Vanguard looks to export its emulation fund concept

Vanguard Investments is looking at extending its emulation-style centralised portfolio capabilities to the US and Europe based on the success of the Australian experience, according to Nelson Wicas, principal of Vanguard’s asset allocation in the US.

“Our Australian office is doing a great job of providing that service. We have to look carefully at doing that in other markets. I think there’s a larger opportunity for it,” Wicas said on a recent trip to Australia. Vanguard teams in Europe and the US are currently exploring emulation-type mandates. Emulation was developed with MLC two and half years ago and involves MLC managers disclosing their portfolio holdings to index manager Vanguard which then runs a similar portfolio for approximately 5 per cent of the total MLC Australian equity portfolio. It can be a more efficient management of the portfolio, particularly if managers involved take opposing positions in the same stock. It is also similar to the ‘master manager’ concept currently taking hold in investment markets – whereby a master manager oversees all trades in shares for a fund or institutional investor. Wicas said index managers were ideally suited to become master managers as they were often expert traders. “The only way index funds manages distinguish themselves from other index managers is through trades,” he said. Wicas was also talking up the role of index management in the current active versus passive or alpha versus beta debate. Index management was good low-cost way to achieve beta return and should not be overlooked, he said. As a rule of thumb, Wicas suggests a 60/40 allocation to index and active for the average investor but a slightly more aggressive allocation to active for the larger institutional investor. “The power of indexing becomes self evident. At the very least indexing gives you greater performance at a lower cost and a lower volatility,” he said.