There's never been a money-management business like Vanguard Group Inc. Any time it enters a new market, competitors see their margins demolished via the so-called Vanguard effect. No other firm controls costs the way it does. And since the financial crisis, no other firm has attracted more assets more quickly. Since 2009, Vanguard has expanded from about $1 trillion in assets under management to almost $5 trillion.
Only Blackrock Inc. has more assets under management, but it has only doubled in size during the same time period. Assuming current growth rates hold, Vanguard should pass Blackrock in size.
You might guess that the success of the Malvern, Pennsylvania-based company would be closely studied by many interested parties. Academics should be cranking out white papers by the thousands; competitors should be imitating their every move; business school case studies should be ubiquitous.
Your guess would be wrong.
Nor have competitors come to grips with what makes Vanguard unique. The reasons for its success are many and varied. Those who shrug it off as the result of low fees and passive funds have missed the bigger picture. If price were the sole reason for success, then Econ 101 tells us that competitors would have simply cut their fees in order to recapture lost market share. But this hasn't happened; if anything, Vanguard's share has increased, and as the New York Times reported, Vanguard is growing faster than all its competitor combined.
Thus, we must conclude this phenomenon is much more than merely price-driven.
I would posit I am at least as familiar with Vanguard's core philosophy and approach as anyone outside of its C-suite. I break down its core strengths into a few key areas:
Philosophy: Vanguard's three core beliefs were set out by founder Jack Bogle four decades ago. First, the firm holds clients' interest as paramount. The firm is organized as a mutual, meaning its investors are also the owners. This is key as it removes the usual conflicts of interests that riddle so many Wall Street firms; it also means there is no fiduciary obligation to maximize profits on behalf of shareholders. Second, the focus on low costs allows clients to keep more of their investing gains. Every academic study shows that costs are a compounding drag on long-term performance. And last, its emphasis on indexing mitigates self-destructive investor behavior.
