At least three bank-based KiwiSaver schemes will have to rehome billions of dollars of indexed investments as Vanguard exits the institutional market in Australasia.
Early in October Vanguard revealed it would return about A$160 billion managed on behalf of a range of institutions in Australia and NZ as the business swings to the retail market in the region.
The move away from institutional would largely affect Australian clients, however, Vanguard has significant mandates with ANZ, ASB and BNZ, which all use the manager to varying degrees in their respective KiwiSaver and other investment schemes.
ASB, for instance, has a more than $3 billion mandate with Vanguard for Australasian equities while BNZ reported over $1.5 billion in passive global shares and fixed income portfolios managed by the index giant. ANZ also outsources much of its default KiwiSaver assets and a portion of global fixed income across all its schemes to Vanguard.
ANZ, ASB and BNZ were unable to comment prior to deadline but the mandate transition across Australia and NZ could take up to two years to complete, Vanguard said in a statement.
However, Australian press reported last week that BlackRock – the world’s largest fund manager and current index investing leader – had already picked up some of the Vanguard discards.
BlackRock is also a likely replacement candidate for the NZ Vanguard mandates, too, but other players including State Street, Northern Trust and possibly the NZX-owned Smartshares might get a look in.
The Vanguard institutional retreat, though, only applies to separate mandates and other “customised solutions” with wholesale investors still able to access the manager’s pooled funds.
“Vanguard will continue to offer pooled fund solutions to institutional clients and will work closely with our existing institutional SMA clients to ensure a smooth transition program is put in place and find the best possible solution to their existing mandates,” the release says.
For example, several smaller KiwiSaver schemes such as Simplicity and Booster invest in Vanguard via vehicles structured as Australian unit trusts (AUTs), which won’t be affected by the change.
But the larger NZ institutions preferred to negotiate direct mandates with Vanguard to better tailor portfolios according to responsible investment policies and to remove the tax drag associated with AUTs. Of course, at-scale institutions also push harder on price with mandates, which for index plays such as Vanguard can drive annual management fees into the single digit basis-point territory.
Even assuming Vanguard earns an average 10 basis points on the A$160 billion, the manager is putting A$160 million of annual revenue at risk to make the retail gambit.
A spokesperson for Vanguard, which has been operating in Australia for 20 years, said: “Increasingly our strategic focus has been on improving outcomes for individual investors either directly or through the financial intermediaries that serve them.”
“That is best demonstrated by the growth of our adviser business over the past 10 years, the development of the ETF market where Vanguard is now the industry leader and most recently the launch of our new digital Vanguard Personal Investor offering and the establishment of a trustee entity for Vanguard Super,” the spokesperson said.
“This is an ambitious plan and it requires us to focus our long-term efforts on opportunities that enable us to better serve direct investors and their advisers.”
Vanguard launched the direct-to-consumer Personal Investor platform in Australia this April with the release of its low-cost superannuation fund imminent.
At this point, the Vanguard Australia, headed by Francis Kolimago, shift to super and direct retail won’t cross the Tasman.
“We have no current plans to expand our current product offering to New Zealand,” the spokesperson said.