How to manage $4 trillion in equity index funds

24 June 2021 | Portfolio construction

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Putting our clients first is at the core of Vanguard’s proposition: it defines our roots as a company and drives everything we do. Today, we manage more than $4.8tn in equity index funds in 50 countries and for around 30 million clients. Helping each of these clients to meet their investment goals is paramount to us.

We aim to give investors the best chance of success through our commitment to indexing as a quality proposition. At the same time, our scale, expertise and client-first philosophy help us to consistently deliver this quality to investors at low cost. Our commitment to putting clients first guides all our actions, from product design through to day-to-day fund management and how we manage risk.

Global coverage, local expertise

A fully integrated, consistent approach across our global investment platform enables us to reliably add value for our investors, using local expertise to extend a global strategy. With 24-hour portfolio management and trade coverage, our global investment platform allows our regional experts to make timely decisions locally. Through a single investment platform, our desks in the US, the UK and Australia use the same daily, disciplined, and tightly risk-controlled approach. Our shared infrastructure across the world means we can pass the full book of trades to an alternate Vanguard site in a seamless transition. In tandem, our global and local broker relationships enhance trading execution, ultimately leading to lower costs for investors.

Our portfolio manager/trader model

Our combined portfolio manager/trader model means trading and portfolio management functions are integrated into one team. Combining these two vital functions helps us improve tracking at the same time as minimising the fund’s transaction costs, especially as this allows us to better navigate upcoming index rebalances, corporate actions and daily cash flows. The model underpins our entire investment process as we seek to deliver quality and value to investors by bringing together the following four components:

  • Expertise: Vanguard’s Equity Index Group has a highly experienced and credentialed team of portfolio managers.
  • Technology: Our global platform uses the most up-to-date technology and tools to keep pace with evolving markets.
  • Scale: We achieve economies of scale through high trading volumes, which allows for negotiated broker costs.
  • No “star” portfolio managers: The Equity Index Group takes a team-based approach to investment management, avoiding a reliance on “star” portfolio managers. This helps ensure long-term fund management continuity and consistency.

Optimisation

Critical to managing a portfolio in line with an index is ensuring that the portfolio tracks the underlying benchmark closely. We use technology incorporating risk models and optimisation techniques to create portfolios and trade lists that match an index as accurately as possible, without incurring unnecessary, additional costs. There are two key areas that can cause the performance of an index portfolio to deviate from its benchmark: one is when positions in the fund do not perfectly match the index; another is when transaction costs and taxes create a drag on performance. We add value for our clients by striving for the optimal balance between the two.

Adding value by managing index changes

We believe it’s vital to effectively manage the constant, daily index changes that take place to ensure we closely track indices in an efficient way, thereby delivering value for investors in our equity index funds and ETFs. Effectively navigating such changes and maintaining minimal tracking error requires timely but considered corresponding trades within an index fund. For any index change, our preference is to execute at market close at the price at which the security will enter or exit the index. However, we may choose to trade earlier in the day, or even the following day, if there are liquidity challenges with a security, idiosyncratic market or country challenges or the stock price is very volatile. Our dual portfolio manager/trader model is key to achieving best execution, and we also leverage our global trading desk to tap local expertise, which can allow us to gain the most efficient and lowest-cost execution.

A conservative securities lending strategy

We take a conservative approach to securities lending, engaging in optimised, value-added activities, backed by a robust risk management programme that is executed by experienced and dedicated investment professionals. As with any investment activity that creates return, securities lending carries varying degrees of risk depending on the strategy. Vanguard performs value-based lending that seeks intrinsic value for all securities on loan, as opposed to volume-based strategies, which focus on aggressive collateral reinvestment to generate revenue. We believe that a value lending approach combined with a well-managed risk framework, which addresses appropriate layers of defence independently, offers higher protection from loss and maximises risk-adjusted returns.

At Vanguard, we’re committed to remaining at the forefront of indexing. Our expertise of over 45 years means that, when you select a Vanguard index fund or ETF, you know exactly what you’re going to get: low-cost, high-value, transparent access to a broad market exposure.

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Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

Issued in Switzerland by Vanguard Investments Switzerland GmbH.

© 2021 Vanguard Group (Ireland) Limited. All rights reserved.

© 2021 Vanguard Asset Management, Limited. All rights reserved.

© 2021 Vanguard Investments Switzerland GmbH. All rights reserved.

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