Please answer # 1. Thank you.
The US company Vanguard pioneered a distinct low-cost strategy in the mutual fund indus and is now exporting it worldwide. mutual funds are managed by investment companies Second, Vanguard distributed their funds direct that raise money from multiple customers and invest customers and did not need to pay commissions the money in a group of assets (stocks, bonds, money y around eight per cent to brokers. Third, the company "market instruments, etc.). Each customer, often as part had internalised investment advisory functions , fellfement plan, then owns shares that represent funds at cost instead of using external investmentat portion of the holdings of the fund. They are charged sors that would charge a premium. Fourth, Vang. an annual fee or 'expense ratio' that covers investment relied on a no-nonsense thrifty organisational cools advisory fees, administrative costs, distribution fees where managers were incentivised to control cost are and other operating expenses. The traditional way of no one, not even senior executives, flew first class competing in the industry was by actively managed Fifth, the company had only a few retail centres and and differentiated investments that tried to generate as spent less on advertising than anyone else in the indus high returns as possible and thus being able to charge try. Last, but not least, as one of the largest asset man. higher fees. The emphasis was on the business perfor- agers globally they gained large economies of scale. mance end of the business by offering differentiated By 2015, the next step for Vanguard was to do to funds with higher returns. Vanguard instead focused the financial advisory services industry what they had on the cost end of the business and offered custom- done to the mutual fund industry. Based on webcam ers considerably lower annual fees and costs. Most chats and other cost reductions, the aim was to offer comparisons showed that Vanguard's fees or expense advisory services at a fraction of the cost of compet- ratios were 65-80 per cent less than the industry itors. They would charge annually 0.3 per cent on average depending on investment asset. The company assets compared to the industry average of one per also launched the industry's first index mutual fund cent, according to Vanguard CEO Bill McNabb; that passively followed a stock market index without ambitions to generate a better performance than the Can we provide really super-high quality advice at market, but which outperformed many actively man- a very low cost and do that in a very large way, and aged funds. change the market? I think we can. We continue to Vanguard has started to export its low-cost focus to think of our primary mission to reduce the complex- Europe, and their non-US assets have more than dou- ity and cost of investing across the board.' bled in the last six years, reaching over $90bn (E68bn, $54bn) in Europe. 'Lowering the cost of investing is in Sources: (1) D. Oakley, Financial Times, 4 March 2015. (2) S. Foley Financial Times, 8 December 2014. our DNA,' blogged Tom Rampulla, former head of Van- guard Europe. Their low-cost strategy involved several components. First, unlike competitors it did not need Questions to make a profit. Tim Buckley, chief investment officer explained: 1 What type of competitive strategy, low-cost, differentiation, focus or hybrid, would you "We are not a listed company. We're a mutual com- suggest as a way of competing with Vanguard? pany. We're owned by our clients. So when we make a profit, we have two choices. We can roll that profit 2 Using webcam chats is one approach to back into the business or we can pay it out to our lower costs in financial advisory services owners, our clients, in the form of lower expenses. as indicated above. What other ways could Over the years we have lowered expenses and that there be to lower costs to support a low-cost has attracted more clients." strategy
