Vanguard is eying the $1.5 trillion Canadian mutual fund market and dipping its toes in with the launch of four new actively managed products. The investment giant is best known north of the border for its low cost exchange-traded funds (ETFs), but is no stranger to mutual funds, where Vanguard cut its teeth decades ago in the U.S.
The actively managed part of that announcement might have raised a few eyebrows in the investing community. One of the misconceptions about Vanguard is that it’s purely an indexing shop, but the truth is the ship that indexing pioneer Jack Bogle built has a lot of history and experience with actively managed products.
Active management gets a bad name, particularly here in Canada, but what the active versus passive investing debate truly comes down to is costs; namely low cost vs. high cost.
These new Vanguard mutual funds promise to be quite different from what we’ve seen out of any other mutual fund provider in Canada. While the majority of actively managed funds come with hefty management fees of up to 2 percent or more, Vanguard’s funds will charge no more than 50 basis points (0.50 percent).
Furthermore, their fee structure uses a performance based method called fulcrum pricing – meaning if a fund fails to meet its benchmark target then the management fee will go down. Conversely, if the fund outperforms its target then the fee will go up (fees are capped at 0.50 percent). This unique pricing aligns the interest of the investor with that of his or her advisor.
Vanguard’s four new actively managed mutual funds
The four Vanguard mutual funds are; the Vanguard Global Balanced Fund, the Vanguard Global Dividend Fund, the Vanguard U.S. Value Windsor Fund and the Vanguard International Growth Fund. All have established track records in either the U.S. or the U.K.
|Mutual Fund||Maximum Management Fee*||First Year Management Fee*|
|Vanguard Global Balanced Fund||0.50%||0.38%|
|Vanguard Global Dividend Fund||0.50%||0.34%|
|Vanguard Windsor U.S. Value Fund||0.50%||0.35%|
|Vanguard International Growth Fund||0.50%||0.40%|
The Vanguard Global Balanced Fund seeks to provide long-term capital growth together with some current income by investing primarily in a combination of equity and fixed income securities of issuers located anywhere in the world.
The Vanguard Global Dividend Fund seeks to provide an above-average level of current income together with long-term capital growth by investing primarily in dividend paying equity securities of companies located anywhere around the world
The Vanguard Windsor U.S. Value Fund seeks to provide long-term capital appreciation and income by investing primarily in large- and mid-capitalization companies located in the United States whose stocks are considered to be undervalued.
The Vanguard International Growth Fund seeks to provide long-term capital appreciation by investing primarily in the stocks of companies located outside Canada and the United States.
How can investors purchase Vanguard mutual funds?
These four Vanguard mutual funds will be available as F-Series Funds, which do not include embedded commissions for advisors. That means they’re limited to investors with fee-based accounts, where investors pay a percentage of the value of their account – typically 1 to 1.5 percent – to cover the cost of advice. If you’re in this type of client-advisor relationship and interested in these products then make sure to ask your advisor about them.
The new Vanguard mutual funds will also be available through two discount brokerage platforms; Questrade and Qtrade, with the hope that more discount brokerages will add the funds to their investor platforms in the near future.
Vanguard All-in-One ETF vs. Vanguard Global Balanced Fund
Having recently launched three asset allocation ETFs, commonly referred to as all-in-one ETFs, Vanguard now has a multitude of low cost, broadly diversified, and simple solutions for Canadian investors (including my own four-minute portfolio).
With Vanguard Balanced ETF Portfolio, investors get an index-based product that holds seven ETFs under one low-cost umbrella (0.22 percent) with an asset allocation comprising of 60 percent equities and 40 percent fixed income.
The new Global Balanced Fund, on the other hand, comes with a maximum MER of 0.50 percent, but as a mutual fund it can be bought and sold with no trading fees. This fund might be ideally suited for investors who contribute on a monthly basis. The fund will hold approximately 66 percent equities and 33 per cent fixed income.
More on this in a future comparison column.
The Vanguard Effect?
I spoke with Atul Tiwari, managing director of Vanguard Investments Canada, about Vanguard’s foray into the Canadian mutual fund market. He said the timing was right to introduce their first mutual funds in Canada and bring the Vanguard effect to Canadian mutual fund investors.
What exactly is the Vanguard effect? Originally coined by Morningstar, the term describes Vanguard’s sizeable influence on new markets it enters where competitors feel the need to reduce fees in order to remain competitive.
“As a group, Canadians hold about $1.5 trillion in mutual fund assets,” said Mr. Tiwari. “Vanguard has a long track record of lowering investment costs in the areas in which we operate, so we see providing greater choice and lower costs to a broader group of investors as very positive.”
Indeed, when Vanguard entered the Canadian ETF market in 2011 it did so with just six products. Fast forward today and Vanguard manages $16 billion in assets with 36 Canadian ETFs. In that time, the average management expense ratios have declined in 12 of the 13 ETF categories in which Vanguard competes. In categories where Vanguard doesn’t compete, fees fell in just five of 12 cases, according to an internal Vanguard analysis.
“Low cost is in our DNA,” said Mr. Tiwari.
Expect Vanguard Canada to add to its mutual fund lineup in the coming years and for the Vanguard effect to give a much needed shake-up to the mutual fund market.
When asked about the Canadian Securities Administrators’ decision not to ban embedded commissions on mutual funds, Mr. Tiwari said he believes the Canadian market, like other regions around the world, will organically evolve away from it.
“Vanguard will continue to champion the interests of Canadian investors with more low-cost and high-quality product options.”