5. Why does Vanguard exist?
“Our core purpose is to take a stand for
all investors, to treat them fairly and to
give them the best chance of
investment success”
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6. Standing Out From The Crowd
• The Vanguard Group exists to serve the needs of our clients – unique mutual structure
• The client first philosophy is the foundation of every Vanguard business throughout the world
• We are an at cost provider – this isn’t just a strategy, it’s an inevitable outcome
The Vanguard Group’s Expense Ratio vs. US Industry Average
Note: This chart is included for reference purposes only. The data is based only on US domiciled funds which are not available for sale in the UK.
Expense ratios as of December 31, 2011. Vanguard expense ratios range from 0.05%–1.84%. Average expense ratios are represented as a percentage of net assets.
Source fro the industry average expense ratios: 1975–1977 Weisenberger Panorama; and Lipper Inc. thereafter.
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7. The Vanguard Group Inc’s unique ownership structure…
Profits
owns owns
invests
invests owns owns
Profits
Vanguard funds refers to US domiciled funds.
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8. The Vanguard Group’s integrated and well-aligned
business model creates a virtuous loop for the investor
The value to our clients of our low costs
Vanguard Group’s Expense Ratio vs. US Industry Average Estimates in millions of dollars
Low-cost
mutual funds Long-term
out-performance
Generates Delivered by a Combined
economies with highest
of scale
high-performing quality
crew service and
investor
advocacy Long-Term Redemption Ratio
Where the cash went in 2011 Vanguard Funds vs. Industry Spread
Consistent 35% Vanguard
cash flow and 29.7%
30%
Strong 26.2% 26.7%
asset growth 25.5%
25% 22.4%
client loyalty 20.6% 20.1%
20% 17.9%
14.9% 14.9% 15.5%
15% 10.1% 10.1% 13.2%
10%
5% 10.5% 10.0% 11.8% 11.3% 10.6% 11.2%
9.2%
0%
2005 2006 2007 2008 2009 2010 2011
*Note: This slide is included for reference purposes only. The data is based only on US domiciled funds which are not available for sale in the UK. Source: The Vanguard Group
“The value to our clients of our low costs”: The chart shows the total additional fund operating costs that Vanguard shareholders would have paid each year if we had charged the fund industry’s average expense ratio (1.12% in 2011).
92 basis points on $1.65 trillion in mutual fund assets under management could translate into approximately $15 billion in savings.
Calculation: 92 basis points comes from subtracting the industry average expense ratio of1.12% from the Vanguard average expense ratio of 0.20%. This number is then multiplied by Vanguard’s assets under management of $1.65
trillion to get the result of $15 billion. This hypothetical illustration does not represent any particular investment and only holds true if the returns are identical. There is no assurance that individual investors will experience similar
savings.
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9. A global presence allows Vanguard to serve investors
worldwide
Asset management services for private and public pension funds, financial advisors and
institutions, and government and charitable organizations
Key Statistics*
• £1.3 trillion AUM
• 13,000 employees
• 25m clients
• 6,000 institutional clients
• 800 charity clients
• Offices in 15 locations
*As at 30 June 2012
Source: The Vanguard Group, Inc. Assets under management for The Vanguard Group.
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• Clients in more than 80 countries
10. Winning the loser’s game
• Standing Out From The Crowd
• The Case for Indexing
• Support to Advisers
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11. The case for indexing
“Most investors, both institutional and individual, will find that the best way to
own common stocks (shares) is through an index fund that charges minimal
fees. Those following this path are sure to beat the net results (after fees and
expenses) of the great majority of investment professionals.”
– Warren Buffett – Berkshire Hathaway Annual Report
1996
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12. The market and the Regulator’s view of index investing?
• “There has been a long term trend towards a rising proportion of assets being managed
passively.”*
• “It is anticipated that the changes to adviser remuneration in the RDR may lead to
advisers recommending passive funds more frequently”*
• “According to the IMA, the proportion of Institutional assets managed passively is
approximately 36%, whereas only 6% of retail funds are indexed….there remains
considerable scope for growth in this area.”**
Net retail sales of tracker funds Funds under management of tracker funds
RDR - Levelling the playing field
Sources: *FSA Retail Conduct Risk Outlook – Feb 2011, page 9.
**Asset Management in the UK 2011-12. The IMA Annual Survey, page 58.
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13. Why indexing works - the theory
A Zero-Sum Game
– Performance of active managers is normally distributed around the market return
Likelihood
Below the market Better than the market Return
= Market performance
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14. Importance of costs – the theory
• Costs reduce the returns
• After costs, the average active manager underperforms the market
Average return after costs Average return before costs
Likelihood
Below the market Better than the market Return
Market Performance
Impact of costs
1.54% average*
* Source: The quoted TER for the average active equity fund represents the simple average (not asset weighted) TER of UK domiciled active equity funds across all sectors and
includes retail and institutional share classes - source: Vanguard Asset Management using TER data from Morningstar based on the latest available annual report as at January
2012.
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15. What percentage of active managers underperform
their benchmark?
5 years 10 years 15 years
UK Equity
? ? ?
UK Gilts
? ? ?
15 VANGUARD ASSET MANAGEMENT - CONFIDENTIAL
16. What percentage of active managers underperform
their benchmark?
The percentage of all funds that started the given period but either underperformed or dropped out of the sample:
5 years 10 years 15 years
UK Equity
77% 74% 73%
UK Gilts
84% 93% 92%
Sources: Vanguard calculations, using data from Morningstar, Inc., FTSE and Barclays Capital. Included funds are from the following Morningstar categories: UK equity – Flex cap,
large-cap blend, large-cap growth, large-cap value, small-cap; UK bonds – UK government. Performance is for periods ending on 31 December 2011. Basis of performance
calculation is net of fees, income reinvested, closing NAV prices. Figures account for survivorship bias. Benchmarks are specified in the fund prospectuses
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17. The case for indexing globally
What percentage of active managers underperform their benchmark?
The percentage of all funds that started the given period but either underperformed or dropped out of the sample.
Emerging
UK Europe US Global
Markets
(15 years) (15 years) (15 years) (15 years)
(15 years)
Domestic
equities 73% 83% 87% 93% 79%
Domestic bonds
92% 100% 100% 100% -
Sources: Vanguard calculations, using data from Morningstar, Inc., FTSE , MSCI and Barclays. Included funds are from the following Morningstar categories:
UK equity – flex cap, large-cap blend, large-cap growth, large-cap value, small-cap; Europe equity – large-cap blend, large-cap growth, large-cap value, flexcap,
small-cap; Global – large-cap blend, large-cap growth, large-cap value, flex-cap, small-cap; US equity – large-cap blend, large-cap growth, large-cap value, flex-cap, small-cap;
Emerging markets equity – emerging markets; Europe bond – EUR diversified; US bond – USD diversified; Global bond – global; UK bonds – UK government. Performance is for
periods ending on 31 December 2011. Basis of performance calculation is net of fees, income reinvested, closing NAV prices. Benchmarks are specified in the fund prospectuses.
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18. Can I pick winning funds in advance?
Quintile Rank in Subsequent Non-Overlapping Five Year Period (% of funds)
Risk-Adjusted Return Ending Dec 2011
Rank 5 Year Ending
Dec 2006 Highest Lowest
High Medium Low Missing Total
Quintile Quintile
Highest Quintile
15.6 14.3 10.4 13.0 23.4 23.4 100.0
(Top 20%)
High 19.2 8.2 16.4 12.3 9.6 34.2 100.0
Medium 12.5 15.0 18.8 18.8 8.8 26.3 100.0
Low 15.8 22.4 6.6 19.7 9.2 26.3 100.0
Lowest Quintile
3.8 10.3 11.5 16.7 17.9 39.7 100.0
(Bottom 20%)
Source: Vanguard and Morningstar.
Notes: The far left column ranks all active U.K. equity funds based on their risk-adjusted returns relative to their peer group (Morningstar category) during the five year period as
of the date listed. Each quintile includes the funds within that quintile from each of the UK Morningstar categories. The remaining columns show how these quintiles performed
over the next five years.
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19. “You get what you don’t pay for”
28 cents
(1/5)
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20. What is the impact of the total costs?
Costs matter
• Costs, like interest, compound over time
• Impact on investment returns not
always obvious
• Table shows the impact of AMC over time
• Assumes neutral growth so that the long-term
effect of costs is readily apparent
Note how a low-cost portfolio, such as
0.2%, has over 95% of the capital after
25 years, while a high-cost portfolio,
say 2%, has eroded by almost 40%.
This is a hypothetical example it does not reflect any
particular investment. The example assumes a zero rate
of return and does not account for market movement.
Source: Vanguard Asset Management, Limited.
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21. Winning the losers game
• Standing Out From The Crowd
• The Case for Indexing
• Support to Advisers
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22. Funds available on Source Pensions
Pre-set dilution Pre-set dilution
Fund Benchmark Share Class TER levy on levy on
purchase redemption
Equity
EUR 0.30%
US 500 Stock Index Fund S&P 500 Index - -
EUR Hedged 0.30%
European Stock Index Fund MSCI Europe Index EUR 0.40% 0.20% -
Eurozone Stock Index Fund MSCI EMU Index EUR 0.40% 0.05% -
Japan Stock Index Fund MSCI Japan Index EUR 0.40% - -
Emerging Markets Stock Index Fund MSCI Emerging Markets Index EUR 0.65% 0.25% 0.25%
EUR 0.40%
Global Stock Index Fund MSCI World Index - -
EUR Hedged 0.40%
SRI European Stock Fund FTSE All World Developed Europe Index EUR 0.50% 0.20% -
SRI Global Stock Fund FTSE All World Developed Index EUR 0.50% - -
Fixed Income
Barclays Capital Global Aggregate Euro
Euro Government Bond Index Fund EUR 0.20% 0.10% -
Government Float Adjusted Bond Index
Barclays Capital Global Aggregate Euro Non
Euro Investment Grade Bond Index Fund EUR 0.30% 0.40%
Government Float Adjusted Bond Index
Barclays Capital Eurozone Inflation-Linked Float
Eurozone Inflation-Linked Bond Index Fund EUR 0.20% 0.15%
Adjusted Bond Index
Barclays Capital Global Aggregate US Credit Float
U.S Investment Grade Credit Index Fund EUR 0.30% 0.50%
Adjusted Bond Index
Barclays Capital Euro Aggregate Treasury 20+
20+ Year Euro Treasury Index Fund EUR 0.30% 0.10%
Year Index
Source: Vanguard Asset Management, Ltd. As at 31st October 2012
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24. Conclusion
• The majority of active funds underperform their benchmark index after costs.
• Selecting funds which will consistently outperform is extremely difficult.
• Is the outperformance worth paying for?
• Costs matter! You get what you don’t pay for.
• Programme of support to advisers
• Vanguard’s Euro share class funds are now available on Source Pensions
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