‘No delay’: Vanguard says super launch on schedule

“I wouldn’t use the word ‘delay’,” Mr Lovett told the… Financial Overview† “When we started this process we knew it was going to be complex, and it delivered on that… We are happy where we are and now confident that we will be in the not-too-distant future.”

Recruitment in readiness

The pandemic had increased the complexity, said Mr Lovett, who was recalled to Melbourne in late 2019 from Vanguard’s global headquarters in Malvern, Pennsylvania. The Australian citizen has been running the firm’s lucrative accounts with independent wealth advisers in the US since 2017.

He confirmed that Vanguard Australia had not yet received an RSE license from the Australian Prudential Regulation Authority. “The regulator has high standards, which we agree with,” said Mr Lovett.

But he pointed to Vanguard’s recruitment of about 100 new employees to work for the pension sector as a testament to the company’s commitment to the Australian project.

Vanguard’s entry into the market has been tipped to put downward pressure on benefits in the pension system, given the company’s historical focus on cheap investing. According to the Treasury Department, Australians pay at least $30 billion a year in administrative and investment costs to super-funds.

Mr. Lovett said he was aware of growing expectations among consumers and wealth advisors that Vanguard Super would charge one of the lowest rates in the market. But he said observers should not assume that the product would be the cheapest in the country at launch.

“We’re starting from scratch,” he said. “We don’t have the scale to cut costs down to where it’s likely to end up in the long run.

“We certainly have a mantra around low costs, although we don’t always have the lowest costs. The more scale we gain, the more we will reduce those costs. We think outside the box, [our fees] will be very competitive.”

Index only start

Mr. Lovett revealed that the first iteration of Vanguard Super would be an index-only product, meaning it has a passive investment strategy that aims to mimic the performance of the market rather than try to beat it. Because they are governed by rules and not investment talent, passive investment products generally charge lower fees than active funds to unitholders.

While many super funds offer index investment options — which were often managed by Vanguard before it shut down the business of “segregated mandate accounts” last year, only a handful are believed to have a fully index-hugging strategy.

The model would be “somewhat unique,” Mr Lovett said, and would make a difference to the giant industry super-funds, which have claimed that actively investing in unlisted assets such as infrastructure and real estate was an important competitive advantage.

An indexing strategy would help Vanguard “pile up well” in the annual performance test imposed on super funds by the Morrison administration as part of the controversial Your Future, Your Super reforms, Mr Lovett said.

“We think benchmarking matters and makes sense,” he said. “We believe in the direction that the regulator and [former] government has taken over.”

In his bid to grow rapidly, Mr. Lovett said Vanguard was open to mergers and acquisitions of other funds, although he admitted it was difficult to negotiate well with prospects without an RSE license.

“We are hopeful that we can play in that space once we have developed a track record,” he said. “The funds that will survive will be the ones that can develop enough scale.”

But he also said he hoped the fund could deliver organic growth and convince customers to switch providers based on ad campaigns and the recommendation of loyal financial advisors.

While Australia has traditionally seen few organic switching opportunities by consumers, some in the industry have supported Vanguard’s opportunities.

“The cult of Vanguard is extraordinary,” former director of the Financial Services Council Sally Loane told the Financial Overview in November last year

“I have young adult children and the first thing they ever wanted to do was invest in a Vanguard [exchange traded fund]and I had no idea where they heard the name Vanguard.”

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