Investors pour into Vanguard
The company's funds got a huge boost after a recommendation earlier this year from Warren Buffett.
The inflow has pushed the mutual-fund giant to almost $3 trillion in assets under management for the first time.
The surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners. Other firms, such as New York behemoth BlackRock (BLK) and Texas-based Dimensional Fund Advisors, are also enjoying an influx of cash.
Vanguard got a huge boost this spring when Warren Buffett gave it a public stamp of approval in March.
The billionaire wrote in his closely watched letter to shareholders of his company, Berkshire Hathaway (BRK.A), that he believed most people would be well-served by following the investing instructions in his will.
Mr. Buffett, 83 years old and with a net worth of $66 billion, wrote that he advised his trustee to "put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. (I suggest Vanguard's.)."
In the five months that followed, investors poured $5.5 billion into the Vanguard fund, or about three times more than during the same period the previous year.
Vanguard, based in Malvern, Pa., credits Mr. Buffett with the surge of money.
Mr. Buffett "mentioned to me that I might be pleasantly surprised by his annual report, and of course I was," said F. William McNabb III, Vanguard's chairman and chief executive, in an interview. He said the company's recent growth shows "the triumph of low-cost investing over all."
In an email to Mr. Buffett, Vanguard's retired founder, John C. "Jack" Bogle, said financial advisers were describing Mr. Bogle as only "the second best salesman at Vanguard."
Mr. Buffett declined to comment.
His recommendation wasn't the only recent milestone for Vanguard. Its Total Stock Market Index (VTSMX) fund is now the biggest mutual fund in the world and also surpassed Pimco in the amount of bond fund assets it manages, according to Morningstar.
"They are the king of the hill," said Michael Rawson, an analyst at Morningstar Inc.
Vanguard's ascent is notable because its plain-vanilla index funds are often derided by more adventurous investors who believe in trying to do better than the overall market. The company is a pioneer in the accelerating shift toward so-called passively managed products like index funds and exchange-traded funds that track baskets of stocks or other assets. These funds typically promise diversification and are relatively inexpensive compared to traditional mutual funds.
It is "a trend that I see continuing on, probably forever," said David Barse, chief executive officer at New York-based Third Avenue Management, which manages $13.5 billion. He said the challenge for active managers, like his firm, is to identify overlooked investments that don't merely track the broad market.
But he acknowledged that is increasingly a tougher sell, particularly to retail investors.
Investors poured a net $336 billion into passively managed stock and bond funds in 2013, handily beating the $53 billion invested in traditional mutual funds of the same type, according to Morningstar. So far this year through July, investors put a net $177 billion into those passive funds, compared with $74 billion in actively managed funds.
Philip Henry, 30, a securities lawyer in Mountain View, Calif., said that in recent months he has moved about $25,000 into Vanguard's index funds from his former 401k provider, the asset manager TIAA-CREF. Mr. Henry said he became convinced that index funds were far superior to actively managed funds after doing research and reading a book by Mr. Bogle. He said cost was a key factor.
"I'm firmly convinced it's the better way to go," Mr. Henry said. "I don't believe fund managers can beat the market."
The average Vanguard U.S. equity index fund has an expense ratio of 0.1 percent versus 0.7 percent for competitors and 1.3 percent for an actively managed stock fund, according to Morningstar.
Traditional stock-fund managers -- old-fashioned stock pickers -- have been the hardest hit in the wave toward passive investment. Through July, passively managed stock funds have seen a net $128.4 billion in investor inflows, compared with $18 billion for traditional stock funds, according to Morningstar.
Bryan Polley, a financial adviser with Allodium Investment Consultants in Minneapolis, with $210 million of assets under management, said he began moving clients into index and exchange-traded stock funds in recent months and away from actively managed funds.
The S&P 500 is in a five-year bull market and is up an additional 8.6 percent this year. "It's been very difficult for active managers to beat the index," Mr. Polley said.
The 2008 financial crisis sparked a general disillusionment among investors about traditional stock managers, and some of that has continued today, say analysts and industry observers.
That general sentiment has helped Vanguard. While the firm's index funds aren't actively run by managers, the company as a whole tends to act like a "doting mother," said Mr. Rawson. "They're telling you what they think you should be doing when a lot of fund companies . . . ask what you want to do and then do it."
Vanguard's ascendance coincides with struggles at one of its top rivals, Pacific Investment Management Co., which has seen outflows for 15 consecutive months. Pimco's flagship fund, the Total Return bond (PTTRX) fund, run by Bill Gross, was for five years the biggest mutual fund in the world, but investors have pulled money amid a stretch of lackluster performance. Pimco's Total Return bond fund now manages $223 billion, compared with $299.4 billion for Vanguard's Total Stock Market Index fund.Pimco's spokeswoman declined to comment.
Mr. McNabb said Vanguard doesn't have any internal growth targets and he hasn't paid attention to the firm's recent milestones. The firm will sometimes take actions that seem counterintuitive to growth, like closing off a popular mutual fund to new investors for a "cooling off" period when it believes investors are only attracted to short-term past performance.
Vanguard isn't the only company benefiting from the wave of money flowing into passive products. BlackRock, the world's largest asset manager, with about $4.6 trillion in assets under management, has seen $53 billion pour into its iShares' ETF business globally this year through Aug. 18, the largest amount of any fund company, according to the company.
BlackRock is the largest ETF provider. A spokeswoman for the company declined to comment. Vanguard, however, the third-largest provider behind State Street (STT) Global Advisors, has seen more investor inflows in the U.S.
—Anupreeta Das contributed to this article.
More from The Wall Street Journal
And WHEN you lose ALL your money blah blue, [boy what a CHEERY name, that is] don't go running around saying you were cheated by wall street, and that it wasn't YOUR fault that you lost your money.
BTW, the article DOES say that "Investors are pouring money into Vanguard Group, the epitome of the hands-off approach to investing, flocking to funds that track market indexes and aren't run by stock pickers or star managers"
You DID read the part in the quote about tracking market INDEXES didn't you?
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