Relax... and let a ‘passive’ investment make your money grow
JOHN Clifton ‘Jack’ Bogle is probably a name you are not familiar with, even if you love your money and see yourself as something of an accomplished investor.
But ‘we’ – investors that is – have a lot to thank this American octogenarian for. This is because he is the gentleman who invented the ‘passive’ investment fund – a low-cost way of buying exposure to the performance of a mainstream stock market such as the FTSE 100 or All Share Index. It is a fund designed to track a specific market, plain and simple, with no deviation from the market other than to account for charges.
Without it, most of us would now be paying much more for having our investments managed and be less well off in the future as a result. In a nutshell, he has democratised investing. Three cheers for Bogle.
There is no doubt that Bogle’s smart invention sparked a revolution in retail investment. Today, millions of people, here and in the United States, now hold passive funds as a matter of course.
In the UK, investors use them as the backbone of their pensions, Individual Savings Accounts and investment portfolios. They allow more of our money to be invested rather than eaten away in fund fees, giving us the opportunity to build bigger investment pots. Many financial advisers swear blind by them.
Bogle came up with his investment brainwave when he set up fund management company Vanguard in 1974 from humble offices i n Philadelphia, Pennsylvania. Although he has long since retired, Vanguard now has assets in excess of $5 trillion (£3.8 trillion), making it the world’s second-largest investment house behind BlackRock. Its success has been firmly built on the rock of the index- tracking investment fund. Other investment companies – the likes of BlackRock, Fidelity and Invesco – have had no choice but to jump on the passive bandwagon.
While Vanguard has made huge waves in the United States, it is only in the past nine years that it has ventured across the Atlantic to sell its wares in the UK. As a result, it has always been playing catch-up with other established index trackers – from the likes of HSBC and Legal & General.
Initially, it targeted financial advisers with lots of clients’ money looking for a home. But since May 2017, Vanguard has parked its tanks firmly on the lawns of both the traditional online investment platforms (the Hargreaves Lansdowns of this world) and the asset managers (such as Fidelity, JPMorgan and Schroders). It now wants to manage our money via its online based ‘personal investor’ service.
Through the account, investors can buy into a range of Vanguard funds, most of them index-tracking. They can select funds with fixed mixes of equity and bond exposure – so called ‘life strategy’ funds – ranging from cautious (20 per cent equity exposure) through to aggressive (all equities). Alternatively, they can opt for ‘ targeted’ retirement funds where the risk of the underlying assets lowers as the chosen retirement age approaches.
Last week, the money invested through this platform broke through the £ 1 billion barrier.
‘It is a privilege to have attracted so much money in so short a space of time ,’ says Nick Blake, head of personal investing at Vanguard. ‘It shows that if you do the right thing as a business t hen you will be successful.’
Vanguard says its main attraction is cost, pointing out that every pound paid in fund fees by an investor is a pound out of their future returns. An investor cannot control the stock market but they can determine what they pay to invest. Minimising cost makes an enormous difference to l ong term investment success.
According to independent financial research company The Lang Cat, a £50,000 investment via Vanguard’s online platform into one of its life strategy funds will result in a total annual charge of £185. This compares with £560 if the same investment was made via the ‘average’ priced platform – £940 in the most expensive.
‘We want to stand up for the investor and offer them a fair deal,’ says Blake. ‘We also want to break new ground and show investors that it does not have to be difficult to engage with financial services companies.’
Vanguard is encouraged that 43 per cent of its 30,000 Personal Investor customers are under the age of 35 while one in three are investing monthly. Also, it appears that it is attracting new investors, not just those keen to transfer existing assets. Personal Investor is not yet the finished product. For example, there is no facility to invest into a personal pension although that is likely to be corrected by the New Year or just after. It also does not offer the breadth of investment choices that is available from a rival platform such as Hargreaves Lansdown.
But it has certainly shaken up the UK’s fund management industry and the online platform market, shining the spotlight on the huge fees most players routinely take from investors’ portfolios.
Some investment companies have responded positively by reducing fund charges.
Meanwhile regulators appear keen to make platform charges more transparent and transferring funds between providers easier – moves that would play into the hands of a low-cost operator such as Vanguard.
‘We would like to think we have done our bit to bring down charges on some rivals’ index funds and to increase competition in the online platform market generally,’ says Blake.
‘When it comes to investment get togethers, we are often Billy No Mates but when nobody is speaking to me, I always think back to what Bogle once said: “In investing, realise that you get what you don’t pay for. Whatever future returns the markets are generous enough to deliver, few investors will succeed in capturing 100 per cent of those returns, simply because of the high costs of investing. So pare them to the bone.”
‘That is our mission and it comforts me. Striving for value for money. All the time.’