202 / 772
8
Vanguard is the most dominant fund company in
history. It already manages the largest stock mutual
fund in the world; it soon will run the largest bond
mutual fund; and despite being a latecomer to the
business of exchange-traded funds, it places a
close second to iShares for new U.S.
ETF
sales over
the past
12
months.
No fund company has ever enjoyed anything like
Vanguard’s
2014
net inflows of
$219
billion into
U.S. mutual funds and
ETF
s. Until American Funds
managed the feat in
2003
, no firm had ever even
cracked the
$50
billion mark.
Another way of putting the matter: Last year,
Vanguard netted more assets than did all the leading
fund companies combined during the New Era of
1995
–
2000
.
The seventh consecutive year of industry-leading
sales has pushed Vanguard to record market share.
Whereas previous leaders commanded between
10%
and
15%
of total industry assets, Vanguard
ended
2014
at
19%
. It almost certainly will be above
20%
by the time
2015
concludes.
The Implications
This raises two questions. What does the company’s
record-breaking success mean for Vanguard
investors? Also, what does it mean for the financial
markets overall?
The first answer seems straightforward: not much.
Previous fund sales leaders almost immediately
struck icebergs. Fidelity’s domestic-stock funds
ceased being extraordinary; Putnam and Janus sunk
when growth stocks fell; and American Funds,
booming because of the belief that it would beat bear
markets, promptly failed
2008
’s test. But Vanguard
is a different animal. Unlike those other firms,
Vanguard has not implicitly promised to outperform
the benchmarks. To maintain its brand and satisfy
customers, Vanguard need only match its benchmarks
and avoid unpleasant surprises.
That should not be a difficult task, as Vanguard was
built for volume. Not only are most of its monies
passively run, but those indexes are also exclusively
cap-weighted, rather than tilted to capture a “stra-
tegic beta.” Consequently, Vanguard’s passive funds
need not make trades to realign as the markets
move. In addition, most Vanguard assets are in large,
liquid securities, and even its active funds follow
a mainstream, low-turnover approach.
Some have argued that index investing was a major
factor in the stock market declines of
2000
–
02
and
2008
, with investor inflows initially pushing up
stock prices, then outflows exacerbating the declines.
However, while it is perhaps possible to trace a
hindsight connection between the popularity of index
What Happens When Vanguard
Owns Everything?
Morningstar Research
|
John Rekenthaler
Annual Net Sales ($ Billion) U.S. Mutual Funds and ETFs
p
Fidelity Investments
p
Vanguard
p
Other
p
American Funds
250
200
150
100
50
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Estimated Net Flow
($ Billion)
Market Share U.S. Mutual Funds and ETFs
Source: Morningstar
p
Fidelity Investments
p
Vanguard
p
American Funds
20
16
12
8
4
93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
Percentage of mutual fund
assets held by company with
largest assets