Founded in Valley Forge, Pennsylvania, and catering to do-it-yourself investors, Vanguard Group is the quintessential U.S. company. But its low-slung suburban campus, not far off the Pennsylvania Turnpike, belies how international the asset management giant has become, particularly since the financial crisis. Vanguard chief executive F. William (Bill) McNabb III, who took the helm in 2008, made international expansion a priority when he and his senior leadership team drafted the company’s strategy in the months after the credit crisis paralyzed the markets that year.
“We had been overseas, but we weren’t serious,” McNabb said during a recent interview in his office, whose walls are still decorated with artwork belonging to Vanguard’s famous founder, index fund pioneer John Bogle.
The efforts have paid off. Vanguard now manages $244 billion in mostly passive assets for non-U.S. investors, up from $108 billion in 2007. Although Vanguard’s U.S. business represents the lion’s share of its $3.1 trillion in total assets, the firm’s broad international client operation makes it one of the largest asset managers globally.
McNabb, 58, and his team invested significant resources in the international effort, believing that the company’s mission of low-cost investing would be just as appealing in other parts of the world as it has been in the U.S., particularly as the financial world was being roiled by mistrust. Vanguard focused on globalizing investment management, including hiring local traders, portfolio managers and support staff, as well as investing in information technology and operations like new fund accounting systems.
But that was the easy part. Outside the U.S., intermediaries, including banks, controlled much of the distribution to mainstream investors. Vanguard needed to both educate investors about the effect of costs on performance and lobby regulators about reform.
Vanguard built a business in the U.K., Canada and Hong Kong, expanded its existing Australian group and launched exchange-traded funds in Europe. The firm has the fastest-growing ETF lineup in Europe and has offices throughout the Continent, including Amsterdam, Paris and Zurich. It also has offices in Tokyo and Singapore and is working with clients in Taiwan. Vanguard has 122 funds in markets outside the U.S.
Thomas Rampulla, a 27-year Vanguard veteran who heads its U.K. and European businesses and will shortly take over its Financial Advisor Services division in the U.S., says the firm focused only on institutional investors up until 2007. “It was tough at first,” he explains. “The market was very commission-driven, and there wasn’t much interest in passive investing by retail investors at all.”
But the environment was changing as distribution came under scrutiny. In the U.K., for example, regulators in 2006 said they were investigating problems in the retail investment market under a sweep called the Retail Distribution Review (RDR). In 2012 U.K. officials banned commissions, among the rules to come out of the RDR, with investors having to pay separately for advice. Low-cost funds suddenly looked a lot more attractive. “Advisers changed their focus from the hottest stocks to financial planning, asset allocation and financial coaching,” says Rampulla in a phone interview from London. “And the focus on passive really increased.”
Vanguard had some success on fund platforms before the RDR changes, but its opportunities were limited because it didn’t pay commissions. “RDR was a nice tailwind for us,” says Rampulla. The Netherlands also passed similar rules, making Vanguard’s funds more attractive there. (John James, who currently runs Vanguard Investments Australia, will succeed Rampulla.)
Whereas Vanguard is well known around the world for indexing, Gregory Davis, global head of the fixed-income group, adds that he would like to see more interest in the firm’s active funds. “The active story isn’t as well baked internationally as it is in the U.S.,” he says. “But our story is not about indexing; it’s about low cost.” Davis spent a year in Australia as chief investment officer for Vanguard’s Asia-Pacific business and has helped the firm globalize its investment team.
Asia is a tougher sell for Vanguard, which has been in the region for 15 years and serves clients in nine locations. Fee-based advice has been slower to catch on in Asia, and regulators do not require the level of disclosure that might pressure advisers to adopt different models. Fund companies that pay for distribution are still preferred.
But Vanguard is pushing ahead. The firm has launched four ETFs in Hong Kong over the past few years. In China it works with institutional clients, including insurance companies. Still, market reforms and more disclosure are needed before Vanguard can make more progress in China and other Asian countries. McNabb isn’t just waiting for things to change. In March he spent a week in China and met with every major regulator. “Success is never guaranteed,” he says.
