell me what the Vanguard Group is, and what does it do?
Tom:
Sure, Vanguard is the largest mutual fund manager in the United States, we manage roughly 1.1 trillion in assets, that's US dollars.
David:
But you probably managed a bit more before, didn't you?
Tom:
We did, we were close to a trillion and a half not too long ago, through no fault of our own the markets did not co-operate in helping us grow our assets, but in spite of that, cash flow has been fantastic the last several years, and I think that's a tribute to the structure of Vanguard and what makes us unique, and that is the mutual ownership, and what I mean by that is the funds themselves collectively own the investment management corporation, the Vanguard Group. As a result, we provide great service, because we're serving our owners, not just some customer out there; we're able to focus very long term in what we do and in our business strategy, and very very important is, any profits that we make, we return to the shareholders in the form of the lowest expense ratios in the industry.
David:
Is that quite unusual for a mutual fund, to actually have the funds own the company itself?
Tom:
Yes, it's completely unique to Vanguard in the United States.
David:
And why is that? – do you think that's a better structure?
Tom:
Well, I think it's better for the investor, because they get the benefit of the economies of scale and efficiency in the profit you make; I think the reason it's not popular is it's not all that popular with the entrepreneur, because they can't get rich doing it.
David:
OK, that's probably a very good reason for having it done that way. So where did the Vanguard Group actually start?
Tom:
Sure, actually our roots go back to the Wellington Fund, which just celebrated its 80th birthday, started in 1929 as a balanced fund, and Wellington Management hired our founder, Jack Bogle, and proceeded to eventually fire Jack Bogle from Wellington Management.
David:
Why was that?
Tom:
Oh, just a dispute in the direction of the organisation, and Jack decided to continue to work with Wellington, he formed Vanguard to do the administration of the funds and distribution of the funds, and leave the investment management to Wellington, and he formed Vanguard and this mutual structure was actually his college thesis at Princeton University, he studied what it would be like to have a mutual fund organisation, and he put that to work.
David:
Right, the thing about the mutual fund, or rather the one that Jack Bogle looked at when he was at university, was that, didn't he find that fund managers generally under-perform the market, and they'd be much better to buy the entire market than to actually use a fund manager?
Tom:
Yeah, Jack's an astute guy, and he did some work at Princeton University, but he also, and being in the industry, saw the amount of potential wealth taken out of the system through commissions and high expenses, and really started to focus on that. Forming Vanguard as a mutual organisation and looking at efficient ways to invest assets, he really focused on index funds and tracker funds, and we came out with the first tracker fund in the US in, I believe, it was 1976.
David:
So how easy was it to try and convince an entire country of investors that it was better to buy the whole of the market, rather than to buy just a handful of shares?
Tom:
We're still trying to convince the folks in the United States, it's still not a huge part of, if you look at overall assets in our management, our tracker assets are not a huge part. On the institutional side, sophisticated institutions, pension funds, endowments and foundations, trackers represent about 30, 35% of assets, so for the smart investors, they took onto it early; I believe in the retail marketplace it's still probably 15% of assets, so we're still convincing folks. It's not so much that the trackers themselves provide an out performance, but it's really the low cost. Active managers charge a lot in fees, they have a high turnover, which results in very high commission costs; it's a tough thing to overcome, roughly in the US, if you look at say a small cap fund, it's 180 basis points in total fees, 200 basis points in total fees – that's tough for a manager to overcome, it's really that low cost structure that makes the trackers outperform over time.
David:
But isn't the argument against trackers that the fund manager that is in charge of a tracker, even if he or she believes that the market is going to be down next year, there is no way that he or she could actually get out of those funds, because there has to be 100% invested in the stock market?
Tom:
Right, well that's a good argument, the only thing I would say is, if you hire an actively managed stock manager, they don't have the ability to go 100% cash either, and we've done a lot of studies that show the tracker funds versus actively managed funds in bear markets, and while some managers may have the ability to get defensive, whether it's defensive securities or going into some cash, they don't typically time it very well, and in the end the trackers end up outperforming anyway.
David:
OK, so you said earlier on that the Vanguard fund started in America back in the 1970s, we're talking 30, 40 years now. Why has it taken you so long to come to the UK?
Tom:
We're deliberate in our approach.
David:
Well you're very deliberate, yes.
Tom:
Actually, the one thing about Vanguard is, we're a very focused organisation, and we want to make sure that we're treating our customers, who are our owners, by the way, the best we can and to make sure we're serving them before we move on to do anything else. So if you think about an organisation that's mutually owned by its clients, you say, OK, I'm going to go and build this business elsewhere – how can I justify the return to them? So it took us a long time to do that, and then in looking around the world, we have to answer three questions on when we'll enter a market, one is – is it substantial enough? Is it a big market? We manage over a trillion dollars, so it's got to be big...
David:
But the UK's pretty big you know, Tom.
Tom:
Exactly, all right.
David:
We're no small fry.
Tom:
No, I know – that's why we're here. Will we be differentiated in the marketplace, and we feel that, here in the UK, we are differentiated – the focus on the investor, education, great value, low cost, excellent performing funds, whether they're active or passive, and then finally do we have some sort of expertise that we can leverage in the marketplace, and if we can answer those three questions "yes", then we will look at that marketplace, about two and a half years ago, looking at the UK again, after over a decade of looking at the UK, we answered those three questions, and hence here we are. It's been a very long-term decision, and we've been coming into the market the last two years, believe it or not.
David:
But some people might say you've come into the UK market at just the wrong time? – the market couldn't be any worse right now, having fallen 30% from last year, so how are you going to encourage investors to renew their appetite for investing in shares now?
Tom:
Sure, so a very good point – I would argue that we came in at the best time possible.
David:
Because we're right at the bottom of the market?
Tom:
Well, no, not necessarily that.
David:
Are you calling the bottom of the market?
Tom:
No, I would never do that – I invest in trackers. No, I think it's a good time for us to be here, for a number of reasons – one, we're a strong, financially strong organisation, so coming in and investing in the marketplace, and building a business when others can't do that necessarily, our competitors can't do that, that's actually good for the business, so we can find some great people, we can invest in the business, we can really set ourselves up for future growth, but looking at the public, they feel they've been burnt, they feel that they've been promised an awful lot and delivered very little.
David:
I think they've almost been cremated, somehow, yeah.
Tom:
That's right, and I think Vanguard's just the type of organisation to come in and educate investors about things like cost, which nobody talks about, because frankly it's not in the best interests of many of our competitors - talk about cost, and the importance of cost, it's the one thing you can't control, when it comes to investing, is cost – you don't know what the markets are going to do, but why pay more? Diversification, saving for the future – we plan on spending a lot of time educating the public at that end, I do think Vanguard comes with a very trustworthy image, and I think that will play well in this marketplace.
David:
Now that you are in the UK market, how big a market share do you think you'll be able to capture? – because the gorilla of the market really is iShares, which is owned by, well which was owned by Barclays and now part of BlackRock so the point is, how big a market share do you think you'll have?
Tom:
I can't tell you what sort of market share we'll have, we're not really sure about that, we don't measure that. We think if we build a really good business and educate investors and focus on investors, the results will follow, so market share in itself is not a measure, it's really an outcome for us as opposed to a goal. I will say, the difference between us and iShares really, if you look at iShares assets under management, they're very institutionally focused; Vanguard is here for the retail investor, to educate the retail investor, so I do think we have a big differentiator between ourselves and iShares.
David:
So talking about the tracker market – how does the UK tracker market compare with the American tracker market? – are we pretty much the same, or are we a nation divided by a common language?
Tom:
I do think that trackers are a little bit more appreciated, and the benefits of indexing are a little more appreciated in the United States than they are here, I just think it's a matter of time. You mentioned earlier educating a country – how long did it take – it took us 30 years to get there, and I think with some education, the UK will certainly catch up, and I think the environment is right for that, transparency and low cost are key words that people are talking about today, and trackers fall in there.
David:
So the other thing is, you've come to the UK now, and one of the things that struck me was the minimum size of the investment. When I heard that you were coming, we were actually quite excited, until we saw the minimum £100,000 investment, I mean that made my jaw drop, it took me ages before I picked my jaw back up from the floor again. So how are small investors going to get access to the Vanguard funds, if the minimum investment is £100,000? – not many of us actually have £100,000 lying around.
Tom:
Well, we spent a lot of time thinking about that. The reason we have the £100,000 minimum frankly is the business model that we're setting up, and that is to work through financial intermediaries, we're just not set up for direct business at this time, but we thought long and hard about that, and the way a small investor can come to Vanguard is through the retail-orientated platforms, and the first one we have partnered with is Alliance Trust, for £12.50 any investor can come and buy a Vanguard fund and not have the £100,000 minimum, so they have access to all of our funds.
David:
But it will cost them £12.50 to actually kick the thing off?
Tom:
That's right.
David:
But there are other platforms out there which don't like the idea of having an initial fee?
Tom:
Right.
David:
So how are we going to overcome that problem then?
Tom:
Well, we're working on that, we've signed Alliance Trust and we're working with others to see how it might work out, that they can make a living distributing Vanguard funds, it'd be fair to the investor.
David:
So would £12.50 give them access to all the funds? – or just one particular fund?
Tom:
The £12.50 is a transaction fee, so as you buy funds, you'll get charged that amount.
David:
So what about people who are trickling money into the stock market? – do many people like the sort of constant investing?
Tom:
Sort of the dollar cost to averaging?
David:
Yes, that's right, so do you have to pay £12.50 each time?
Tom:
Yeah, I think it's important to look at – and that's why we're going to go with several different platforms, with different business models, I think depending on how you're investing, it would determine which platform you should choose, so maybe you go more towards an asset-based fee if you're going to be doing the dollar cost averaging, versus hitting a transaction cost every time.
David:
So if you did the dollar cost averaging, you would have to pay £12.50 for each dollar cost average that you take?
Tom:
I believe that's the model, yes.
David:
OK. So what kind of funds can people expect from you? – what are the various things? – just whet my appetite a little bit.
Tom:
Sure, so the initial one up, it's eleven funds, it will allow a UK-based investor to build a diversified global portfolio, should they choose its equity and its fixed income, we'll add more funds over the next couple of years, we will add active as well, I think a lot of people think of Vanguard only as trackers, but 40% of our assets in the US are actually actively managed funds, and people say, how can you do that?
David:
Well, exactly.
Tom:
How could you do that? – you're indexers, but it's not so much active versus passive, we think they both play a role, it's low cost and transparency, the lower the cost, the better chance you have of outperformance, and our actively managed funds are very competitive performers over the long term, that's really the cost advantage.
David:
Give me some idea as to what an actively managed fund will actually cost an investor?
Tom:
Well I can you tell you, on average in the US, our overall expense ratio is about 19 basis points, and of that, the actively managed portfolios are about 26 basis points, so that's where we are in the US. Obviously there's significant scale in the US, but we will be very competitive on the active side as well.
David:
I was going to say, you can't really find many fund managers working for 26 basis points, can you?
Tom:
We've got a few.
David:
OK, now the other thing that interests me is your equity income fund – at the moment in the UK, everybody is after income, well not everybody, most people are after income, me in particular, and this is one that floats my boat, so can you explain to me, what exactly is the equity income fund that you're offering?
Tom:
Sure, equity income funds are quite popular in the UK, and especially right now - they focus on higher dividend paying securities. We have built an index, a customised index with FTSE, to do that in a tracker set up, where the index looks at the FTSE 350, which is mid and large companies, screens out anybody that doesn't pay a dividend, takes those dividend payers, looks at the top quartile of highest dividend payers, has them in the portfolio and then puts some restrictions on, percentage in, a given stock or a given industry, and that's one you have to worry about with the dividend funds, you have to look at your industry concentration.
David:
Because otherwise you'll just end up buying all the miners or all the banks, and we know what happens if you buy up the banks.
Tom:
You'll be 60% in financials, which would not have been a good thing 18 months ago, so we make sure that we control into industry diversification, and it should be a higher yielding equity portfolio.
David:
OK, so what other funds can people look forward to from Vanguard – I mean, a rough idea as to …
Tom:
Sure, you've got your basic UK equity funds, the FTSE All-Share, which is the entire market, a number of foreign funds, so you'll have emerging markets, Asia, on the continent so you can build a global portfolio, there's a global equity fund, so you could take two funds and put them together and get global exposure; you could take the World Ex-UK, plus the UK All Shares, and you have two funds, very low expenses, exposure to all stocks round the world.
David:
What about exposure to places like India, I mean this is one country that interests me, India and China – have you got funds that do that?
Tom:
Right, well we don't have specific country funds at this time, again this was the initial line up, we'll look to see the demand and what makes sense from an investment standpoint, and then we'll add more portfolios.
David:
The iShares have actually got some exposure to the China market itself, through the Xinhua, I think the 25?
Tom:
That's right, the 25.
David:
So you've got no intention of actually doing that out?
Tom:
I wouldn't say we don't have any intentions, we don't have anything today, and we just need to look at the demand. The one thing we want to be careful of is chasing fads – if you look at our line up, even in the US, we have 135 funds, but there's no internet index or anything like that; we want to make sure that something is long term and enduring, and really is not a fad, we'd rather stay away from that stuff, because I think the expectation of investors, they'll be disappointing otherwise.
David:
OK. Now I'd like to pick your brain a little about the stock market – how do you see the stock market at the moment? – do you think the stock market is about to recover? This is the million dollar question that I ask everybody.
Tom:
Yeah, you're asking the wrong guy here – I'm a businessman, not an investor. I actually worked in our fixed income portfolio management of Vanguard about 15 years ago, but who knows? – I would just say, investors shouldn't focus on that, they should focus on what your goals are, get the proper asset allocation and focus on that – don't worry about the ups and downs of the market. For shorter-term assets, obviously you need to be more conservative, but for the long term, focus on your proper asset allocation, keep that allocation, don't panic and you'll be great.
David:
Yeah, at the risk of sounding just a little personal, what are the things that you invest in? – what are the things that excites Tom Rampulla?
Tom:
Honestly, it's just all our tracker funds. I've got a global portfolio that is made up of Vanguard tracker funds, I'm pretty much in line with the various market caps around the world, it's sort of boring, but it's worked out pretty well for me.
David:
The other thing really is for people who are invested in the stock market at the moment – what they're saying is, "I've lost complete confidence in the stock market – I really don't know what to do, because I look at these economic statistics that come out all the time – it's all over the place" – what kinds of words of encouragement can you give to people like that?
Tom:
Put it in perspective – there's been some really rough times, the Great Depression, there were some rough times in the '60s, but those were actually great buying opportunities. The worst buying opportunity, of course, is when everybody's excited about the market, and piling in and valuations are very high, but I would say that I don't think that the economies of the world are going to go away, I think there'll be growth, significant growth; I think you need to look around the world, and not just, if you're a UK investor, not just look in the UK but get a global portfolio, there's going to be growth coming from Asia and many other places.
David:
I think this is the kind of message that we're getting from virtually all the guests that we have on the podcast, I mean all these people, some of whom are very very seasoned investors, and they're saying that you really have to keep your nerve, you just have to keep on continually investing in the stock market, and just forget the fact that the stock market has fallen 30%, I mean that's all in the past – what you need to do now is to try and refocus and say, "Where do I want to be in about 20 years' time?", and if you need to invest a little bit more, you need to do so.
Tom:
That's right, I mean the one thing I would say is, a person who's not at or close to retirement, it's sort of a perverse view, but it's actually good, because if your dollar cost averaging and it's for some sort of savings plan, you're buying more shares for the same amount of money. You want the market to go up close to the end of your retirement, not while you're saving, your peak saving years, and if you can have that long-term perspective, you'll do just fine – but you have to be saving enough, that's the thing.
David:
I think what people need to do is to try and accept the fact that, first of all, their wages aren't going to be going up very much, and they're going to have to start economising, and then what they need to do then is to start to try and put some money to one side so that they can reinvest for the future, because if you don't do that, then you're going to end up with absolutely nothing, and then all those people who have been able to do that will be able to benefit. So how long are you planning to be in the UK for, Tom?
Tom:
Well, my family and I have moved here, and we're permanent, so hopefully a long time.
David:
You've only been in the UK for about a year?
Tom:
Uh huh.
David:
Where were you in the States?
Tom:
Outside of Philadelphia, Pennsylvania.
David:
Right, OK – is that where the Liberty Bell is?
Tom:
In Philadelphia, that's right.
David:
Have you actually seen the Liberty Bell?
Tom:
Yes, I have.
David:
Have you rung the Liberty Bell?
Tom:
I have not, I think I would have been shot by one of the park rangers if I got close to it!
David:
So really, I was absolutely right when I said that Vanguard was ringing in the changes for fund management over in the States, and you're going to be doing exactly the same over here?
Tom:
We're hoping to, we're hoping to educate the public about the importance of cost and diversification and transparency, and if we can have an impact on the market to benefit them, we'd be very happy about that.
David:
Right, that's wonderful. Now, you may not know this, but I end each podcast with a quote, and today's quote, believe it or not, actually comes from Confucius, Confucius hasn't made an appearance on my podcast for a long time, and Confucius says (now, tell me if you like this), he says, "He who does not economise will have to agonise" – he didn't know about tracker funds in those days.
Tom:
He would have invested in Vanguard, I'm sure of it!
David:
I think he might have done! So anyway, thank you very much – that was Tom Rampulla from the Vanguard Group, and this has been MoneyTalk. Now, if you have a comment about today's show, you can post it on the MoneyTalk blog, which you can find at fool.co.uk/podcast, or, if you have a suggestion for future shows, please email me at moneytalk@fool.co.uk.
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