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Jan 12, 2015

Vanguard reports record inflows as passive funds gain ground

What does passive investment success mean for investor relations? 

Vanguard, the world’s second-largest asset manager, has resoundingly beaten the record for global fund-raising for a third successive year after taking in $243 bn in 2014.

This year’s figure is an increase of 61 percent on the company’s previous record of $151 bn, set in 2013, reports the Financial Times. Passive funds currently account for 35 percent of all mutual fund assets in the US, a stark increase from just 2 percent 20 years ago.

Bill McNabb, Vanguard’s chairman and CEO, is also confident that index-based investment will continue to grow in 2015 as his company continues to fire ‘on all cylinders’.

As Vanguard and other index funds continue to attract investors in their droves, what role might investor relations play in a world where active fund management has become less popular?

According to Richard Davies, founder and managing director of London-based IR firm RD:IR, the index funds trend is set to continue into 2015 as investors seek low-cost and market-neutral strategies. ‘The willingness to invest in active asset management has reduced in line with the overall decline in equity returns over recent years, and the less-than spectacular returns of many hedge funds has spoiled the appetite of many for higher fee payments in general,’ he says.

But Davies believes the role of an IRO will become more important as corporates will be aiming to get maximum efficiency from their investor targeting and roadshow programs.

‘Active management is never going to go away; it will remain for many years at levels of ownership of stock where its contribution to share price support is crucial,’ he explains. ‘Understanding investors and targets – their funds and their strategies – is key to this. Good IR is about ensuring senior management is seeing the right people.

‘The banks and brokers have controlled the roadshow process historically but this is changing: IROs need to have an even deeper and wider understanding of the market than ever before.’

The same tenets of good IR – Davies suggests knowing exactly who owns your company’s stock, particularly with a breakdown according to funds managed, is crucial – hold true for active and passive shareholders alike. ‘Two different funds managed by the same investment firm may have two different strategies with different investment requirements, for example,’ he explains.

‘If index funds choose not to meet or engage with the company, that is their call, but companies should offer access on the same basis as active funds, especially as an index or passive investor may have a very active governance and responsible investment overlay process.’