Vanguard, the world's largest asset manager with a nautical theme, has completed its separation into two distinct investment units. The company's funds are now managed by either Vanguard Capital Management or Vanguard Portfolio Management, with each team operating from separate buildings. This division was finalized this week, following an announcement about the pending establishment of the two U.S. investment advisors six months ago. Vanguard stated the process had been in development for years.
Jeff DeMaso, editor of The Independent Vanguard Adviser, commented on the change in a note to clients. "Vanguard has grown enormously, and splitting responsibilities creates clearer lines of accountability, more leadership roles and additional career paths for portfolio managers," DeMaso said. "But it also introduces a real challenge: Can Vanguard maintain two world-class stock indexing teams without letting costs rise or performance slip?"
According to Vanguard, having two distinct investment management and stewardship teams benefits clients and the firm. The company announced that establishing separate teams provides management with deeper focus, investment teams with greater flexibility, and talented staff with more growth opportunities. It added that funds will benefit from streamlined operations for these high-performing teams.
The change also relates to proxy voting, an area criticized by conservative groups and politicians for several years. Vanguard, along with BlackRock, StateStreet and proxy advisory firms, has faced criticism from Republican members of Congress over alleged influence on corporate policies in their portfolios, especially regarding environmental, social and governance issues. Vanguard stated that having two investment stewardship teams will help "further diversify perspectives in the proxy voting ecosystem over time."
Vanguard Portfolio Management oversees $2.7 trillion, as noted by DeMaso. This includes all actively managed stock funds, except diversified equity strategies, along with index funds such as sector, style-box and dividend funds, and actively managed multi-asset funds.
Vanguard Capital Management handles $8.2 trillion. This covers all bond funds, active diversified equity, broad-market and foreign index funds, and passive multi-asset funds like target-date suites.
DeMaso pointed out a potential nuance in creating two different teams: tension could arise because some funds hold many of the same stocks, and funds might compete for shares or be on opposite sides of trades. "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."