LONDON (Reuters) - Funds giant Vanguard has ruled out a flotation or big-ticket takeover spree after netting record volumes of new business in 2012, crushing the hopes of dealmakers circling one of the world’s fastest growing managers.
Chief Executive Bill McNabb said the firm, famous for its low-cost, conservative and long-term investment ethic, would “never go public” because he feels listing on the stock market creates a conflict of interest between shareholders and clients.
“You really can’t serve two masters,” McNabb told Reuters, reigniting a debate over the way mutual fund managers should be structured.
“I believe that very strongly. We like to say that we are not smart enough to deal with two ... With every tick up in costs on the funds, the one thing you know is your client is getting a smaller return. How do you balance that?” he argued.
Philadelphia-based Vanguard, which has $2.2 trillion (1.4 trillion pounds) assets under management, took in more than $140 billion in new business last year, largely from an investor base repelled by the spiralling costs of funds that have failed to even protect, much less grow, their wealth in troubled markets.
The inflows smashed the annual record of $129.6 billion set by JPMorgan Chase & Co in 2008, according to fund research firm Strategic Insight.
McNabb says they reflect a profound shift in the way people are prepared to invest after the global financial crisis, revising return expectations and putting security and value ahead of the next investment fad.
Vanguard has drawn unflattering comparisons with the likes of Boston-based Fidelity Investments and Larry Fink’s BlackRock (BLK.N) -- rivals perceived to be more fashionable and dynamic than McNabb’s firm.
BlackRock ran $3.8 trillion in assets as at December 31, while Fidelity had roughly the same figure under administration as at September 2012, their respective websites show.
But McNabb is not frightened of the boring tag and has no plans to shake it off with a rapid acquisition spree of higher-risk managers who could, as Wall Street rainmakers would argue, ‘complement’ their dominant position in index-linked funds.
“People say ‘if you had a public share price you’d have currency to go and buy stuff’. Well, most people who buy stuff screw it up. We are humble enough to think that we probably fit right into that category,” he said.
McNabb’s primal fear of M&A stems from an unsatisfying stint unwinding flawed leveraged buyouts in the 1980s. As a result, he speaks evangelically about the merits of organic business growth and the dangers of performance-related incentives.
Too many asset managers are paying banker-style salaries and bonuses that risk putting the industry next in line for a public thrashing over pay, he says.
“There are some asset managers who fall into the banking category as far as I‘m concerned,” McNabb said, attacking the traditional unsymmetrical way most funds earn fees even if they underperform markets, and describing the way some hedge funds are paid as “a joke”.
“The trick is aligning incentives and time frames with investors. We pay people for outperformance but it’s trailing for three years and if there’s a five basis point incentive on outperformance, there’s a five basis point disincentive if you underperform,” he explains.
That doesn’t mean Vanguard pays its managers poorly. McNabb has recognised a war for talent, and with more than $2 trillion in assets to manage, and no prospect of a big stock market payday for his workforce, he cannot afford to slip behind peers.
“We tell people when they come to us, don’t come to us just for a job. Come to us because you believe in the values and you want to be here for your career...we know we have to pay people well...we’ve never lost a senior person on compensation ever.”
Despite attracting such enormous net new business last year, almost equivalent to the gross domestic product of New Zealand, Vanguard has no plans to stand still.
The asset manager is prioritising expansion in markets outside the U.S. in 2013 and expects its international arm to represent up to a fifth of its total business within a decade.
“We’ve taken a lot of talent out of the U.S. and said ‘go see what you can do. Go forth and spread the word’,” he told Reuters in an interview in Vanguard’s London offices, midway through a global trip drumming up business in Australia, Europe and China.
McNabb said he was confident Vanguard’s transparent, low-cost fund product would become a successful export in a world of more modest returns expectations.
“Boring works,” he shrugs. “If you boil it down, our way of investing seems to be taking hold. It’s a global trend that is not going away,” he said.
“We’re starting the pattern, people are responding and I think that’s a really good thing for investors overall.”
Editing by Mike Nesbit