Vanguard broke all the rules when it came to its pioneering Vanguard Index Funds combined with a unique ownership structure that directly benefits its customers. Today, it’s one of the biggest investment firms in the world and it has recently launched new services directly to UK customers. We review the great things Vanguard UK can now offer, the downsides and of course – is Vanguard UK really the cheapest?
Who is Vanguard UK?
Vanguard is one of the biggest fund management companies in the world. Establishing the company in 1975 with an approach that changed the landscape of investing forever, John Bogle is regarded by many as the grandfather of passive investing. The guy is a legend and sadly passed away in January 2019.
The underlying principle that shook the investment world was and still is, to make money for its investors, not from its investors. Instead of paying dividends to investors, it puts this money back into lowering the costs of its funds.
Crucially, this means there are no outside owners and therefore no conflicting loyalties. The company is owned by its funds, which in turn are owned by their shareholders. This unique client-owned structure allows Vanguard to return profits to fund shareholders in the form of lower expenses. Low costs help clients keep more of their returns, which can help them earn more money over time. Everyone wins.
Vanguard has driven the mass adoption of low-cost index investing, ensuring its clients get maximum value for money with minimal knowledge.
As a result, today Vanguard holds £3.5 trillion in assets under management and has over 20 million investors. Its fees are some of the lowest in the market and it has an enviable reputation for looking after its customers.
What does Vanguard provide in the UK?
Vanguard provides a range of funds that can be purchased via investment platform like Fidelity or Hargreaves Lansdown. Funds offered by Vanguard are usually ‘low-cost index trackers’.
Vanguard has launched its own UK investment platform called Vanguard Investor. You can set up a Stocks and Shares ISA, a Junior ISA or a standard investment account. Vanguard promises some of the lowest platform charges in the market, however, the catch is that you can only invest in Vanguard funds.
If you want to invest in more then just Vanguard funds then check out our reviews on Hargreaves Lansdown or Fidelity both provide an investment supermarket allowing you to choose stocks & funds from a broad range of companies and providers.
Active vs passive investing
To understand what Vanguard does and why it is different, we need to first understand ‘active’ and ‘passive’ investing.
- Active investing – based on continually buying and selling investments to try and beat the market at that time. This strategy can incur considerable fees from frequent trading.
- Passive investing (aka ‘buy and hold’) – in contrast, this strategy seeks to minimise fees and maximise returns by keeping buying and selling to a minimum. It is based on the principle that if you spread your bets and stick around long enough, everything goes up.
Vanguard, through Vanguard Index Funds, in particular, specialises in providing passive funds for its clients. So, what are we missing out on if our investments are not actively managed? Well, active management is where a fund manager will actively select particular investments based on the fund’s requirements. These investments could be in companies, properties or commodities etc depending on the scope of the fund.
For example, a “recovery” style active fund could invest in distressed companies that the fund manager thinks will recover and therefore return a profit in future. The aim is to outperform the market.
Active vs Passive fund fees
The problem with active funds is that they typically carry higher annual charges than passive funds. This is because active funds are run by humans who need to make a living and justify their charges by making regular changes to beat the market.
Passive funds, on the other hand, are run by computers that make the decisions based on pre-set criteria. Minimal human intervention is required and so teams of researchers do not add to the fund’s annual cost. Once built, computers are cheap and have no children to feed.
Passive funds have gained a lot of fans over the years with one of the biggest advocates being Warren Buffet. In 2019, Buffet famously announced that despite his seeming ability to picks stocks, he plans to move 90% of vast fortune into passive index trackers when he passes away. If that is not a good indicator, I don’t know what is!
What is an Index Tracker?
Index trackers are passive investment funds that aim to track a particular index (think FTSE 100, S&P500 etc) or a commodities price (think gold, oil etc). Investors can get complete exposure to an index without having to buy all the stocks.
In effect, you are essentially buying a very small piece of every company in that Index. This means that your risk is not exposed to the performance of a single or small group of companies, but rather the index as a whole. The result is a significantly reduced risk profile.
It also gives the investor the chance to be hands-off (or ‘passive’) as the fund’s computers are rebalancing the correct allocation of stocks to accurately track the market’s performance.
Furthermore, removing all the trading activity associated with actively traded funds has two important and significant effects:
- Fees and charges are significantly reduced. This is really important. Saving 1% over decades has a dramatic effect on the returns.
- Human error, and ego, of trying to pick individual stocks is removed.
Warren Buffet famously made a million-dollar bet in 2007 that an S&P 500 tracker fund could beat any actively managed fund over 10 years. As yet no one has stepped forward to claim the prize!
Are Vanguard low-cost index funds the best?
Other trackers on the market can synthesise tracking the market using 3rd parties.
What makes Vanguard different, is that no 3rd parties or proxies are involved.
Vanguard funds physically replicate the indices they track, which means they physically buy and sell the shares in the fund using computer algorithms to track the market as closely as possible.
The result is less exposure to risk.
Are Vanguard index funds UK the cheapest?
Vanguard funds carry some of the lowest charges in the UK market. However, they are technically not the lowest.
Vanguard has consistently pushed the costs of its funds lower over the years and the rest of the market has responded.
For example; the iShares FTSE 100 UCITS ETF only charges 0.07% per year. By comparison, the Vanguard FTSE 100 UCITS ETF charges 0.09%. Unless you’re holding multi-millions, a difference of 0.02% is not going to hugely affect most people.
However, comparing the Vanguard LifeStrategy series can show a significant difference. Some low-cost index trackers funds are available offering fees of under 0.1%. By comparison, the Vanguard LifeStrategy series carries a cost of 0.22%. However, there is more to this than meets the eye which we discuss later.
We explain why you may want to pay more for the LifeStrategy funds later in this article but let’s stick with straight tracker funds for now.
Remember, the cost of the fund is only one part. You also have to consider the cost of the platform you purchase your funds from (eg, Hargreaves Lansdown). Choosing a more expensive platform can have a significant impact on your overall investment costs, so be sure to check this out.
Vanguard UK Investor Platform
In the past, you could only buy Vanguards index funds within an ISA wrap from a different platform (eg, Hargreaves Lansdown). The Vanguard UK Investor platform now allows investors to take an ISA out directly with Vanguard for the first time.
And as with everything Vanguard, costs have been driven down to a market-beating rate. Nice.
The platform charges an annual account fee of 0.15% on balances up to £250,000. Anything over £250,000 and the annual fee is waived, meaning you pay a maximum platform fee of £375 per year.
By comparison, Hargreaves Lansdown, one of the most popular UK investment platforms, charges an annual fee of 0.45%. On a portfolio worth £250,000 this would equate to £1,125. That’s a whopping £750 saving and we know that driving down fees has a hugely positive impact on your balance over the long term.
However, there’s no such thing as a free dinner and Vanguard’s market-beating rate comes at a price. Your investments are limited to their own Vanguard index funds only. Great if you are a passive index fund investor but not so much if you’re looking to add Tesco or Amazon to your portfolio.
For investors starting out and looking to build their first £1,000, £10,000 or £20,000 etc, this is a great way to start accumulating a nest egg. You can set up a monthly direct debit into one of Vanguards UK index funds and forget about it for a year.
There are cheaper platforms than Vanguard
Depending on how much money you have, there may be cheaper alternatives.
Interactive Investor is a fixed fee platform, meaning that they charge a fixed fee of either £22.50 every quarter or £90 per year, regardless of your portfolio size.
This means if you have over £60,000, you will pay a lower annual fee with Interactive Investor than Vanguard. If you buy your Vanguard fund via Interactive Investor, the underlying fund charge remains the same.
Vanguard UK LifeStrategy funds – a mini guide
Some of the most popular Vanguard funds in the UK are the LifeStrategy series. Whilst more expensive than the trackers from others above, their exposure is usually linked to a single index (for example, the UK FTSE 100).
A FTSE tracker only tracks the FTSE. If you’re looking to spread your risk and balance your portfolio, such as investing in the US market, you will need to choose another fund. And what about bonds? Yep, you guessed it – another fund. Even for experienced investors, this can be confusing and time-consuming.
What the LifeStrategy series provides, whilst more expensive, is a simple ‘all in one’ portfolio that includes a pre-defined balance and diversification of indices and bonds, with a weighting of your choosing.
They are designed with a weighting (%) towards stock market, or equity exposure (high returns, higher risk) or bonds (lower returns, lower risk). You can then select the weighting depending on your appetite for risk.
|LifeStrategy 20% Equity Fund|
|LifeStrategy 40% Equity Fund|
|LifeStrategy 60% Equity Fund|
|LifeStrategy 80% Equity Fund|
|LifeStrategy 100% Equity Fund|
The LifeStrategy funds are primarily trackers which mean they follow the market trends. That means they are never going to outperform the market in any significant manner. Though likewise, they should never significantly underperform either. What you are buying is consistency at a low cost, meaning these are great for novice and experienced investors alike.
More information on the Vanguard LifeStrategy Funds can be found here
Which Vanguard Lifestrategy fund should I buy?
The choice of fund will depend on your attitude to risk. Having more of your money tied up in equities (stocks and shares) is seen as a higher risk than investing in bonds, but may yield greater returns.
A generally accepted rule for equity allocation is to deduct your age from 100. This will give you your equity allocation.
For example, a 40-year-old investor would end up with a score of 60 (100 – 40 = 60 ). For them, this suggests a 60% equity allocation. So the Vanguard LifeStrategy 60 would be seen as a suitable investment.
As you get closer to retirement you would adjust your fund type down stocks wise and have a higher allocation of bonds. For example, Life Strategy 40 or 20 may be more appropriate. This reduces the risk associated with stock market exposure.
Not sure of your attitude to risk? Take this short Vanguard survey to see your ideal allocation of equities
Transfer your ISA to Vanguard
You can transfer an existing ISA or Junior ISA to Vanguard UK if you want to lower your fees. However, remember you can only invest in Vanguard funds. Any funds you hold in your current ISA will be sold and only the cash value transferred. Any existing Vanguard funds will be retained and transferred across.
There is a standard ISA transfer form to complete here. If you transfer an existing cash ISA it will automatically be turned into a Stocks and Shares ISA.
Vanguard UK Investor Platform – the downsides
While Vanguard provides an excellent low-cost platform and aggressively priced funds, there are some drawbacks to consider.
You can only invest in Vanguard. The Vanguard Investor platform only allows you to buy Vanguard funds. This is the drawback for investors who want to craft their portfolio or for Apple fanboi’s who want to buy the latest tech company of the month. If you want access to the whole market check out Hargreaves Lansdown or Fidelity.
There is no Mobile App. Vanguard does not have a mobile app for UK accounts. There is one for American investors but as yet nothing in the UK. Many would argue that this is actually a good thing as you shouldn’t check up on your investments constantly. By comparison, Hargreaves Lansdown offers an excellent app. Hopefully, this is only a temporary problem.
This is the real world….get with the programme Vanguard!
The LifeStrategy funds have a heavy US weighting (or more than you think). As a UK investor, you may be surprised that in addition to a good chunk of UK stocks, the equity portion of the LifeStrategy is also weighted between 25-30% is US stocks. Yes, this provides you with exposure to some of the largest companies in the world. And yes, the US stock market has gained significantly over the last few years. But also, if this comes to an end then the returns from your equities will be impacted.
How safe is Vanguard UK?
Typical investment management companies are owned by outside stockholders. These companies have to charge fees to pay their owners and feed the children, which can reduce investors’ returns.
At Vanguard, there are no outside owners and therefore no conflicting loyalties. The company is owned by its funds, which in turn are owned by their shareholders. Vanguard’s unique client-owned structure allows them to return profits to fund shareholders in the form of lower expenses. Low costs help clients keep more of their returns, which can help them earn more money over time.
Vanguard’s unique ownership structure is a safeguard in and of itself. In Vanguards own words: “Vanguard is structured as a “mutual” mutual fund company. Our interests are completely aligned with those of our clients. We never have to weigh what’s best for clients against what’s best for the company’s owners, because they are one and the same.”
In addition, Vanguard is covered by the Financial Services Compensation Scheme (FSCS). This means the first £85,000 of your money is 100% protected. This is in line with most other UK financial institutions and these limits may change in the future.
Alternatives to Vanguard Investor
Vanguard investor limits your investment choices to only Vanguard products. Lots of UK investors like the Vanguard funds due to their simplicity and low cost. You can keep all of these benefits but also pick funds from other providers and individual stocks if you want.
Alternative investment platforms from Fidelity and Hargreaves Lansdown provide access to Vanguard funds as well as the rest of the market. These platforms do charge a slightly higher platform fee for this privilege but if the choice is important to you then you can’t go wrong with either provider.
We’ve always loved Vanguard and their new UK offering is, overall, another winner in our eyes. You must, however, be comfortable with it’s limitations to Vanguard only funds and if you do take this product, you may wish to consider other investments/funds to balance your portfolio and spread your risk.
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