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The Vanguard Group, Inc.

The Vanguard Group, Inc.

100 Vanguard Boulevard
Malvern, Pennsylvania 19355
Telephone: (610) 648-6000
Fax: (610) 669-6605
Web site:

Private Company
1974 as The Vanguard Group of Investment Companies
Employees: 10,500
Sales: $1.2 billion (1998 est.)
NAIC: 52392 Portfolio Management (pt); 52393 Investment Advice

The Vanguard Group, Inc. is one of the most successful mutual fund companies in the United States. Managing more than $520 billion worth of investors money, the firm provides an entire family of mutual funds from real estate to bond funds. Its Vanguard 500 Index Fund, a portfolio of stocks that tracks the broad market, is the largest of the 103 domestic funds managed by the firm and is among the largest of U.S. mutual funds. Vanguards family of mutual funds maintains one of the lowest expense ratiosthe relation of management costs for a fund to the amount of assets in the fundwithin the financial services industry.

The Birth of the Mutual Fund: 1920s-40s

Although the Vanguard Group of Investment Companies was started in 1974 by John ? Bogle, its predecessor goes back to 1929. The Wellington Fund was started by Walter L. Morgan in July 1929. Morgan, a certified public accountant with a degree from Princeton University, was convinced that the ordinary investor with limited money needed a diversified investment portfolio managed by a professional staff, rather than just venturing out on his own and buying individual company stocks. Massachusetts Mutual Fund, Americas first mutual fund, was established in 1924 in Boston, and Morgan immediately recognized the opportunity that such an investment service provided.

When Morgan formed the Wellington Fund, he based the firms investment strategy on three principles: 1) that the fund was unleveraged rather than leveraged, thus reducing the risk involved in using money that was borrowed; 2) that Wellington would be an open-end fund rather than a closed-end fund, and 3) that Wellington would be a balanced rather than a common stock fund, thereby reducing a customers risk by including bonds as well as stocks in the individuals investment portfolio. These highly conservative decisions made in the midst of the most rampantly speculative era in stock market history served Morgan well. With the coming of the stock market crash in the autumn of 1929, the Wellington Fund not only remained in business but prospered. Capitalizing on its conservative investment philosophy, the funds assets passed the $1 million mark by 1935 and grew steadily. By 1943, the Wellington Fund reported over $10 million in assets and by 1949, over $100 million.

Ups and Downs in the 1950s and 1960s

Throughout the 1950s and early 1960s, Wellington Management Company, the formal organization with the responsibility of managing the Wellington Funds assets, operated on four principles: a conservative investment philosophy, an emphasis on long-term investment performance, a single fund without any related orsister funds, and a comprehensive, well-organized sales and marketing campaign through brokers and investment advisors across the country.

As the years passed, however, what had worked for the company during the previous years was no longer viable for the era of burgeoning stock market investments. By the late 1960s, the companys strategy of a balanced fund was out of favor with almost all investment advisors. The Wellington Fund, once the leader in balanced fund investing, fell to lower and lower performance levels. At the same time, Walter Morgan decided to retire from active management of the fund, and hired John C. Bogle, a Princeton University graduate. Morgan encouraged Bogle to revive the Wellington Fund by whatever means necessary, and the young man immediately established a strategy which included the acquisition of an aggressive growth fund, the entry into the investment counsel business, and hiring highly capable and experienced portfolio fund managers.

Carrying out Bogles new plan as quickly as possible, The Wellington Company purchased Thorndike, Doran, Paine and Lewis, Inc., a well-established and successful investment firm in Boston, Massachusetts, that managed the Ivest Fund. The new acquisition also included an investment counsel business and four talented portfolio managers. The marriage of The Wellington Companys administrative and marketing operations to Thorn-dike, Doran, Paine and Lewiss investment expertise was concluded in 1967. It was assumed that Bogle would become the chief executive office of both companies and their respective funds. From the very start of the merger, events seemed to conspire against its success. The stock market declined, both the Wellington and Ivest Funds performed poorly, and business in general was on the downswing. Dissatisfaction began to arise among management and in 1974, because Bogles associates from the Boston firm had a majority on the Wellington Management Companys board of directors, they summarily fired him.

Shifting Course in the 1970s and 1980s

Although Bogle was heartbroken over his dismissal and the loss of what he considered to be his company, he was determined to revive his fortunes. The Wellington Fund was required by U.S. federal law to have a board of directors independent of the managing companys board of directors. This latter group of directors voted to retain Bogle as chairman of the fund. Bogle then advocated to his board of directors that the Wellington Fund and Ivest Fund should be given complete independence of the Wellington Management Company. Yet the board of directors at the fund decided that Wellington Management Company should continue providing marketing and portfolio management services and also keep its name; at the same time the two funds, Wellington and Ivest, should be made independent of the Wellington Management Company and be given a new name. Bogle chose the name Vanguard, in honor of Lord Horatio Nelsons flagship HMS Vanguard during the Napoleonic Wars. Incorporated in 1974, The Vanguard Group of Investment Companies opened for business in July 1975.

Bogle had advocated that the Wellington Fund and the Ivest Fund should be their own distributor. At first the board of directors rejected this proposal, but in 1977 it was decided that the two funds should get rid of Wellington Management Company as their distributor and designate Vanguard. The move resulted in an immediate cessation of the traditional broker-dealer distribution network that had always been used by the two funds and the total elimination of any sales charges. The conversion to what is now called ano load fund was due to the demand from consumers for lower prices in the management of their money. Initially, the companys cash flow reflected a loss of $125 million in 1976, but by 1977 Vanguard proudly reported a complete turnaroundits cash flow had jumped to a positive $50 million.

The 1980s were some of the brightest years for the company. Bogle decided to bring in-house the management of Vanguards fixed income portfolio, which included six money market and municipal bond funds whose assets were approximately $1.8 billion. During this period, Vanguards total assets rose from $500 million to almost $4 billion. The companys Windsor Fund, a mixed equities portfolio, was one of the best performing mutual funds in the nation during the entire decade, and its assets increased from $900 million to nearly $8 billion. Assets for the Vanguard Index Trust, the first index mutual fund in the world, skyrocketed from a mere $90 million to an astonishing $7.5 billion. By the end of the decade, Vanguard was acknowledged as the leading no-load mutual fund service which, in turn, led to more profitable returns and greater growth. The assets managed by the company had grown from $3 billion in 1980 to over $50 billion by the fall of 1990.

Vanguards impressive growth during the 1980s was carried along by one of the most active and positive periods in the worldwide financial markets. During the early 1980s, both stocks and bonds started to produce tremendous returns on investments. On average throughout the decade, the bond market produced an annual rate of return of 13 percent, the highest in the history of the market. At the same time, the stock market came close to its historically highest rate of return, averaging an annual return of just over 18 percent. In addition, tax laws were changed in favor of retirement programs, and individual retirement accounts (IRAs) greatly enhanced the total asset base of the mutual fund industry. In fact, assets for the entire mutual fund industry leaped from $240 billion in 1981 to approximately $1.3 trillion by 1991, a sixfold increase. Although the companys portfolio managers were able and talented, Vanguard doubtless rode the crest of the wave across all the financial markets. Assets managed by Vanguard in December 1991 had increased to $75 billion. Since its inception, Vanguards asset base had grown at a phenomenal compounded growth rate of 35 percent annually.

Company Perspectives:

Underpinning our shareholder-focused philosophy is a set of values that guide our day-to-day operations: we manage our funds with prudence, a long-term orientation, and clearly defined objectives. Our overriding goal is to provide investment returns that are competitive with those of similar mutual funds as well as with our unmanaged benchmark indexes; ever mindful of the trust placed in us by our clients, we put our fiduciary duty to them first and foremost, ahead of marketing or other considerations. Thisclient-first philosophy allows us to focus on getting better, not bigger; we provide accurate and candid information to investors, prominently discussing the risks and costs of investing as well as the rewards; we maintain a spirit of fair dealing, integrity, and honesty in our relationships with clients; we avoid hyperbolic advertising, especially the kind that focuses on past investment performance, which has no predictive value for the future; we foster a commitment to excellence in the crew serving our clients.

Continued Growth in the 1990s

The Vanguard Group was in the vanguard of the mutual fund industry during the early and mid-1990s. The Vanguard Index Trust had grown into one of the largest equity mutual funds in the world, and the company set the standard for market indexing management. Consumerism led the way toward a cost-consciousness within the industry that has had lasting effects. Many of the mutual funds created during the early part of the decade were no-load direct marketing funds, following the lead that Vanguard had set years earlier. Ever mindful of the way extra costs decrease a customers yields, in 1993 Vanguard introduced four new no-load funds with minimal expenses. Called the Admiral funds, these funds had an expense ratio, which includes money management fees and other costs, of a mere 0.15 percent of net assets. Compared with an average of 0.53 percent for United States Treasury money-market funds and 0.93 percent for United States Treasury bond funds, many investors were pleased with the bargain. This difference was telling, since only $100 in expenses would be paid by a customer who invested in the Vanguard Admiral U.S. Treasury Money Market Portfolio as opposed to $440 dollars in expenses in a Fidelity Spartan fund. The only drawback was that the Admiral funds required a minimum investment of $50,000.

In 1994, Vanguard enjoyed one of its best years. Although the market for bonds was highly volatile due to leveraged and risky kinds of derivatives and many mutual funds that specialized in bonds suffered as a result, Vanguard escaped the turmoil because of its supremely efficient bond fund management. In addition, when diversified stock funds lost 1.7 percent across the entire mutual fund industry, Vanguards low costs and expenses enabled its stock funds to post a 0.6 percent average gain. Not surprisingly, 16 out of Vanguards 18 diversified stock funds performed better than the industrywide average. By the end of 1994, Vanguards total asset base had increased to $132 billion.

In July 1995, John J. Brennan was chosen to succeed John C. Bogle as chief executive officer of Vanguard. Brennan, only 40 years old at the time of the appointment, had worked at the company for 13 years and had acted as Bogles deputy since 1989. Brennans vision included continuing the emphasis on index funds that his predecessor had started, along with the strategy of low-cost management of all the firms mutual funds. Brennan also laid plans to invest in new technology that would allow people to transfer money from their bank to buy a Vanguard fund by using a personal home computer. In addition, he hoped to offset the competition from discount brokers by setting up a network so Vanguard would be able to sell non-Vanguard funds for a small transaction fee.

With the stock market climbing to record highs throughout 1995, both institutional investors and private investors began to pour money into mutual funds that were designed to follow the performance of market measures such as Standard & Poors 500 (S&P 500). These index funds became the leading performers during the year. Index funds that mimicked the S&P 500 reported increases of 19.9 percent during the first six months of 1995, compared to the average equity fund that only gained 16.6 percent during the same period. Vanguards Index 500 Fund, with more than $13 billion in assets, was the largest such portfolio. In the first half of 1995, the fund had taken in a net $1.5 billion of new money from investors. With the influx of such a large amount of money, the Index 500 became the companys largest stock fund.

At the end of 1995, Vanguard listed a wide range of mutual funds that investors could choose from, including money market funds, tax-exempt income funds, state tax-exempt income funds, fixed-income funds, balanced funds, growth and income funds, growth funds, aggressive growth funds, and international funds. A few of the companys most successful mutual funds included the 500 Portfolio Fund, an index fund that invested in all the 500 stocks of the S&P 500 Composite Stock Price Index and which recorded an average annual return of 16.99 percent over the five-year period ending September 30, 1995; the Growth and Income Portfolio Fund, another index fund that reported an average annual return of 25.63 percent during the recent five-year period ending in September 1995; and the Vanguard Explorer Fund, an aggressive-growth fund that specialized in emerging companies with highly attractive growth potential and which recorded an average annual return of 22.84 percent over the five-year period ending in September 1995.

Vanguard continued to grow its operations and services in the second half of the decade and prospered. At the beginning of 1996 a changing of the guard took place when founder John Bogle stepped down as CEO. Bogle remained the chairman of Vanguards board. John J. Brennan, who had been with Vanguard since 1982, was appointed CEO. Bogle nominated Brennan to fill his shoes and said in a prepared statement, I have full confidence that, under his [Brennans] leadership, Vanguard will maintain the basic principles that have served the company so well over the past two decades. And I know his judgment and decisiveness will enable Vanguard to face the challenges that lie ahead.

Under Brennans leadership, Vanguard maintained its traditional low costs while expanding operations to remain competitive in the volatile financial services industry. Internationally, the company established Vanguard Investments Australia in 1997 to serve institutional investors. A year later the division began to offer six indexed funds to individual customers. Also in 1998 the company added three indexed mutual funds to its Vanguard Group Ireland offerings. Other notable new events in the mid-1990s included the launch of Vanguard Fiduciary Services in 1998. The unit provided investment management and advisory services to such organizations as foundations, endowments, and tax-exempt organizations. At the end of its first year of operations, the fiduciary group had more than 50 clients and managed about $4.2 billion in assets. The Personal Financial Services (PFS) division, started in 1997, was made up of Vanguard Asset Management and Trust Services and Personal Financial Planning. PFS grew quickly, and by the end of 1998 the unit managed or had produced advisory plans for about $10 billion in assets, an increase of 100 percent since the end of 1997.

Key Dates:

Walter L. Morgan forms the Wellington Fund.
John C. Bogle establishes The Vanguard Group of Investment Companies.
The Vanguard Group opens for business.
The Vanguard Index 500 Fund becomes the companys largest fund.
John J. Brennan becomes CEO.
Company expands to the Malvern, Pennsylvania, area.

Vanguard had an outstanding year in 1998, thanks in large part to the U.S. stock market, which experienced a fourth consecutive year of gains exceeding 20 percent. In 1998 alone, Vanguard added more than two million new accounts, boosting its total to more than 12 million by the end of the year. The firms share of U.S. mutual fund assets grew to 7.9 percent, more than twice its market share of 3.8 percent a decade earlier. In addition to adding three new index funds to U.S. investors, Vanguard introduced its 13th state tax-exempt municipal bond fund, launched online trading capabilities as part of the services offered by Vanguard Brokerage Services, and revamped its web site to provide individual clients the capability to open new accounts, view account balances and change options, and access information about Vanguards funds. Amid all the activity, Vanguard managed to keep its costs low. According to Lipper Inc., which tracks fund performance, Vanguards operating costs averaged 0.28 percent of assets during 1998, compared to an industry average of 1.25 percent.

As the second largest mutual fund company in the world in 1998, Vanguard received recognition for its innovations and performance. The firms web site was elected the best mutual fund site of 1998 by Institutional Investor magazines weekly newsletter, Financial NetNews.Vanguard also made it onto InformationWeek s list of top technology innovators, and Working Mother listed Vanguard as one of the best companies for working mothers. In addition, the firms 1998 Client Satisfaction Survey determined that more than 99 percent of its individual investor clients were pleased with Vanguard and would recommend the firm to others.

Though Vanguards financial success continued in the late 1990s, the firm experienced some internal upheaval. Vanguards board of directors, including Bogles successor as CEO, sought to force John Bogle into retirement when he reached the age of 70 in May 1999. Though the company had a policy requiring employees who turned 70 to retire, Bogle desired to remain on the board and protested the decision. Employees and investors alike voiced their outrage at the attempted ousting of the legendary founder. The dispute continued through the summer, and in September the board relented, offering Bogle the opportunity to remain on the board. Surprisingly, Bogle turned down the offer. Instead, Bogle continued to work at Vanguard as the head of the newly formed Bogle Financial Markets Research Center.

Heading into the new millennium, Vanguard continued to forge ahead. According to consultancy and fund-tracking firm Financial Research Corporation, Vanguard had net sales of about $45.9 billion in 1999, making it the mutual fund industrys leader, in terms of long-term fund sales, for the fourth consecutive year. In addition, Vanguards flagship Vanguard 500 Index Fund was on the verge of displacing Fidelity Magellan Fund from the top spot as the worlds largest mutual fund in early 2000. Magellan had been the largest mutual fund for nearly a dozen years and in 1992 was three times the size of the Vanguard 500 Index Fund. From 1995 to 2000, however, Vanguards fund grew quickly, outperforming many actively managed funds and reporting gains of more than 28 percent a year. By early 2000, Vanguard 500 had more than $100 billion in assets.

To maintain its leadership position, Vanguard aimed to increase its international presence and to continue offering a full breadth of stocks, bonds, and mixed funds to the investing public. The company announced plans to add a socially responsible mutual fund to its long list of offerings by early 2000; the Vanguard Calvert Social Index Fund would be the first socially responsible fund offered by a major fund company. Vanguard also intended to invest more energy into its actively managed funds, which did not fare particularly well in the late 1990s, to maintain a better balance of financial offerings. Additionally, industry analysts believed the heyday of the index fund was passing, and Vanguard did not wish to be left behind. By the end of February 2000, for example, more than 75 percent of actively managed funds were outperforming the S&P 500, a feat that had not been matched since 1977. In March 2000 Vanguard said it planned to offer two new actively managed funds and formed a partnership with Turner Investment Partners to reorganize the Turner Growth Equity Fund into the Vanguard Growth Equity Fund. With managed assets exceeding $520 billion and a long history of placing the needs of its investor-shareholders first, Vanguard seemed likely to continue growing and dominating the global mutual fund industry.

Principal Operating Divisions

The Individual Investor Group; The Institutional Investor Group.

Principal Competitors

FMR Corp.; Barclays PLC; Mellon Financial Corporation; Merrill Lynch & Co., Inc.

Further Reading

Bogle, John, Vanguard: The First Century, Newcomen Society: New York, 1992.

Calian, Sara,Vanguard Boosts Its European Presence, Wall Street Journal, February 17, 2000, p. C27.

Clements, Jonathan,Dont Abandon the Vanguard Ship, Wall Street Journal, August 17, 1999, p. CI.

Edgerton, Jerry,Vanguards New Skipper Will Push High-Tech Service and Index Funds, Money, July 1995, p. 53.

Grover, Mary Beth,Feast or Famine, Forbes, July 4, 1994, p. 150.

Hardy, Eric S., and Zweig, Jason,Vanguards Achilles Heel, Forbes, May 8, 1995, p. 148.

Kaye, Stephen D.,Inside Vanguard, U.S. News & World Report, February 6, 1995, p. 70.

Lowenstein, Roger,It Bogles the Mind: Vanguards Founder Turned Funds Upside Downand Not Always for the Better, SmartMoney, October 1, 1999, p. 71.

Misra, Prashanta,The Vanguard Group Comes Begging for Less, Money, April 1993, p. 56.

Priai, Dunstan,Vanguard Founder Shares Views on Tech Fervor, Funds Industry, Dallas Morning News, January 30, 2000, p. Hll.

Spiro, Leah Nathans,Vanguard: Cutting Expenses, Boosting Returns, Business Week, March 1, 1993, p. 108.

Tarn, Pui-Wing,Vanguard Aims to Perk Up Actively Managed Funds, Wall Street Journal, January 24, 2000, p. CI.

Tarn, Pui-Wing, and John Hechinger,Vanguard 500 Set to Pass Magellan, Wall Street Journal, January 12, 2000, p. CI.

Ward, Sandra,A Shifting Vanguard: Why Two Actively Managed Funds Are Being Added to the Lineup, Barrons, March 6, 2000, p. F3.

Wiles, Russ, Vanguard Steps Up to Ethics Challenge, Chicago Sun-Times, December 27, 1999, p. 58.

Zweig, Jason, Vanguard: The Penny-Pincher, Forbes, August 28, 1995, p. 164.

Thomas Derdak

updated by Mariko Fujinaka

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