Vanguard Group distinguished itself this year despite — or perhaps because of — difficult market conditions.
The fund giant significantly increased its assets under management, unveiled new products and expanded distribution internationally, according to William McNabb, its chairman and chief executive. And it put some distance between itself and its archrival Fidelity Investments.
"This downturn was devastating on a lot of fronts, but we were pretty well positioned and were able to anticipate at least some of it," McNabb, who became Vanguard's president in 2008, said in an interview last week. "We found ourselves in a good position to deal with the bumpy environment."
Vanguard's plan to stay on top in 2010 centers on continuing to bring new products to the market. Last week the Malvern, Pa., company announced plans to expand its menu of actively managed products by launching a small-cap value fund and a midcap value fund. McNabb said the funds were filed with the Securities and Exchange Commission, and he expects them to be available in "February or maybe March." "It was a hole in our lineup, and we think this was a good opportunity to fill that hole," he said. "We really continue undaunted. We are always looking to add things where we perceive an opportunity, regardless of market conditions."
Vanguard plans to roll out more exchange-traded funds in 2010, McNabb said. Exchange-traded funds accounted for $25 billion of its $93 billion in inflows through Nov. 30. "ETFs are not really a separate thing for us," McNabb said. "We see this as another way to index and … an opportunity to take the low-cost diversified story to another audience. ETFs are one of the big trends in the investment business right now and a story that is finding wider and wider appeal."
Vanguard plans further global distribution expansion, McNabb said. Currently less than 10% of its assets are held outside of the United States. McNabb said he will not set a goal for growth of its international business, but the company plans to come out with more international products to add assets, possibly including new ETFs in Australia.
Vanguard has also developed some of the "less sexy" areas of its business connected to asset management, including its servicing side and its Web site, McNabb said. "The Web site is not so hidden, considering we have hundreds of thousands of logons daily, but we wanted to make a huge investment in it this year so we can continue to generate that kind of traffic next year."
McNabb, who in November became only the third chairman in Vanguard's 35-year history, said that in addition to introducing new exchange-traded funds and a series of bond funds in the past year, it opened an office in the United Kingdom and added a series of international funds.
"I think one lesson that has been reinforced during the crisis is that boring works," he said. "It doesn't generate a lot of chatter at a cocktail party, but we are profiting from those principles" — low-cost diversification and a balanced approach — "in spite of the environment."
Vanguard has increased its assets under management 30%, to $1.3 trillion, in the past year, and analysts expect further growth. Geoffrey Bobroff of Bobroff Consulting in East Greenwich, R.I., said that traditionally after a decade in which equity investing slumps, the sector will rally, but if Vanguard continues to invest in its actively managed products and its 401(k) business, it can profit even in a downturn.
Vanguard attracted new assets of $93 billion through November, making 2009 its second-strongest year of inflows. In 2007 it brought in $104 billion of assets. According to Morningstar Inc., this is the third consecutive year that Vanguard has led the fund industry in net inflows.
With the exception of money market funds, Vanguard has generated positive flows into most of its sectors, but specifically its fixed-income products. Through Nov. 30, Vanguard had attracted $40 billion to its equity funds, $1.7 billion to its balanced funds and $73 billion to its fixed-income funds, and had $21 billion of outflows from its money market funds.
"It has been a record year for fixed income for the entire industry, and we have benefited because we have a great bond fund lineup," McNabb said. "The equity side has done well, but fixed is still leading the way for us."
Vanguard's strong inflows this year stand out next to Fidelity's, analysts said. According to Morningstar, for five months in a row and for the eighth time this year, in November, Vanguard's combined open-end and ETF monthly flows exceeded $10 billion. Fidelity had net outflows in October and November.
McNabb said a larger percentage of Fidelity's assets are heaped in money market funds. In the first 11 months of this year, Vanguard had $21 billion of outflows from its money funds.
"We are seeing money leaving money funds and moving into our bond funds," McNabb said. "For us, we have benefited by having a diversified set of offerings and a diversified client base."
Vanguard's index-based approach, low-cost model and its decision to offer ETFs give it an edge over Fidelity, Bobroff said. Fidelity is one of the few large fund companies that have avoided ETFs, he said.
"The decade we are closing was the third worst in the history of the markets in terms of equity investing," Bobroff said. "So indexing was the chosen path for more investors. Fidelity has some index funds, but they have been less inclined to promote these products."
"So much will depend on the psyche of investors in the year ahead," Bobroff said. "A lot is still up in the air, but Vanguard is in a unique position to continue to generate assets."