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. Vanguard this week is
expected to top $3 trillion in assets, the latest in a series of milestones for
the mutual-fund giant. The company got help from two investing legends: Warren
Buffett and Bill Gross.
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.
Vanguard got a huge boost this spring when Warren
Buffett gave it a public stamp of approval in March. Mr. Buffett, 83 years old and with a net worth
of $66 billion, wrote that he advised his trustee to put 10% of the cash in
short-term government bonds and 90% in a very low-cost S&P 500 index fund (suggested
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.
His recommendation wasn't the only recent milestone for
Vanguard. Its Total Stock Market Index 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.
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.
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.
The average Vanguard U.S. equity index fund has an expense
ratio of 0.1% versus 0.7% for competitors and 1.3% 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.
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.”
Vanguard isn't the only company benefiting from the wave of
money flowing into passive products. Vanguard, however, the third-largest
provider behind State Street Global Advisors, has seen more investor
inflows in the U.S.
Click
here to access the full article on The Wall Street Journal.