Vanguard Splits Into Two Investment Teams

Imagine — a boat with two hulls. Preposterous! Oh, wait. Catamarans.

Vanguard, the world’s largest nautically themed asset manager, just separated into two investment units. The company’s funds are now handled by either Vanguard Capital Management or Vanguard Portfolio Management, which are separate teams operating in different buildings. The division, completed this week, came about six months after Vanguard announced the pending establishment of the two US investment advisors, a process that it said was years in the making. 

“Vanguard has grown enormously, and splitting responsibilities creates clearer lines of accountability, more leadership roles and additional career paths for portfolio managers,” Jeff DeMaso, editor of The Independent Vanguard Adviser, said in a note to clients about the change. “But it also introduces a real challenge: Can Vanguard maintain two world-class stock indexing teams without letting costs rise or performance slip?”

Making Waves

Two distinct investment management and stewardship teams is good news for clients and the firm, according to Vanguard. “Establishing separate investment management teams also creates a number of benefits for our investors and our organization, including management teams with an even deeper focus, investment teams with greater flexibility, and highly talented crew with more opportunities for growth,” the company said in an announcement. “Additionally, the funds will benefit from streamlined operations for these high-performing teams.” 

But it also alluded to a change affecting something that conservative groups and politicians have made a target of for several years: proxy voting. Vanguard, along with BlackRock, StateStreet and proxy advisory firms, have been criticized by Republican members of Congress over their alleged influence on corporate policies at the companies in their portfolios, particularly around environmental, social and governance issues. Having two investment stewardship teams will help “further diversify perspectives in the proxy voting ecosystem over time,” Vanguard stated. 

Here’s how the two separate investment management teams break down:

• Vanguard Portfolio Management runs $2.7 trillion, DeMaso noted, among all actively managed stock funds (except diversified equity strategies), index funds (sector, style-box and dividend) and actively managed multi-asset funds.
• Vanguard Capital Management runs $8.2 trillion across all bond funds, active diversified equity, broad-market and foreign index funds and passive multi-asset funds such as the target-date suites.

Rocking the Boat: A nuance to the creation of two different teams is that there could possibly be tension, as some of the funds hold a lot of the same stocks, and the funds may compete for buying shares or could be on different sides of a trade, DeMaso said. “What happens if one team becomes faster, more efficient or simply better at trading than the other?” he said. “If Vanguard executes well, shareholders shouldn’t notice a thing. But the task is not trivial: Vanguard now has to run two elite indexing operations while preserving its defining advantage — rock-bottom costs.”