10/8/2010 6:00 PM ET|
Why Vanguard is beating Fidelity
The stable of low-cost index funds now controls more assets than the home of the once-giant Magellan fund. Are investors giving up on skilled stock pickers for good?
John Bogle has preached the virtues of low-cost indexing since the 1970s, arguing that it doesn't make sense for investors to pay higher fees for big-name money managers at companies such as Fidelity Investments. His advocacy of investors' interests earned him the nickname "St. Jack," and his persistence paid off this year when The Vanguard Group unseated Fidelity as the largest U.S. mutual fund company by assets, a distinction Fidelity had held for more than two decades.
Bogle, 81, founded Vanguard in 1975 with the idea that most professionals can't beat the market, so it's not worth paying them to try. Ned Johnson, 80, took over Fidelity two years later and built the family business by betting on star stock pickers such as Peter Lynch.
Index funds mimic the benchmarks they are designed to track, while active managers pick securities based on research. In the 10 years ended Aug. 31, domestic equity index funds posted an annual loss of 2%, Morningstar data show, while actively run stock funds returned 0.9% a year. Many active managers, of course, returned less than the average.
Fidelity Magellan (FMAGX) run by prominent managers including Johnson, Lynch, and Jeffrey Vinik, was once the world's largest mutual fund, peaking at $110 billion in August 2000. It now controls $17.7 billion in assets and is substantially smaller than the Vanguard 500 Index Investor (VFINX).
Vanguard has benefited as the stock market floundered, says Michael Miller, a managing director at the company. "People pay more attention to costs when returns are less," he says. Fidelity spokesman Vincent Loporchio says his company's "focus has never been on being the largest company but on providing the best products and services for our customers."
"It is possible investing has changed for good," says Jack Ablin, the chief investment officer at Harris Private Bank, which manages $55 billion. "People don't want to rely on stock pickers who have not earned their keep."
Stock index funds charge an average of 29 cents per $100 invested, compared with 95 cents for actively managed funds, according to data from research company Lipper.
Vanguard snatched the No. 1 ranking from Fidelity in March and has maintained it. Vanguard had $1.31 trillion in fund assets as of July 31, compared with $1.24 trillion for its main rival, according to the most recent data from the Investment Company Institute, a trade group. Fidelity has topped the list at the end of every year since 1988, when the company overtook Merrill Lynch.
In the 10 years ended Dec. 31, Vanguard's stock and bond funds added $440 billion in new investments, compared with $101 billion for Fidelity, Morningstar estimates. This year through August, Vanguard took in $49 billion, while Fidelity had withdrawals of $2.8 billion. Almost 80% of the money flowing to Vanguard's stock and bond funds this year went to indexing, according to Morningstar.
The tally includes stock, bond and money market funds. The figures do not count exchange-traded funds, a variation of index funds whose prices change as they trade through the day, like stocks. Vanguard had $113 billion in ETF assets at the end of August, according to State Street. Fidelity has largely ignored that business. Vanguard has also benefited from the popularity of its bond funds, which pulled in $134 billion from Jan. 1, 2008, through Aug. 31, 2010, a period in which Fidelity's attracted $33 billion.
Bogle has long criticized the financial industry for its supposed excesses, says Nancy Koehn, a professor at Harvard Business School. "The world has changed profoundly," she says, "and Vanguard is sitting right where the market has arrived."
This article was reported by Charles Stein for Bloomberg Businessweek.
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