"Vanguard vs. Pimco" made headlines last week, with Morningstar data revealing Vanguard's new status as the largest mutual fund - a spot which Pimco had since 2008.
Gross's Pimco Total Return Fund (PTTAX) has shrunk by $37.5 billion since the start of this year, ending last month with $247.9 billion in assets, according to data obtained by Bloomberg and provided by Newport Beach, Calif.-based Pacific Investment Management Co. In comparison, the Vanguard Total Stock Market Index Fund (VTSMX) ended October with $251 billion.
Industry sources note that Vanguard's new lead reflects the rise of passive investing in recent years amid a turbulent economy, fears over spiking interest rates and the possibility that the Federal Reserve would scale back its stimulus. While Pimco Total Return has been pummeled this year by investor redemptions amid a difficult fixed-income landscape, Vanguard's Total Stock Market Index Fund has benefited from the stock market's now five-year-long bull market and the transition to more index-based investing.
"Our cash flow has been strong in 2013 to index funds - Vanguard considers ETFs building blocks," says Vanguard spokesman David Hoffman, noting that active management still represents about 40% of the firm's assets. "It's been our low-cost active and passive approaches that have led to our success. Index funds will continue to attract investor assets as one of the greatest financial innovations of the past 40 years," Hoffman contends.
Talk of Pimco's comparative faltering, however, may be overstated. The success of active vs. passive is cyclical. Passive always gathers money after a long bullish run in the market. Look at the 1995 to 1999 period when passive strategies grew, or the 2000 to 2002 period when the market was crushed and passive bled assets. Between 2003 and 2007 passive grew once again, and in 2008 the market got smashed and passive assets fled. Since 2009, after one of the worst financial crisis in our history, passive has grown.
And what will happen when we have a market correction? Passive assets will flee like they have in the past.
The bottom line is that stocks are "in" right now and bonds are "out," Morningstar's Ben Johnson says. The fact that the biggest stock fund just got a bit bigger than the biggest bond fund is an anecdote amid a swath of research that speaks to the "great rotation" out of bonds and into stocks.