Vanguard robo-adviser to offer active mutual funds

Vanguard Group Inc. is upping efforts to enhance its active equity options via its hybrid, digital-and-human advice business, Personal Advisor Services, with the introduction of three high-conviction mutual funds set to debut in the fourth quarter.

Vanguard plans to pair new active equity mutual funds: Vanguard Advice Select Dividend Growth Fund, Vanguard Advice Select Global Value Fund, and Vanguard Advice Select International Growth Fund with two current ones Vanguard Capital Opportunity and Vanguard International Core Stock. Together, the funds will be made available for PAS clients through their advised portfolios as part of a five-fund active equity offer, according to the announcement Thursday.

While active funds have seen stronger demand in 2021, including positive flows in every month through July, their inflows are still just a blip on the radar relative to passive strategies, according to Morningstar. Passively managed strategies pulled in $57 billion, mostly due to ETFs' $49 billion inflow, while actively managed funds collected about $15 billion.

Still, Vanguard believes the funds' concentrated, higher-alpha strategies are an ideal fit for PAS clients with greater appetite for risk and patience for active exposure as they can materially impact portfolio performance even at a relatively small allocation, according to the announcement.

At 40 to 45 basis points per year, each fund is attractively priced compared with most active options, though more expensive than some Vanguard siblings, according to Morningstar.

“Vanguard Dividend Growth, for example, is 19 basis points cheaper than Vanguard Advice Select Dividend Growth's 45-basis-point annual charge,” said Alec Lucas, a strategist within manager research for Morningstar in a report. “Its fees are likely to come down as assets scale, but the higher levy also likely reflects Vanguard Advice Select Dividend Growth's greater return potential.”

Vanguard's introduction of these equity funds and their use with PAS for an active thematic option could be all about client segmentation and customer acquisition, said David Goldstone, head of research for Backend Benchmarking. By offering thematic portfolios a robo is able to attract different types of clients.

PAS manages $243 billion in assets, as of June 30, according to Vanguard's announcement.

“Vanguard's PAS is a compelling offering with live advisers offered at just a 0.30% fee, but investors who are not on board with passive indexed portfolios will not be attracted to it,” Goldstone said. “By offering an active option Vanguard can cater to both those who believe passive indexing is the best option, as well as, those that want an active manager.”

The new active equity options could be a way for Vanguard, a leader in passively managed funds, to fight back against margin pressure and competition from self-directed investing and emerging asset classes like cryptocurrencies, said William Trout, Javelin Strategy's head of wealth management.

“Clearly there are commercial considerations involved, but I believe Vanguard is tweaking the playbook, versus tearing it up,” Trout said. “An active approach to investment management should help Vanguard better manage an eventual market correction.”

The real story, however, is the need for differentiation in an increasingly mature market for hybrid digital advice services, Trout said.

“PAS has been a great success, but Jonathan Cleborne [head of Vanguard PAS] and the other young guns at Vanguard want to add new arrows to their quiver,” he said.