By Ross Kerber
BOSTON (Reuters) – While many U.S. asset managers that focus on stock picking are getting squeezed by low-cost passive rivals, at least one of them has found a way to benefit.
Boston-based Wellington Management is leveraging a decades-old relationship with index-fund giant Vanguard Group to become one of the fastest-growing asset managers specializing in active management.
Outsized investment returns and strong inflows have seen Wellington’s assets under management grow to $939 billion at the end of March from $834 billion at the end of 2013, putting it on track to join the exclusive club of money managers running more than $1 trillion by as early as this year.
While smart stock picking has helped, the company’s growth has also been fueled in large part by its ties to Vanguard, which uses Wellington as its largest outside manager for active funds. That relationship, which dates back to the 1970s, now accounts for about a third of Wellington’s business and has helped it to draw in money and to keep costs below rivals, industry specialists said.
“They’re growing because they are plugged into the Vanguard machine,” said Jonathan Scheid, president of Bellatore Financial, which helps financial advisers select investment managers.
The picture is quite different for other fund firms focused on active management. They are struggling to keep pace as a broad stock market rally in recent years makes stock-picking seem pointless and expensive compared to lower-cost products like index funds and exchange-traded funds.
U.S. passive mutual funds, for example, took in $464.9 billion last year and $326.4 billion in 2013, versus just $117.9 billion for active funds last year and $271.3 billion in 2013, according to Thomson Reuters’ Lipper unit.
“Wellington puts the lie to the current accepted wisdom that active management can’t outperform,” said Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter. He said the company could have $1 trillion under management by the end of this year, barring a market downturn.
Wellington’s ties to Vanguard run deep. Wellington employed the famed fund executive John Bogle from 1951 until he left to create Vanguard in 1974. Vanguard now manages about $3 trillion, one of only four stand-alone U.S. money managers above the $1 trillion mark.
While Wellington does not break out much financial data, the fortunes of about 40 percent of its asset base can be tracked through its role as sole investment adviser to mutual funds sponsored by partners, which in addition to Vanguard include Hartford Funds and others. Wellington declined comment.
Funds solely advised by Wellington and administered by Vanguard held about $253 billion as of April 30 according to Lipper, and took in net deposits of about $13 billion since the start of 2014 through April 30.
In contrast, other active managers had outflows in the same period from their mutual funds including Janus Capital and Waddell& Reed Financial.
The flows reflect the strong performances of some Wellington-run Vanguard funds such as the $91 billion Vanguard Wellington Fund. Its annualized return of 12.11 percent over the five years through May 28 beat 91 percent of peers, according to Morningstar.
Helping the returns and flows are low expenses. Vanguard Wellington’s expense ratio is 0.26 percent, for example, less than a third of its category average.
Figures like that likely reflect Vanguard’s tough bargaining with Wellington that keeps fees low and returns competitive, said Marshall Front, chairman of Chicago investment manager Front Barnett Associates. “Vanguard is probably all over them like a wet blanket,” Front said.
Vanguard executive Dan Newhall said Vanguard negotiates on fees with all its external managers. Newhall also said Wellington’s structure as a partnership helps it retain portfolio managers and analysts, paid with a share of the firm’s profits.
(Reporting by Ross Kerber; Editing by Richard Valdmanis and Frances Kerry)