Morningstar Magazine - April/May 2018 - 27

Vanguard Takes a
Different Direction
AMERICAS

Canada
Vanguard is a champion of low-fee direct investing
in the United States, but individual Canadian
investors won't be able to buy Vanguard mutual
funds directly from the company. If Canadians
want to invest in a Vanguard mutual fund once the
funds receive final regulatory approval, they'll
need to be a client of a fee-based advisor.
Vanguard's Feb. 21 preliminary prospectus is for
two series of units. Series F will require
retail investors to have a fee-based account with
a dealer. Series I is for institutional accounts.
Vanguard Investments Canada's advisor-only
distribution strategy for mutual funds will
set it apart from its giant U.S. parent, Vanguard
Group, a dominant player in direct sales of mutual
funds in the United States.
In Canada, where Vanguard's family of 36
exchange-traded funds now ranks third in market
share with more than $14 billion in assets,
there are no toll-free numbers to call, nor chat
lines nor any other venue for investors to
communicate directly with Vanguard. As Vanguard
notes on its website, its current registration
in Canada allows the company to discuss
its products only with registered dealers and
financial advisors.
Nor will the opening lineup of four Vanguard
mutual funds include any of the low-fee
index funds that are the U.S. parent's largest and
most popular mutual-fund offerings. Vanguard
Canada's starting four are all actively managed
and rely primarily on external subadvisors.
For Canadian investors who are looking
to Vanguard as a source of low-cost investing,
its ETFs will remain the products of choice.
The cost of ownership will be higher for the
mutual funds, as active management costs
more-but not all that much more. As noted in
Vanguard Canada's Feb. 22 press release,

the maximum management fee is 0.5% for the
Series F units, not including fund expenses.
That's a cheap price to pay for actively managed
funds in the fee-based advisory channel.
In addition, because of the performance-fee
provisions that Vanguard has negotiated with its
external subadvisors, the management fees
could be even lower than the maximum 0.5%. Not
that investors would want to pay any less: It
would mean that the funds were underperforming
the benchmarks that Vanguard has set for
them. Vanguard will pay its subadvisors a base
rate, plus or minus a performance adjustment.
If the funds underperform, the subadvisors
will be paid less, and these savings will be passed
on to investors.
If the funds outperform their benchmarks, however,
Vanguard will pay the performance bonuses
to the subadvisors at no extra cost to fundholders.
Vanguard says this performance-fee structure
is designed to align the interests of investors with
those of the portfolio managers responsible for
managing the funds.
Communicating only with advisors will help
Vanguard Canada save money, but an even
more important cost advantage is its ability to
piggyback on investment strategies and
subadvisory relationships that are already in
place outside Canada.
For example, the soon-to-be-launched Vanguard
U.S. Value Windsor is subadvised by Wellington
Management Canada and its Boston-based parent,
and New York-based Pzena Investment
Management. Its investment mandate is similar to
that of U.S.-domiciled Vanguard Windsor VWNEX,
which is also subadvised by Wellington and Pzena.
Vanguard International Growth, whose external
subadvisors are Baillie Gifford Overseas of
Edinburgh, Scotland, and Schroder Investment
Management North America, based in
New York, has a U.S.-domiciled analog (Vanguard
International Growth VWILX) with the same
subadvisors and a similar mandate.
The other two funds to be launched in Canada,
subject to final regulatory approval, are Vanguard
Global Dividend, subadvised by Wellington

and Vanguard Group's quantitative equity group,
and Vanguard Global Balanced, also subadvised
by Wellington.
Rudy Luukko is editor, investment and personal finance,
with Morningstar Canada.

Active Funds Still
Prevail in Europe
GREATER EUROPE

Germany
Europe's asset management industry enjoyed
a record-breaking year 2017 with both net
inflows and assets under management hitting new
highs, according to Morningstar data. Buoyant
markets and record net inflows took Europeandomiciled open-end funds to EUR 8.9 trillion under
management, up from EUR 7.96 trillion in
2016. European fund managers saw net inflows
of EUR 682.8 billion for the year. Fixed-income
products raked in a record EUR 288 billion. Inflows
to allocation funds amounted to EUR 134.6
billion, close to the record levels of EUR 136 billion
in 2014. Open-end equity funds pulled in
net inflows of EUR 106.9 billion-reversing the net
outflows of EUR 57.5 billion in 2016, which
largely came on the back of heavy outflows from
actively managed funds.
Actively managed funds left the horrible year
of 2016 easily behind, taking in net flows of
EUR 526.4 billion, which amounts to a growth rate
of 8.5%. Passive funds remained a distinctive
source of growth for Europe's fund industry. In all,
the combined inflows into long-term open-ended
index funds and ETFs amounted to EUR 162
billion in 2017-less than inflows to active funds,
but representing an organic growth rate of
14.7%. Passive funds have increased their market
share from 15.2% at the end of 2016 to 16%
as of the end of December.
Drilling deeper reveals that, as in the
U.S., the trend toward passive funds in Europe is
driven primarily by equity funds. Open-end
index equity funds and equity ETFs took in net
new money of EUR 104 billion in 2017, thus

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Table of Contents for the Digital Edition of Morningstar Magazine - April/May 2018