According to news reports, the US mutual fund, The Vanguard Group, has had total inflows of $130.4 billion till date this year. This is the highest for any mutual fund ever. To put this number into perspective, it’s of the same scale as the total size of the assets managed by entire Indian MF business. The previous record was the $129.6 billion that JP Morgan took in in 2008.
The significance of this goes far deeper than the hair’s breadth by which the record has been beaten. JP Morgan is just another Wall Street firm, albeit very large; but Vanguard is unique in the world of MFs. It’s the pioneer and the champion of low-cost index investing. It was founded 37 years ago by John C Bogle, the father of index investing.
Index investing is a type of investment management in which there’s no fund manager who takes decisions. Instead, the fund’s investments replicate an index. But more important is Vanguard’s ownership structure. It is owned by the investors in its funds themselves. Conceptually, this is closer in spirit to co-operative than a for-profit corporation.
Vanguard’s costs of managing its investors money is stunningly low, about 0.2% per annum. This is a fraction of what even others with similar funds charge.
However, the rise of Vanguard is not just about low-cost. If it offered low-cost and poor returns, then there would have been nothing to this story. However, coupled with its low-cost has been the general inability of (expensive) actively-managed funds to consistently beat the market indices and funds based on them.
Does the Vanguard story hold any portends for India? Index investing hasn’t yet arrived in India, but its day might be on its way. Historically, India actively managed funds have beaten the indices comfortably but this margin has been steadily narrowing while costs are actually rising. Perhaps, there’s a Vanguard in our future as well.