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Vanguard AUM Balloons As Investors Flock To Index Funds -- Barron's Blog


DOW JONES & COMPANY, INC. 9:24 AM ET 08/21/14

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Money managers will often say that any given market is a stock-picker's market, and proceed to describe why their expertise allows them to choose the wheat and leave the chaff.

Whether or not this is true, it seems that many investors are opting to for a much more noninterventionist approach, epitomized by the flood of money pouring into Vanguard.

As The Wall Street Journal reports, in the five months since March, Vanguard has seen $5.5 billion in inflows, helping the firm log new record assets under management, approaching $3 trillion.

From the report: "The surge is part of a sea change in the fund business in which investors are increasingly opting for products that track the market rather than relying on managers to pick winners. Other firms, such as New York behemoth BlackRock ( BLK) and Texas-based Dimensional Fund Advisors, are also enjoying an influx of cash."

Of course, it might be tempting to simply call this the Warren Buffett effect, as the influx of funds comes after the billionaire advised investors to put a large portion of their money in low-cost index funds, highlighting Vanguard's.

Yet while Buffett's endorsement is certainly powerful--the $5.5 billion in new cash is triple the amount of money Vanguard attracted from March through August 2013--that's not all that's at play.

Star fund managers simply don't have the appeal they once did, because the numbers simply aren't there to support them. As my erstwhile colleague Brendan Conway wrote yesterday: "Few stock-fund managers stay ahead; in fact, it's fewer than random chance would predict. Over the last five years, nearly three-quarters of large-cap fund managers were beaten by the S&P 500. Merely being "average," meaning matching the index or some other benchmark, turns out to be a pretty good deal. You could do a lot worse than, for instance, a simple three-fund portfolio of Vanguard S&P 500 ( VOO), Vanguard Total World Stock Index ETF ( VT) and iShares Core U.S. Aggregate Bond ETF(AGG) ."

Vanguard founder John Bogle made the case that ETFs aren't a wise option for regular investors, and even Dilbert creator Adam Scott advised investors to just own index funds.

Of course, that's not to say that active portfolio management doesn't have a place or that index funds are right for every investor. But as the Journal report shows, their popularity continues to grow--with, arguably, plenty of room to run.

More at Barron's Focus on Funds blog, http://blogs.barrons.com/focusonfunds/


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08-21-140924ET
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