Vanguard closes in on BlackRock’s number-one spot

Vanguard is closing in on BlackRock’s title as the world’s largest asset manager after pulling in more than $1bn a day of investor money since the start of the year.

The two heavyweights of the investment industry are attracting unprecedented inflows into their low-cost exchange traded funds amid rising investor dissatisfaction with the high fees and poor performance of active managers that strive to beat the market.

Investors ploughed $215bn into Vanguard’s funds in the first six months of the year, far outpacing new business growth for BlackRock, which pulled in $168bn over the same period.

Pennsylvania-based Vanguard, which last week announced a leadership shake-up, has set an industry record for new business inflows for five consecutive years and is growing at a significantly faster rate than its rival. Investors have sunk a net $1.3tn into Vanguard’s funds since the start of 2012, whereas BlackRock has drawn $762bn over the same period, according to figures provided by the companies.

Analysts expect the continued surge of money into Vanguard’s funds will enable the company, which oversees $4.4tn of assets, to overtake BlackRock’s $5.7tn total within the next five years. A senior figure in the UK investment industry, speaking on condition of anonymity, said Vanguard was likely to usurp BlackRock, given that the former is a “much-loved brand”.

Avi Nachmany, an asset management consultant, added that Vanguard is best placed to benefit from a global push by regulators to drive down fees for pension funds and savers due to its unusual structure: owned by its clients, Vanguard is able to cut fees continuously as it gets bigger, unlike competitors that keep fees high to bolster profits for external shareholders. “The thrust by regulators to lower fees and the entire investment ecosystem is moving in Vanguard’s favour,” he said.

Executives from both companies play down their rivalry in public but privately monitor any changes or developments at their principal competitor in detail.

Jim Norris, head of Vanguard’s international business, said: “Asset growth is not an objective for us. We don’t set cash-flow targets for our teams. Our mission is to change how the world invests.”

Timothy Strauts, markets research manager at Morningstar, the data provider, predicted in January that Vanguard would again be the best-selling manager globally in 2017 on the back of the huge popularity of its low-cost mantra. “Vanguard is eating the rest of the US fund industry. It is dominating completely. Both its active and passive businesses are doing very well, mainly because [it charges] very low fees,” he said at the time.

Vanguard is widely expected to intensify its efforts to attract overseas investors, who currently account for 9 per cent of its assets, when chief investment officer Tim Buckley takes the reins of the company from Bill McNabb in January.

Some of these efforts are already under way. Vanguard will open an office in Germany, where it previously lacked any real presence, later this year, and one in Mexico, to provide a stronger platform for its activities in Latin America.

It opened an office in Shanghai in May as part of its longer-term ambition to build a meaningful presence in China, launched a platform targeting UK retail investors in June, and plans to create more ETFs in Australia, where it has already become the country’s second-largest asset manager.

BlackRock, however, is defending its position. The New York-based company has pledged to spend $1bn on technology this year, in part to improve the performance of its actively managed funds. It also confirmed plans to fire several prominent stockpicking fund managers in March and switch their funds into quantitative investment strategies offering enticingly low fees.

Amin Rajan, chief executive of Create Research, an asset management consultancy, said BlackRock would be “hard to knock off its perch” in spite of Vanguard’s faster growth. He added that Vanguard would also be more vulnerable than BlackRock in the event of a market downturn, as passive funds account for three-quarters of Vanguard’s assets, compared with 63 per cent of BlackRock’s.

“Given the huge weight of money in Vanguard’s passive funds, its asset base will suffer a disproportionate hit in the next bear market,” he said.

Additional reporting by Madison Marriage

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