Vanguard has roughly $2.4 trillion in assets under management and roughly half of those are in indexed products. "Can Vanguard become too big?" asks writer Allan Roth in this week's issue of Money Management Executive.
What implication will the firm's dominance have on the industry and on the way mutual fund and ETF providers operate?
Who really knows. But with Vanguard's rising market share, here are clear takeaways for mutual fund and ETF providers as they think about how to handle their marketing, distribution and technology in the years ahead.
1. Consolidation continues. The percentage of mutual fund assets managed by the top 10 firms was 44% in 2000 and has risen to 53% in 2013, according to the Investment Company Institute. Many in the industry point to the role of technology in driving this consolidation, accelerating a movement toward indexing versus active management. The economies of scale earned by the likes of Vanguard and Blackrock also shows the ability of such firms to compress fees and expenses and increase marketing budgets. Advisors are seeking the lowest cost solution for their clients which leads them to these larger providers.
2. Indexing uptick. Vanguard's success is largely about being at the right place at the right time. It established itself - before its competitors did - as the leader in low-cost, broad based indexing, a trend that is likely to continue, many say. Only 30% of all equity assets are managed by an indexed product, according to Brian Bush of Stephens Inc. Capital Management, reflecting a big upside for passive indexed products. "Even during bull markets, that trend toward passive products has continued as investors are seeking alternatives to the traditional mutual fund model," Bush says. After all, the statistics show that 65% of actively managed large cap mutual funds lagged the S&P 500 over the last 10 years.
3. Cross subsidization. To play in this space, providers may need to cross subsidize with loss leader index funds, which some managers say that Schwab and iShares have done. This is similar to grocery stores putting the milk at the back of the supermarket so you walk through the store and buy $50 in groceries, Roth tells me. The only way other providers can offer lower pricing than Vanguard is to charge more fees on other products, he says.
4. Vulnerability of size. As Vanguard continues its rise, it could become vulnerable as large organizations often do, financial theorist William Bernstein has noted. Indeed, the larger the company, the more difficult it is to manage and innovate. "Vanguard has found its niche - is innovation really necessary for this Goliath of mutual fund providers?" I asked Bush. "Absolutely," was the answer I got from him. His view? We're not living in a static world and if the company wants to maintain its leadership position they will have to be innovative. The wave of the future may be better indexes. Right now the majority of index products are market weighted. Many firms are working on developing new approaches to index investing. Vanguard will not be able to rely on its past success forever.
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