Vanguard, a fund created in 1975, has last week hit $7 trillion in assets under management, making it the second-biggest in the world.
The success of the fund manager is unquestionable. Even in a year like 2020, in the midst of the pandemic, Vanguard brought in close to $1 trillion in value to their clients. Return on investment has averaged between 10-15 per cent per year, and while past performance is never a sure guide to the future, Vanguard has maintained solid returns from most of its funds for many years.
Vanguard was one of the first funds to specialise in indexes, and later in exchange-traded funds. This exceptionally conservative approach has served Vanguard well. Indexing is a passive investment strategy that seeks to replicate, rather than beat, the performance of some benchmark index such as the S&P 500 or Nasdaq 100.
But Vanguard will cherry pick assets from an index, choosing the ones they expect to drive performance. To keep costs low, Vanguard often This also keeps costs under control.
And, as it has expanded over the years, Vanguard offers funds that track a wide variety of market indexes, large and small, some in niche markets.
Vanguard also has a fairly unique structure in terms of investment management companies. The company is owned by its funds. The company’s different funds are then owned by the shareholders. Thus, the shareholders are the true owners of Vanguard. The company has no outside investors other than its shareholders.
Vanguard was created to make a radical change from the traditional mutual fund corporate structure, in which an external management company managed fund affairs for profit. “Our challenge at the time,” founder John Bogle explained in an interview, “was to build, out of the ashes of major corporate conflict, a new and better way of running a mutual fund complex. ‘The Vanguard Experiment’ was designed to prove that mutual funds could operate independently, and do so in a manner that would directly benefit their shareholders.”
This structure, which Vanguard invented, allows the company to keep the “load,” meaning the cost to investors, at relatively low levels, and to reduce its charges over the years. According to the company, In the past seven years alone, lower expense ratios saved index investors over $725 million. The average expense ratio across Vanguard’s index mutual funds and ETFs is 73 per cent less than the industry average.