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INTERVIEW-As Vanguard trounces U.S. rivals, it moves slowly overseas

Tue 16th September, 2014 5:59pm
By Ashley Lau and Tim McLaughlin 
    MALVERN, Pa., Sept 16 (Reuters) - As U.S. investors race 
into Vanguard Group mutual and exchange-traded funds at 
breakneck speeds, the No. 1 mutual fund company's overseas 
operations have expanded at a comparative snail's pace. 
    Vanguard Chairman and Chief Executive William McNabb is 
happy with an overseas strategy that is sometimes painstakingly 
slow because he wants to preserve what he sees as the company's 
most valuable export: the culture of low-cost investing. 
    "We're going to make sure that our culture thrives 
overseas," McNabb said on Friday evening during an interview at 
his office that focused on the company's expansion into Canada, 
Europe and Asia. 
    Vanguard's U.S. assets have doubled to $2.7 trillion in five 
years under a long-held model of providing affordable 
investments for investors, putting the company well-ahead of 
nearest competitors Fidelity, American Funds and Pacific 
Investment Management Co. 
    Over about a dozen years, assets held by Vanguard's overseas 
investors, meanwhile, have grown to about $233 billion, 
according to Vanguard. 
    Vanguard is so focused on getting its culture right in 
places like London that McNabb's top lieutenant there, Thomas 
Rampulla, has personally blessed every U.K. hire. McNabb calls 
Rampulla his top "culture carrier" in the United Kingdom, where 
Vanguard opened a London office about six years ago. Vanguard 
now has about 250 employees there. 
    McNabb brushed aside questions about asset-gathering goals 
and Vanguard's next overseas market. But he showed enthusiasm in 
how Vanguard's early foray into Hong Kong is something akin to 
doing "missionary work." Vanguard launched its first ETF there 
in May 2013.  
    "If you go to these places, and forget the accents for a 
minute, you'd think you're here," McNabb said while talking 
about Vanguard's overseas offices.   
    "Here" is Vanguard's leafy campus in the Philadelphia suburb 
of Malvern, Pennsylvania. McNabb said he'd like to believe that 
Vanguard, despite its successes, still acts and feels like a 
small company with Midwestern values. But that statement carries 
some contradiction for a company that employs more than 14,000 
people and with central operations more than a thousand miles 
from the heart of the U.S. Midwest.  
    But what Vanguard is really exporting is a low-cost 
proposition for investors - a model that has worked in the 
United States. Vanguard's average fund expense ratio hovered at 
0.19 percent in 2013, far below the industry average of 1.08 
percent, according to data from Vanguard and Lipper Inc. 
    That low-cost mentality is reflected in the wardrobes of 
McNabb and some members of his senior executive team. During an 
interview with Reuters, McNabb wore gray slacks and a tattersall 
shirt to go with striped socks and a scuffed pair of penny 
loafers. Bespoke suits and cuff links - signatures of Wall 
Street executives - aren't part of the Vanguard wardrobe. 
    "I own several tattersall shirts," McNabb said proudly. 
    Investors have warmed to the approach.  
    Through the end of July this year, investors made net 
deposits of $77 billion into Vanguard mutual funds. That's 10 
times more than BlackRock Inc  BLK.N , the world's largest money 
manager, and better than the combined performance of T. Rowe 
Price Group Inc  TROW.O , JPMorgan Chase & Co  JPM.N  and 
Franklin Templeton Investments  BEN.N , according to Morningstar 
Inc data. 
    Meanwhile, No. 2 Fidelity Investments, No. 3 American Funds 
and No. 4 Pimco have experienced net investor withdrawals of 
$12.7 billion, $9.6 billion and $72.8 billion, respectively, 
during that period, Morningstar said. 
    Despite that resounding success, McNabb has a long list of 
worries as the No. 1 U.S. mutual fund company makes a bigger 
commitment to export its business model. Among them are the 
frothy bond market, the Internet hackers who probe Vanguard's 
digital underbelly, high frequency traders, and investor 
obsession with chasing high yield investments. 
    But what really rattles McNabb is a mere question.  
    "The worst thing that someone has said about us has been a 
question, 'Will success go to our heads?' I'm glad someone asked 
that. That's the greatest risk we face," McNabb said. 
 
 (Reporting by Ashley Lau and Tim McLaughlin; Editing by Richard 
Valdmanis and Chris Reese) 
 ((tim.mclaughlin@thomsonreuters.com; +1 617-856-4409; Reuters 
Messaging: Tim.McLaughlin.thomsonreuters.com@reuters.net)) 
 
Keywords: FUNDS VANGUARD/CHAIRMAN
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