Asset Manager Overview
Vanguard is one of the world's largest managers of passive strategies. The organization is mutually owned by investors in its U.S. domiciled funds and has a policy of returning profits to its U.S. clients through lower charges. The UK and European arms of the business return any small profits made back to the U.S. arm, which ultimately distributes profits to the investors in the U.S. domiciled funds. Overall, we do not believe that UK and European investors are significantly disadvantaged by this policy; instead, they benefit from the expertise and technology of the wider Vanguard group.
Fund Manager/Team Overview
The equity and fixed income funds at Vanguard are managed by two separate teams, each with expertise in their respective asset classes. The equity team manages funds from three global locations to ensure 24-hour market access. They oversee over $7 trillion in assets with the help of more than 100 dedicated professionals.
Investment Philosophy & Process Overview
The fund invests in physical securities and follows a full replication approach. A full replication approach, as the name suggests, involves purchasing all the securities in the same weights as they are represented in the index. In principle, this sounds very straightforward, but there are subtle differences in the way corporate actions, such as dividends and changes to the index composition, are handled. The impact of these differences on performance is small, and this is captured in our analysis of the fund's returns.
This approach, gross of fees, can provide the highest degree of accuracy in tracking the fund's benchmark. However, it can also involve higher transaction costs compared to other methods and is therefore more suitable for liquid markets.
The fund's cut-off for dealing is midday, but the fund is not priced until 16:30. This eliminates the need to apply a fair value adjustment to align its price with that of the tracked index. We believe that this represents good practice for index funds, although investors should be aware of the short time delay in obtaining full exposure to the market as a result.
This approach is different from that of many of Vanguard's peers, and as a result, its tracking error may appear lower. This is simply a characteristic of the fund's structure. Over the long term, we don't believe that when a fund is priced will materially impact the performance of a fund.
This fund operates with a partial swing pricing policy, which means that units are typically bought and sold at the same price. However, the fund can apply a small spread if the daily inflow or outflow exceeds a certain threshold. This involves adding (in the case of inflows) or subtracting (in the case of outflows) the costs of creating or cancelling units in the fund. This means that incoming or exiting investors will bear these costs rather than the current investors. This spread is sometimes referred to as an anti-dilution levy and we consider this policy to be reasonable, as it protects the interests of investors who continue to hold the fund.
The fund can undertake stock lending activity, although typically less than 10% of the fund's NAV will be on loan. Stock lending involves lending securities to another party and receiving income in return. Trades are usually conducted with another entity, often an investment bank, which introduces counterparty risk—the risk that the other party may renege on their agreement and fail to repay the stock in full.
Vanguard has strong risk controls in place to protect the fund in the event of a default on any stock lent. This includes strict over-collateralization requirements as well as third-party indemnification agreements.
The fund benefits from the income generated through stock lending. The impact on performance from stock lending tends to be limited.
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