Vanguard raked in almost every dollar that went into U.S. equity funds this year

Most of the money went into low-cost index mutual funds

Dec 18, 2013 @ 12:01 am

By Jason Kephart

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If you bought a U.S. equity fund this year, there's about a 98% chance you invested in a fund managed by the Vanguard Group Inc.

Vanguard, best known for its index funds and emphasis on low-cost investing, received $41.4 billion of net inflows into its U.S equity funds in 2013 through Nov. 30, according to Morningstar Inc. U.S. stock funds not managed by the company founded by John C. Bogle in 1974 took in a net total of about $1.1 billion.

Much of Vanguard's success in attracting investors is thanks to Mr. Bogle's creation — the index fund. Of the $41.4 billion invested in its domestic equity funds this year, about $36 billion went into the firm's U.S. equity index mutual funds, including the $296.4 billion Vanguard Total Stock Market Fund (VITSX), which passed the $244 billion Pimco Total Return Fund (PTTAX) as the world's largest mutual fund last month.

“The story works,” mutual fund industry consultant Geoff Bobroff said. “They've got a confirmed audience that likes the Vanguard approach and low costs.”

Index funds have surged in popularity in the wake of the financial crisis, as more and more investors have become disenchanted with costs and the inability of active managers to outperform consistently.

Still, this year has turned that logic somewhat on its head, Mr. Bobroff said.

“In a low-return environment, low costs matter, but we haven't had a low-return environment,” he said.

In fact, the S&P 500 index is up more than 25% year-to-date through Dec. 16, on pace for its best year since it returned 26.5% bouncing off the financial crisis lows in 2009. Its five-year annualized return now tops 16%, thanks to the magic of time, which has rolled away the carnage of the market's free fall in late 2008 and early 2009.

And with returns like that, fewer investors appear worried about paying 1%, even for a manager who's slightly underperforming.

Indeed, actively managed U.S. stock funds have seen a boost from the market rally and are on pace for their best year of sales since 2005, the last time these funds had net inflows as a group. Though still negative, over the first 11 months of 2013, actively managed U.S. stock funds have had only $10 billion of net outflows, down 92.3% from $130 billion in 2012.

Vanguard has quite a bit of firepower in that department too. The index giant has more than $650 billion in actively managed mutual funds, which is more than Pacific Investment Management Co. manages in total fund assets.

Vanguard's suite of actively managed equity funds, including its $39 billion Vanguard Primcap Fund (VPMCX), has had $5 billion of net inflows for the year through November.

J.P. Morgan Funds, with $10.4 billion of inflows, and MFS Investments, with $6.9 billion, are the only two mutual fund companies to attract more net new money into U.S. equity funds from investors over that time period.

Vanguard's success this year goes beyond just U.S. equity funds, though. Its mutual funds, including international equities and bonds, have had $65 billion of inflows through the first 11 months, and the company is well on its way to winning the annual flows crown for the third straight year.

Perhaps most impressive stat — or scary, depending on your perspective — is that the gap between Vanguard and the rest of the mutual fund world is only growing.

Dimensional Fund Advisors, the second-best -selling mutual fund company, trails Vanguard by $44.3 billion in sales. Last year, Pimco was within $28.8 billion when it finished in second place.

The story is not much different in the exchange-traded-fund market. Vanguard's $51 billion of ETF inflows top BlackRock Inc.'s iShares' $37.7 billion, even though iShares' total ETF assets are almost double that of Vanguard's.

So just how much bigger can Vanguard grow than any other fund company?

The company's market share of mutual funds and ETFs across all asset classes has grown to 17.6%, from 13% in 2007. The last two years, Vanguard has punched above its weight, though, attracting around a quarter of total net inflows. If it keeps growing at that pace, the U.S. Mint may have to replace George Washington with Mr. Bogle on all its quarters.

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