As asset management companies around the world come to grips with the post-global financial crisis environment, one of the growing risks to the business is the emphasis on macro-type products, argues Bill McNabb, global CEO of Vanguard.
Speaking with AsianInvestor on a trip to the firm’s new Hong Kong office, McNabb says a major post-2008 trend in the business is to push active products “that say they can be anything and go anywhere”.
Challenged on the question of whether multi-asset funds are a sensible return to diversified portfolio construction, McNabb says: “The tactical elements of many of these products make me nervous.”
He relates how Vanguard used to have a tactical asset-allocation fund, which it eventually closed. “It was hard to add value,” he says. “Today the markets are even more complex, the tail risks are longer, the interconnectivity and relationships are harder to understand.”
McNabb predicts that products based on tactical moves or derivative overlays will ultimately lose money. “The models behind these strategies look good, but then the models always look good,” he says.
Vanguard manages $2.2 trillion, of which about $100 billion is derived from Asia-Pacific, mainly from Australia. The firm also runs segregated mandates for other Asian institutional investors and markets its US or Ucits exchange-traded funds to Asian retail investors, often via online brokers.
It is looking to list ETFs on Asian bourses this year, but is still working on everything from operational support to licensing, says Shelly Painter, Hong Kong-based regional managing director.
McNabb took over as CEO in August 2008, just a few weeks before the collapse of Lehman Brothers. The financial crisis has prompted Vanguard to accelerate its thinking about what it will take to succeed in asset management, he notes. As a result, the firm has hastened its push into non-US markets and become more focused on ETFs, rather than just relying on its traditional index mutual-fund business.
Asia presents problems for Vanguard’s business model, which has been built around conditions in the United States that don’t always translate overseas, such as the presence of a huge financial advisory community and a culture of defined contribution pension schemes.
While the firm hopes to plant a flag in Asia and help nudge regulators, distributors and market practice more towards conditions that support index funds and ETFs, it is also wondering how to adapt in the US to a new generation of tech-savvy individuals.
These people – McNabb cites an apocryphal Google techie, someone with money but not the time to do much research into their finances – want the convenience of mobile and tablet-based apps, with enough help to make basic decisions.
“The power app will be providing advice at scale,” he says. Today 95% of Vanguard’s client transactions are conducted by desktop. These are inevitably going to move to mobile tools, at least in the US.