Tom Rampulla, chief executive of Vanguard’s UK operation, spoke this week to Paul Amery, editor of IndexUniverse.eu, about his company’s strategy. Vanguard launched its first index funds for the UK retail market a year ago.

IU.eu: Tom, you recently said that UK investors should focus more on the price of investing and less on performance. Are there any signs of this happening?

Rampulla: I don’t think investors will ever focus exclusively on price, but a shift in this direction is happening to some extent. If you look at what has happened in the US over the last 10 to 15 years you’ll see that there’s been a big shift from chasing the best performing fund managers to selecting the lowest-cost funds, both active and passive. A recent Morningstar study backs this up by analysing US fund flows, and I’ve been suggesting that the same trend might happen in the UK.

In particular, once you get more transparency on fund charging practices it becomes easier to think about the different components of the overall cost of your investment and to make more informed decisions as a result. Increased transparency should help stimulate competition as well.

IU.eu: The Financial Services Authority recently issued a discussion paper on fund platforms and proposed to ban all rebates to platforms from providers in order to “unbundle” fund-related charges. There’s been quite a lot of industry resistance to this idea. Is there a risk that the proposal gets watered down?  

Rampulla: Some platform providers are resisting the FSA’s proposals as these will affect the way they do business and the way they run their systems in particular. The proposals could be watered down but we hope they are not. The spirit of the FSA’s Retail Distribution Review has been to promote transparency and thereby to benefit consumers. Disaggregating all fund-related expenses and not allowing rebates would achieve just that.

IU.eu: Some advisers argue that if you force unbundling, investors may end up paying more as a result, since platform operators may lose the ability to negotiate bulk discounts with fund providers.

Rampulla: One of the comments we passed back to the FSA was that platform operators should be able to negotiate volume discounts, but that these should then be passed on to end-investors. If I’m one of the big platforms and can go to an investment house and get a 70 basis point fund for 50 basis points, that should be permitted, but the consumer should get the saving. I don’t buy the argument that there will be an increase in overall costs though, since unbundling should lead to a much more efficient market. Some service providers may be scared of transparency but in the end it should be a good thing for the whole industry since it will increase investor trust. Also, you don’t have to compete on price alone; you can compete on the basis of better service, for example.

IU.eu: It sounds like a good thing to focus on the price of investing, but isn’t it very hard to do so? Different definitions of fund expense ratios can be very confusing.

Rampulla: There should be a much better understanding of what goes into a fund’s expense ratio. In the US market there’s a much clearer definition, whereas in the UK (and in Europe) there’s often confusion between the annual management charge (AMC) and total expense ratio (TER). The TER, rather than the AMC, should be the relevant measure of expenses, but there need to be better rules around disclosure. Investors also need the information to be able to make an informed choice, and I’ve often said that people buying a mobile phone plan get more transparency than those selecting investment funds. Having said that a standardised measure for TER needs to be agreed on, you also have to be careful about what is practical to include. You may not be able to reflect trading costs for the underlying securities, for example.

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