Investors pour into Vanguard

The company's funds got a huge boost after a recommendation earlier this year from Warren Buffett.

By MSN Money Partner Aug 21, 2014 12:57PM
Credit: © NetPhotos/Alamy

Caption: Vanguard websiteBy Kirsten Grind, The Wall Street Journal

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.

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

Aug 21, 2014 2:08PM
Everyone doing this watched "Frontline" the other night and the show was about the state of retirement and 401k's  in the US and how fee's placed on mutual funds are ripping us off and index funds are the way to go with much lower fee's if any! 
Aug 21, 2014 2:21PM
Vanguard offers some fund details that other fund families do not which makes planning and asset allocation a little easier. They also have fees and expenses far lower than the average fund. I've been with them for over 30 years and 5 recessions; heard all the gloom and doom before - not buying it.   
Aug 21, 2014 2:23PM
What happened to the correction?  You know, the one that was supposed to hammer people like me to ruins?  Look, I'm not naive enough to believe that this market will go straight up, but I'm also not naive enough to believe that this market will tank to depression levels.  If you've got a little nerve, coupled with a lot of patience, the market can be a godsend.  It's not gambling when you're betting on the future of America and capitalism.  If you believe the best days of America are behind us and capitalism is dead, then how do you even get out of bed?  Who wants to wallow in misery every damn day?
Aug 21, 2014 2:14PM
I've been putting a bit of money away monthly in Vanguard (funds/percentages varied as I got older) for almost 30 years. IMHO and based on my current situation, "very" comfortable retirement ,Dollar averaging and compounding in a slow but disciplined approach(low cost, no front loaded funds) is the way to go.  "IF" a person really knows market and stays on top of individual stock investing then more money to be made, but that's a big "IF". 
Aug 21, 2014 2:12PM
This is good news and the people at edward jones should take note.  Nobody needs to pay rediculous 5.75% front end loads and then high expense ratios and then a AUM% on top of that.  Don't listen to the people whining about market correlation and not enough people keeping the market efficient.  There will always be an equilibrium.
Aug 21, 2014 2:32PM
Ahh...... the sounds of the Wall Street toilet flushing in the backgound.
Aug 21, 2014 4:04PM
After nearly 25 years getting calls from my brokers only when they needed a commission, I started doing all my research and trading on my own. My stocks have tripled in last 6 years and my income has done the same. I have a dozen stocks that I watch practically daily. This is not the way for people who do not have time or patience to do it.
Aug 21, 2014 9:00PM
I'd hardly call $5 billion into the Vanguard funds "POURING" when they already manage $3 trillion.  Besides, Buffet is 25 years late on that tidbit of advice.
Aug 22, 2014 11:01AM
As always Warren gives good advice. Nearly all investors would be better off in an index fund. Simply make you initial investment and add to it monthly. 

BTW, not all Vanguard funds are indexed. I have a large portion of my assets in an actively managed Vanguard fund due to its low fee.  I also own stock, and I have two actively managed funds. 

It is true that "on average" the index funds do better than actively managed fund but the difference is perhaps a few basis points. In general, this difference is due to the low fees for the index funds.  But for those who can take the time to do their research, there are actively managed funds that have had excellent performance. The risk in trying to find them is you might get in when their performance tanks. 

The bottom line is just buy an index and save yourself a lot of worry. Then you won't be here posting gibberish about the end of the world.

Yuk yuk!
Aug 21, 2014 4:21PM
He liked the passive strategy so much, that he moved a whopping 25,000 into it!
Aug 21, 2014 2:07PM
The future is unclear and the end is always near.
Aug 21, 2014 6:25PM
index investing has any number of positives, but people still need to be vigilant. i have used indices for some time, partcularly in those areas that i am less familiar with. the mid cap and small cap indices are two examples. only a handful of small and mid cap mutual funds outperform the indices. i would point, however, that vanguard's website is among the worst in the business. and, there people are certainly not investing giants. a friend of mine insisted on using vanguard for his children's trusts and i would absolutely switch to fidelity or schwab if he would allow it.
Aug 26, 2014 2:16PM
Some things to keep in mind here:

1) Without active trading in the markets, indexing cannot work. So, like all other strategies, if everyone is doing it, it is doomed. As an indexer, I hope the strategy decreases in popularity. So should you.
2) The success of Vanguard is only partially due to indexing. Every mutual fund family indexes. Vanguard's success is due to the fact that they are actually on the side of the investor client. Case in point: When one of my balances rises to the point where I am eligible for their lower cost "Admiral" class, Vanguard actually informs me that I can switch from "Investor" class and save money due to the lower expense ratio. Can you imagine your phone company voluntarily informing you that they have a plan that can lower your costs? Again, Vanguard is fair, transparent, and services clients like no other fund house. They are the gold standard.
3) PIMCO Total Return going out of favor has as much to do with their publicized boardroom battles as their performance. No one feels comfortable investing with people who are spending energy on internal ego battles. That said, is now the time to buy PIMCO Total Return?
Aug 23, 2014 12:54AM
He recommended this 20 years ago, what's taken people so long ??
Aug 21, 2014 4:53PM

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?


Aug 21, 2014 4:03PM
I can;t dance like Mick Jagger and i know I can't invest in single stocks like Warren I listen to him about investment advice .....he has said that putting money into index funds was the way to go years I own the Vanguard sp500 fund and 200 shares of Berkshire-Hathaway B ...just so i can go to the annual meeting and learn something from Munger and Buffet. I do have some pimco bond fund also....about 10% of my porfolio....
Aug 21, 2014 3:22PM
I've put around 85% of my portfolio in index funds and use the other 15% to buy individual stocks.  I may not beat the index every year, but it is more fun than watching my index funds.  My individual stock portfolio has grown to near $500k and in 2014 so far I have beaten my index funds by over 100%.   If you have a long time horizon and can watch your individual stocks daily I really think you can beat the indexes because you are managing a lot less money than an active fund manager and you can make instant sell and buy decisions on your own.  You don't have to worry about fund shareholder redemption's, etc.  You aren't as diversifed as an index fund, but you already know that going in so you can be prepared for that market risk. 
Aug 22, 2014 10:25AM
Nothing out of the ordinary this morning folks....The Fed did not  say anything that we were not expecting and of course these scumbags started to do their thing soon after. Not a big shocker after the last few days, manipulators have been not too happy to say the least so they will try to make up for it today...Be cautious the rest of the day, markets on a downward bias thanks to these dirt bags. More a bit later.
Aug 22, 2014 7:43AM
A MAFIA boss just told us to steer clear of the markets because they are corrupt. Do you know why no one is listening to him? Because EVERYONE on Wall Street is corrupt. And touches YOUR money more often than you do or can when the shift hits the fan.
Aug 21, 2014 1:38PM
That's herd mentality and a really bad omen for the markets!
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