Vanguard funds in the U.S., including those that are actively run, charge an average fee of 16 basis points, compared with 79 basis points for the industry, data from Denver-based Lipper show.
Because Vanguard had so much room to grow at home as indexing took hold, the company was slow to move overseas, Chief Executive Officer F. William McNabb said in an April interview at the firm’s Valley Forge, Pennsylvania headquarters. The international business will “be an important pillar” in the coming decade, said McNabb.
At New York-based BlackRock, 40% of assets were outside the Americas as of Dec. 31, according to data compiled by Bloomberg. At San Mateo, California-based Franklin Resources Inc., non-U.S. assets were 34% as of Sept. 30, company data show.
Britain’s rule change may create an opening for Vanguard, said Rampulla, who sold products to U.S. financial advisors before moving to London four years ago.
As American advisors abandoned commissions in favor of asset-based fees over the past decade, they became more sensitive to the costs they were passing on to clients and in the process, turned into better customers for Vanguard, he said. Vanguard’s assets managed for U.S. advisors rose to $620 billion as of Sept. 30 from $260 billion at the end of 2007, company data show.
“We were a good value proposition,” Rampulla said.
In the U.K., winning over advisors is critical because the market is more advisor-driven than in the U.S., he said. “There is very little direct business.”
Mutual-fund sales by intermediaries such as financial advisors and wealth managers are about six times greater than direct sales to consumers, according to the Investment Management Association, the industry’s lobbying group.
Vanguard has already won converts. Alan Smith became a customer in 2010 when he and his colleagues soured on stock pickers after the global financial crisis.
“We couldn’t find a compelling reason to remain exposed to active funds” said Smith, CEO of Capital Asset Management, a London-based wealth-management firm that oversees 125 million pounds, 40% of it with Vanguard.
James Norton, whose London-based Evolve Financial Planning Ltd. manages 200 million pounds, including Vanguard funds, said passive investing in the U.K. is growing.
Index funds, known as trackers in the U.K., represent about 7% of the British market for mutual funds, according to the Investment Management Association, about half their share in the U.S.
“When advisors aren’t getting paid commission, I think more of them will take a look at the likes of Vanguard,” Norton said in a telephone interview.
Vanguard had 3.1 billion pounds in British mutual funds as of Sept. 30, according to Morningstar data.
That compares with about 40 billion pounds for Atlanta- based Invesco Ltd., 32 billion pounds for BlackRock and 28 billion pounds for New York-based Bank of New York Mellon Corp. The largest fund provider by assets is M&G Securities Ltd., the fund management unit of London-based Prudential Plc, which is the U.K.’s biggest insurer.
“The more savvy investment advisors have heard of Vanguard, but the majority of people still don’t know the name,” Norton said.
Vanguard’s biggest British index fund, the 556 million pound Vanguard FTSE UK Equity Index Fund, ranks 22nd in size among the country’s index funds, Morningstar data show.
Price competition has intensified because of Vanguard’s entry into the market, said Christopher Traulsen, director of Morningstar’s fund research in Europe. London-based HSBC Holdings Plc dropped the expenses on its index funds by as much 88% within a week after Vanguard’s arrival in the country, Traulsen said in a June 2009 article headlined “The Vanguard Effect.”
Vanguard now has a modest price edge over most peers, Traulsen said in a telephone interview. Its fund that tracks the FTSE Index charges 15 basis points, compared with 21 basis points for the larger BlackRock fund and 30 basis points for the Fidelity MoneyBuilder U.K. Index Fund, Bloomberg data show. The Royal London FTSE 350 Tracker Fund charges 12 basis points.
“Vanguard is lacking in competitive advantage,” said Ben Yearsley, head of investment research for direct investing at Charles Stanley Group Plc, a London-based firm that oversees 15 billion pounds.