What our US analysts say about Vanguard
Vanguard has evolved from the upstart firm that Jack Bogle founded more than three decades ago, but it has maintained the investor-centric ethos that has made it unique. It's now an industry titan with more than $1 trillion under management and 12,000 employees. It's less shy about marketing, trying to gain a foothold in the financial advisor market, and it offers dozens of funds, including sector index funds and ETFs, that sometimes seem at odds with its tradition of simple, diversified, long-term investing. Some, including Morningstar, have asked if Vanguard is straying from the idealistic roots planted by its founder. A look at Vanguard's history, though, shows that Bogle himself wasn't afraid to tip sacred cows. At one time Vanguard didn't advertise, didn't worry about being a technology leader, didn't actively manage equities in-house, and didn't offer custom advice. The family started doing all those things in the 1990s at Bogle's instigation, according to Robert Slater's book, John Bogle and the Vanguard Experiment.
Most of what is good about Vanguard's culture stems from its unusual corporate structure. Unlike most other fund companies, whose funds are technically owned by shareholders but are practically controlled by management companies, Vanguard investors own the funds, which own the management company. This mutual ownership structure allows Vanguard to run its funds at cost and for the benefit of shareholders. That helps keep costs low and alleviate the conflict the most other fund families face: Whom do you serve first, the management company or fund shareholders?
Vanguard favors fund owners in a number of ways. Its shareholder communications are written clearly in plain English and preach the virtues of simplicity, low costs, diversification, and keeping a long-term view. The family advertises more now but doesn't tout individual fund performance. Vanguard's fund lineup has grown in recent years, but the family has avoided investment fads. With the exception of its sector index funds, most of its new funds in recent years have been staid: target-retirement funds and diversified equity offerings that filled lineup holes, such as Vanguard Mid-Cap Value and Vanguard Mid-Cap Growth. The firm has branched out into more esoteric disciplines, such as market-neutral strategies and endowmentlike investing at the new Managed Payout funds, but it has been careful to guard against the misuse of those funds by unsophisticated investors by setting high minimum investments or, in the case of the Vanguard Market Neutral Fund, reserving them for institutional clients. The firm also has protected long-term shareholders from frequent trading by enforcing trading limits and imposing redemption fees, higher investment minimums, and closures on hot funds. The same tools have helped manage asset growth.
Vanguard, however, isn't headquartered in nirvana. It's in Malvern, Pennsylvania, and has its share of earthly concerns. As the family continues to evolve and explore new markets, it may risk compromising the principles that have gotten it where it is today. For example, Vanguard is using its exchange-traded fund lineup as a way to get business from financial advisors. But Vanguard, which has never hesitated to tell investors how their conventional funds should be used, takes a hands-off approach with its ETF clientele. It's agnostic about how financial advisors employ ETFs. Indeed, Vanguard's ETF salesforce is more apt to say "the advisor is my client, not the advisors' clients." This is disquieting coming from a firm that made its name by focusing on the needs of individual investors, and it's worth monitoring. Vanguard, however, still deserves investors' confidence because of its long record of doing the right thing.
