The Vanguard Group of Investment Companies

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The Vanguard Group of Investment Companies

1300 Morris Drive
Wayne, Pennsylvania 19087
U.S.A.
(610) 648-6000
Fax: (610) 648-6000

Private Company
Incorporated: 1974
Employees: 2,300
Assets: $152 billion
SICs: 6282 Investment Advice

The Vanguard Group of Investment Companies is one of the most successful mutual funds in the United States. Managing over $155 billion worth of investors’ money, the firm provides an entire family of mutual funds from real estate to bonds funds. One of the company’s most important innovations was the Vanguard Index Trust, started in 1974. A portfolio of stocks that track the broad market, the Index Trust is the largest of all such portfolios in the investment community, with approximately $13.4 billion under its management. Vanguard was also the first mutual fund company to offer three maturities of municipal bonds, including short term, intermediate, and long term. Despite the volatility of the stock market during the late 1980s and early 1990s, customers continued to flock to Vanguard’s family of mutual funds because it maintained one of the lowest expense ratios—the relation of management costs for a fund to the amount of assets in the fund— within the financial services industry.

Although the Vanguard Group of Investment Companies was started in 1974 by John C. Bogle, its predecessor goes back to 1929. The Wellington Fund was started by Walter L. Morgan in July of 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, America’s 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 firm’s 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 customer’s risk by including bonds as well as stocks in the individual’s 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 fund’s 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.

Throughout the 1950s and early 1960s, Wellington Management Company, the formal organization with the responsibility of managing the Wellington Fund’s assets, operated on four principles: a conservative investment philosophy, an emphasis on long-term investment performance, a single fund without any related or “sister” 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 company’s strategy of a balance 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 Bogle’s 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 Company’s administrative and marketing operations to Thorndike, Doran, Paine and Lewis’s investment expertise was concluded in 1967. It was assumed that Bogle would become the chief executive office of both company’s and their respective funds. From the very start of the merger, events seem to conspire against its success. The stock market declined, both the Wellington Fund and Ivest Fund performed poorly, and business in general was on the downswing. Dissatisfaction began to arise among management and in 1974, because Bogle’s associates from the Boston firm had a majority on the Wellington Management Company’s board of directors, they summarily fired him.

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 United States federal law to have a board of directors independent of the managing company’s 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 Nelson’s flagship HMS Vanguard during the Napoleonic Wars. Incorporated in 1974, The Vanguard Group of Investment Companies opened for business in July of 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 a “no load” fund was due to the demand from consumers for lower prices in the management of their money. Initially, the company’s cash flow reflected a loss of $125 million in 1976, but by 1977 Vanguard proudly reported a complete turnaround—its 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 Vanguard’s fixed income portfolio, which included six money market and municipal bond funds whose assets were approximately $1.8 billion. During this period, Vanguard’s total assets rose from $500 million to almost $4 billion. The company’s 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.

Vanguard’s 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 company’s portfolio managers were able and talented money men, Vanguard doubtless rode the crest of the wave across all the financial markets. Assets managed by Vanguard in December of 1991 had increased to $75 billion and to an impressive $78 million in mid-January of 1992. Since its inception, Vanguard’s asset base had grown at a phenomenal compounded growth rate of 35 percent annually.

The Vanguard Group of Investment Companies 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 customer’s 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, Vanguard’s low costs and expenses enabled its stock funds to post an impressive 0.6 percent average gain. Not surprisingly, 16 out of Vanguard’s 18 diversified stock funds performed better than the industrywide average. By the end of 1994, Vanguard’s total asset base had increased to $132 billion.

In July of 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 a Bogle’s deputy since 1989. Brennan’s vision included continuing the emphasis on index funds that his predecessor had started, along with the strategy of low-cost management of all the firm’s 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 & Poor’s 500. These index funds became the leading performers during the year. Index funds that mimicked Standard & Poors’ 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. Vanguard’s Index 500 Fund, with over $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 company’s 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 company’s most success mutual funds included the 500 Portfolio Fund, an index fund that invested in all the 500 stocks of Standard & Poor’s 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.