Increase in institutional assets result of 'confluence of events'
Vanguard Group Inc. topped $3 trillion in worldwide institutional assets under management, less than two years after reaching the $2 trillion milestone.
The money manager reported overall worldwide AUM of $4.442 trillion as of June 30, in response to a Pensions & Investments survey. That is up from $3.965 trillion six months earlier, an increase of 12%. Worldwide institutional AUM growth, however, was even more significant, hitting $3.027 trillion as of June 30, up from $2.392 trillion at the end of 2016, an increase of 26.5%. The firm had reported $2.102 trillion as of June 30, 2015.
Christopher Philips, Valley Forge, Pa.-based head of Vanguard Group's institutional advisory services, said the rapid growth is the result of a "confluence of events" happening among institutional clients. "A focus on costs is a huge driver, you see a focus on risk control as a second huge driver," he said. "Thirdly, a drive more globally, what I'll call advised solutions."
The first two drivers have led to the industrywide explosion in passive management, as well as in target-date fund assets, both of which play to Vanguard's strengths.
Target-date fund AUM totaled $465.4 billion as of June 30, according to Vanguard data, up 21.6% from Dec. 31 and up 36.6% from a year earlier.
Success of target-date funds
Mr. Philips said institutions — from insurance companies to foundations and endowments to defined benefit plans — have been looking at "the success of pools of money like target-date funds, how those returns have been comparable not just in straight-up returns but also risk adjusted," suggesting the success of target-date funds has led organizations to pursue OCIO-type models.
Those institutions — especially globally — are looking at their existing providers and "asking tough questions about has it been effective."
"We're really just starting the first inning of our global push," Mr. Philips said. "This whole idea of indexing, of cost control, taking back control of the portfolio, starts to evolve in the global marketplace."
While many of those factors have contributed to the growth of assets at other money managers like BlackRock (BLK) Inc. (BLK) and State Street Global Advisors, the rate at which Vanguard's assets have risen is particularly significant.
Vanguard added $1 trillion in a mere 18 months. The firm reported worldwide institutional assets to P&I just a hair below $2 trillion at $1.97 trillion as of Dec. 31, 2015. BlackRock, meanwhile, first exceeded $3 trillion when it reported $3.051 trillion in worldwide institutional assets as of Dec. 31, 2014. It had only exceeded $2 trillion in 2009 following its purchase of index fund giant Barclays Global Investors.
SSGA's worldwide institutional assets, meanwhile, had surpassed Vanguard Group until Dec. 31, 2015, and SSGA's most recent reported number was $1.92 trillion as of Dec. 31, 2016.
Brad Long, research director at DiMeo Schneider & Associates LLC, Chicago, said Vanguard Group has benefited from being one of the "first movers" in passive management. "They've definitely developed a name in the industry. They've always won on fees."
While recently competitors such as Fidelity Investments have trumpeted lower fees on passive vehicles, Vanguard's long-held reputation in passive management might have contributed to its assets growing at such a fast pace.
"So everyone's starting to play at Vanguard's game, but the difference is people have a mental association with Vanguard being the cheapest or the safest from an operational perspective or how they structure their portfolios," Mr. Long said.
Said Martin Schmidt, principal at HS2 Benefits, a benefits administration and solutions consultant in Chicago: "As an index provider, low-cost provider, in terms of open architecture, they just pass all of the fund-screening metrics. It's a combination of all of those and obviously the reputation that Vanguard has."