Vanguard Group's top executive apologizes for not telling a more exciting story.
But the story of an investment manager that had $96 billion of inflows in a year highlighted by tumultuous market conditions, credit crisis, divestitures, and writedowns would be thrilling for most companies.
"Our measurement periods for success are years and decades, not weeks and months," said John J. Brennan, Vanguard's chairman and chief executive officer. "Institutions, advisers, and individuals come here because of our performance, our service, our education, and our cost, and they stay with us for a long time. It is a little bit of a dull story, but it works well for us."
Dull certainly would have been preferable for the many companies struggling with outflows and writedowns. Vanguard, in contrast, "dodged a bullet" and avoided the credit crisis, Mr. Brennan said; the company's money market and fixed-income funds did not have any exposure to subprime or structured investment vehicles.
"By stressing consistency and avoiding fads, we have been able to differentiate ourselves from the headlines and found growth in a difficult environment," he said. "We have always focused on our long-term strategy rather than maximizing short-term gains," and last year "we were fortunate because of that."
This approach has enabled the Malvern, Pa., company to exceed $1.4 trillion in assets under management through November. In the process, it has expanded its product mix beyond domestic mutual funds to include exchange-traded funds, U.S. collective trusts, Australian separately managed accounts, and funds based in Dublin.
Mr. Brennan, who became Vanguard's top executive in 1999, when its founder, John Bogle, retired, said its disciplined approach meant "slow and steady" expansion last year, when it added to its exchange-traded fund lineup and lowered expenses. (Since Mr. Brennan took the helm its fund expenses have dropped 70%.)
"We have stayed disciplined, but that doesn't mean we have been perfect by any means," he said. "We just hope that we can continue to avoid the pitfalls that periodically hit the marketplace. We want to find a way to do well, avoid the big mistakes, and build a good track record for our customers."
Analysts said Vanguard has avoided the problems that have harmed its competitors because, as a privately owned company, it does not have to chase fads to deliver quarterly dividends.
"The three largest fund companies, American Funds, Fidelity Investments, and Vanguard, are private. That isn't a coincidence," said Burton Greenwald, a Philadelphia analyst with B.J. Greenwald Associates. "These companies can deliver results and focus long-term, because no one is breathing down their necks."
American Funds, Fidelity, and Vanguard held 37.5% of all U.S. fund assets as of Sept. 30, versus 30% at the end of 1997, according to Financial Research Corp. of Boston. In the first nine months of last year they took in nearly 33 cents of every dollar going into the 50 biggest fund companies.
Mr. Brennan said that Vanguard has no plans to make any large acquisitions this year to take advantage of competitors struggling through the credit crisis. However, it does expect to add exchange-traded funds and find ways to create products for individuals entering retirement. It introduced its first ETFs in 2001 and now has 37 with $41 billion of assets. Last year it introduced 10 such funds.
The ETF market has expanded exponentially in the past couple years, he said, but Vanguard has never wanted to be a niche player in any of its business lines.
Vanguard will expand its ETF lineup further this year, Mr. Brennan said; it probably will not add another 10 funds, but it will consider rolling out more products. "We won't be a proliferator of fringe concepts. Our funds will build the basis for a portfolio."
His company is the third largest in the ETF market, with a 7% share as of Sept. 30, according to Barclays Global Investors. "It is amazing when you see how many new companies have filed ETFs," Mr. Brennan said. "We are not about the concept du jour. We have built products that will endure in perpetuity, and a lot of these new players won't be durable."
Vanguard is preparing to introduce a series of managed payout funds. The funds, expected to become available early this year, are designed to provide regular payouts to help retirees meet expenses without exhausting capital.
The funds are expected to complement Vanguard's current products that are designed to help investors move from asset accumulation to distribution.
"This is a product that we weren't thinking about 10 years or 20 years ago, but we know that customers are going to need 10 years from now," he said. "Customers want a simplified solution from a trusted provider that can replace their income in retirement. This is the next phase in providing solutions to our clients."
Even after posting strong inflows last year, Vanguard will not set growth targets for this year, Mr. Brennan said. "Growth objectives can lead to making short-term decisions that may work in the short term but don't work in the long term. If we said we needed X or Y in cash flow and Z in assets, that would be a distraction."
For the time being Vanguard will look to extend its market share, he said, since unlike many competitors, it is still a company that some consumers do not know about. It plans to continue to increase its marketing and advertising — it recently launched an ad campaign to run during television shows such as "Grey's Anatomy."
Vanguard continues to seek the same long-term customers it did when it launched in 1975, Mr. Brennan said. "If people want fads, then don't come here," he said. "If they want expedient behavior, then don't come here."
Vanguard's goal remains the same, Mr. Brennan said.
"We want to develop terribly loyal clients that will grow with us and stay with us and tell two friends along the way," he said. "That is the most effective marketing."
