Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Vanguard Goes Head to Head

Vanguard Groupdoes not avoid head-to-head competition. In fact, it encourages it.

The Malvern, Pa., investment firm founded by John Bogle ("John Bogle, Keeping the Faith," above) in 1974 and that now manages $1.4 trillion in assets, is putting tools in the hands of its advisers that quite intentionally spur head-to-head comparisons-or even head-to-head-to-head-to-head comparisons-between its products and those of rivals.

Almost as if comparing features and prices between digital cameras on an electronics site, the adviser can compare the attributes and performance of any Vanguard fund with any fund from Fidelity Investments, BlackRock's iShares, Invesco's PowerShares or other supplier.

"One thing we know about advisers is they really want to get under the hood," said Vanguard Senior Manager Andy Nusbickel. "This allows them to do so."

Vanguard has built a series of tools for its financial advisers that encourage comparisons of returns and-perhaps more pointedly-costs.

The primary comparison tool, called Compare Characteristics, allows the adviser to pull up basic product details on multiple funds at the same time. The side-by-side comparisons show the features of, for instance, a Vanguard exchange-traded fund based on investments in emerging markets with an iShares index fund based on the same sort of investments.

From one window, the adviser can see the amount of money invested in each fund, overall; download prospecti for each and check out the effective rate of interest, if applicable, for instance.

But that's just the surface. The tool then draws deeply on Morningstar data to provide direct comparisons on expenses, fees and total returns.

In the case of the Vanguard Emerging Markets ETF against the iShares MSCI Emerging Markets Index Fund (above), the adviser can see the independently verified expense ratio of the Vanguard fund is 0.27% of the value of the fund and the iShares ratio is 0.72%.

In the case of these two emerging markets funds, the iShares fund has an overwhelming advantage in annual return over its life (21.91%) versus the Vanguard fund's life (13.42%).

But in the last five years, the Vanguard fund edges by the iShares fund, 12.20% to 11.57%. In the last year, 19.81% to 17.10%.

The tool provides one-year, three-year, five-year, 10-year and "since inception" comparisons of annual returns. And it does each of these on a "nothing taken out" basis, then two other tougher forms. These are after taxes on distributions from the funds and after taxes on distributions and sale of fund shares.

There also are head-to-head comparisons, on such factors as price-earnings ratio, price-to-book ratio and return on equity. There are rundowns on the diversification of each fund, by industry or country and the top 10 holdings of each.

But Vanguard makes it clear what the Vanguard strength is, with a companion tool that it calls Cost Simulation. This will show what the total costs of keeping money in one fund versus another will be, assuming the same return each year for 10 years. In this case, of course, the cost to the investor is under $3,000 for the Vanguard fund, on a $100,000 investment. The cost under iShares is more than $9,000, leaving more than $6,000 in the pocket of the original investor, returns being equal.

"Our products stand up to scrutiny," Nusbickel said.

And the firm is devoted to letting the adviser scrutinize the returns by most imaginable means. Comparing returns, for instance, to different indices or benchmarks is built-in. The "whole universe" of ETFs and mutual funds are available for the comparisons. And the data source, Morningstar, is the most relied-on source in the industry, for reliable value, cost and return information.

"It's part of our commitment to advisers,'' he said.

The tools were given a shot in the arm in June. That's when the results of a six-month overhaul were introduced.

The biggest part of the upgrade was a vetting of the data, to make sure the head-to-head comparisons were based on the right data, correctly defined, correctly presented, field by comparative field.

"At the end of the day, it's the data that makes the tool work," Nusbickel noted in an interview with Money Management Executive.

How the data is presented, however, also was overhauled, which led to the easier-to-enter, easier-to-compare side-by-side delivery of information, akin to gadget comparisons.

The results are clear, in the traffic the tools receive. Usage of the Compare Characteristics tool has doubled. Usage of its Cost Simulation tool has quadrupled.

There are other tools provided the advisers. Among them are tools which let the advisers determine the performance of an investment or a portfolio over time and helps them build portfolios, compare them, and then execute a result. Yes, the system generates the required selling and buying instructions to reshape the allocations of assets in a portfolio, accordingly.

All inputs and all outputs can be downloaded and saved, for future reference. The more sophisticated tools, whose results are stored on Morningstar servers, require registration and authorization.

Not surprisingly, Nusbickel believes that the approach works in bringing move investment into Vanguard's funds, because "our products do well when you look at them head-to-head against most of the competitors."

Also not surprisingly, many of the best-performing advisers are also the heaviest users of the tools. But Nusbickel can't say whether they become the best performers because they are heavy users of the tools. Or whether they become heavy users of the tools, because they already are the best performing advisers.