John Spence

Despite Legal Setbacks, 2001 Another Strong Year for Vanguard

Vanguard fund assets under management jumped from $564 billion to $581 billion in 2001, an increase of 3%. According to Financial Research Corporation, total assets for the mutual fund industry dropped from $4.3 trillion to $4.1 trillion, a loss of about 3%. Several of the top-selling mutual funds in 2001 had Vanguard in their names, as shown below.

In the early 1970s, responding to "efficient market" and "random walk" academic theories and as his own ideas about low costs and diversification, John Bogle introduced the first broad market index fund for retail investors, what is now known as the Vanguard S&P 500 index fund. The mutual fund industry quickly ridiculed the concept of a fund that attempted to mirror - rather than beat - the stock market, and dubbed the endeavor "Bogle's Folly."

Today, the Vanguard 500 fund is the second largest mutual fund in America with over $87 billion in assets, right behind the Fidelity Magellan fund, and Vanguard's lineup of equity and bond funds regularly beat a majority of their peers, particularly over the long haul.

Bogle stepped down from the Vanguard helm in 1996 to make way for his hand-picked successor John Brennan, and Vanguard is still the industry leader in retail index funds and overworked nautical imagery. Despite a bear market and cutbacks in the fund industry, Vanguard enjoyed another growth year in 2001.

Vanguard's broad stock index funds undoubtedly benefited from tech's collapse as equity investors painfully relearned the importance of diversification. However, investors poured $75.6 billion into bond funds in 2001, compared to the $33.6 billion that flowed into stock funds, according to Lipper. This reverses a trend of the past few years where investors shoveled record amounts of cash into equity mutual funds, and Vanguard's bond index funds flourished.

"When the bear market began, a lot of investors had way too much exposure to growth stocks, especially in the technology sector," said Scott Cooley, a Morningstar senior fund analyst who keeps tabs on several Vanguard funds. "I think some folks realized they weren't as risk-tolerant as they thought they were, and that's one reason why the Vanguard bond index funds have enjoyed such strong inflows over the past year."

Vanguard also continued rolling out Admiral Shares for its funds to reward large and long-standing accounts - the special share class is now available for 52 funds. The average expense ratio for Admiral Shares is 0.23%, compared to 0.29% for regular investor class shares.

In a nod to the growing popularity of exchange-traded funds, Vanguard introduced VIPERs as separate shareclasses for its Total Stock Market and Extended Market index funds.

However, one blemish for Vanguard in 2001 was a disappointing legal defeat at the hands of index provider Standard & Poor's. Unhappy with its licensing agreement, S&P asked a federal court to bar Vanguard from using its indexes for ETF shareclasses of existing Vanguard funds. In April, a federal judge ruled in favor of S&P and granted an injunction preventing Vanguard from launching S&P VIPERs. Vanguard appealed the decision but to no avail.

The defeat was an unexpected blow for Vanguard. "In our wildest dreams, we didn't think we'd lose the court case," Vanguard index fund guru Gus Sauter told The Wall Street Journal.

At this point the future of S&P VIPERs is unclear, but many industry observers believe the appeal denial may have sealed their fate unless the two firms can somehow reconcile their differences. In any case, Vanguard is still free to launch VIPERs for its index funds that aren't tied to S&P indexes.