Vanguard makes rare retreat as price war it started takes toll

Vanguard Group created the price-cutting fervor that became an Olympic sport in money management. Now it's feeling the toll of that competition.

The fund giant amassed $6.3 trillion on founder Jack Bogle's once-contrarian idea that it could thrive by focusing on cutting costs for investors. That ethos, which helped Vanguard earn the trust of small savers and big institutions alike, has been showing its limits in a turbulent year.

Net flows to Vanguard's funds slowed in 2020 as rivals continue to roll out similar products and amid the rise of so-called robo-advisers and almost free trading. The vast majority of its growth came from exchange-traded funds, though they offer even thinner fees than the index mutual funds that long propelled its success. The company staged an abrupt retreat in recent months from some of its boldest plans for global expansion.

It all shows that even the world's second-largest asset manager isn't impervious to the combined pressures of industry competition and the discombobulating effects of the COVID-19 pandemic on the financial world. As Vanguard charts a course through the storm, it's ditched business lines, closed overseas offices and seen senior executives depart. Now the firm is swiveling to focus more squarely on what it knows best: catering to individual investors.

"Their roots are in retail — that higher-touch institutional service model isn't necessarily their strength," said Kyle Sanders, an asset management analyst at Edward Jones. "They were just never reaching that level of success."

It's no help that competition in retail investing is fiercer than ever, with customers expecting virtually free experiences at a range of firms — whether it's getting automated advice online or making no-fee trades through Charles Schwab Corp. or the financial technology phenomenon Robinhood Markets Inc.

This year, as the Dow Jones Industrial Average rebounded from a blistering selloff to soar past 30,000 for the first time, funds run by Vanguard in the U.S. drew about $159.1 billion in total net flows through October, coming in 19% below the about $197 billion it collected by the same point last year. That's the money manager's lowest level of net flows for the first 10 months of a year since 2013.

Vanguard's storied mutual funds took in just $10.4 billion over the same 10-month period. Its ETFs brought in a net $148.7 billion, with about 20% of that coming from conversions of shares from its mutual funds to its ETFs, according to company data.

The squeeze on inflows isn't just affecting Vanguard. Its main rival, publicly traded BlackRock Inc., saw total net flows through the first three quarters of the year fall 12% from the year-earlier period to $264 billion.

Unlike such rivals, Vanguard has an unusual structure in which it's owned by its funds and therefore the investors in them. The Valley Forge, Pa.-based firm's main mission is to give customers "the best chance for investment success," company spokesman Freddy Martino said.

Amid heightened competition among low-cost money managers, Vanguard has made a series of moves this year rolling back its global ambitions. It withdrew from Hong Kong and Japan, and returned $21 billion in managed assets to government clients in China. It shuttered most of its Australia institutional business.

Another blow came last week, when Vanguard lost its mandate to run at least $590 million in Taiwan government pension and insurance assets. The sum was redeemed in part because of the firm's "unusual moves" in Asia, according to a Bureau of Labor Funds update.

"Vanguard's vision for our international businesses is to improve investment outcomes for individual investors, either by serving them directly or through financial intermediaries," Mr. Martino said in a statement. "We are focused on countries globally where our business model resonates."

Institutional funds were at one point a pillar of Vanguard's growth strategy in Asia. Back when William McNabb was chief executive officer, he made a point to travel to Asia at least once a year. After taking the helm in 2018, Tim Buckley opted out of his predecessor's annual trips, according to a former employee in the region. They likely became impossible anyway with the pandemic.

That person and two former colleagues, speaking on the condition they not be identified, said the company found it increasingly difficult to commit the necessary resources to catering to the region's institutional clients, who often require customization and individualized attention. In recent years the firm turned away some mandates from institutional customers because the fees generated were too low to justify the work, one of the people said. It still maintains a presence in defined contribution plans, as well as in endowments and foundations.

Vanguard made several leadership changes this year. In July it named John James, formerly the head of Vanguard's human resources division, to oversee institutions, preceding its pullback in Asia. Last week it appointed Chris McIsaac to lead its international business, succeeding a more-than three-decade company veteran, Jim Norris.

To its competitors — and especially smaller firms that have suffered outflows this year — Vanguard maintains an enviable position in money management. Its ETF inflows are a major bright spot: Vanguard trounced BlackRock in the first three quarters of the year as it continues to gain market share.

As it adjusts, Vanguard is doubling down on managing money for individual investors, setting up a potential price war for investment advice. It's promoting a robo-adviser that selects portfolios made up of Vanguard ETFs. For those with about $50,000 or more to invest, Vanguard pushes a reduced-cost advisory service with access to a human via phone, email or video conference. Since setting up a joint venture with China's Ant Group last December, the duo unveiled a robo-adviser aimed at customers with at least 800 yuan ($122) to invest, which recommends portfolios built from 6,000 mutual funds.

In a sense, the company is doubling down on the no-frills ethos that has worked so well for decades to weather the landscape it helped inspire.

"The Vanguard effect is hitting Vanguard," said Eric Balchunas, an analyst at Bloomberg Intelligence. "It's like a boomerang in a way."