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Vanguard, the world’s second-biggest asset manager, is planning a fresh push into the active fixed-income market, citing “extraordinary” inefficiencies and opportunities.
While the firm is better known for its equities business, increasing its scale in fixed income is a priority, according to chief executive Salim Ramji. Roughly 10 per cent of Vanguard’s assets are currently allocated to active fixed income.
Fixed income “is going to be more important as people retire . . . it’s going to be more important in, at least our view is, the long term rate environment”, Ramji told a Financial Times conference on Wednesday.
“If you think of the fixed income market today . . . it’s far more antiquated, it’s far less transparent, far more expensive,” he said, in one of his first interviews since becoming Vanguard’s chief executive in July. “I think there’s an opportunity that Vanguard has to change that dynamic.”
The move has the potential to rock the bond management industry by pushing down fees significantly. Vanguard, which has $9.7trn in assets under management, has already redefined equity investing, as investors flocked to its low-cost products.
Ramji said the firm had plans to bring more of its heft into the actively managed fixed income market. He also criticised the fixed-income market for high fees and lack of transparency, which he said benefited firms more than their clients. “The opportunity set is vast when you look at the fixed-income market. It’s twice the size of equity market and the inefficiencies in fixed income are extraordinary.”
He noted that Vanguard’s actively managed fixed-income fund cost just 14 basis points, significantly less than other active managers as well as the average for passive fixed-income funds. “What this shows is the whole dichotomy between I want great performance [or] I want a low price is a false dichotomy.”
Ramji is the first outsider to lead the asset manager since its founding in 1975. Previously he was a top executive at BlackRock, its main competitor that is the world’s biggest asset manager.
“It sounds like they are doubling down” on moves into bonds that began before Ramji arrived, said Dan Sotiroff, the lead analyst on Vanguard for Morningstar. He noted that active bond managers have a stronger record of beating their indices than equity funds. “It makes perfect sense. [Active bond funds] are a little more ripe for the picking.”
Vanguard revolutionised the asset management industry through low-cost index investing under founder Jack Bogle, and 80 per cent of Vanguard’s assets are in passive index funds.
However, the push into fixed income comes at a time when the asset manager is already under political pressure during an election year from both the left and right for its tremendous size, and the amount of shares it holds in many US companies.
Ramji also walked a fine line around the firm’s decision to support none of the environmental or social shareholder proposals that it considered in the 2024 proxy season. ESG has become increasingly politicised in the US.
Ramji said: “We don’t dictate to companies what their strategy should be, we don’t push a particular agenda.”
He also addressed technical and service failures that have plagued the manager in recent years as the industry has rapidly modernised, and acknowledged that the firm, had “let down” its customers. “We have some work to do,” he said.
This article has been amended to reflect that Vanguard has $9.7trn in assets under management
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