A look at Vanguard and why it works so well
Landon Thomas, Jr., has a good profile of Vanguard:
The Vanguard trading floor is the epicenter of one of the great financial revolutions of modern times, yet it is a surprisingly relaxed place.
A few men and women gaze at Bloomberg terminals. There is a muted television or two and a view of verdant suburban Philadelphia. No one is barking orders to buy or sell stock. For a $4.2 trillion mutual fund giant that is still growing rapidly, it occupies a small fraction of the space of a typical Wall Street trading hub.
You can barely hear the quiet hum of money being invested — money in scarcely imaginable quantities, pouring into low-cost index mutual funds and exchange-traded funds (E.T.F.s) that track financial markets.
In the last three calendar years, investors sank $823 billion into Vanguard funds, the company says. The scale of that inflow becomes clear when it is compared with the rest of the mutual fund industry — more than 4,000 firms in total. All of them combined took in just a net $97 billion during that period, Morningstar data shows. Vanguard, in other words, scooped up about 8.5 times as much money as all of its competitors.
“Flows of this magnitude into one company are unprecedented,” said Alina Lamy, an expert on fund flows at Morningstar. “Since the crisis, investors have been saying, ‘I may not be able to control the market, but I can control how much I pay in mutual fund expenses.’ And when they look for quality funds with low fees, the first answer is Vanguard.”
The triumph of index fund investing means Vanguard’s traders funnel as much as $2 billion a day into stocks like Apple, Microsoft and Amazon, as well as thousands of smaller companies that the firm’s fleet of funds track. That is 20 times the amount that Vanguard was investing on a daily basis in 2009. It is manageable, in large part, because no stock-picking is involved: The money simply flows into index funds and E.T.F.s, and through February of this year, nine out of every 10 dollars invested in a United States mutual fund or E.T.F. was absorbed by Vanguard.
By any measure, these are staggering figures. Vanguard’s assets under management have skyrocketed to $4.2 trillion from $1 trillion seven years ago, according to the company. About $3 trillion of this is invested in passive index-based strategies, with the rest in funds that rely on an active approach to picking stocks and bonds.
More broadly, this deluge of money abandoning higher-price actively managed funds for Vanguard’s plain vanilla cut-rate vehicles has come as an existential shock to a mutual industry that has long been resistant to change.
What is being called the Vanguard effect was felt last month when the indexing giant’s rival, BlackRock, announced that it would revamp its stock-picking operations, promoting instead a process that relies more on computer-driven methodologies.
The effect within Vanguard has been no less profound. For decades, the firm has made the case that cheaper index funds will, over time, outperform more-expensive mutual funds that rely on brainy portfolio managers to pick stocks.
The main advocate of this doctrine was the founder, John C. Bogle, who retired in 1999 but runs a research operation on the Vanguard campus. For years, the firm has relied more on his simple message and the passion of his devotees than on fancy advertising campaigns to spread the word.
Unlike its peers, Vanguard is owned by its funds — and ultimately its investors — so as money rushes in, expenses are persistently reduced, resulting in perpetual savings for the legions of Vanguard clients. They number well over 20 million and include New York Times employees: Vanguard runs the company’s 401(k) retirement plans.
The model has been a powerful one: Since 1976, fees on Vanguard funds have fallen to about 0.12 percent from about 0.70 percent. By comparison, Lipper calculates that the average fee for all mutual funds is currently 1 percent, although it has been coming down rapidly.
“Mr. Bogle used to say, ‘This is not our money,’ and I agree,” said F. William McNabb III, Vanguard’s chief executive, referring to the extraordinary inflows. “For many years, there has been a real move to our way of investing. And it’s more than active versus passive — it’s high cost versus low cost.”
This no-frills approach has come under some strain as cash flowing into Vanguard funds reaches new highs year after year, some people who follow Vanguard closely say. There have been reports of operational snarls, including website outages, longer-than-usual wait times on the phone and misdirected fund transfers.
“All this growth has come at the same time that the company has been cutting costs,” said Daniel P. Wiener, the editor of the Independent Adviser, a newsletter for Vanguard investors, who says he has received many complaints about the current state of customer service at Vanguard. “Most companies when they are growing spend more. Vanguard is trying to spend less. At some point, cutting costs will bite you.”
There is no doubt about Vanguard’s commitment to pinching pennies. In touring the 287-acre campus of pathways, low-slung buildings and a commanding statue of Mr. Bogle, the sensibility is decidedly puritan. . .