Two Giants Square Off
Fidelity and Vanguard are bigger than ever since the fund scandals
Last fall, as the worst scandal in the 80-year history of the mutual fund business was unfolding, industry leaders quietly began to worry: What would happen if Fidelity or Vanguard, the two giants of the business, got caught up in the mess? How would investors, who have collectively placed $1.3 trillion in stock and bond funds run by the two firms, react?
"If a blue-chip company like Fidelity were drawn into this, or especially Vanguard, which holds itself out to be a place of high regard for shareholder interests, it would have had a much greater impact on investor confidence," says Steve Savage, a managing director for Litman/ Gregory Asset Management.
Fortunately for the $7 trillion industry, the question was moot. Vanguard and Fidelity avoided the trading scandals that roiled competitors--including Putnam, Alliance, Janus, and Strong--and today they are even more dominant as a result. Now, the question within the industry is what happens if these two 800-pound gorillas become even bigger?
Record flows. For the moment, thanks in part to the fact that Fidelity and Vanguard have kept faith with their shareholders, fund investors continue to pour money into mutual funds. In the first quarter, investors added a record $135 billion to stock mutual fund holdings, according to the research firm Strategic Insight. That compares with $8 billion taken out in the same period last year. Even more impressive, in the months since the scandal broke, investors have plowed $249 billion into stock and bond funds, more money than the industry typically enjoys in an entire year. "To me, what the investor has been doing and saying lately is, we have great confidence in mutual funds as the vehicle of choice to save for the future," says John Brennan, chairman and chief executive of Vanguard, based in Valley Forge, Pa.
The dominance of the two giants is even more impressive when you consider there are scores of companies, large and small, clamoring for your investment dollar and some 16,391 individual funds in which you can invest. At the end of 2003, Fidelity and Vanguard managed 26 cents of every $1 held in stock and bond funds in the United States, according to figures compiled by Financial Research Corp., a Boston firm that tracks mutual fund investment flows.
But since the trading scandals erupted last September, Putnam, Janus, and Alliance have bled assets while Fidelity and Vanguard have attracted 38 percent of the new money that's being invested in mutual funds. Add in American Funds, the nation's third-largest fund family but one that largely relies on brokers to sell its products, and 64 cents of every new invested dollar this year is going to the biggest firms.
For the most part, Vanguard and Fidelity are considered benevolent giants, at least by most of the investing public. They are among the lowest-cost providers of asset management services in the business. While the average domestic stock fund charges annual expenses of 1.5 percent of assets, the average Fidelity domestic stock fund charges 1.3 percent. Equity funds at Vanguard, the industry's absolute cost leader, charge just 0.3 percent on average.
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