Vanguard is planning a new push into the active fixed income market

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Vanguard, the world’s second-largest asset manager, is planning a new push into the active fixed-income market, citing inefficiencies and “extraordinary” opportunities.

While the firm is better known for its equities business, growing its size in fixed income is a priority, according to chief executive Salim Ramji. About 10% of Vanguard’s assets are currently allocated to active fixed income.

Fixed income “will be more important as people retire. . . it will be more important in, at least our view is, the longer-term rate environment,” Ramji told a Financial Times conference call on Wednesday.

“If you think about the fixed income market today . . . it’s a lot more outdated, it’s a lot less transparent, a lot more expensive,” he said, in one of his first interviews since becoming Vanguard’s chief executive in July. “I think there’s an opportunity that Vanguard has to change that dynamic.”

The move has the potential to shake up the bond management industry by significantly cutting fees. Vanguard, which has $9.7 billion in assets under management, has already redefined stock investing as investors flocked to its low-cost products.

Ramji said the firm plans to bring more weight to the actively managed fixed income market. He also criticized the fixed-income market for high fees and a lack of transparency, which he said benefited firms more than their clients. “The opportunity set is vast when you look at the fixed income market. It’s twice the size of the stock market, and the inefficiencies in fixed income are tremendous.”

He noted that Vanguard’s actively managed fixed income fund cost just 14 basis points, far less than other active managers as well as the average for passive fixed income funds. “What this shows is the whole dichotomy between I want high performance (or) I want low price is a false dichotomy.”

Ramji is the first foreigner to head the asset manager since its inception in 1975. He was previously an executive at BlackRock, its main competitor which is the world’s largest asset manager.

“It looks like they’re doubling down” on the bond shifts that began before Ramji arrived, Dan Sotiroff, principal analyst at Vanguard told Morningstar. He noted that active bond managers have a stronger track record of beating their indexes than equity funds. “It makes perfect sense. (Active bond funds) are a little bit more ripe for the picking.”

Vanguard revolutionized the asset management industry with low-cost index investing under founder Jack Bogle, and 80% of Vanguard’s assets are in passive index funds.

However, the push into fixed income comes at a time when the asset manager is already under political pressure in an election year from both the left and the right for its extraordinary size and the amount of shares on which owns them in many US companies.

Ramji also walked a fine line around the company’s decision not to support any of the environmental or social shareholder proposals it considered in the 2024 proxy season. ESG has become increasingly politicized in US.

Ramji said: “We don’t dictate to companies what their strategy should be, we don’t push a particular agenda.”

He also addressed the technical and service failures that have plagued the manager in recent years as the industry has rapidly modernized and admitted the firm had “let down” its customers. “We have some work to do,” he said.

This article has been amended to reflect that Vanguard has $9.7 billion in assets under management