$10 trillion manager moves into Australian superannuation
Daniel Shrimski is Managing Director of Vanguard Australia. He joined Vanguard in 2011 and moved to the US in 2017 to become the CFO of the US Retail Investor Group, which manages over $US2 trillion in assets for more than seven million retail investors. He returned to Australia for the MD role in October 2021. Globally, Vanguard manages $10 trillion in assets for 30 million investors.
GH: It’s been almost a year since you became MD in Australia. You’ve worked and lived here before, but has anything surprised you this time around?
DS: Yes. First, the makeup of our business here is very different. I left in the beginning of 2017 when we were predominantly institutional with a financial adviser business. We have pivoted away from institutions to become a direct retail business that serves financial advisers. We’re more mature in marketing, corporate affairs, compliance and government relations as part of the move into retail.
Secondly, the acceleration and pace of growth in ETFs has been exciting. When I left, the total market was about $22 billion and now it’s about $130 billion. We’re proud to be the ETF leader with about 30% of the market.
Finally, the consolidation in superannuation has surprised me, and there’s better member engagement, although I think there’s a long way to go.
GH: Do you mean consolidation of industry funds?
DS: Super funds across the board, encouraged by the requirements of the APRA performance test, which should give a better chance of investment success for members.
GH: Stepping away from big institutional clients must have been a tough decision because while the margins are fine, billions of dollars was involved.
DS: Yes, it was a bold decision. We walked away from the something like $100 billion of institutional business, but we did it with a long-term focus on what’s the best chance for us to work directly with retail investors rather than through other financial institutions.
GH: Which leads to Vanguard Personal Investor (PI), your direct offer which was launched in Australia in 2020. What’s been the experience so far?
DS: Yes, two-and-a-half years into the retail journey, we have tens of thousands of new clients, although obviously this year has been tougher than we expected but the market has changed. The data suggests we’re winning market share and we’ve launched useful enhancements. We started off with individual account types, then joint accounts, SMSFs, company accounts, and there’ll be more account types in future. We have a new ‘auto invest’ feature for managed funds and we plan to launch it for ETFs. Clients can put in as little as $200 monthly or quarterly and it aligns with our long-term investing approach. We build for scale to manage hundreds of thousands of clients and independent financial advisers. We have also included a lot more educational material on our new website.
GH: Member engagement is tricky because you don’t want most retail investors checking their balances every day, worrying about every movement of a few percent. That might lead to repeated switching at the wrong time.
DS: Yes, trading every day is another story but as long as people are doing it responsibly with a long-term investment philosophy and we certainly don’t believe in trying to time the market. For many people, superannuation is their second-largest asset and they should be closer to their super, such as knowing that small changes in costs can mean a lot over time.
GH: That’s a good segue into Vanguard’s plans in retail superannuation. How is that going and what will it look like?
DS: Well, we have some big news, you’re the first external person to hear this, but we received our Registrable Superannuation Entity (RSE) licence today. It’s very exciting for the team. We’ve been building the superannuation offer for about two and a half years and it’s a massive responsibility to manage people’s retirement savings. We’ll make a public launch before the end of 2022. It will focus on simplicity, transparency, our investment expertise, high levels of diversification and low cost.
GH: That’s been much anticipated. It’s September now, so launch within the next three months?
DS: We think so. We will also focus on the investment experience and we’ve partnered with a third party that will enable us to really be nimble in employing technology and continually improving.
GH: As you know, for most younger people, it is an industry fund connected with their first workplace that captures their superannuation. Do you see Vanguard competing for that source?
DS: Longer term, absolutely yes. Incremental choice for members is a good thing, with more Australians engaged with super early. The competition will be tough but we’ve also got a great brand in the adviser space and we will leverage that as well as our PI platform.
GH: Back to your existing business, where have been the best flows for 2022 and have any funds done much better than you expected, listed or unlisted?
DS: One that has surprised me is our Australian Shares ETF, VAS. It held $2 billion when I left five years ago but now sits at $11 billion, the biggest ETF in Australia. Also, the range of diversified funds, where investors can access the entire market with a low minimum at a low cost, have done well. And international equities. They’re the three main areas of growth. This will be the first year where we see ETF flows bigger than unlisted managed funds.
GH: On ETFs, some of your competitors make regular launches of thematic or niche funds but I don’t see Vanguard playing in that market. Is that a conscious strategy?
DS: It definitely is. Our founder, the late Jack Bogle, always said, “Don’t try to buy the needle in the haystack, buy the haystack” and in terms of launching products, that’s how we run our business. New products go through a rigorous process and we look at four different elements:
One, does it have investment merit over the long term?
Two, will clients be better off over the long term with the product?
Three, is it feasible from a legal and a regulatory standpoint?
Four, is it something where we think we have an advantage over our competitors?
When you look at those four, and you run some of the thematics and cryptos through it, they don’t stack up. Crypto is more speculation in a largely unregulated space and it’s something we’ve steered clear of.
GH: And often, the thematics are launched at the peak of their popularity to catch a demand wave, such as the crypto funds that have lost 70% of their value. If we have this conversation five years from now, how will your business look different?
DS: Our strategy is locked in for that time frame and now it’s about good execution.
First, we will work more with like-minded financial advisers, that’s a real position of strength, including technology solutions for them around things like retirement income builders. We’re also building a portal that will enable advisers to access our retail offers in superannuation and PI. We’re helping advisers with their offer, their practice management.
Second, on the direct-to-consumer side, it’s about growth and scale. We want a much louder voice in the retail investor and superannuation space.
And third, active and diversified funds will become a bigger part of our offering. It’s a small but growing part of our story.
GH: Many advice businesses divide their clients into the As and Bs, the profitable high net worths, but the Cs and Ds have less to invest and are finding it difficult to access advice. Do you work with advisers across all these groups so they can service the Cs and Ds as well?
DS: Yes, and giving clients access to a low-cost personal investor offer with no platform fees is even more important as advisers are struggling with, as you say, the Cs and the Ds. We worry that advisers are leaving the industry and good advice matters for investment returns. We want advisers to be able to scale their business in terms of practice management.
GH: Final question. Do you think future investment returns will be able to match the generally good outcomes we’ve seen over the past 30 to 40 years?
DS: I don’t really have a strong view about 10-year returns but we always encourage clients to stay the course. Although we do see a 40% to 50% chance of a recession in Australia over the next couple of years, nobody knows how much of that is already priced into the market. Vanguard has been in Australia for 26 years and we’re not focussed only a few months ahead. I couldn’t be more excited about the growth opportunity in the retail space in coming years as many fundamentals work in our favour.