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Changing the Message

Last February, Vanguard published a white paper titled The Case for Private Equity. The broad conclusion of the paper was that “Private equity represents a distinct and growing segment of world equity markets that, because of its significant illiquidity and other market dynamics, offers suitable investors the opportunity to earn long-term excess returns while increasing portfolio diversification.” The paper further put private equity “At the forefront of Vanguard’s mission to broaden access to world-class strategies that have the potential to improve investor outcomes.”

Fast forward to last week. True to its mission, Vanguard announced that the firm will begin private labeling the HarbourVest private equity funds to accredited investors this summer. Shortly after this release, it will make the funds available to qualified advised clients through the Vanguard Personal Advisor Series program. 

Vanguard’s support of private equity is consistent with the firm’s long-time goal of democratizing investments. But a case could be made that the move in many respects runs counter to Vanguard’s founding principles of embracing very low cost, highly liquid, well-diversified, and fully transparent portfolios. Indeed, on the cost issue alone, Vanguard’s private equity report says that private equity investments could cost as much as 600 basis points while the HarbourVest funds are expected to come in at a still healthy 125 basis points. These price levels would likely have had Jack Bogle wondering whether this was a different Vanguard than the one he founded.

With Vanguard’s size and clout in retail and institutional markets, it’s unlikely that embracing private equity will compromise the firm’s growth or positioning. But for smaller or less well-established investment firms, it is important to carefully evaluate when and to what degree it is advisable to stray from core messaging and potentially compromise hard-won, but often easily lost, brand value.