Two Giants Square Off
Fidelity and Vanguard are bigger than ever since the fund scandals
Partly as a result of low fees, Vanguard and Fidelity also are among the better-performing fund complexes over long periods. Over the past decade, 89 percent of Vanguard funds and 78 percent of Fidelity funds have beaten their peer groups. Vanguard's approach has been to stress consistency over time. As for Fidelity, "if you go back to the '80s it was more Janus than Janus," says mutual fund consultant Geoff Bobroff, referring to that firm's aggressive, swing-for-the-fences style. "But [Fidelity] recognized in the '90s that larger retirement investors don't want any home runs."
Today, the firms are changing but becoming somewhat more alike. Vanguard, rooted in index funds that track entire markets, is changing more as it broadens its appeal, a move that has drawn criticism from its faithful fans (story, Page 48). Fidelity, with more of a stock-picking ancestry, is trying to leverage its strength in asset management into other financial services. But some fear that as these two companies get bigger, a growing number of investors may just hand over most of their assets simply out of convenience. "It doesn't make sense to limit yourself to one family," says Litman/Gregory's Savage. "Great managers and great funds are few and far between, and they're not all at one family."
Another concern: As more money flows to Vanguard and Fidelity, the average size of portfolios at these complexes is likely to grow. And academic research indicates that funds that grow too big have a harder time outperforming their peer groups. "When funds accumulate huge amounts of money, it gets more and more difficult to differentiate themselves from the indexes," says Paul Merriman, president of Merriman Capital Management in Seattle and publisher of FundAdvice.com.
Strong gains. Fidelity and Vanguard aren't the only firms that are seeing sizable fund flows. T. Rowe Price, another company that has avoided scandal, has been performing well lately. But it's still nowhere near the size of Fidelity and Vanguard. American Funds, run by Capital Research & Management, is actually outpacing Fidelity and Vanguard in garnering new money. But unlike Fidelity and Vanguard, which for the most part sell directly to investors through no-load funds, American Funds are distributed through financial advisers and brokers, who don't stop selling just because times are tough in the stock market.
In that sense, Fidelity and Vanguard's dominance serves as vindication of sorts for no-load funds, which have lost market share to adviser-sold funds for several years. The days of Fidelity being known for just one fund--the flagship Magellan--and Vanguard being regarded simply as an index-fund firm are long gone. Starting in the mid-to-late 1990s, both firms--which have the advantage of being privately held, unlike competitors that are part of publicly traded corporations with short-term pressures--have evolved into huge financial services firms that reach into virtually every segment of their clients' lives, from college to the workplace, retirement, and beyond.
Vanguard is certainly no longer just an "index shop," as 65 of its 110 funds are actively managed, says Jeffrey Ptak, an analyst with Morningstar who follows Vanguard. While some may view this as a departure from the company's past, Vanguard CEO Brennan notes that actively managed funds like Windsor and Wellington played a big part in the firm's history. "We want a mix--a balance between stocks, bonds, and money market funds and actively managed funds and index funds," says Brennan.
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