Transcript Financial Intermediary

FINANCIAL INTERMEDIARY
XUEQI FENG
YIFAN SONG
YANGYANG GUAN
YI WANG
TONG LI
XUAN ZHANG
Content
History
Operation
SWOT
Financial
Background
Story
Strengths
Balance Sheet
Growth
Products
Weaknesses
Equity Holding
Milestone
Comparison
Opportunities
Issues
Threats
Risk
Principle
Case
Analysis
Vanguard active
management
case
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92%
100%
of all Vanguard funds
outperformed their peer averages
of all Vanguard balanced funds
outperformed their peer averages
Background
Xuan Zhang
100%
of all Vanguard money market funds
outperformed their peer averages
Vanguard Group Inc.
▪ One of the world's largest investment companies
▪ Offering a large selection of low-cost mutual funds, ETFs, advices,
and related services.
▪ Providing unique information for individual investors, financial
professionals, or corporate or institutional investors
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Background
▪ Began operations on May 1, 1975
▪ Corporate headquarters is in Valley Forge, Pennsylvania
▪ The oldest fund: Wellington Fund (inception: July 1, 1929)
▪ Chairman and CEO: F. William McNabb III
▪ Assets: $3 trillion in global assets under management
▪ Investors: More than 20 million investors
▪ Employees: More than 14,000 in the United States and abroad
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Steady Growth
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Milestones
1975
• The Vanguard Group, Inc. began operations
• Opened Vanguard 500 Index Fund. The first index mutual fund available to individual investors
in the United States
1976
• Launched the first bond index fund, Vanguard Total Bond Market Index Fund, which has
become one of the world’s biggest bond funds
1986
1990
2001
• Introduced the first international stock index funds in the United States
• Offered Exchange Traded Fund (ETF) share class for many Vanguard funds in the United States
• Vanguard launches its Target Retirement Funds, now among the largest series of balanced,
diversified target-date funds for retirement savers
2003
2013
• Assets under management at Vanguard pass the $2 trillion mark.
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Principle for Investment Success
▪ Create clear, appropriate investment goals
▪ Develop a suitable asset allocation using broadly diversified funds
▪ Minimize cost
▪ Maintain perspective and long-term discipline.
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▪ Vanguard.com gets an "A+" for
transaction satisfaction.
----Mutual Fund Monitor
▪ There's reason to trust the firm, which
earns an A grade for its culture in
Morningstar's Stewardship methodology.
----Morningstar
▪ 16 Vanguard funds made the "Money 50"
list of recommended funds.
----Money
Operation
Yifan Song
Vanguard Story
1970s – 1980s:
Average fund expense ratio
▪ Reduced cost
▪ Extended services
0.89%
▪ Steady cash flow
▪ Low redemption rate
0.38%
Today:
0.18%
 World’s largest & most trusted
 International market
1975
1990
2014
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Investment Products
▪ Vanguard mutual funds
▪ Vanguard ETFs (Exchange-traded funds)
▪ Other companies’ funds & ETFs
▪ Individual stocks
▪ Individual bonds & CDs
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Vanguard mutual funds
▪ Money market funds
▪ Bond funds
▪ Balanced funds
▪ Stock funds
▪ International funds
▪ Sector & specialty funds
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Performance
▪ 92% of Vanguard funds have beaten the returns of their peers.
▪ 10-year period ended March 31, 2015, outperformed their Lipper
peer-group averages:
▪
▪
▪
▪
▪
10 of 10 money market funds
46 of 51 bond funds
18 of 18 balanced funds
109 of 119 stock funds
a total of 183 of 198 funds
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Vanguard Vs. Industry
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Vanguard ETFs
▪ Stock ETFs
▪ Bond ETFs
▪ Sector ETFs
▪ International ETFs
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More investment options
▪ Thousands of other companies' funds & ETFs
▪ Buy & sell individual stocks
▪ Buy & sell individual bonds & CDs
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Strengths
• Broad product and service
portfolio
• Strong geographical
presence
• Low operating expense
compare to industry
• Reputation and customer
loyalty
Weaknesses
• Limited access to
alternative distribution
channel
Opportunities
Threats
• US retirement market
expansion
• Launch of new funds
• Fluctuations in interest
rates
• Changing rules and
regulations
• Strong Competition
outside the US
SWOT Analysis
Yangyang Guan
SWOT Analysis --- Strengths
▪ Broad Product and service portfolio
▪ Products: Vanguard mutual funds, exchange-traded funds, individual
stocks and bonds, college savings plan, etc.
▪ Services: administrative and recordkeeping, consulting, investment
advisory, and retirement planning, etc.
▪ Strong geographical presence
▪ Offers more than 170 US funds and 50 international funds
▪ Offices in Netherland, Australia, UK, France, South Korea, Singapore,
Japan and Switzerland.
▪ Low Operating expenses
▪ Low expense ratio
▪ Reputation and customer loyalty
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SWOT Analysis --- Weakness
▪ Limited alternative distribution channel
• Do not use brokerage houses or independent agents
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SWOT Analysis --- Opportunities
▪ US retirement market expansion
• Assets in IRAs totaled $4.9 trillion by 2011
• Defined contribution plan assets reached $4.5 trillion
• Government pension plans held $4.5 trillion
▪ Launch of new funds
• Launched two international bond index funds in 2011
• Introduced Ultra-Low-Cost share in 2011
• Will launch Ultra-Short-Term Bond Fund in 2015
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SWOT --- Threats
▪ Interest rates volatility
▪ Effects on raising market interest rates
▪ Effects on dropping market interest rates
▪ Changing rules and regulations
▪ Uncertainty of new rules and regulations
▪ Expensive and time consuming to meet legal and registration
requirement
▪ Strong competition outside the US
▪ Limited experience with foreign country’s investors
▪ Limited knowledge about culture and traditions
▪ Limited knowledge about foreign country’s regulations
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Financial Position
Yi Wang
Balance sheet
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Equity holding
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Issues
▪ Off balance sheet risk
▪ Corporation always settle down their customers transaction within 3
business days.
▪ Sometimes broker is unable to fulfill its contractual obligations and the
Corporation has to purchase or sell the financial instrument underlying
the contract at a loss
▪ Regulatory matters
▪ The industry is highly regulated. Applicable laws and regulations
restrict permissible activities and investments, and require compliance
with financial and customer-related protection.
▪ The consequences of noncompliance can include substantial monetary
and nonmonetary penalties
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Risk
Alpha
Beta
Sharp
ratio
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Case Analysis
---Vanguard active
management
Xueqi Feng
Outperforming with active managers is
challenging
▪ Over the past 20 years, less than 25% of actively managed U.S.
equity mutual funds outperformed their relevant style benchmarks
▪ The underperformance is relatively consistent across various
countries, market segments, and time periods
Why?
▪ The zero-sum game assumes no transaction related costs (or
taxes)
▪ The lack of persistence among top-performing managers
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Improving the odds of active management
success
▪ Holding all else equal, a lower expense ratio would mean higher returns.
 Left side: the percentage of
outperformers for the full
universe of actively
managed U.S. equity funds.
 Right side: narrow the
universe of funds by
removing those with the
highest expense ratios.
 Far right side: the universe
includes only funds with
expense ratios in the lowest
10% of all actively
managed U.S. equity funds.
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Improving the odds of active management
success
▪ Two Conclusions:
▪ Lower costs leading to higher
relative performance
▪ Although this trend is positive,
lower cost does not by itself
guarantee success
▪ For investors to achieve
success using active
management, a combination
of both low cost and talent
are needed.
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Identifying talent
▪ Vanguard’s criteria of identifying a skilled active manager:
▪ Why has the overall success rate of using active
managers not been higher?
▪ The application of these factors remain subjective
▪ The most crucial intersection here is obtaining top
talent at a low cost.
▪ Solving this paradox is not easy.
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Solve the low-cost/top-talent paradox
▪ Unique ownership structure helps to provide a decisive cost
advantage
▪ Vanguard is owned collectively by the funds it operates. These funds in
turn are owned by their shareholders. Vanguard provides its services to
the Vanguard funds at cost without any profit margins built in at other
fund companies.
▪ CEO-led search and oversight process sustains long-term
perspective
▪ The Portfolio Reviews long-term stability reduces the potential to
overreact to short-term events and promotes manager evaluation
continuity.
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Solve the low-cost/top-talent paradox
▪ Large scale reduces fee levels
▪ Vanguard is the largest user of subadvisors in the world
▪ Managers also recognize the operational benefits of these sizable
mandates.
▪ Long-term perspective attracts talent
▪ Vanguard engages managers for more than 13 years on average
▪ The cumulative fees managers expect to receive from Vanguard is
greater than what they would expect to obtain from relationships that
may pay a higher fee but typically do not last as long
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Solve the low-cost/top-talent paradox
▪ Symmetrical performance-based fees align manager and client
interests
▪ All of Vanguard’s subadvisors are paid a base fee that is a percentage
of assets managed, reward the manager for outperforming the fund’s
benchmark
▪ Vanguard typically structures its performance fees for periods of three
to five years.
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Vanguard’s Performance
▪ From 1982 to 2012, Vanguard has offered 34 actively managed
equity mutual funds.
▪ To measure the success or failure of these funds, we use three
different methodologies to weight the performance impact of each
fund
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Vanguard’s Performance
▪ For all three weighting methodologies over the full term examined,
Vanguard provided investors with positive excess returns.
▪ Equal-weighted portfolio: produced 0.35% of annualized excess return relative
to the costless benchmarks.
▪ Asset-weighted basis: 0.59% annualized excess return over the past 30 years.
▪ Market-proportional basis: 0.24% of annual excess return
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Comparison with other active funds
▪ For the 15 years ended June 30, 2012, the median results of Vanguard
active funds compares favorably with the universe of other available
actively managed funds.
▪ In addition, the median
Vanguard active equity fund has
outperformed the median nonVanguard active equity fund over
the past 10- and 15-year
periods.
▪ The core drivers of these results
are skilled managers and low
cost.
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Conclusion
Thank You!