Vanguard narrows gap with Fidelity New money flowing to No. 2's index approach

Mutual funds

"We're getting inquiries from all over the globe to buy our funds." John Brennan, Vanguard's new chairman

May 31, 1998|By Bill Barnhart | Bill Barnhart,CHICAGO TRIBUNE

The Vanguard Group of mutual funds is growing faster than its only bigger rival, Fidelity Investments.

The popularity of Vanguard's low-cost, index approach to fund investing has been building for years in the United States and presumably has a long way to go.

The Vanguard fund complex, with $375 billion under management, took in $14.3 billion in the first quarter, nearly double the $7.25 billion received by Fidelity, which has $620 billion in mutual funds, according to Bloomberg News.

Nonetheless, Vanguard has launched a campaign to expand sales into Europe, where mutual funds are an unfamiliar concept.

When an American chief executive officer named Brennan announces he wants to start a new venture based in Ireland, there may be reason to wonder, admits John Brennan, Vanguard's new chairman.

Moreover, the move comes shortly after Brennan succeeded the firm's venerable former chairman, John Bogle, who for years has scolded his mutual fund colleagues about the vanity of empire-building.

So what's the urge? And what's the benefit, if any, for Vanguard fund shareholders here at home?

"The demographics and the momentum here are strong" for marketing mutual funds, Brennan acknowledged in a recent interview.

"We don't need to go global like Coca-Cola, because you can only drink so much Coke."

But "we're getting inquiries from all over the globe to buy our funds," he said.

The Internet gives investors everywhere instant access to U.S. mutual fund Web sites, even though U.S.-registered funds generally can't be sold abroad.

In addition, multinational firms that offer Vanguard funds in their 401(k) retirement plans want to be able to offer the same investments to employees in Europe.

"There's a bit of a defensive side to it," he said.

"Large companies want to take their [retirement] programs global." A fund organization that can't accommodate that need may find itself dropped from a corporation's 401(k) menu.

Brennan sees two other objectives in the European venture: a chance for Vanguard administrators and fund managers to learn more about the European economy, which is undergoing an historic process of unifying several national economies, and a chance to generate more profits from existing technological and staff resources at the company's headquarters in Valley Forge, Pa.

Higher profits through economies of scale mean lower costs for Vanguard fund investors, he said.

Vanguard is taking advantage of the favorable tax and regulatory climate available in Dublin's international financial center -- a sort of enterprise zone for global companies seeking to enter the European market.

The initial move will be to solicit pension business in Britain, the Netherlands and Belgium. (Ironically, the funds can't be sold in Ireland.)

Marketing efforts will skirt Germany, where the investment business is dominated by a few large banks and there is no trend yet toward 401(k)-type retirement plans, Brennan said.

Four mutual funds have been registered in Dublin as what are called UCITS, or Undertaking for Collective Investment in Transferable Securities.

Vanguard's Standard & Poor's 500-stock index fund, a European equity index fund and a global index fund as well as a money-market fund will be offered -- all priced in dollars. Index funds in Europe are called tracking funds.

Brennan has no plans to follow Fidelity into Japan, which on April 1 opened its investment market to foreign money managers.

Fidelity launched six funds there, but Brennan said he is unconvinced that the Japanese would welcome U.S. money management firms.

"There's a cultural question about whether what has been a closed shop is going to open up or whether the words [about financial deregulation] are just the appropriate words to speak at a time of financial crisis," he said.

"It's been a hostile market for financial firms. It's a very high-cost place to do business."

Pub Date: 5/31/98

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