Techies have Apple, java lovers have Starbucks and investors increasingly appear to have Vanguard. The fund giant has captured enough of the brand, and asset flows, to make competitors green with envy.
In a preliminary review of 2016 asset flows data, Morningstar found that Vanguard had more net inflows globally than the rest of the fund industry combined.
Worldwide flows into Vanguard amounted to net $289 billion, while global funds excluding Vanguard took in $244 billion.
According to Morningstar analysts, investors are flocking to Vanguard because of low costs. Morningstar research has shown that fees are one of the best predictors of good long-term performance.
In particular, a new report from the Chicago-based research firm found that the lowest-cost U.S. equity funds succeeded three times as often as the highest-cost funds, with expense ratios consistently showing predictive power.
And of course, there’s the ongoing issues with active managers:
“Drilling deeper reveals that Vanguard’s success tells a grim story about the predicament of the actively managed fund industry,” Ali Masarwah wrote in a companion piece. “In 2016, actively managed funds posted outflows of $92.3 billion, while index funds brought in $625.2 billion. The advent of passive funds has been evident for years, but it was by no means clear that such an avalanche would hit the active fund industry. In 2015, inflows into passive funds amounted to $571 billion, while active funds took in $285 billion. But from 2012 through 2014, active fund inflows easily outpaced those of index funds.”
While the magnitude of index funds’ surge was not predictable, Masarwah added, the reasons for their success are clear: “low fees are one of the best predictors of good long-term performance. Moreover, costs can be predicted, while investment results cannot. Investors have caught on.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
