Vanguard Factor Funds Closing in the UK

Vanguard Factor Funds are closing in the UK. What does this mean for investors? What does this mean for active management? And what does this mean for Vanguard?

Take a trip to Vanguard’s ETF page, scroll about half way down and you should notice four funds lit up like Christmas trees. Yellow lights indicating active management and red lights indicating closures!

In other words Vanguard’s actively managed ETF range for UK investors are all closing.

These funds are Vanguard’s factor offerings. Factor investing is a way to invest where different shares are chosen based on certain characteristics that are associated with higher returns. There are lots of different ones to choose from. Vanguard offered Liquidity, Volatility, Momentum and Value.

Combining Vanguard’s low cost approach with funds that are designed to out perform the market seems like a match made in heaven so what went wrong?

Well, it turned out nobody invested in those funds. Well, nobody is a bit of an exaggeration, but definitely not enough investors were willing to invest to make it worthwhile for Vanguard.

And let us be clear, investors aren’t shunning the company. Their other funds aren’t closing. In fact, I’m pretty sure more and more people are investing in those everyday.

So the question becomes why these four funds?

And though I can’t be sure, I can definitely think of a few reasons.

First and foremost these four funds are all active investments. There was a time not so long ago, when people thought you needed an active manager to make your investments reach their potential, but lately the evidence is piling up showing pretty comprehensively the opposite is true. Perhaps people just don’t think the funds will outperform.

Another reason could be the lack knowledge outside the US. Though there are plenty of Americans that know about factor investing, the same probably isn’t true in Europe.

Additionally, some think factors don’t work anyway. The most compelling reason for this argues that they only work if nobody knows about them. So now that everybody knows about them, they just don’t work!

And I’m sure it doesn’t help that a lot of these factors simply haven’t performed well recently. When funds do poorly people have a habit of forgetting about them.

But for what it’s worth my personal view goes something like this. I’m sure there are plenty of people out there that believe in factor investing. I just think those people aren’t the same kind of people who like to invest in Vanguard.

Vanguard’s founder, the late Jack Bogle, was such a good proponent of the passive investing strategy that Vanguard become associated with that type of investing. Factor investing really goes against the message Bogle communicated.

In short, Vanguard is associated with low cost passive funds, and as such, attracts investors who want that. Factors and active management seems to go against everything Bogle stood for.

So what does this mean for investors?

These funds closing in the UK should only impact investors in those particular funds, and even then, the impact shouldn’t be too sizeable. At worst you may have to pay some capital gains tax. At best you’ll need to spend a bit of time deciding where to reinvest your money.

British expats aren’t liable for capital gains tax on the sale of UK shares (from an HMRC standpoint) and UK investors in tax sheltered accounts like ISAs will also avoid this. On the other hand a UK investor in a general account will be liable for tax, but this will only be high if the gains are high. In other words if you pay a lot of tax you’ll have made a lot of money, so it won’t be all bad!

I’m sure it goes without saying that you can sell your positions whenever you like, but if you want to avoid commissions you can wait for the closing date at which point Vanguard should just give you your money back.

As for choosing what to do with your money, there are plenty of other products on the market these days. iShares are one of many that have low cost alternatives, and if you want to stick with Vanguard, perhaps their global vanilla fund is the best alternative. (You can read more about that here.)

The Bottom Line

Whilst Vanguard factor funds closing in the UK is a little inconvenient if you were invested, unless you’ve made a lot of money that isn’t tax sheltered, you shouldn’t be overly impacted.

The worst case scenario would be investors in a general account who’ve made a lot of capital gains that is subject to tax. But paying a lot of tax would mean you’ve made a lot of money so it’s not all bad!