Tuesday, January 6, 2015

The Move to Smarter Investing in 2014: Vanguard Gains Market Share

The Move to Smarter Investing in 2014:  Vanguard Gains Market Share

In about four months, the Investment Company Institute will report that the average mutual fund fee has fallen by a few basis points.  The ICI’s press release will make it appear that the mutual fund industry has been responding to its investors.  Actually, it’s the other way around.  Mutual fund investors have been responding to the poor relative performance of active managers and moving their money to index funds.  The early evidence comes from Vanguard, which reported $216 billion in new inflows in 2014, including a record $31 billion in December.[1]  It’s been ten years since someone other than Vanguard attracted the largest amount of mutual fund cash flows into their complex.

We shouldn’t make too much of this announcement.  Active managers continue to oversee the vast majority of institutional and retail assets.  In addition, hedge fund and other alternative managers have had continuing success in drawing large amounts of capital.  I’m sure their achievements will be trumpeted in the coming weeks.

Moreover, not all the capital flowing into Vanguard is going into index products, because Vanguard offers a lot more than passive funds and ETFs.  Typically, Vanguard represents the lowest cost provider of most investment products, irrespective of style, strategy, or approach.  Investors are slowly waking up to the fact that expenses matter.

Why isn’t the rest of money management following in Vanguard’s footsteps?  To be sure, Blackrock, Dimensional Fund Advisors, and a few others offer similarly effective products.  However, Vanguard has one advantage that the rest of the money management industry can’t follow.  Vanguard is a mutually owned entity.  In other words, any profits belong to its clients.  I’m not sure that any other money management firm is prepared to adopt that model.  They’d probably claim that they wouldn’t be able to attract and retain the professionals needed to manage their companies.  They may be right.  However, Vanguard has managed to hire 14,000 people and attract $3.1 trillion in assets, so their model seems to work, at least for them and their investors.

Active managers will be arguing that their time has come.  Since they’ve underperformed for a number of years, they probably will enjoy a moment in the sun at some point.  I am certain of one thing.  Once their time comes, it won’t last for long.

[1] http://www.wsj.com/articles/vanguard-sets-record-funds-inflow-1420430643

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