Shares in Hargreaves Lansdown fell more than 8pc yesterday as the market digested the implications of the launch of a new, low-cost investment service by American fund giant Vanguard.
With 876,000 investors on its books and £70bn of funds, FTSE 100 Hargreaves Lansdown is seen as particularly vulnerable to large-scale, low-cost entrants. Its enormous profitability – it boasts net profit margins of more than 50pc, see table – stems in part from high charges and a lack of serious competition – to date.
Yesterday’s share price wobble suggests some investors think Hargreaves’s days of dominance are over.
Vanguard’s British proposition replicates its highly successful, two-pronged business model in America. It offers ultra-cheap “passive” or “tracker” funds that mirror the make-up of indices such as the FTSE 100, allowing savers to rapidly put together a diversified portfolio.
These funds have been available in the UK via other platforms (including Hargreaves) for some years. But yesterday Vanguard went one step further with the launch of its own platform where savers can manage their Isa and other accounts directly – and at a vastly reduced cost.
Vanguard is now effectively in direct competition with both traditional fund managers as well as platforms such as Hargreaves. While Hargreaves took the biggest hit, shares in quoted asset managers Jupiter, Schroders and Henderson also dipped.
Vanguard’s new service will charge 0.15pc a year on any assets held on the platform capped at £375 per year. This fee compares to 0.45pc charged on investments up to £250,000 on Hargreaves Lansdown.
Fund charges apply on top of those annual fees, but again Vanguard’s own funds painfully undercut rivals’. A cheap tracker on Vanguard’s platform would add 0.08pc to the annual 0.15pc fee, giving a total cost of 0.23pc. The equivalent on Hargeaves would give a total, annual cost of more than 0.5pc. Many active funds from traditional managers such as Schroders charge 0.75pc.
Vanguard is not a threat to easily brush away. Not only is it riding on a growing investor appetite for “passive” strategies but it is already formidable in size. Its mutual status gives it even more power to reduce margins.
Last year Vanguard took in more money globally than its nearest 10 competitors combined. It increased its assets by $200bn in the year, while its nearest rival Amundi, a European asset manager, took in $35bn.
In addition to its passive “trackers”, Vanguard also offers “multi-asset” funds, blending different asset classes together for “one-stop” portfolio especially suitable for retirement saving. These funds cost 0.22pc, far lower than the cost of multi-asset funds offered by active fund management houses. Other providers, such as Blackrock, are also moving into the passive space.
The pressure on active asset managers has already been seen, with two big tie-ups announced in recent months. Last year Henderson Global Investors and US fund management giant Janus Capital Group announced a merger and in March Standard Life and Aberdeen Asset Management followed suit. In both cases cost efficiencies and the benefits of scale were cited.
Aberdeen, Henderson and Standard Life have the lowest net profit margins among the London listed asset managers, although Standard Life has considerable business outside of its asset management operations.
Mike Barrett, of investment industry consultancy Langcat, believed Vanguard’s launch in the UK will hit asset managers harder than other platform providers.
“Hargreaves Lansdown has proved that the platform market is not price sensitive, because it has been 10 to 20 basis points more expensive than its main rivals for a long time, yet it is still the biggest platform by mile,” he said.
Asset managers face the “real disturbance”, said Mr Barrett.
“If this results in a shift of investor behaviour akin to the one taking place in America, where Blackrock and Vanguard are eating everyone’s breakfast, lunch and dinner, then this launch will be a pivotal moment,” he said.