Wednesday, September 29, 2010

Vanguard Ends Fidelity's Two Decade Reign as Largest Fund Family (by Assets)

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The go go days of the 1990s was the heyday for growth oriented stock picking fund families like Fidelity.  Their star manager system - led by legendary Peter Lynch - and huge funds (Lynch's Fidelity Magellan was once the largest in the country) made them the most prominent fund family in America.  But the past decade has not been so kind as "close your eyes, throw a dart, long only is the way to go, and stocks just go up almost every year in a magical way" investing of 1983 to 1999 came to abrupt end in 2000.   [Feb 5, 2009: Mutual Funds Have Tough Decade]   While still a dominant player, the mostly passive index folks at Vanguard (i.e. we cannot beat the market, so we will best try to replicate it) have now taken the mantle as largest fund manager in America after a two decade reign.  With many (human) stock pickers now throwing up their hands as the complexion of the stock market changes from humans to computers, correlations skyrocket, and some 50% of the trading has morphed to ETFs rather than individual stocks - it will be very interesting to see what happens in the decade ahead.

Via Bloomberg:

  • ... this year when Vanguard Group Inc. unseated Fidelity as the largest U.S. mutual-fund company by assets, a distinction the Boston firm had held for more than two decades.  Vanguard had $1.31 trillion in fund assets as of July 31, compared with $1.24 trillion for its main rival.
  • A decade bookended by bear markets has sapped U.S. investors’ faith in the ability of money managers to protect them from losses, spurring a rush into cheaper index funds pioneered by Vanguard. Bogle, 81, founded the Valley Forge, Pennsylvania-based firm in 1975 on the idea that most professionals can’t beat the market, so it’s not worth paying them to try. Edward “Ned” Johnson, 80, took over Fidelity two years later and built the family business by betting on star stock pickers such as Peter Lynch.
  • Index funds mimic the makeup of the market benchmarks they are designed to track, while active managers pick securities based on research.  Fidelity Magellan Fund, run by a prominent list of managers including Johnson, Lynch and Jeffrey Vinik, produced middle-of- the-pack returns in the past decade. Once the world’s largest mutual fund, Magellan is now one-fourth the size of the $87 billion Vanguard 500 Index Fund.
  • Vanguard has benefited as the stock market foundered, said Michael Miller, a managing director at the firm. The market in 2009 came through its first full decade of losses since the 1930s, and U.S. bond yields are near record lows this year.
  • “It is possible investing has changed for good,” he said. “People don’t want to rely on stock pickers who have not earned their keep,” and active managers will have to “demonstrate that they have an edge that is worth the management fee they charge.”

Now for the ironic part... despite lower fees in index funds, and the often repeated mantra that active management cannot beat passive indexing, index funds actually have lagged (in aggregate) the past decade.
  • In the 10 years ended Aug. 31, actively run domestic stock funds returned 0.9% a year compared with an annual loss of 2% for index funds.

Specific to this story, the same holds true in Vanguard v Fidelity.... again despite Vanguard's lower costs.   But perception is everything in life.
  • Fidelity’s equity funds returned an average of 2.1% a year versus 1.2% for Vanguard’s, according to Lipper.
My first thought for this was the way human psychology workers - investors tend to (a) performance chase and (b) sell at the worst times.... i.e. March 2009.  Hence their results in actively managed funds would actually lag someone who just bought and closed their eyes for 5-10-20 years.  But on second thought, one would think the same human psychology would hit those who invest in index funds.... unless the type of investors in the 2 groups are different.   Perhaps those in index funds are more of the "buy it and forget it" types, who hence do not sell at the worse times - whereas those picking individual managers are more actively watching things and hence prone to the issues of buying at the top, and selling at the bottom.

  • Investors took a net $301 billion out of actively run equity funds in the U.S. from the start of 2008 through August, Morningstar estimates, while stock-index funds attracted $113 billion.

Or maybe Vanguard is just a much better marketer ;) [plus offers more in the way of bond funds while the retail crowd is buying as they abandon the lure of equities]

  • Fidelity doesn’t have the marketing zing Pimco can bring with Bill Gross,” Bonnanzio said.
  • Indexing drew Kent Grealish, a financial adviser in San Bruno, California, outside San Francisco, to Vanguard in 2004. Grealish said he spent most of his career as a believer in stock selection. Over time, “I changed my attitude about my ability and the ability of others to beat the market,” he said in a telephone interview.

Random factoid:  Can you guess who was the largest fund family before Fidelity in 1988?

Answer:  Merrill Lynch. 


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