1 What type of competitive strategy, low-cost, differentiation, focus or hybrid would you suggest as a way of competing with Vanguard? Mutual funds are managed by investment companies that raise money from multiple customers and invest the money in a group of assets (stocks, bonds, money market instruments, etc.). Each customer, often as part of a retirement plan, then owns shares that represent a portion of the holdings of the fund. They are charged an annual fee or ‘expense ratio’ that covers investment advisory fees, administrative costs, distribution fees, and other operating expenses. The traditional way of competing in the industry was by actively managed and differentiated investments that tried to generate as high returns as possible and thus being able to charge higher fees. The emphasis was on the business performance end of the business by offering differentiated funds with higher returns. Vanguard instead focused on the cost end of the business and offered customers considerably lower annual fees and costs. Most comparisons showed that Vanguards fees or expense ratios were 65–80 per cent less than the industry average depending on investment asset. The company also launched the industry’s first index mutual fund that passively followed a stock market index without ambitions to generate a better performance than the market, but which outperformed many actively managed funds.

Vanguard has started to export its low-cost focus worldwide and has about $400bn (€300bn, £240) in non-US assets and reach over $45bn (€34bn, £30bn) under management in Europe. ‘Lowering the cost of investing is in our DNA’ blogged Tom Rampulla, former head of Vanguard Europe. Their low-cost strategy involved several components. First, unlike competitors it did not need to make a profit. Tim Buckley, chief investment officer explained:

‘We are not a listed company. We’re a mutual company.

We’re owned by our clients. So when we make a profit, we have two choices. We can roll that profit back into the business or we can pay it out to our owners, our clients, in the form of lower expenses. Over the years we have lowered expenses and that has attracted more clients.’1 Second, Vanguard distributed their funds directly to customers and did not need to pay commissions of around 8 per cent to brokers. Third, the company had internalised investment advisory functions of the funds at cost instead of using external investment advisors that would charge a premium.

Fourth, Vanguard relied on a no-nonsense thrifty organisational culture where managers were incentivised to control cost and no one, not even senior executives flew first class.

Fifth, the company had only a few retail centres and spent less on advertising than anyone else in the industry. Last, but not least, as one of the largest asset managers globally they gained large economies of scale.