September 29, 2010

Vanguard Overtakes Fidelity as Top Manager by Assets

Bogle supporters claim victory for low-cost passive strategy

John Bogle's low-cost evangelism has paid off.

The founder of Vanguard Group has for years preached the advantages of a passively indexed investment strategy, railing against high-cost, active managers that underperform the broad market and new products that fail to act in clients' best interest. His views occasionally put him at odds with his former company, but with news that Vanguard has overtaken Fidelity Investments as the largest asset management company, it appears to have worked.

The Investment Company Institute reported that Vanguard, based in Valley Forge, Pa., had $1.3 trillion in assets under management as of July 31, compared with Fidelity's $1.24 trillion.

"The world has shifted towards bond funds and index funds, both of which speak to Vanguard's strengths," said Russel Kinnel, director of fund research with Morningstar. "Vanguard has a business model that is much more scalable to the present investing environment. Bond and index funds don't have capacity constraints that Fidelity does. Vanguard can hire four or five sub-advisors and tap into their sources of alpha."

Kinnel notes that Vanguard has generally outperformed due to its lower cost pricing structure, which he says allows for a greater margin of error for managers.

"The performance threshold Fidelity must reach is higher than Vanguard simply because there fees and expenses are higher," he says.

Vanguard began operations on May 1, 1975, with 11 mutual funds and approximately $1.8 billion in assets.

According to the company, at the time, the mutual fund industry was small--$46 billion in assets, a modest sum by today's standards--and getting smaller. More cash was flowing out of funds than was coming in. Investors, stung by big losses during the 1973-1974 stock market slump, were wary of putting more money into the market.

Fidelity, owned by the Johnson Family and its employees since 1930, overtook Merrill Lynch & Co. as the largest asset manager in 1988. At the time, the company was enjoying widespread success due in large part to portfolio manager Peter Lynch and the company's flagship Magellan Fund.

Read about changes to Vanguard and Fidelity's 529 plans in AdvisorOne.com.

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