The Money Mustache Community
Around the World => Australia Discussion => Topic started by: Dropbear on January 05, 2020, 02:26:22 AM
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Hi all,
Can I please ask a question for the brainstrust, mostly on behalf of an interested family member of mine:
Is it safe to go long on Vanguard?
Whether investing via ETFs or managed funds, how do people feel about having a significant proportion of one's investment in Vanguard passive indexing products?
Is it prudent to mix in other companies' products, such as Blackrock, or is the Vanguard ship fairly steady - as long as investors have adequate plans to buy-and-hold a suitable asset allocation and ride out any potential share market crash?
Thanks!
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A couple of links that may help...
https://forum.mrmoneymustache.com/investor-alley/etf-issuer-risk/ (https://forum.mrmoneymustache.com/investor-alley/etf-issuer-risk/)
https://www.mrmoneymustache.com/2012/06/07/safety-is-an-expensive-illusion/ (https://www.mrmoneymustache.com/2012/06/07/safety-is-an-expensive-illusion/)
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Thanks Moony, that's very helpful! (I did a search but didn't have the right words to describe this kind of risk.)
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Vanguard Australia is not owned by the fund members like it is in the US. Vanguard Investments Australia Ltd is a wholly owned subsidiary of The Vanguard Group, Inc. It's owned by the US company.
But the key point is that the funds are held in trusts the underlying assets are not owned by Vanguard and are usually held by a third-party custodian, making them unavailable to creditors in the event of default. So, even if Vanguard went belly-up, the bulk of the funds are safe. The other concern would be fraud, but I think I can rely on the Vanguard brand and Vanguard Australia's auditors to ensure that there's no funny business going on.
They better be safe, I have a couple of million in Vangaurd funds.
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Thanks mjr!
It sounds like these ownership and trust structures are a point of difference for Vanguard relative to other alternative options.
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Actually, I' be very surprised if similar companies didn't use trusts as well. But I haven't investigated other companies, so I make no claims either way.
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Most mutual funds and ETFs in Australia are set up as trusts, with a trustee board empowered to act in the interests of the unit holders*, and with an external custodian** holding the assets on behalf of the trust to reduce the risk of misappropriation of assets by the Manager (Vanguard). The exception is Listed Investment Companies which are... surprise, companies, but given they have additional ASX disclosure requirements one could argue that is an additional check and balance in the investors favour.
* This is where the retail superannuation funds came unstuck at the royal commission. Because the trustee and the board members of the trustee were the profit generating company that benefited by charging the unitholders fees.
** Blockchain technology would eliminate the need for custodians. Some intense lobbying behind the scenes must be happening because the technology has been available for years but hasn't been implemented yet. Another example of the industry putting fees and profits ahead of investors.
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Other than Vangard, similar fund providers appear to be Betashares and Blackrock, for example. They're for-profit companies, though, right?
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Other than Vangard, similar fund providers appear to be Betashares and Blackrock, for example. They're for-profit companies, though, right?
State Street is another one. Yes they are for-profits.
But their fees are comparable. They have to be with a basic index product.
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A note about safety of assets: pyramid schemes and fraud almost never use a third-party custodian to hold assets. The most famous fraud / pyramid scheme, Bernie Madoff, used false reports that claimed to have assets at a third-party custodian. The U.S. SEC never checked. If they had taken any (falsified) report of assets and tried to verify it, the entire Madoff scheme would have collapsed, instead of waiting for the 2008 crisis.
The separation of client accounts (Vanguard) and holder of assets (various banks, acting as custodians) makes fraud extremely difficult, in case that's your concern.
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Thanks Marty and MustacheandaHalf. We were interested in any kind of risk that could impact a company like this, and are glad to hear about Vanguard's focus on and protections of clients' interests.