If you wanted a Champions League-level of performance from your investments over the next few decades, would you pay extra for the privilege of being able to choose from the hundreds, if not thousands, of football teams dispersed across Europe?
Or would you be content to choose from a smaller pool made up of teams with solid track records from the biggest leagues with the biggest resources and the pick of the world’s best individual players, whether established or up-and-coming?
Exactly. More isn’t always more. You want access to all the players, coaches and managers that might gel and excel and deliver the silverware, yes, but with the right 50-100 teams, you’re covered.
It’s how we feel at Vanguard about our home-grown stable of funds. Quality, not quantity, is what counts – and it is integral to our investment philosophy, which is to give investors the best chance of long-term investment success with low-cost and diversified funds that are fit for purpose and built to last.
So far, the evidence suggests we’re doing just fine in this respect. As Matias Möttölä, an associate director at independent research group Morningstar, recently put it: “When you are investing with Vanguard, you can be confident that the fund you invested in will be there to serve you for a long time.”
That was after Morningstar analysed 30 investment firms with the world’s largest selection of funds by total assets, including exchange-traded funds (ETFs), and concluded we were the least likely to close our funds1.
It also follows research from S&P Dow Jones Indices that shows only about half of all sterling-denominated and actively managed stock market funds in existence at the end of 2011 were still there 10 years later2.
New additions to the Vanguard product line-up are designed solely with our clients’ needs in mind. Because of our unique ownership structure3, we always ask ourselves the following questions when weighing up each product idea:
- Does the product have enduring investment merit?
- Does the product fulfil the long-term needs of its targeted clients?
In addition, we ask:
- Can we deliver a compelling advantage over competitors?
- Is it feasible to launch the product?
Creating funds based on narrow, thematic investment fads4 – from agricultural products to artificial intelligence, blockchain to biotech – could conceivably encourage more people to invest more money with us. But it is not our style or preferred route.
It’s also potentially detrimental to the long-run interests of investors since today’s buds can be tomorrow’s duds.
In that regard, consider the chart below. It shows how thematic funds often fail to last the course – a troubling trend when you consider the record 589 thematic funds that were launched globally in 20215,6!
Global thematic fund survival and success rate
Past performance is not a reliable indicator of future returns.
Source: Morningstar as of 31 December 2021.
Instead, at Vanguard, we play the long game. In this way, our interests are better aligned with our investors because we are guided by the same investment principles that we hope and expect are guiding them in turn.
That means providing low-cost funds that enable investors to pursue their investment goals, including all-in-one multi-asset solutions like our LifeStrategy and Target Retirement Fund ranges, geographical and single-asset-class building-block mutual funds and exchange-traded funds (ETFs)7, and ESG8 funds and ETFs.
The choice is yours
So rather than too little choice, what we provide are investment products designed to give you a better chance of investment success by taking a balanced and diversified approach to investing rather trying to pick winners and losers.
Simply slicing the pie into ever more convoluted or narrow ‘choices’ is an illusion when you can buy all the companies anyway, with Vanguard – whether that’s through funds that deliver ready-made portfolios or funds that provide you with the building blocks to create your own personalised portfolios. It’s about having the right choices.
Having too much choice can also be detrimental to your long-term wealth in a couple of ways.
On the one hand, why pay for access to thousands more funds when many if not most will underperform. In the same way Halifax Town or Benidorm Club de Fútbol are unlikely to ever win the Champions League, why stray too far from more tried and tested solutions?
We’ve already seen how narrow thematic funds can often bite the dust. But they are not the only ones. Even broader funds covering a range of market types can do so too, and usually because they underperform their index benchmarks, as the chart below shows.
Most closed funds failed to match their benchmarks
Past performance is no guarantee of future results.
Notes: All data as at 31 December 2021. Chart displays cumulative annualised performance of funds that were merged or liquidated, relative to the representative benchmark for each Morningstar style category. We measured performance starting from 1 January 2006 to the month-end before the fund was merged or liquidated. Figure displays the middle-50% distribution of these funds’ returns before their closure. NAV-based performance; returns calculated in GBP, net of fees.
Sources: Vanguard calculations, based on data from Morningstar, Inc., FTSE, MSCI and Bloomberg.
On other hand, too much choice can leave you not knowing what to do; it can leave you out of the market altogether, which also won’t help you get to your goal.
It’s a normal human reaction – one illustrated by a famous psychological study9 that showed how consumers given a choice of six flavours of jam were 10 times more likely to buy jam compared with consumers who were asked to choose from 24 different varieties.
It’s the paradox of choice – too much choice – and it’s another reason why Vanguard’s focused and deliberately designed range of funds are the only ones you’ll ever need to build your wealth over the long term.
1 Vanguard least likely to close funds, Morningstar finds, 22 March 2022.
3 The Vanguard Group is owned by Vanguard’s US-domiciled mutual funds and ETFs, rather than being publicly traded or owned by a small group of individuals. Those funds, in turn, are owned by their investors. We believe this structure, which is unique in the mutual fund industry, represents a strategic advantage relative to our competitors, who are driven to generate profits for their shareholders, rather than their fund investors.
4 Morningstar defines its universe of thematic funds as those that select holdings based on their exposure to one or more investment themes. These themes may pertain to macroeconomic or structural trends that transcend the traditional business cycle. Examples include demographic shifts or technological advances.
5 Morningstar's Global Thematic Funds Landscape Report Shows Record Inflows into Thematic Funds Since the Start of Covid-19 Pandemic, 24 March 2022.
6 Europe accounts for 55% of total thematic fund assets, according to Morningstar.
7 Exchange-traded funds.
8 Environmental, social and governance.
9 Iyengar, S. S., & Lepper, M. R. (2000), When choice is demotivating: can one desire too much of a good thing?
Investment risk information
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Some funds invest in emerging markets which can be more volatile than more established markets. As a result, the value of your investment may rise or fall. Investments in smaller companies may be more volatile than investments in well-established blue-chip companies.
The Vanguard LifeStrategy® and Target Retirement funds may invest in Exchange Traded Fund (ETF) shares. ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid-offer spread which should be considered fully before investing.
Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment.
The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.
The Funds may use derivatives in order to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Fund's net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index.
For further information on risks please see the “Risk Factors” section of the prospectus on our website at https://global.vanguard.com.
If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this article, please contact your financial adviser.
This article is designed for use by, and is directed only at, persons resident in the UK.
For further information on the fund's investment policies and risks, please refer to the prospectus of the UCITS and to the KIID before making any final investment decisions. The KIID for this fund is available, alongside the prospectus via Vanguard’s website https://www.vanguardinvestor.co.uk
The information contained in this article is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this article is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of shares and /or units of, and the receipt of distribution from any investment.
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