(Update) Low-cost US tracker fund giant Vanguard has vowed to shake up the UK investment market after launching its first consumer website in this country.
Shares in Hargreaves Lansdown tumbled 4.7% to £13.78 as shareholders worried about the competitive threat Vanguard’s service would pose to the country’s biggest fund supermarket which charges around four times as much as its US rival.
Fund managers Jupiter, Schroders and Aberdeen also saw their share prices wilt as the City reckoned Vanguard’s move would increase the pressure on their margins.
Vanguard goes direct
Pennsylvania-based Vanguard has operated in the UK for eight years but its range of cheap index-tracking funds and exchange traded funds (ETFs) has only really been accessible to financial advisers and wealth managers given their minimum investment has been £100,000.
Vanguard has now slashed the entry level to £500 for one-off investments and to £100 for monthly contributions. This is designed to appeal to the growing army of DIY investors looking for cost-effective ways to deploy their savings in the stock market.
Sean Hagerty, managing director of Vanguard Europe, claimed the launch would ‘lower the cost of investing’ in the UK with its platform charging an annual fee of 0.15% of the first £250,000 of an investment.
The platform fee will not apply to amounts over £250,000 meaning the charge is effectively capped at £375.
On top of this, investors will pay an average annual ongoing charge figure (OCF) of 0.14% for Vanguard’s tracker funds, taking all-in costs to around 0.29%.
This undercuts Hargreaves Lansdown, which despite offering thousands of funds, investment trusts and shares, looks expensive with its Vantage platform charging 0.45% a year and a typical fee of 0.69% on funds taking its total annual cost to around 1.1%.
Value for money
Hargerty said the City regulator, the Financial Conduct Authority, had been right to issue a hard-hitting report last year in which it criticised active fund managers for over charging customers and delivering below stock market returns.
‘This is why we are launching our new service – we want to offer investors the value for money they deserve. We aim to offer investors the highest value investment products and services available with an unwavering commitment to lowering the cost of investing in the UK,’ said Hagerty.
Founded by John Bogle in 1975 after a US stock market crash, Vanguard has become one of the world’s biggest investment groups with assets under management over $4 trillion (£3 trillion). It operates a mutual structure like a credit union which means that the company is owned by the investors in its funds.
By not having to pay dividends to shareholders or big wages to fund managers, Vanguard says it has been able to steadily cut the charges on its index-tracking funds as the business has grown.
Its cheapest fund is the Vanguard FTSE 100 ETF , which has an OCF of just 0.06% while its most expensive is the Vanguard Global Emerging Markets fund, with an OCF of 0.8%.
In total 65 Vanguard exchange traded funds (ETFs), target retirement funds and actively managed funds are available on the new private investor website.
Vanguard’s Life Strategy range of funds, which invest in a mix of shares and bonds, has attracted over £5 billion from investors. It will be available with an OCF of 0.22% plus an annual account fee of 0.15%, bringing total costs to 0.37%.
Investors can invest Vanguard’s funds through an ISA (individual savings account), junior ISA and general investment account. The ability to invest via a self-selected personal pension (Sipp) is not currently available but will be added soon, the company said.
According to Vanguard, an ISA investor with £10,000 would pay a total of £23 a year to invest in its FTSE UK All Share Index unit trust. Using figures from a survey by consultancy Platforum it said the same fund would cost an average of £49.58 on rival investment websites. The most expensive would charge £128 a year, it said.
Deal breaker
Hargreaves Lansdown’s corporate adviser Numis Securities played down the competitive threat to the Bristol-based broker saying that Vanguard would be unable to offer a ‘one-stop shop’ as its website was restricted to its own funds and would not offer investments from other companies.
‘We believe that not being able to have all of your assets in one place is a fundamental deal breaker and we are not concerned about the Vanguard offering,’ Numis analysts said.
In later trading Hargreaves shares recovered some ground to stand 3.4% down at £13.98. They have risen 15% this year and have gained 175% in the past five years.