Ten years ago on May 1, 1975—“May Day” —The Vanguard Group of Investment Companies commenced operations. Surely Vanguard, a decade ago, was a new beginning in every sense of the phrase. Our challenge was to build … a new and better way of running a mutual fund complex. “The Vanguard Experiment” was designed to prove that mutual funds could operate independently, and do so in a manner that would directly benefit their shareholders. Thus, our new beginning was also, in its modest way, a revolution both in the ideology of this industry and its governance structure. The Vanguard Experiment, it seems fair to say, has been successful beyond our wildest dreams.
So said Vanguard founder John C. Bogle on May 18, 1985, in his speech “May Day and the Vanguard Experiment” to celebrate the firm’s 10th anniversary.
You would little recognize the Vanguard of 1975 from the firm you know today. The fledgling service company administered nearly $1.8 billion in assets, which was invested in 11 funds owned by less than 500,000 clients in the United States. Vanguard managed zero dollars, didn’t offer a single index fund, and on a relative basis, was more “expensive,” with an average expense ratio of 0.89% (source: Vanguard).
Forty years later, Vanguard is a global investment management enterprise of $3.3 trillion, offering more than 280 funds to 20 million clients in 80 countries. Today our internal investment management teams oversee $2.1 trillion and manage more than 200 index funds. Our fund expense ratios are among the lowest in the industry—0.18% on a straight average basis; 0.14% on an asset-weighted basis (source: Vanguard).
It’s fair to say Vanguard has been a success on the customary measure of growth—assets, sales, funds, etc. But the most important measure to us is the millions of clients we’ve helped to achieve a financially secure retirement, fund a college education, or buy a first home. Over 40 years, we’ve helped a generation or two of investors.
Our success can be attributed to a number of factors: Our client-owned structure; several critical business decisions; our client-first culture and dedicated crew; and a bit of good fortune in the form of favorable financial markets and regulatory changes.
Following our own advice
Another key has been our business strategy. In fact, how we manage our business is how we encourage our investors to manage their money—by adhering to the following four principles:
Have a goal. We seek to take a stand for all investors, treat them fairly, and give them the best chance of investment success. This goal represents both simplicity and clarity, and serves as a guiding star for our leadership team and crew.
Minimize costs. Vanguard’s low costs are a result of our at-cost corporate structure and relentless pursuit to operate more efficiently and productively. We run a tight ship, limiting the amount spent on marketing relative to competitors, negotiating favorable fee arrangements with our external investment advisors and benchmark providers, and seeking savings by investing in technology to improve operations and service.
Be balanced and diversified. Vanguard offers one of the most diversified family of funds in the industry—mutual funds and ETFs; stock, bond, balanced, and money market funds; actively managed and index funds; internally managed and externally advised. We also have a very balanced business, serving individuals, institutions, employer-sponsored retirement plan participants, and financial advisors—in the U.S. and abroad. Such balance and diversification among our product and client types helps us weather the inevitable periods of market downturns and changing business cycles.
Be disciplined. We’re not publicly traded, which means we’re not subject to earning a profit for corporate stockholders. We aren’t beholden to meeting quarterly earnings estimates of Wall Street analysts. We refrain from unnecessarily expanding our product line and offering “hot” products for the sake of gathering more assets. We close funds when they grow too large to manage prudently. In short, we have freedom to govern our enterprise and steward our funds for the long term.
I offer these insights not to brag; rather, I think you and your fellow clients can take some measure of comfort in knowing that we “walk the talk,” so to speak, and try to operate according to the same principles that we encourage our investors to follow. There’s a nice symmetry to it, and one that I believe is rare in the business world.